Final Exemptive Order Regarding Compliance With Certain Swap Regulations, 858-882 [2012-31736]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 78, Number 4 (Monday, January 7, 2013)]
[Rules and Regulations]
[Pages 858-882]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31736]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN 3038-AD85


Final Exemptive Order Regarding Compliance With Certain Swap 
Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

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SUMMARY: On July 12, 2012, the Commodity Futures Trading Commission 
(``Commission'' or ``CFTC'') published for public comment, pursuant to 
section 4(c) of the Commodity Exchange Act (``CEA''), a proposed order 
(``Proposed Order'') that

[[Page 859]]

would grant market participants temporary conditional relief from 
certain provisions of the CEA, as amended by Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'' or ``Dodd-Frank''), and the Commission also published its 
proposed interpretive guidance and policy statement (``Proposed 
Guidance'') regarding the cross-border application of the swap 
provisions of the CEA as added by Title VII of the Dodd-Frank Act. The 
Commission has determined to finalize the Proposed Order, with certain 
modifications and clarifications to address public comments. Under this 
final order (``Final Order''), a non-U.S. person that registers as a 
swap dealer (``SD'') or major swap participant (``MSP'') may delay 
compliance with certain entity-level requirements of the CEA (and 
Commission regulations promulgated thereunder), and non-U.S. SDs and 
MSPs and foreign branches of U.S. SDs and MSPs may delay compliance 
with certain transaction-level requirements of the CEA (and Commission 
regulations promulgated thereunder), subject to specified conditions. 
In addition, the Commission is separately proposing further guidance on 
certain specific aspects of the Proposed Guidance (``Further Proposed 
Guidance'').

DATES: The Final Order is effective on December 21, 2012 and will 
expire on July 12, 2013.

FOR FURTHER INFORMATION CONTACT: Carlene S. Kim, Deputy General 
Counsel, (202) 418-5613, ckim@cftc.gov, Terry Arbit, Deputy General 
Counsel, (202) 418-5357, tarbit@cftc.gov, Mark Fajfar, Assistant 
General Counsel, (202) 418-6636, mfajfar@cftc.gov, Office of General 
Counsel; Gary Barnett, Director, Division of Swap Dealer and 
Intermediary Oversight, (202) 418-5977, gbarnett@cftc.gov; Jacqueline 
H. Mesa, Director, Office of International Affairs, (202) 418-5386, 
jmesa@cftc.gov; Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act,\1\ 
which amended the CEA \2\ to establish a new regulatory framework for 
swaps. The legislation was enacted to reduce systemic 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 derivative products; (3) 
creating rigorous recordkeeping and data reporting regimes with respect 
to swaps, including real-time public reporting; and (4) enhancing the 
Commission's rulemaking and enforcement authorities over all registered 
entities, intermediaries, and swap counterparties subject to the 
Commission's oversight. Section 722(d) of the Dodd-Frank Act also 
amended the CEA to add section 2(i), which provides that the swap 
provisions of the CEA apply to cross-border activities when certain 
conditions are met, namely, when such activities have a ``direct and 
significant connection with activities in, or effect on, commerce of 
the United States'' or when they contravene Commission rulemaking.\3\
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \2\ 7 U.S.C. 1 et seq. (amended 2010).
    \3\ 7 U.S.C. 2(i)
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    In the two years since its enactment, the Commission has finalized 
41 rules to implement Title VII of the Dodd-Frank Act. The finalized 
rules include those promulgated under CEA section 4s,\4\ which address 
registration of SDs and MSPs and other substantive requirements 
applicable to SDs and MSPs. Notably, many section 4s requirements 
applicable to SDs and MSPs are tied to the date on which a person is 
required to register, unless a later compliance date is specified.\5\ A 
number of other rules specifically applicable to SDs and MSPs have been 
proposed but not finalized.\6\
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    \4\ 7 U.S.C 6s.
    \5\ Examples of section 4s implementing rules that become 
effective for SDs and MSPs at the time of their registration include 
requirements relating to swap data reporting (Commission regulation 
23.204) and conflicts of interest (Commission regulation 23.605(c)-
(d)). The chief compliance officer requirement (Commission 
regulations 3.1 and 3.3) is an example of those rules that have 
specific compliance dates. The compliance dates are summarized on 
the Compliance Dates page of the Commission's Web site. (https://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm).
    \6\ These include rules under CEA section 4s(e), 7 U.S.C. 6s(e) 
(governing capital and margin requirements for SDs and MSPs).
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    Further, the Commission published for public comment the Proposed 
Guidance,\7\ which set forth the manner in which it proposed to 
interpret section 2(i) of the CEA as it applies to the requirements 
under the Dodd-Frank Act and the Commission's regulations promulgated 
thereunder regarding cross-border swap activities. Specifically, in the 
Proposed Guidance, the Commission described the general manner in which 
it proposed to consider: (1) Whether a non-U.S. person's swap dealing 
activities are sufficient to require registration as a ``swap 
dealer'',\8\ as further defined in a joint release adopted by the 
Commission and the Securities and Exchange Commission (``SEC'') 
(collectively, the ``Commissions''); \9\ (2) whether a non-U.S. 
person's swap positions are sufficient to require registration as a 
``major swap participant,'' \10\ as further defined in the Final 
Entities Rules; and (3) the treatment of foreign branches, agencies, 
affiliates, and subsidiaries of U.S. SDs and of U.S. branches of non-
U.S. SDs. The Proposed Guidance also generally described the policy and 
procedural framework under which the Commission may permit compliance 
with a comparable regulatory requirement of a foreign jurisdiction to 
substitute for compliance with the requirements of the CEA. Last, the 
Proposed Guidance set forth the manner in which the Commission proposed 
to interpret section 2(i) of the CEA as it applies to the clearing, 
trading, and certain reporting requirements under the Dodd-Frank Act 
with respect to swaps between counterparties that are not SDs or MSPs.
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    \7\ ``Cross-Border Application of Certain Swaps Provisions of 
the Commodity Exchange Act,'' 77 FR 41214, Jul. 12, 2012.
    \8\ 7 U.S.C. 1a(49).
    \9\ 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 Entities Rules'').
    \10\ 7 U.S.C. 1a(33).
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    Contemporaneously with the Proposed Guidance, the Commission 
published the Proposed Order pursuant to section 4(c) of the CEA,\11\ 
in order to foster an orderly transition to the new swaps regulatory 
regime and to provide market participants greater certainty regarding 
their obligations with respect to cross-border swap activities during 
the pendency of the Proposed Order. The Proposed Order would grant 
temporary relief from certain swap provisions of Title VII of the Dodd-
Frank Act.
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    \11\ ``Exemptive Order Regarding Compliance With Certain Swap 
Regulations,'' 77 FR 41110 Jul. 12, 2012.
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    The public comment periods on the Proposed Order and the Proposed 
Guidance ended on August 13, 2012 and August 27, 2012, respectively. 
The Commission received approximately 26 letters on the Proposed Order 
and approximately 288 letters on the Proposed Guidance from a variety 
of market participants and other interested

[[Page 860]]

parties, including major U.S. and non-U.S. banks and financial 
institutions that conduct global swaps business, trade associations, 
clearing organizations, law firms (representing international banks and 
dealers), individual citizens, and foreign regulators.\12\ The 
Commission staff also held numerous meetings and discussions with 
various market participants, domestic bank regulators, and other 
interested parties to discuss the Proposed Order and the Proposed 
Guidance.\13\
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    \12\ Some of the commenters submitted a single comment letter 
addressing both the Proposed Order and the Proposed Guidance. The 
comment letters submitted in response to the Proposed Order and 
Proposed Guidance may be found on the Commission's Web site at 
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234.
    Approximately 200 individuals submitted substantially identical 
letters to the effect that oversight of the $700 trillion global 
derivatives market is the key to meaningful reform. The letters 
stated that because the market is inherently global, risks can be 
transferred around the world with the touch of a button. Further, 
according to these letters, loopholes in the Proposed Guidance could 
allow foreign affiliates of Wall Street banks to escape regulation. 
Lastly, the letters requested that the Proposed Guidance be 
strengthened to ensure that the Dodd-Frank derivatives protections 
will directly apply to the full global activities of all important 
participants in the U.S. derivatives markets.
    \13\ The records of these meetings and communications can be 
found on the Commission's Web site at: https://cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
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    Further, the Commission staff closely consulted with the staff of 
the SEC in an effort to increase understanding of each other's 
regulatory approaches and to harmonize the cross-border approaches of 
the two agencies to the greatest extent possible, consistent with their 
respective statutory mandates.\14\ The Commission expects that this 
consultative process will continue as each agency works towards 
implementing its respective cross-border policy.
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    \14\ In addition to differences in the applicable statutory 
provisions, there are also differences in the markets and products 
overseen by each agency, which may lead to divergent approaches to 
cross-border activities.
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    The Commission also recognizes the critical role of international 
cooperation and coordination in the regulation of derivatives in the 
highly interconnected global market, where risks are transmitted across 
national borders and market participants operate in multiple 
jurisdictions. Close cooperative relationships and coordination with 
other jurisdictions take on even greater importance given that, prior 
to the recent reforms, the swaps market has largely operated without 
regulatory oversight and many jurisdictions are in differing stages of 
implementing their regulatory reform. To this end, the Commission staff 
has actively engaged in discussions with their foreign counterparts in 
an effort to better understand and develop a more harmonized cross-
border regulatory framework. The Commission expects that these 
discussions will continue as it finalizes the cross-border interpretive 
guidance and as other jurisdictions develop their own regulatory 
requirements for derivatives.\15\
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    \15\ This is one aspect of the Commission's on-going bilateral 
and multilateral efforts to promote international coordination of 
regulatory reform. The Commission staff is engaged in consultations 
with Europe, Japan, Hong Kong, Singapore, Switzerland, Canada, 
Australia, Brazil, and Mexico on derivatives reform. In addition, 
the Commission staff is participating in several standard-setting 
initiatives, co-chairs the IOSCO Task Force on OTC Derivatives, and 
has created an informal working group of derivatives regulators to 
discuss implementation of derivatives reform. See also Joint Press 
Statement of Leaders on Operating Principles and Areas of 
Exploration in the Regulation of the Cross-border OTC Derivatives 
Market, included in CFTC Press Release 6439-12, Dec. 4, 2012.
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    The Commission has determined not to take further action on the 
Proposed Guidance at this time. The Commission believes it will be 
beneficial to have further consultations with other domestic and 
international regulators in an effort to harmonize cross-border 
regulatory approaches prior to taking action with respect to the 
Proposed Guidance. The Commission also believes that further 
consideration of public comments, including the comments that may be 
received on the Further Proposed Guidance regarding the Commission's 
interpretation of the term ``U.S. person,'' and its guidance regarding 
aggregation for purposes of SD registration, will be helpful to the 
Commission in issuing final interpretive guidance.
    Nonetheless, the Commission has determined to issue the Final Order 
as a time-limited exemptive order that is substantially similar to the 
Proposed Order, except for the addition of provisions regarding 
registration and certain modifications and clarifications addressing 
public comments. Recently, the Commission staff granted time-limited, 
no-action relief to promote continuity in the application of Dodd-Frank 
requirements and facilitate the transition to those requirements by 
enabling swap market participants to apply a uniform and readily 
ascertainable standard regarding which swaps must be included in the 
calculations under the SD and MSP definitions.\16\ The Final Order 
continues that process and furthers the same purposes.\17\
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    \16\ See CFTC Division of Swap Dealer and Intermediary 
Oversight, Re: Time-Limited No-Action Relief: Swaps Only With 
Certain Persons to be Included in Calculation of Aggregate Gross 
Notional Amount for Purposes of Swap Dealer De Minimis Exception and 
Calculation of Whether a Person is a Major Swap Participant, No-
Action Letter No. 12-22, Oct. 12, 2012 (``CFTC Letter No. 12-22'').
    \17\ The Commission intends that the Final Order is in addition 
to any no-action relief issued or to be issued by the Commission 
staff. Unless specifically provided in any letter providing no-
action relief, the Final Order does not limit the availability of 
any no-action relief.
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    In preparing the Final Order, the Commission has attempted to be 
responsive to commenters' concerns and recommendations, so that market 
practices will not be unnecessarily disrupted during the transition to 
the new swap regulatory regime. At the same time, the Commission also 
recognizes the importance of the new SD and MSP regulatory scheme to 
the Dodd-Frank swap reforms and, therefore, is mindful that its 
implementation should not be subject to undue delay. The Commission 
believes that the Final Order strikes the proper balance between 
promoting an orderly transition to the new regulatory regime, while 
appropriately tailoring relief to ensure that the Commission can 
responsibly discharge its statutory duties.
    This release is organized in seven sections. Section II provides a 
brief overview of the Commission's exemptive authority under section 
4(c) of the CEA and the Proposed Order; Section III provides a summary 
of the comments received on the Proposed Order and the Commission 
determinations regarding the Final Order; Section IV provides the 
Commission's findings pursuant to CEA section 4(c); Section V addresses 
the Paperwork Reduction Act; Section VI discusses cost benefit 
considerations; and Section VII contains the Final Order.

II. Commission's Exemptive Authority and Proposed Order

A. Section 4(c) of the CEA

    Section 4(c)(1) of the CEA authorizes the Commission to ``promote 
responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transaction from any of the 
provisions of the CEA (subject to certain exceptions) where the 
Commission determines that the exemption would be consistent with the 
public interest and the purposes of the CEA.\18\ Under section 4(c)(2) 
of the CEA, the Commission may not grant exemptive relief unless it 
determines that: (1) The exemption is appropriate

[[Page 861]]

for the transaction and consistent with the public interest; (2) the 
exemption is consistent with the purposes of the CEA; (3) the 
transaction will be entered into solely between ``appropriate 
persons''; and (4) the exemption will not have a material adverse 
effect on the ability of the Commission or any contract market to 
discharge its regulatory or self-regulatory responsibilities under the 
CEA.\19\ In enacting section 4(c), Congress noted that the purpose of 
the provision is to give the Commission a means of providing certainty 
and stability to existing and emerging markets so that financial 
innovation and market development can proceed in an effective and 
competitive manner.\20\
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    \18\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1).
    \19\ CEA section 4(c)(2), 7 U.S.C. 6(c)(2).
    \20\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
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B. Proposed Order

    Under the Proposed Order, the Commission would allow non-U.S. SDs 
and MSPs to delay compliance with certain Entity-Level Requirements of 
the Dodd-Frank Act (and the Commission's regulations thereunder), 
subject to specified conditions described therein.\21\ An exception to 
the foregoing relief from the Entity-Level Requirements related to the 
swap data repository (``SDR'') reporting requirement \22\ and part 20 
of the Commission's regulations relating to large-trader reporting 
(``LTR''). Specifically, non-U.S. SDs and MSPs would be required to 
comply with the SDR reporting and LTR requirements for all swaps with 
U.S. counterparties upon their compliance date. Further, for swaps with 
non-U.S. counterparties, the Commission proposed that only those non-
U.S. SDs and MSPs that are not affiliates or subsidiaries of a U.S.-
based SD would be permitted to delay compliance with the SDR reporting 
and LTR requirements.
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    \21\ The ``Entity-Level Requirements'' and ``Transaction-Level 
Requirements'' for purposes of the Proposed Order were the same as 
those defined for purposes of the Final Order. See section II.D.1., 
below.
    \22\ See 7 U.S.C. 2(a)(13)(G). The Commission believes that the 
data reported to, and collected by, SDRs will be important to its 
ability to effectively monitor and address the risk exposures of 
individual market participants (including SDs and MSPs) and the 
concentration of risk within the swaps market more generally.
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    With respect to U.S. SDs and MSPs, the Commission proposed to 
permit such registrants \23\ to delay compliance with certain Entity-
Level Requirements through January 1, 2013. This relief with respect to 
Entity-Level Requirements, however, would not extend to swap data 
recordkeeping, SDR reporting or LTR requirements. That is, U.S. SDs and 
MSPs would be required to comply with the swap data recordkeeping, SDR 
reporting and LTR requirements for all swaps.
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    \23\ For purposes of the Final Order, the term ``registrant'' 
means a registered SD or MSP.
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    The Commission also proposed to grant, with respect to certain 
Transaction-Level Requirements of the Dodd-Frank Act (and the 
Commission's regulations thereunder), temporary relief to non-U.S. SDs 
and MSPs, as well as foreign branches of U.S. SDs and MSPs, for swaps 
with a non-U.S. counterparty so that they may comply only with the 
regulations as may be required in the home jurisdiction of the non-U.S. 
registrant (or in the case of a foreign branch of a U.S. registrant, 
the foreign location of the branch).\24\ With respect to swaps with any 
U.S. counterparty, however, these registrants (as well as foreign 
branches of U.S. SDs and MSPs) would be required to comply with all 
applicable Transaction-Level Requirements that are in effect. Finally, 
the Commission did not propose exemptive relief for swaps between 
market participants that are neither SDs nor MSPs.
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    \24\ Under the Proposed Guidance, a foreign branch of a U.S. 
person would be deemed a U.S. person. Accordingly, swaps entered 
into between a foreign branch of a U.S. person and another foreign 
branch of a U.S. person would be subject to the Transaction-Level 
Requirements.
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    The proposed temporary exemptive relief for non-U.S. registrants 
(and foreign branches of U.S. registrants with respect to Transaction-
Level Requirements) would become effective on the compliance date for 
registration and expire 12 months following the publication of the 
Proposed Order in the Federal Register (i.e., July 12, 2013). In the 
Proposed Order, the Commission also stated that, in the interest of 
promoting an orderly transition to the new swap regulatory regime, it 
intends to consider extending the effectiveness of the exemptive relief 
at its expiration based on, among other things, whether and when 
substituted compliance with foreign regulatory requirements for non-
U.S. persons is available.
    A non-U.S. registrant seeking relief under the Proposed Order would 
have to satisfy certain conditions. First, a non-U.S. person that is 
required to register as an SD or MSP would have to apply to become 
registered as such when registration is required. Second, within 60 
days of applying for registration, a non-U.S. registrant would have to 
submit to the National Futures Association (``NFA'') a compliance plan 
addressing how it plans to comply, in good faith, with all applicable 
requirements under the CEA and related rules and regulations upon the 
effective date of final cross-border interpretive guidance.
    The Commission further noted that the proposed relief would 
neither: (1) Limit the applicability of any CEA provision or Commission 
regulation to any person, entity or transaction except as provided in 
the Proposed Order; nor (2) affect any effective date or compliance 
date set out in any specific Dodd-Frank Act rulemaking by the 
Commission.

III. Comments on the Proposed Order and Commission Determinations

A. Comments Generally

    Many commenters expressed general support for the Proposed Order 
but urged the Commission to broaden the scope of the relief to give 
market participants adequate time to implement necessary operational 
and compliance changes and to reflect the fact that certain key aspects 
of the Proposed Guidance (particularly those relating to registration 
determinations) were not yet final as of the date of the comments.\25\ 
Many of the commenters supporting temporary exemptive relief also 
suggested specific modifications or clarifications of the Proposed 
Order concerning the scope and/or timing of the exemptive relief.\26\
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    \25\ See e.g., Letters from Security Industry and Financial 
Markets Association (``SIFMA'') (Aug. 13, 2012); Institute of 
International Bankers (``IIB'') (Aug. 9, 2012); Cleary Gottlieb 
Steen & Hamilton LLP (``Cleary'') (Aug. 16, 2012); and Futures 
Options Association (``FOA'') (Aug. 13, 2012). Some of the 
commenters expressly stated that the Commission should finalize the 
exemptive relief as promptly as possible. See e.g., IIB Letter at 1 
and Cleary Letter at 3. For example, IIB stated that the proposed 
relief should be modified to address ``unrealistic and unwarranted'' 
compliance burdens related to the Proposed Guidance and certain 
aspects of the Commission regulations adopted to date. IIB Letter 
(Aug. 9, 2012) at 2. Accordingly, IIB requested limited interim 
relief from certain aspects of the Commission's registration and 
definitional rules (in particular, the aggregation requirement for 
purposes of the de minimis calculation). Id. at 3-7. Similarly, The 
Clearing House Association LLC (``The Clearing House'') expressed 
concerns that the proposed relief will be ``ultimately ineffective'' 
in accomplishing its objectives if concepts from the Proposed 
Guidance are required to be applied before they are finalized, and 
requested exemption from those rules or concepts that are not yet 
finalized. The Clearing House (Aug. 13, 2012) at 2.
    \26\ See, e.g., SIFMA (Aug. 13, 2012), at 3, 5-6, 10-13, A-50; 
Lloyds Banking Group (``Lloyds'') (Aug. 13, 2012) at 1-2; IIB (Aug. 
9, 2012), at 5; Canadian Bankers Association (Aug. 13, 2012), at 2; 
Credit Suisse (Aug. 27, 2012), at 7; Cleary (Aug. 16, 2012), at 4; 
Deutsche Bank AG (``Deutsche Bank'') (Aug. 13, 2012), at 3, 7; 
Societe Generale (Aug. 8, 2012), at 2.
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    On the other hand, other commenters--namely, public interest groups 
such as Americans for Financial Reform (``AFR'') and Public Citizen's 
Congress Watch--expressed concerns

[[Page 862]]

about delaying the implementation of the Dodd-Frank Act to overseas 
activities.\27\ AFR stated that the Proposed Order would significantly 
extend the period where markets lack critical protections against 
derivatives risks and expressed concern about taxpayer exposure to 
foreign banks, particularly ``foreign affiliates of U.S. banks whose 
liabilities are guaranteed (implicitly or explicitly) by the parent 
company.'' \28\ Similarly, Public Citizen's Congress Watch expressed 
the concern that the Proposed Order would unnecessarily delay 
compliance with most entity requirements and transaction requirements 
for foreign subsidiaries and affiliates of U.S. financial institutions 
and for U.S. subsidiaries and affiliates of foreign banks, further 
prolonging exposure of U.S. taxpayers to unnecessary systemic 
risks.\29\
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    \27\ See AFR (Aug. 13, 2012), at 1-4. AFR stated that, while it 
recognized the complexities and challenges the industry faces, ``the 
large swap entities designated under the Dodd-Frank Act have been 
aware of the general contours of these requirements for several 
years, and there have already been significant delays in 
implementation.'' AFR Letter at 2. Public Citizen's Congress Watch 
expressed concerns that delayed compliance would unnecessarily 
prolong American taxpayers' exposure to the systemic risks of U.S. 
institutions and interests. See Public Citizen's Congress Watch 
(submitted by Professor I. Michael Greenberger) (``Public Citizen's 
Congress Watch'') (Aug. 14, 2012) at 1-13.
    \28\ AFR (Aug. 13, 2012) at 2.
    \29\ See Public Citizen's Congress Watch (Aug. 14, 2012) at 1-2.
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B. Definition of ``U.S. Person''

    Although at this time the Commission is not making any 
determinations as to the scope of the final interpretive guidance, the 
Commission believes that the comments received on the definition of 
U.S. person set forth in the Proposed Guidance are nonetheless relevant 
and helpful in determining the appropriate scope of exemptive relief in 
the Final Order. Taken together, these comments generally support, as 
an interim measure, the approach taken by the Commission staff in CFTC 
Letter No. 12-22 regarding the initial scope of the application of the 
CEA to swaps activities. Accordingly, in light of the Commission's 
experience to date with CFTC Letter No. 12-22 and these comments, it is 
taking a similar approach to the definition of U.S. person to that set 
forth in the staff no-action letter and supported by many commenters.
    To be clear, the Commission wishes to emphasize that the discussion 
here is not, and should not be construed as, an indication of, or a 
limitation on, the definition of the term ``U.S. person'' that the 
Commission may adopt in final cross-border interpretive guidance. As 
discussed further below, the Commission is seeking further comment on 
this issue. However, the Commission is aware that the terms ``U.S. 
person'' and ``non-U.S. person'' are commonly used in the discussion of 
these issues. For ease of reference, therefore, this release and the 
Final Order use the term ``U.S. person'' to refer to a person that is 
described by the criteria discussed below, and the term ``non-U.S. 
person'' to refer to any other person.\30\
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    \30\ A number of commenters voiced concerns regarding potential 
expansion of the term ``U.S. person'' that they thought could result 
from the prefatory phrase ``includes, but is not limited to'' that 
appeared in the Proposed Guidance. These commenters requested that 
the Commission affirmatively state that non-U.S. persons are any 
persons that do not meet the definition of ``U.S. person.'' See 
SIFMA (Aug. 27, 2012) at A-15; IIB (Aug. 27, 2012) at 11-12; 
European Commission (``EC'') (Aug. 24, 2012) at 1-2; and Australian 
Bankers Association Inc. (``Australian Bankers'') (Aug. 27, 2012) at 
4.
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1. Proposed Definition in the Proposed Guidance
    Under the Proposed Guidance, the term ``U.S. person'' would be 
defined by reference to the extent to which swap activities or 
transactions involving one or more such persons have the relevant 
connection with activities in, or effect on, U.S. commerce.\31\ As 
proposed, the term ``U.S. person'' would encompass both: (1) Persons 
(or classes of persons) located within the United States; as well as 
(2) persons that may be domiciled or operating outside the United 
States, but whose swap activities have a ``direct and significant 
connection with activities in, or effect on, commerce of the United 
States'' within the meaning of CEA section 2(i).\32\ That is, the term 
``U.S. person'' identifies those persons whose swap activities--either 
individually or in the aggregate--satisfy the jurisdictional nexus 
under section 2(i) of the CEA.
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    \31\ See Proposed Guidance, 77 FR at 41218.
    \32\ Specifically, as set forth in the Proposed Guidance, the 
definition of the term ``U.S. person'' would include, but not be 
limited to:
    (i) Any natural person who is a resident of the United States;
    (ii) Any corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or 
any form of enterprise similar to any of the foregoing, in each case 
that is either (A) organized or incorporated under the laws of the 
United States or having its principal place of business in the 
United States (legal entity) or (B) in which the direct or indirect 
owners thereof are responsible for the liabilities of such entity 
and one or more of such owners is a U.S. person;
    (iii) Any individual account (discretionary or not) where the 
beneficial owner is a U.S. person;
    (iv) Any commodity pool, pooled account or collective investment 
vehicle (whether or not it is organized or incorporated in the 
United States) of which a majority ownership is held, directly or 
indirectly, by a U.S. person(s);
    (v) Any commodity pool, pooled account or collective investment 
vehicle the operator of which would be required to register as a 
commodity pool operator under the CEA;
    (vi) A pension plan for the employees, officers or principals of 
a legal entity with its principal place of business inside the 
United States; and
    (vii) An estate or trust, the income of which is subject to U.S. 
income tax regardless of source.
    Under the proposal, a ``U.S. person'' would include a foreign 
branch of a U.S. person; on the other hand, a non-U.S. affiliate or 
subsidiary guaranteed by a U.S. person would not be deemed a ``U.S. 
person.''
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2. Comments
    In general, commenters stated that the proposed ``U.S. person'' 
definition presented significant interpretive issues and implementation 
challenges.\33\ The commenters contended that it would be difficult to 
determine U.S. person status because the proposed definition was, they 
said, overly broad, contained ambiguities, and would require collection 
of information not readily accessible at this time. The commenters, 
therefore, urged the Commission to provide market participants with 
sufficient time to implement a final definition of the term ``U.S. 
person'' and to reconsider the proposed definition in favor of ``a 
simpler, more easily applied'' definition of ``U.S. person.'' \34\
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    \33\ See SIFMA (Aug. 27, 2012) at 5; Societe Generale (Aug. 8, 
2012) at 4; IIB (Aug. 27, 2012), at 4-14; Deutsche Bank (Aug. 27, 
2012), at 1-4; Goldman Sachs Group, Inc. (``Goldman'') (Aug. 27, 
2012), at 3; The Hong Kong Association of Banks (``Hong Kong 
Banks'') (Aug. 27, 2012), at 4; Australian Bankers (Aug. 27, 2012) 
at 4.
    \34\ See SIFMA (August 27, 2012) at A-10.
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    A number of commenters requested that the Commission adopt an 
interim definition of ``U.S. person'' that would allow firms to rely on 
their existing systems and classifications and avoid the need to 
develop systems to achieve temporary compliance with standards that may 
change when a definition of the term ``U.S. person'' is finalized.\35\ 
IIB explained that applying any definition of ``U.S. person'' that 
departs from status based on residence or jurisdiction of organization, 
and in some cases principal place of business, will require time to 
implement relevant documentation conventions and diligence 
procedures.\36\ IIB, therefore, requested that the Commission implement 
a phased-in interim approach to the ``U.S. person'' definition that 
would encompass, in general, (1) a natural person who is a U.S. 
resident; and (2) a corporate entity

[[Page 863]]

that is organized or incorporated under the laws of the United States 
or has its place of business in the United States.\37\
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    \35\ See e.g., Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27, 
2012) at A-8-A9; IIB (Aug. 9, 2012) at 4; Deutsche Bank (Aug. 13, 
2012) at 2; State Street Corporation (``State Street'') (Aug. 27, 
2012) at 2; and Goldman (Aug. 27. 2012) at 3.
    \36\ See IIB (Aug. 9, 2012) at 4.
    \37\ Id. For purposes of IIB's suggested definition, a foreign 
branch of a U.S. SD would be considered a non-U.S. person. IIB added 
that it believed that the Commission should adopt a final definition 
of ``U.S. person'' that is consistent with IIB's proposed interim 
definition.
---------------------------------------------------------------------------

    SIFMA also urged the Commission to phase in the ``U.S. person'' 
definition, citing the implementation difficulties identified by IIB. 
Specifically, SIFMA recommended that the Commission allow market 
participants to apply an interim definition of ``U.S. person'' until 90 
days after the final definition of ``U.S. person'' is published.\38\ 
SIFMA stated that its interim definition--which was identical to IIB's 
interim definition--should identify ``core'' U.S. persons and allow its 
members to phase in compliance with the Dodd-Frank requirements without 
building new systems that might have to be changed when a final 
definition is adopted.
---------------------------------------------------------------------------

    \38\ See SIFMA (Aug. 25, 2012) at A-8.
---------------------------------------------------------------------------

3. Commission Determination on Definition of ``U.S. Person''
    The Commission finds merit in the comments suggesting that it 
should adopt a phased approach to cross-border activities. The 
Commission understands, from the comments, that market participants may 
need additional time to assess their businesses in light of the Final 
Order and to institute necessary changes to their systems and 
operations. Therefore, for purposes of the Final Order, the Commission 
will apply a definition of the term ``U.S. person'' based upon the 
counterparty criteria set forth in CFTC Letter No. 12-22 \39\ with 
certain modifications as described below. With respect to the other 
issues raised by commenters regarding the definition of ``U.S. 
person,'' the Commission believes that further public comment and 
consideration during the effectiveness of the Final Order will be 
helpful.
---------------------------------------------------------------------------

    \39\ The counterparty criteria set forth in CFTC Letter No. 12-
22 are:
    (i) A natural person who is a resident of the United States;
    (ii) A corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or 
any form of enterprise similar to any of the foregoing, in each case 
that is organized or incorporated under the laws of the United 
States;
    (iii) A pension plan for the employees, officers, or principals 
of a legal entity described in (ii) above, unless the pension plan 
is exclusively for foreign employees of such entity;
    (iv) An estate or trust, the income of which is subject to U.S. 
income tax, regardless of source; or
    (v) An individual account (discretionary or not) where the 
beneficial owner is a person described in (i) through (iv) above.
---------------------------------------------------------------------------

    For purposes of the Final Order, the Commission will treat as a 
``U.S. person'' any person identified by the following five criteria: 
\40\
---------------------------------------------------------------------------

    \40\ The Commission understands that persons may currently be 
relying upon the counterparty criteria set forth in CFTC Letter No. 
12-22. Thus, until December 31, 2012, persons may continue to apply 
those criteria for purposes of the Final Order. In effect, until 
December 31, 2012, a person may apply either the counterparty 
criteria in CFTC Letter No. 12-22, or the definition set forth 
herein for purposes of the Final Order. Beginning on January 1, 2013 
(i.e., following the expiration of CFTC Letter No. 12-22), a person 
must apply the definition set forth in the Final Order for purposes 
of swaps entered into on or after that date.
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    (i) A natural person who is a resident of the United States;
    (ii) A corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or any 
form of enterprise similar to any of the foregoing, in each case that 
is (A) organized or incorporated under the laws of a state or other 
jurisdiction in the United States or (B) effective as of April 1, 2013 
for all such entities other than funds or collective investment 
vehicles, having its principal place of business in the United States;
    (iii) A pension plan for the employees, officers or principals of a 
legal entity described in (ii) above, unless the pension plan is 
primarily for foreign employees of such entity;
    (iv) An estate of a decedent who was a resident of the United 
States at the time of death, or a trust governed by the laws of a state 
or other jurisdiction in the United States if a court within the United 
States is able to exercise primary supervision over the administration 
of the trust; or
    (v) An individual account or joint account (discretionary or not) 
where the beneficial owner (or one of the beneficial owners in the case 
of a joint account) is a person described in (i) through (iv) above.
    The modifications made by the Commission to the counterparty 
criteria set forth in CFTC Letter No. 12-22 relate to (1) the location 
of an entity's principal place of business, (2) the treatment of 
pension plans for foreign employees, (3) the treatment of estates and 
trusts, and (4) the treatment of joint accounts.\41\
---------------------------------------------------------------------------

    \41\ Also, the Commission is clarifying that language in the 
second counterparty criterion in CFTC Letter No. 12-22 referring to 
an entity ``incorporated under the laws of the United States'' 
includes an entity incorporated under the laws of a state or other 
jurisdiction in the United States.
---------------------------------------------------------------------------

    First, regarding the location of an entity's principal place of 
business, the Commission considered that the second counterparty 
criterion in CFTC Letter No. 12-22 is generally intended to cover legal 
entities that are physically located or incorporated within U.S. 
territory. For purposes of the Final Order, the Commission believes it 
is appropriate to treat as a ``U.S. person'' a legal entity that is not 
incorporated in the United States but that nonetheless has its 
``principal place of business'' in the United States.\42\ The 
Commission believes that it is appropriate to consider an entity that 
is organized outside the United States but nonetheless has its 
``principal place of business'' within the United States in the same 
manner as an entity organized or incorporated under the laws of the 
United States, because the center of direction, control and 
coordination of its business activities is located in the United 
States.\43\ However, the Commission understands from commenters that 
market participants will need a short period of time to implement the 
treatment of entities with a principal place of business in the United 
States as ``U.S. persons.'' \44\ Therefore, the Commission will not 
treat

[[Page 864]]

entities incorporated or organized outside the United States and with a 
principal place of business in the United States as U.S. persons until 
April 1, 2013 (i.e., approximately 90 days after effectiveness of the 
Final Order). The Commission also understands from commenters that the 
application of the principal place of business element may be complex 
for funds and collective investment vehicles and require further 
guidance in this regard; therefore, at this time for purposes of the 
Final Order, the Commission has determined that this element will not 
apply to funds or collective investment vehicles.\45\
---------------------------------------------------------------------------

    \42\ For purposes of the Final Order, the Commission will 
construe the term ``principal place of business'' as referring to 
the single place where a corporation's officers direct, control, and 
coordinate the corporation's activities. Typically, the principal 
place of business will be where the corporation maintains its 
headquarters. See Hertz v Friend, 559 U.S. ----, 130 S.Ct. 1181, 
1192, 175 L.Ed. 2d 1029 (2010) (``[I]n practice [a company's 
principal place of business] should normally be the place where the 
corporation maintains its headquarters--provided that the 
headquarters is the actual center of direction, control and 
coordination, i.e., the `nerve center' '').
    \43\ Commenters supported inclusion of the principal place of 
business element in the interim definition. See Cleary (Aug. 16, 
2012) at 6 (``the Firms respectfully request that the Commission 
adopt an interim `U.S. person' definition based on factors such as 
residence, place of organization or incorporation and principal 
place of business''); see also IIB (Aug. 27, 2012) at 13 (suggested 
definition of ``U.S. person'' that includes ``Any corporation, 
partnership, limited liability company, business or other trust, 
association, joint stock company or any form of enterprise similar 
to the foregoing (other than a collective investment vehicle, 
employee benefit plan, estate or trust) that is organized or 
incorporated under the laws of the United States or having its 
principal place of business in the United States.''); SIFMA (Aug. 
13, 2012) at 4 (``The Commission should include as part of the Final 
Exemptive Order a workable, uniform definition of U.S. person for 
this transitional time period* * *. For most [of our members] this 
would consist of Any natural person who is a resident of the U.S.; 
and Any corporation, partnership, LLC, business or other trust, 
association, joint-stock company, fund, or any form of enterprise 
similar to any of the foregoing that is organized or incorporated 
under the laws of the United States or has its principal place of 
business in the United States* * *. [S]uch a definition would allow 
most of our members to identify those counterparties that are U.S. 
persons during the Interim Period without the necessity of building 
new, interim systems that might have to be changed when a Final 
Definition is adopted.'').
    \44\ See, e.g., SIFMA (Aug. 25, 2012) at A-8 (suggesting 90-day 
period to transition to definition including principal place of 
business element).
    \45\ See, e.g., Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012 
at 6-7. The Commission is separately proposing further guidance 
regarding the treatment of funds and other collective investment 
vehicles for purposes of the definition of the term ``U.S. person.''
---------------------------------------------------------------------------

    Second, regarding the treatment of pension plans, the Commission is 
refining the third counterparty criterion in CFTC Letter No. 12-22 to 
indicate that a pension plan that is ``primarily'' (rather than 
exclusively) for the foreign employees of an entity is also a ``U.S. 
person'' for purposes of the Final Order.\46\
---------------------------------------------------------------------------

    \46\ In a letter to the Commissioners dated November 30, 2012 
requesting transition relief under Title VII of the Dodd-Frank Act, 
the Futures Industry Association (``FIA''), IIB and SIFMA suggested 
that this criterion be modified to replace the word ``exclusively'' 
with ``primarily.'' See joint letter from FIA, IIB and SIFMA (Nov. 
30, 2012) at 14, fn. 14.
---------------------------------------------------------------------------

    Third, regarding the treatment of estates and trusts, the 
Commission is refining the fourth counterparty criterion in CFTC Letter 
No. 12-22 so that the treatment of an estate or trust for purposes of 
this relief does not depend on whether the income of the estate or 
trust is subject to U.S. income tax.\47\ The Commission understands 
that whether income is subject to U.S. tax can depend on a variety of 
factors, including the source of the income, which may not be relevant 
for purposes of the Dodd-Frank Act. Accordingly, for purposes of the 
Final Order, the Commission is of the view that an estate should be 
treated as a ``U.S. person'' if the decedent was a resident of the 
United States at the time of death, and a trust should be treated as a 
``U.S. person'' if it is governed by the law of a state or other 
jurisdiction in the United States and a court within the United States 
is able to exercise primary supervision over the administration of the 
trust.
---------------------------------------------------------------------------

    \47\ See, e.g., IIB Letter (Aug. 27, 2012) at 12 (market 
participants do not typically identify an estate's or trust's 
regulatory status on the basis of its tax status); see also joint 
letter from FIA, IIB and SIFMA at 14, fn. 14 (suggesting that the 
fourth criterion from CFTC Letter No. 12-22 be limited to estates 
and trusts organized under the laws of the United States).
---------------------------------------------------------------------------

    The Commission believes that this approach is appropriate in view 
of how estates and trusts use swaps, and is consistent with how they 
are treated for other purposes under law. For estates, if the decedent 
was a party to any swaps at the time of death, then those swaps would 
continue to be treated in the same way after the decedent's death, when 
the swaps would most likely pass to the decedent's estate. Also, this 
test will be predictable and easy to apply for natural persons planning 
for how their swaps will be treated after death, for executors and 
administrators of estates, and for the swap counterparties to natural 
persons and estates.
    With respect to trusts, the Commission considered that each trust 
is governed by the laws of a particular jurisdiction, which may depend 
on steps taken when the trust was created or other circumstances 
surrounding the trust. The Commission believes that if a trust is 
governed by U.S. law (i.e., the law of a state or other jurisdiction in 
the United States), then it is reasonable to treat the trust as a U.S. 
person for purposes of the Final Order. The definition also requires 
that a court within the United States be able to exercise primary 
supervision over the administration of the trust.\48\ Including this 
element of the definition will ensure that the treatment of the trust 
for purposes of the Final Order will be in line with how the trust is 
treated for other legal purposes.
---------------------------------------------------------------------------

    \48\ The Commission is aware that one element of the test 
applied by the Internal Revenue Service to determine if a trust is a 
U.S. person for tax purposes depends on whether a court within the 
United States is able to exercise primary supervision over the 
administration of the trust. See 26 CFR 301.7701-7(a)(1)(ii). 
However, the Commission does not intend to formally adopt the 
Internal Revenue Service test for this purpose.
---------------------------------------------------------------------------

    Finally, regarding the treatment of joint accounts, the Commission 
is refining the fifth counterparty criterion in CFTC Letter No. 12-22 
to include not only individual accounts where the beneficial owner is a 
person described in the preceding counterparty criteria, but also joint 
accounts where any of the beneficial owners is such a person.
    Due Diligence. As described above, many commenters said that the 
information necessary to accurately assess the status of their 
counterparties as U.S. persons may not be available, or may be 
available only through overly burdensome due diligence. For this 
reason, these commenters requested that the Commission allow for 
reasonable reliance on counterparty representations as to their ``U.S. 
person'' status.\49\
---------------------------------------------------------------------------

    \49\ For example, SIFMA stated that a swap counterparty should 
be responsible for determining its own U.S.-person status but in the 
alternative, recommended that the Commission allow for reasonable 
reliance on counterparty representations. See SIFMA (Aug. 27, 2012) 
at A-16-18. SIFMA and Cleary further pointed out that the Commission 
has accepted reasonable reliance on counterparty representations in 
the context of the external business conduct rules. See SIFMA/AMG 
(Aug. 27, 2012) at 4-5; and Cleary (Aug. 16, 2012) at 6.
---------------------------------------------------------------------------

    The Commission agrees with the commenters that a party to a swap, 
in order to rely upon the exemptive relief provided in the Final Order, 
should be able to reasonably rely on its counterparty's representation 
in determining whether the counterparty is a ``U.S. person.'' In this 
context, the Commission interprets the ``reasonable'' standard to mean 
that a party to a swap should conduct reasonable due diligence on its 
counterparties, with what is reasonable in a particular situation to 
depend on the relevant facts and circumstances. The Commission notes 
that under its external business conduct rules, an SD or MSP generally 
meets its due diligence obligations if it reasonably relies on 
counterparty representations, absent indications to the contrary.\50\ 
Similarly here, the Commission believes that allowing for reasonable 
reliance on counterparty representations provides for an objective 
standard and avoids subjective evaluations. This, in turn, facilitates 
a more consistent and foreseeable determination of whether a person is 
a ``U.S. person'' for purposes of relying on temporary exemptive 
relief.
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    \50\ See 77 FR 9734, Feb. 17, 2012. Consistent with the 
``reasonable reliance'' standard in the external business conduct 
rules, an SD or MSP may rely on the written representations of a 
counterparty in performing its due diligence. However, an SD or MSP 
cannot rely on a written representation and continue to claim the 
exemptive relief if it has information that would cause a reasonable 
person to question the accuracy of the representation. In other 
words, an SD or MSP cannot ignore red flags when relying on written 
representations in performing its due diligence. Further, if agreed 
to by the counterparty, the written representations may be included 
in counterparty relationship documentation. However, an SD or MSP 
may only rely on such representations in the counterparty 
relationship documentation if the counterparty agrees to timely 
update any material changes to the representations. In addition, the 
Commission expects SDs and MSPs to review the written 
representations on a periodic basis to ensure that they remain 
appropriate for their intended purpose.
---------------------------------------------------------------------------

    Finally, the Commission confirms that this definition of ``U.S. 
person'' applies only for purposes of the Final Order. Further, the 
Commission confirms that the definition of ``U.S. person'' applies only 
to Commission regulations promulgated under Title VII's swap 
provisions. Thus, for example, it would

[[Page 865]]

not apply to the CEA provisions (and Commission regulations promulgated 
thereunder) relating to the futures markets.
    Foreign Branch of U.S. Person. The Commission views as a ``U.S. 
person'' the foreign branch of a U.S. person. As the Commission 
explained in the Proposed Guidance, a branch does not have a legal 
identity separate from that of its principal entity. In this respect, 
the Commission notes that branches are neither separately incorporated 
nor separately capitalized and, more generally, the rights and 
obligations of a branch are the rights and obligations of its principal 
entity (and vice versa). Under these circumstances, the Commission 
views the activities of a foreign branch as the activities of the 
principal entity. \51\
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    \51\ In the Proposed Guidance, the Commission asked whether a 
foreign branch of a U.S. SD should be defined as a ``U.S. person.'' 
Some commenters recommended that a foreign branch of a U.S. SD be 
excluded from the definition of ``U.S. person.'' Sullivan & Cromwell 
on behalf of Bank of America, Citigroup, and J.P. Morgan (``S&C'') 
argued that a foreign branch should not be considered a U.S. person 
solely on the basis that it is a part of a U.S. bank. See S&C (Aug. 
13, 2012) at 6-7. Citigroup Inc. (``Citi'') recommended that the 
Commission define a foreign branch of a U.S. SD as a non-U.S. 
person, so long as the branch remains subject to Entity-Level 
Requirements and obtains substituted compliance for Transaction-
Level Requirements for transactions with non-U.S. persons. See Citi 
(Aug. 27, 2012) at 2-4. In Citi's view, this would address comments 
by the foreign branch's non-U.S. clients that they would have to 
register as SDs or MSPs, while assuring that such non-U.S. clients' 
swaps with the foreign branch are covered by the Transaction-Level 
Requirements or substituted compliance. See also State Street (Aug. 
27, 2012) at 3; and IIB (Aug. 27, 2012) at 8.
---------------------------------------------------------------------------

    Accordingly, the Commission declines to recognize foreign branches 
of U.S. persons separately from their U.S. principals for purposes of 
the Dodd-Frank swap provisions, including registration and Entity-Level 
and Transaction-Level Requirements. Therefore, if a foreign branch were 
to be an SD or MSP, as discussed further below, its U.S. principal 
would be required to register, and that registration would encompass 
the foreign branch. Based on the same rationale, the Dodd-Frank Act 
fully applies to a swap between a foreign branch of a U.S. person and a 
foreign branch of another U.S. person. Nevertheless, for purposes of 
the Final Order, as discussed further below, foreign branches of U.S. 
persons may comply only with transaction-level requirements as may be 
required in the location of the foreign branch with respect to swaps 
with foreign counterparties. Further, non-U.S. persons may exclude 
swaps with foreign branches of registered SDs for purposes of 
determining whether they have exceeded the de minimis level of swap 
dealing activity under the SD definition. Finally, for purposes of the 
Final Order, as further discussed below, the Transaction-Level 
Requirements will not apply to a swap transaction between foreign 
branches of U.S. SDs or foreign branches of U.S. MSPs. The Commission 
believes that it is appropriate to extend the foregoing relief on a 
temporary basis while the Commission continues to consider, and works 
with foreign regulators regarding, the treatment of foreign branches of 
U.S. registrants.

C. Registration

1. Timing of Registration for All Prospective SDs and MSPs
i. Comments
    The Proposed Order did not include any delay in the timing of the 
registration requirement for either U.S. or non-U.S. prospective 
registrants. A number of commenters urged the Commission to delay 
registration of SDs and MSPs.\52\ Some of these commenters noted that 
final regulatory determinations essential to the implementation of 
Commission regulations are either still in proposed form or have only 
recently been finalized.\53\ As a result, commenters said, firms will 
need additional time to assess whether they will be required to 
register as an SD or MSP and the consequences of doing so.\54\
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    \52\ See e.g., SIFMA (Aug. 13, 2012) at 3, 5; IIB (Aug. 9, 2012) 
at 5; Societe Generale (Aug. 9, 2012) at 2, Citi (Aug. 13, 2012) at 
2; Goldman (Aug. 27, 2012) at 8-9; and Lloyds (Aug. 13, 2012) at 1-
2.
    \53\ See e.g., Goldman (Aug. 27, 2012) at 9 (citing the 
Commission's proposed rule on the treatment of inter-affiliate 
transactions for purposes of mandatory clearing and the anticipated 
Commission action on the status of guarantees of swaps); Societe 
Generale (Aug. 9, 2012) at 2; and IIB (Aug. 9, 2012) at 2.
    \54\ Without such relief, commenters are concerned that they 
will be required to register based on requirements that are subject 
to change at a later date. See Cleary (Aug. 16, 2012) at 6; SIFMA 
(Aug. 27, 2012) at A1-8; IIB (Aug. 9, 2012) at 4-5).
---------------------------------------------------------------------------

    SIFMA recommended a delay of at least 90 days following the 
publication of final interpretive guidance; \55\ Societe Generale 
recommended delaying registration at least until the Proposed Guidance 
has been finalized.\56\ Cleary recommended a delay of at least 90 days 
after a final exemptive order is issued, explaining that firms will 
need additional time to assess and comply with the determinations 
therein.\57\ Lloyds suggested that registration be delayed for non-U.S. 
SDs for at least 12 months after the publication of final guidance, 
with computation of the de minimis threshold starting from that 
date.\58\
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    \55\ See also Goldman (Aug. 27, 2012) at 9.
    \56\ See Societe Generale (Aug. 9, 2012) at 2.
    \57\ See Cleary (Aug. 16, 2012) at 4. IIB suggested a delay 
until a ``reasonable'' period after the final exemptive order is 
issued. See IIB (Aug. 9, 2012) at 9. IIB also noted that this is 
particularly important for non-U.S. firms that are required to 
coordinate their registration plans with their home country 
regulators.
    \58\ See Lloyds (Aug. 13, 2012) at 1-2.
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ii. Commission Determination on Timing of Registration
    Throughout the Dodd-Frank rulemaking process, the Commission 
consistently has strived to strike the proper balance between the need 
to implement the new regulatory framework for swaps without undue 
delay, and the need to minimize disruption and hardships for market 
participants. Consistent with that goal, the Commission has taken steps 
to provide greater certainty to market participants regarding 
registration determinations and their compliance obligations. The 
Commission is also mindful that more than two years have passed since 
the Dodd-Frank Act--a comprehensive reform of the swaps market--was 
enacted as a direct response to the financial crisis of 2008. A central 
element of this reform is the registration and regulation of SDs and 
MSPs. For example, registered SDs and MSPs are required to clear swaps 
with certain counterparties, are subject to detailed reporting and 
recordkeeping requirements and must comply (when final) with new 
capital and margin requirements--all of which are designed to enhance 
market transparency and protections against systemic risk.
    In the Commission's view, any further delay in the registration of 
SDs and MSPs would effectively postpone Dodd-Frank's comprehensive new 
regulatory regime for swaps, frustrating the congressional mandate 
embodied in the Dodd-Frank Act. Further, given the global nature of the 
swaps market, an SD or MSP--whether operating in or outside the United 
States--plays an important role in the U.S. swaps market. Under these 
circumstances, the Commission believes that a further delay in the 
compliance date for registration as an SD or MSP would adversely affect 
the Commission's ability to discharge its responsibilities under the 
CEA and would be contrary to the public interest. Therefore, the 
Commission declines to delay the registration requirement for non-U.S. 
SDs and MSPs.
    However, the Commission believes it is appropriate to provide 
targeted, time-limited exemptive relief with respect to the swap 
dealing transactions to be

[[Page 866]]

included in the de minimis threshold calculation that applies for 
purposes of the SD definition. The Commission expects that this step, 
and the other relief provided in the Final Order, will substantially 
address commenters' concerns regarding the complexity of implementing 
the swap requirements for the interim period during which the Final 
Order is in effect.
2. Scope of Transactions To Be Included in Registration Calculations
    The Commission has adopted final rules and interpretive guidance 
implementing the statutory definitions of the terms ``swap dealer'' and 
``major swap participant'' in CEA sections 1a(49) and 1a(33).\59\ The 
Final Entities Rules delineate the activities that cause a person to be 
an SD and the level of swap positions that cause a person to be an MSP. 
In addition, the Commission has adopted rules concerning the statutory 
exceptions from the definition of an SD, including the de minimis 
exception.\60\ Commission regulation 1.3(ggg)(4) sets forth a de 
minimis threshold of swap dealing, which takes into account the 
notional amount of a person's swap dealing activity over the prior 12 
months.\61\ When a person engages in swap dealing transactions above 
that threshold, the person meets the SD definition in section 1a(49) of 
the CEA.\62\ Commission regulations 1.3(jjj)(1) and 1.3(lll)(1) set 
forth swap position thresholds for the MSP definition in Commission 
regulation 1.3(hhh). When a person holds swap positions above those 
thresholds, such person meets the MSP definition in section 1a(39) of 
the CEA.
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    \59\ 7 U.S.C. 1a(49) and 1a(33). See Final Entities Rules.
    \60\ Section 1a(49)(D) of the CEA (7 U.S.C. 1a(49)(D)) provides 
that ``[t]he Commission shall exempt from designation as a swap 
dealer an entity that engages in a de minimis quantity of swap 
dealing in connection with transactions with or on behalf of its 
customers. The Commission shall promulgate regulations to establish 
factors with respect to the making of this determination to 
exempt.'' This provision is implemented in Commission regulation 
1.3(ggg)(4).
    \61\ As used in this release, the meaning of the term ``swap 
dealing'' is consistent with that used in the Final Entities Rules.
    \62\ Under Commission regulation 3.10(a)(1)(v)(C) and Commission 
regulation 23.21, a person is required to register as an SD when, on 
or after October 12, 2012, the person falls within the definition of 
an SD. However, the rule defining ``swap dealer'' includes a de 
minimis threshold so that an entity is not an SD if it, together 
with the entities controlling, controlled by, and under common 
control with it, engages in swap dealing activity during the prior 
12 months in an aggregate gross notional amount of less than the 
specified thresholds. The rule further specifies that swap dealing 
activity engaged in before the effective date of both the ``swap 
dealer'' and ``swap'' definition rules (i.e., before October 12, 
2012) does not count toward the de minimis threshold. The rule also 
provides that an entity that exceeds the de minimis threshold must 
register as an SD two months after the end of the month in which it 
exceeds the threshold. See Commission regulation 1.3(ggg)(4).
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i. Proposed Guidance
    In the Proposed Guidance, the Commission addressed the general 
manner in which a person's overseas swap dealing activities or 
positions may require registration as an SD or MSP, respectively. 
Specifically, under the Proposed Guidance, a non-U.S. person whose swap 
dealing transactions with U.S. persons exceed the de minimis threshold 
would be required to register as an SD.\63\ Likewise, under the 
Proposed Guidance, a non-U.S. person who holds swap positions with U.S. 
counterparties that are above the specified MSP thresholds would be 
required to register as an MSP.\64\ In determining whether a non-U.S. 
person is engaged in more than a de minimis level of swap dealing, the 
Proposed Guidance would include the notional value of any swap 
transactions between such non-U.S. person (or any of its non-U.S. 
affiliates under common control) and a U.S. person, other than foreign 
branches of registered SDs.\65\ Following a similar rationale, the 
Proposed Guidance stated that in calculating whether a non-U.S. person 
meets an MSP threshold, the non-U.S. person would include the notional 
value of any swaps entered into between such non-U.S. person and a U.S. 
person.\66\
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    \63\ See Proposed Guidance, 77 FR at 41218-41219.
    \64\ Id. CFTC Letter 12-22 applied a similar approach for both 
SD and MSP purposes.
    \65\ Proposed Guidance, 77 FR at 41218-41220. Further, where the 
potential non-U.S. SD's swap obligations are guaranteed by a U.S. 
person, the non-U.S. person would be required to register with the 
Commission as an SD when the aggregate notional value of its swap 
dealing activities (along with the swap dealing activities of its 
non-U.S. affiliates that are under common control and also 
guaranteed by a U.S. person) with U.S. persons and non-U.S. persons 
exceeds the de minimis threshold. Additionally, the Proposed 
Guidance clarified that a non-U.S. person without a guarantee from a 
U.S. person would not be required to register as an SD if it does 
not engage in swap dealing with U.S. persons as part of ``a regular 
business'' with U.S. persons, even if the non-U.S. person engages in 
dealing with non-U.S. persons.
    \66\ Id. at 41221. The Proposed Guidance also provided that if 
the non-U.S. person's swaps are guaranteed by a U.S. person, then 
such swaps will be attributed to the U.S. guarantor and not the 
potential non-U.S. MSP. Further, the non-U.S. person would be 
required to include in its MSP calculation any swaps between another 
non-U.S. person and a U.S. person if the potential non-U.S. MSP 
guarantees the obligations of the other non-U.S. person thereunder.
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    In general, commenters did not raise concerns or objections to the 
Commission's interpretation that non-U.S. persons who engage in more 
than a de minimis level of swap dealing with U.S. persons would be 
required to register as SDs.\67\ A number of commenters argued, 
however, that a non-U.S. person should not be required to register as 
an SD solely by reason of its swap obligations being guaranteed by a 
U.S. person.\68\ SIFMA stated that the ``connection between a non-U.S. 
swap dealing entity and its U.S. guarantor creates too tenuous a nexus 
to justify registration on the basis of this relationship alone.'' \69\ 
Other commenters raised various other issues with respect to the 
treatment of guarantees.\70\
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    \67\ One commenter, Japanese Bankers Association, stated that 
the cross-border application of Dodd-Frank is overbroad because it 
would capture even hedging transactions of a non-U.S. SD with a U.S. 
SD that is making a market. The definition of ``dealing activity'' 
is ambiguous, this commenter asserted, and might require the non-
U.S. SD to register. See Japanese Bankers Association (``Japanese 
Banks'') (Aug. 27, 2012) at 1.
    \68\ See e.g., Goldman (Aug. 27, 2012) at 5; ISDA (Aug. 10, 
2012) at 12 (in the typical case, an intra-group guarantee allocates 
risks and activities within the corporate group and is not a dealing 
activity of the non-U.S. person); Commercial Energy Working Group 
(``CEWG'') (submitted by Sutherland Asbill) (Aug. 27, 2012), at 6-7 
(Proposed Guidance should not include swap guarantees for 
aggregation purposes because it is contrary to the Final Entities 
Rules; jurisdiction should not be extended to transactions between 
two non-U.S. persons if the swap obligations of one party are 
guaranteed by a U.S. person because U.S. jurisdiction in these 
circumstances is not supported by law or existing international 
conventions).
    \69\ See SIFMA (Aug. 27, 2012) at A-29. As an alternative, SIFMA 
posited that only guarantees by a U.S. person for which there is a 
material likelihood of payment by the U.S. guarantor should be 
counted towards the de minimis calculation. To implement this 
recommendation, SIFMA suggested that the Commission establish a 
standard for determining that the likelihood of payment is remote, 
such as a comparison of the aggregate contingent liability of the 
U.S. person guarantor to the net equity of that guarantor. Id. at A-
29--A-30.
    \70\ See Goldman (Aug 27, 2012) at 5 (inconsistent to require SD 
registration solely on the basis of guarantees by a U.S. parent, 
absent any showing of a ``direct and significant'' jurisdictional 
nexus; concerns can be addressed through anti-evasion authority). 
See also CEWG (Aug. 27, 2012) at 7 (because there is no legal basis 
under CEA section 2(i) for asserting jurisdiction based on a 
guaranty, Commission should clarify that a non-U.S. person is not 
subject to Commission regulation, even where a U.S. person 
guarantees either counterparty); The Hong Kong Association of Banks 
(``HKAB'') (Aug. 27, 2012) at 8 (swaps between non-U.S. persons 
should be excluded from the de minimis determination regardless of 
whether a counterparty is guaranteed); ISDA (Aug. 10, 2012) at 12 
(focus should be on whether a U.S. guarantor of a non-U.S. person 
should register); Investment Industry Association of Canada 
(``IIAC'') (Aug. 27, 2012) at 6 (seeking confirmation that indirect 
holding company ownership alone does not constitute a guarantee); 
and JP Morgan (Aug. 27, 2012) at 10 (term ``guarantee'' should not 
include keepwells and liquidity puts that do not create the same 
third-party rights and may be unenforceable by third parties). But 
see contra AFR (June 14, 2012) at 2 (failure to include guaranteed 
affiliates as U.S. persons and to capture the ``large grey area'' 
between explicit and informal guarantees creates opportunities to 
escape Dodd-Frank regulations by shifting business overseas; 
Commission should clarify that it will ``follow through on properly 
implementing these principles and will not enable a `race to the 
bottom' in which incentives are created for derivatives affiliates 
of global banks that are able to relocate to areas of lax regulation 
to take advantage of an inadequate `substituted compliance' 
regime.'').

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[[Page 867]]

ii. Commission Determination on Exemptive Relief Regarding Registration
    Registration Thresholds for Non-U.S. Persons. As noted above, the 
Commission is not, at this time, taking action on the Proposed 
Guidance. Under CEA sections 1a(49) and 1a(33) and Commission 
regulations 1.3(ggg)(4) and 1.3(hhh),\71\ a person is required to take 
account of the notional amount of all of its swap dealing activity over 
the prior 12 months for purposes of the SD determination, and all of 
its swap positions for purposes of the MSP determination. These CEA 
provisions and the Commission's regulations apply to activities within 
the United States and, as provided in section 2(i), to certain 
activities outside the United States.
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    \71\ 7 U.S.C. 1a(49) and 1a(33). See Final Entities Rules.
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    However, while the Commission continues to consider the comments on 
its Proposed Guidance regarding section 2(i), the Commission believes 
it appropriate to provide, under the Final Order, relief for non-U.S. 
persons (regardless of whether the non-U.S. persons' swap obligations 
are guaranteed by U.S. persons) from the requirement that a person 
include all its swaps in its calculation of the aggregate gross 
notional amount of swaps connected with its swap dealing activity for 
SD purposes or in its calculations for MSP purposes. On the other hand, 
the Commission believes that it is not appropriate to provide a non-
U.S. person with relief from the registration requirement when the 
aggregate level of its swap dealing with U.S. persons, as that term is 
defined above, exceeds the de minimis level of swap dealing, or when 
the level of its swap positions with U.S. persons, again as that term 
is defined above, exceeds one of the MSP thresholds. In the 
Commission's view, such relief from the registration requirement is 
inappropriate when a level of swap activities that is substantial 
enough to require registration as an SD or an MSP when conducted by a 
U.S. person, is conducted by a non-U.S. person with U.S. persons as 
counterparties.
    Therefore, the Final Order provides that a non-U.S. person 
(regardless of whether the non-U.S. persons' swap obligations are 
guaranteed by U.S. persons) does not need to include in its calculation 
of the aggregate gross notional amount of swaps connected with its swap 
dealing activity for purposes of Commission regulation 1.3(ggg)(4) or 
in its calculation of whether it is an MSP for purposes of Commission 
regulation 1.3(hhh), any swaps where the counterparty is a non-U.S. 
person.
    Exclusion for Swaps with Foreign Branches of U.S. Swap Dealers. The 
Proposed Guidance would exclude from a non-U.S. person's de minimis 
threshold calculation its swap transactions with foreign branches of 
U.S. SDs. This exclusion was intended to allow non-U.S. persons to 
continue their swap activities with foreign branches of U.S. SDs 
without exceeding the de minimis threshold, thereby triggering a 
requirement to register as an SD.
    In CFTC Letter 12-22, the Commission staff noted that because the 
proposed exclusion would be limited to registered U.S. SDs and many of 
the persons who expect to register as U.S. SDs may not do so until 
December 31, 2012, or later, market participants had expressed concern 
that a non-U.S. person could be required after October 12, 2012, to 
begin counting toward the de minimis threshold any swap dealing 
transactions with a foreign branch of any person that may meet the 
definition of ``U.S. person'' and that is not yet registered (and 
consequently be required to register as an SD) even though many U.S. 
persons with foreign branches intend to register as SDs later in 2012 
or in early 2013.\72\ The Commission staff noted that this potential 
outcome would not be consistent with the scope of relief intended to be 
provided in the Proposed Guidance.\73\
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    \72\ Similarly, if a non-U.S. person must include swaps with 
such foreign branches in its calculation of whether it is within the 
definition of MSP in Commission regulation 1.3(hhh), it could be 
required to register with the Commission in that capacity. Although 
the Proposed Guidance did not provide for a similar exclusion with 
respect to the consideration of a non-U.S. person's swaps with 
foreign branches of U.S. SDs with respect to determining whether the 
non-U.S. person must register as an MSP, some commenters requested 
that the Commission provide a similar exclusion. See SIFMA (Aug. 27, 
2012) at 9, A-28, A-29; Citi (Aug. 27, 2012) at 2-3.
    \73\ Commenters, such as Goldman, argued that the rationale for 
this exclusion is equally applicable to non-U.S. persons that are 
banks or broker-dealers when dealing with U.S. SDs that do not 
conduct overseas business through foreign branches. Absent a similar 
interpretation in these circumstances, they argued, U.S. SDs would 
be at a competitive disadvantage vis-[agrave]-vis foreign branches 
of U.S. SDs since non-U.S. persons will limit their dealing 
activities to foreign branches of U.S. SDs. See Goldman (Aug. 27, 
2012) at 5-6. The Commission does not believe that it would be 
appropriate for a non-U.S. person to exclude from the de minimis 
calculation swap dealing transactions with U.S. SDs (other than 
their foreign branches). By way of comparison, however, for purposes 
of the Final Order, a swap that a non-U.S. person enters into with a 
non-U.S. affiliate of a U.S. SD (whether guaranteed by a U.S. person 
or not) is not a swap with a U.S. person and, thus, need not be 
counted towards the de minimis calculation. The Commission proposed 
to interpret section 2(i) so as to exclude swap dealing transactions 
with a foreign branch of a U.S. SD in order to avoid the otherwise 
potential result that foreign entities would cease doing swap 
dealing business with foreign branches of U.S. SDs in order to avoid 
SD status, while continuing to do business with foreign affiliates 
of U.S. SDs located in the same jurisdiction. The Commission does 
not believe relief should be provided in a manner that would lead to 
such disparate treatment of entities located outside the United 
States, i.e., foreign branches and foreign affiliates of U.S. SDs 
that are located in the same jurisdiction but that happen to bear a 
different legal structure. Similar considerations of potentially 
discriminatory results do not apply, however, with respect to swaps 
directly with U.S. SDs. Such U.S. SDs are different in kind from a 
foreign affiliate of a U.S. SD, and the rationale for the foreign 
branch exclusion is inapposite in these circumstances.
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    The Commission believes it appropriate to provide, in this Final 
Order, the scope of relief afforded in CFTC Letter No. 12-22 while it 
considers action on the Proposed Guidance. Accordingly, for purposes of 
the Final Order, swap transactions by a non-U.S. person with a foreign 
branch of a registered U.S. SD, or with a foreign branch of a U.S. 
person that is not yet registered as a U.S. SD but that does intend to 
register as such when required, are not required to be included in the 
calculations for SD and MSP registration purposes.
    Therefore, the Final Order provides that a non-U.S. person does not 
need to include in its calculation of the aggregate gross notional 
amount of swaps connected with its swap dealing activity for purposes 
of Commission regulation 1.3(ggg)(4) or in its calculation of whether 
it is an MSP for purposes of Commission regulation 1.3(hhh), any swap 
where the counterparty is a foreign branch of a U.S. person that is 
registered as an SD or that represents that it intends to register with 
the Commission as an SD by March 31, 2013.\74\
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    \74\ The representation of the intention to register with the 
Commission as a swap dealer need not be obtained prior to execution 
of a swap.
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    Aggregation for the De Minimis Calculation. Commission regulation 
1.3(ggg)(4) requires that a person include, in determining whether its 
swap dealing activities exceed the de minimis threshold, the aggregate 
notional value of swap dealing transactions entered by its affiliates 
under common control. Additionally, under the Proposed Guidance, a non-
U.S. person, in determining whether its swap dealing transactions 
exceed the de minimis threshold, would include the

[[Page 868]]

aggregate notional value of swap dealing transactions entered into by 
its non-U.S. affiliates under common control but would not include the 
aggregate notional value of swap dealing transactions entered into by 
its U.S. affiliates.
    Numerous comments on the Proposed Guidance discussed considerations 
relating to when the swap dealing activities of affiliates should be 
aggregated for purposes of determining if a non-U.S. person is required 
to register as an SD. The Commission is considering these comments, and 
intends to address them in preparing final guidance on this issue. 
However, the Commission believes it is appropriate to provide, in the 
Final Order, temporary relief from the requirement in Commission 
regulation 1.3(ggg)(4) to include the swap dealing activities of 
certain affiliates in the de minimis calculation.
    For purposes of the Final Order, the Commission believes that a 
non-U.S. person that is engaged in swap dealing activities with U.S. 
persons as of the effective date of the Final Order should not be 
required to include, in its determination of whether it exceeds the de 
minimis threshold, the swap dealing transactions of any of its U.S. 
affiliates.\75\ In addition, the Commission believes it is appropriate 
that if the non-U.S. person is an affiliate of a person that is 
registered as an SD, it should not be required to include, in its 
determination of whether it exceeds the de minimis threshold, the swap 
dealing transactions of any of its non-U.S. affiliates that engage in 
swap dealing activities, so long as each such excluded affiliate is 
either (i) engaged in swap dealing activities with U.S. persons as of 
the effective date of the Final Order or (ii) registered as an SD.\76\
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    \75\ For this purpose, the Commission construes ``affiliates'' 
to include persons under common control as stated in the Final 
Entities Rules with respect to the term ``swap dealer,'' which 
defines control as ``the possession, direct or indirect, of the 
power to direct or cause the direction of the management and 
policies of a person, whether through the ownership of voting 
securities, by contract or otherwise.'' See Final Entities Rules, 77 
FR at 30631, fn. 437.
    \76\ The Commission notes that, in any case, the swap dealing 
transactions of a non-U.S. person's non-U.S. affiliates that may 
have to be included in the de minimis determination are the 
transactions between the non-U.S. affiliates and U.S. person 
counterparties. In no case would swap dealing transactions between 
the non-U.S. person's non-U.S. affiliates and other non-U.S. person 
counterparties need to be included in the determination.
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    Where at least one of the entities in the affiliated group 
registers as an SD, the Commission believes that during the transition 
period covered by the Final Order, it is not necessary to aggregate the 
swap dealing transactions of the various affiliates, even if the 
aggregate amount of such swap dealing transactions among all the 
unregistered non-U.S. affiliates is above the de minimis threshold. 
Thus, where at least one of the entities in the affiliated group 
registers as an SD, another entity in the affiliated group would have 
to register as an SD only if its own swap dealing transactions with 
U.S. persons, considered individually, were above the de minimis 
threshold.\77\
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    \77\ The Commission wishes to make clear that relief from the 
registration requirement is not available to any person or entity 
that engages in swap dealing transactions with U.S. persons above 
the de minimis threshold. The discussion in this section relates 
only to whether and when non-U.S. persons must aggregate their own 
swap dealing transactions with the swap dealing of their non-U.S. 
affiliates.
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    As noted above, however, this limited transitional relief is not 
applicable if a non-U.S. affiliate begins to engage in swap dealing 
transactions with U.S. persons after the effective date of the Final 
Order. The Commission believes that this limitation is appropriate for 
the relatively short time period that the Final Order will be in 
effect, in order to prevent evasion and abuse of this relief. Without 
this limitation, new non-U.S. affiliates could be created simply in 
order to engage in further swap dealing activity with U.S. persons. 
Moreover, most commenters were clear that limited transitional relief 
from the aggregation requirement is necessary with respect to their 
existing swap dealing activities, but is not necessary in order to 
expand their swap dealing activities in the short term.\78\
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    \78\ See, e.g., Cleary (Aug 16, 2012) at 5-6; SIFMA (Aug 13, 
2012) at 4-5.
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    Central Booking Entity. In the event an entity operates a ``central 
booking system'' where swaps are booked into a single legal entity, 
whether or not such entity is a counterparty to the swap, the Proposed 
Guidance stated that the entity that books the swaps would be subject 
to any applicable SD registration requirement, as if it had entered 
into such swaps directly, regardless of whether such entity is a U.S. 
person or whether the booking entity is a counterparty to a swap (has 
booked the swap directly) or has booked a swap indirectly by way of a 
back-to-back swap or other arrangement with an affiliate. The 
Commission noted that a non-U.S. affiliate or subsidiary may also be 
required to register as an SD if it independently meets the definition 
of an SD.\79\ A number of commenters sought clarification of the 
Commission's interpretation with respect to the central booking 
model.\80\
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    \79\ Section 1.3 (ggg)(3) of the Commission's regulations 
permits a person to apply for a limited purpose designation based on 
a particular type, class, or category of a swap, or to a particular 
business unit within an entity. See Commission regulation 
1.3(ggg)(3); Final Entities Rules, 77 FR at 30645-46. Cleary urged 
the Commission to recognize limited designation for non-agricultural 
firms. Specifically, it argued that limited designation should be 
available to an entity that registers as a firm, and not merely a 
branch, division, or office. See Cleary (Aug. 16, 2012) at 14. 
Regarding the two points raised by Cleary, the Commission clarifies 
that a limited designation is available to any registrant that can 
demonstrate its ability to comply with applicable requirements; it 
is not limited to only agricultural firms, and it could be available 
to an entity that registers as a firm. The Commission believes that 
further relief at this time regarding limited designations is not 
justified under the criteria of CEA section 4(c). As noted in the 
Final Entities Rules, the Commission believes that limited 
designation is appropriately addressed on a case-by case basis in 
the context of individual applications for registration. See Final 
Entities Rules, 77 FR at 30646 (``Any particular limited purpose 
application will be analyzed in light of the unique circumstances 
presented by the applicant.'').
    \80\ See e.g., Goldman (Aug. 27, 2012) at 6-7; Credit Suisse 
(Aug. 27, 2012) at 9; IIB (Aug. 27, 2012) at 26 (stating that, 
although it is not entirely clear, in a central booking arrangement 
under which a non-U.S. person dealing in swaps with other non-U.S. 
persons ``books'' those swaps to a U.S. affiliate (which either 
directly becomes a party to the swap or indirectly enters a back-to-
back arrangement), the Proposed Guidance could be interpreted as 
requiring the non-U.S. affiliate to separately register as an SD if 
its activities with non-U.S. persons meet the definition of an SD); 
and Lloyd's (Aug. 24, 2012) at 2-3 (requesting clarification as to 
whether or not non-U.S. institutions (not acting as principal to 
swaps with U.S. persons) employing central booking models, would be 
required to register as SDs when they centrally manage market risk 
for swaps with an affiliated non-U.S. SD and other non-U.S. related 
swaps activities).
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    In this situation, the Commission clarifies that a non-U.S. person 
should not be required to include in its calculation of the aggregate 
gross notional amount of swaps connected with its swap dealing activity 
for purposes of Commission regulation 1.3(ggg)(4), any swap to which it 
is not a party because the swap is entered into by an affiliated 
central booking entity.
    Summary. For purposes of the transitional relief under this Final 
Order, in determining whether a non-U.S. person is engaged in more than 
a de minimis level of swap dealing \81\ or

[[Page 869]]

holds swap positions above any of the MSP thresholds, the non-U.S. 
person--whether guaranteed or not by a U.S. person--may exclude and not 
consider the aggregate notional value of:
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    \81\ Cleary and SIFMA have asked the Commission to confirm that 
swap activities that are limited to unwinding ``legacy'' swap 
portfolios do not constitute swap dealing. See Cleary (Aug. 16, 
2012) at 11-12; SIFMA (Aug. 27, 2012) at A-31. See also The Clearing 
House (Aug. 13, 2012) at 11. In a related vein, IIB requested that 
the Proposed Order be modified to allow certain less active 
``Transition Affiliates'' additional time to transfer swap positions 
to their principal swap dealing affiliate, see IIB (Aug. 9, 2012) at 
7, and Cleary separately asked the Commission to consider whether 
the aggregation rule should apply to non-U.S. affiliates whose swap 
dealing activity is already subject to local regulation by a G-20 
supervisor, see Cleary (Aug. 16, 2012) at 9-10. In general, the 
Commission previously concluded that bright-line tests and 
categorical exclusions from the term ``swap dealer'' based on the 
general nature of a person's business are unwarranted. See Final 
Entities Rules, 77 FR at 30615. The Commission believes that this 
approach is equally appropriate here, with regard to the exemptive 
relief requested in the cross-border context. As noted above, the 
Commission believes that registration of non-U.S. persons that are 
within the definition of the term ``swap dealer'' is a key element 
of the Dodd-Frank swaps reforms. Therefore the Commission believes, 
at this time, that blanket relief in this area along the lines 
suggested by commenters is not in the public interest, and that the 
determination of whether particular activities constitute swap 
dealing or otherwise bring a person within the definition of the 
term ``swap dealer,'' should proceed along the lines that the 
Commission adopted in the Final Entities Rules. Under these 
circumstances, the Commission has determined that it would be 
inappropriate to provide further relief in this regard under CEA 
section 4(c). However, the Commission does not intend to preclude 
its staff from considering appropriate relief in this regard on a 
case-by-case basis.
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     Any swap where the counterparty is a non-U.S. person; and
     Any swap where the counterparty is a foreign branch of a 
U.S. person that is registered as an SD or that represents that it 
intends to register with the Commission as an SD by March 31, 2013; and
     For purposes of SD registration only, any swap to which it 
is not a party because the swap is entered into by an affiliated 
central booking entity.
    Further, for purposes of the transitional relief under this Final 
Order, in determining whether a non-U.S. person is engaged in more than 
a de minimis level of swap dealing, the non-U.S. person may exclude and 
not consider the aggregate notional value of: \82\
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    \82\ As noted above, this further relief is available only where 
the non-U.S. person is engaged in swap dealing activities with U.S. 
persons as of the effective date of the Final Order.
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     Any swap dealing transaction of its U.S. affiliates under 
common control; and
     If any of its affiliates under common control is 
registered as an SD, any swap dealing transaction of any of its non-
U.S. affiliates that (i) is engaged in swap dealing activities with 
U.S. persons as of the effective date of the Final Order or (ii) is 
registered as an SD.\83\
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    \83\ The foregoing summary is based on the term ``U.S. person'' 
as it is defined above.
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D. Entity-Level and Transaction-Level Requirements

1. Categorization of Entity- and Transaction-Level Requirements
    Title VII of the Dodd-Frank Act establishes a comprehensive new 
regulatory framework for SDs and MSPs. This framework is an important 
element of the ``improve[d] financial architecture'' that Congress 
established in the Dodd-Frank Act to reduce systemic risk and enhance 
market transparency.\84\ Among other things, a registered SD or MSP 
must comport with certain statutory requirements (and regulations the 
Commission may promulgate thereunder) governing risk management, 
internal and external business conduct standards, and reporting. 
Further, U.S. SDs and MSPs, once registered, are required to comply 
with all of the requirements applicable to SDs and MSPs for all their 
swaps, not just the swaps that make them an SD or MSP.
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    \84\ S. Rep. No. 111-176, at 228 (2010).
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    For purposes of the Proposed Order, the Dodd-Frank swap provisions 
were divided into two categories: (1) Entity-Level Requirements, which 
apply to all the firm's activities or transactions; and (2) 
Transactional-Level Requirements, which apply on a transaction-by-
transaction basis. For purposes of the Final Order, the Commission will 
apply the Entity-Level and Transaction-Level Requirements as 
proposed.\85\
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    \85\ To date, the Commission has not adopted final rules 
relating to the Entity-Level Requirement of capital adequacy, nor 
the Transaction-Level Requirements of margining (and segregation) 
for uncleared swaps, and trade execution. See sections 2(h)(8), 
4s(e) and 4s(l) of the CEA, 7 U.S.C. 2(h)(8), 6s(e) and 6s(l). No 
exemptive relief is necessary with respect to Requirements that are 
not yet in effect and, therefore, the Final Order does not apply to 
these Requirements. In the event that final rules with respect to 
any of these Requirements that are issued by the Commission come 
into effect prior to the expiration of this Final Order, the 
Commission will consider extending the Final Order to such 
Requirements at that time. For further details regarding the Entity-
Level Requirements and the Transaction-Level Requirements, see the 
appendices to the Proposed Order.
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    The Entity-Level Requirements consist of: (1) Capital adequacy; (2) 
chief compliance officer; (3) risk management; (4) swap data 
recordkeeping; (5) SDR reporting; and (6) LTR.\86\ The Entity-Level 
Requirements apply to registered SDs and MSPs across all their swaps 
without distinctions as to the counterparty or the location of the 
swap.\87\
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    \86\ Specifically, the Entity-Level Requirements are those set 
forth in Commission regulations 1.31, 3.3, 23.201, 23.203, 23.600, 
23.601, 23.602, 23.603, 23.605, 23.606, 23.607, 23.608 and 23.609 
and parts 20, 45 and 46.
    \87\ IIB and The Clearing House noted that the Proposed Order 
did not address Commission regulation 1.31, which sets forth certain 
recordkeeping obligations that apply to all books and records 
required to be kept under the Commission's regulations. See IIB 
(Aug. 9, 2012) at 10; and The Clearing House (Aug. 16, 2012) at 14. 
In the Proposed Order, the Commission proposed generally that 
recordkeeping requirements would be Entity-Level Requirements but 
did not explicitly list Commission regulation 1.31 as an Entity-
Level Requirement. The Commission clarifies that for purposes of the 
Final Order, Commission regulation 1.31 is an Entity-Level 
Requirement and, therefore, subject to the exemptive relief under 
the Final Order
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    The Transaction-Level Requirements consist of: (1) Clearing and 
swap processing; (2) margining and segregation for uncleared swaps; (3) 
trade execution; (4) swap trading relationship documentation; (5) 
portfolio reconciliation and compression; (6) real-time public 
reporting; (7) trade confirmation; (8) daily trading records; and (9) 
external business conduct standards.\88\
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    \88\ Specifically, the Transaction-Level Requirements are those 
set forth in CEA section 2(h)(8) and Commission regulations 23.202, 
23.400 to 23.451, 23.501, 23.502, 23.503, 23.504(a), 23.504(b)(1), 
(b)(2), (b)(3) and (b)(4), 23.506 and 23.610 and part 43. The 
Proposed Guidance placed one of the Transaction-Level Requirements--
external business conduct standards--into a ``Subcategory B,'' as 
distinguished from the remaining Transaction-Level Requirements in 
``Subcategory A.'' This distinction is not relevant for purposes of 
the Final Order, in which all Transaction-Level Requirements are 
provided the same exemptive relief.
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    The Commission intends to consider any reclassification of Entity-
Level and Transaction-Level requirements, including for the reasons 
raised by various commenters, in connection with further guidance on 
cross-border issues. As described below, however, the Commission has 
considered issues raised by commenters regarding the scope of the 
proposed exemptive relief from such Requirements--apart from their 
ultimate classification.
2. General Comments on the Proposed Order
    In response to the Proposed Order, a number of commenters addressed 
the proposed exemptive relief from the Entity-Level and Transaction-
Level Requirements. The Clearing House stated that appropriate phase-in 
relief requires the Commission to ``provide greater flexibility'' with 
respect to the application of the Dodd-Frank requirements to overseas 
operations and non-U.S. counterparties.\89\ Several other commenters--
including IIB, Citigroup and Cleary--recommended that the Commission 
either delay the compliance date for certain requirements or expand the 
scope of relief (particularly as to transactions with non-U.S. 
counterparties) to address certain compliance and operational burdens 
associated with applying the Dodd-Frank requirements to

[[Page 870]]

transactions outside the United States.\90\ These comments and the 
Commission determinations in response thereto are discussed below.
---------------------------------------------------------------------------

    \89\ See The Clearing House (Aug. 13, 2012) at 13-14. To that 
end, The Clearing House recommended that certain rules currently 
categorized as entity-level be changed to transaction-level.
    \90\ See e.g., IIB (Aug. 13, 2012) at 9-10, Cleary (Aug. 16, 
2012) at 14-16; and Citigroup (Aug. 13, 2012) at 4.
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3. SDR Reporting (Part 45 and Part 46) and LTR Requirements
i. Comments
    As discussed above, in the Proposed Order, the Commission proposed 
to allow non-U.S. SDs and MSPs to delay compliance with Entity-Level 
Requirements subject to specified conditions--except for the Entity-
Level Requirements of SDR reporting and LTR requirements. Under the 
Proposed Order, non-U.S. SDs and MSPs would be required to comply with 
SDR reporting and LTR requirements for all swaps with U.S. 
counterparties upon their compliance date. And, with respect to swaps 
with non-U.S. counterparties, the Commission proposed that only those 
non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a 
U.S.-based SD would be permitted to delay compliance with the SDR 
reporting and LTR requirements. The Commission is adopting this 
temporary exemptive relief generally as proposed, with certain 
modifications in response to comments received.
    Some commenters requested an extension of the compliance date for 
SDR reporting and LTR requirements. IIB stated that due to the 
``expansive'' proposed aggregation rule and ambiguities in the proposed 
U.S. person definition, non-U.S. registrants may not have their systems 
ready to report their U.S.-facing swaps, which they expect to be 
relatively few in number.\91\ As an initial step, IIB requested that 
the Commission further extend the compliance date for SDR reporting and 
LTR requirements with respect to swaps between non-U.S. registrants and 
other non-U.S. counterparties (including foreign branches of U.S. 
persons) under the exemptive relief, pending final interpretive 
guidance and for a ``reasonable'' time thereafter.\92\ Similarly, 
cleary stated that compliance with part 45 swap data reporting 
requirements would require U.S. operations overseas (i.e., affiliates 
and foreign branches) to develop new reporting infrastructures, which 
requires additional time for implementation. It requested that 
registrants be permitted to comply with SDR reporting with non-U.S. 
counterparties by reporting to the Global Trade Repository 
(``GTR'').\93\
---------------------------------------------------------------------------

    \91\ See IIB (Aug. 13, 2012) at 10.
    \92\ Id. IIB also said that there may be jurisdictions that 
restrict the disclosure of even swaps with U.S. persons, and 
additional relief may be necessary for those jurisdictions.
    \93\ See Cleary (Aug. 16, 2012) at 15-16.
---------------------------------------------------------------------------

    Other commenters requested broader relief from the reporting 
requirements. SIFMA argued that non-U.S. registrants should be relieved 
from complying with SDR reporting for all of their swaps.\94\ SIFMA 
explained that because the proposed reporting relief is not available 
for swaps with U.S. counterparties, non-U.S. registrants are 
effectively required to comply with the full extent of SDR reporting 
and LTR requirements upon the effectiveness of the rules, nullifying 
the benefit of any transition period. Therefore, SIFMA urged that the 
proposed relief for non-U.S. registrants should apply to swaps with all 
counterparties.
---------------------------------------------------------------------------

    \94\ See SIFMA (Aug. 13, 2012) at 8-9.
---------------------------------------------------------------------------

    The Clearing House stated that potential registrants--whether U.S. 
or non-U.S. and irrespective of affiliation or branch status--should 
not be required to apply SDR reporting rules or LTR requirements to 
transactions with non-U.S. counterparties.\95\ It explained that for 
swaps with non-U.S. counterparties, these rules are transaction-
specific and further, the cost of developing the necessary reporting 
infrastructure during the exemptive period would create disadvantages 
vis-[agrave]-vis those potential registrants for which delayed 
implementation of these requirements would be granted under the Final 
Order. The Clearing House, like IIB, also cited the fact that under the 
Proposed Guidance, many non-U.S. entities may be unexpectedly required 
to register as SDs but lack the operational infrastructure to comply 
with the reporting requirements.
---------------------------------------------------------------------------

    \95\ See The Clearing House (Aug. 13, 2012) at 13-14. This 
commenter also stated that where the foreign jurisdiction lacks any 
parallel transaction-level rules, the registrant should not be 
required to apply any Dodd-Frank Transaction-Level Requirements with 
respect to any swap with a non-U.S. counterparty. For jurisdictions 
with transaction-level requirements, all registrants should be 
allowed to comply with the local requirements during the exemptive 
period.
---------------------------------------------------------------------------

    Several commenters also requested additional time for compliance 
with part 46 reporting of historical and transition swaps. For example, 
Citi stated that data for many historical swaps is not available in the 
format necessary, and that many of the relevant swaps have expired or 
were terminated.\96\ SIFMA said that allowing additional time for 
compliance would not materially hinder the Commission's ability to 
assess systemic risk.\97\ SIFMA requested that the Commission delay for 
all market participants part 46 historical swap reporting for a 
particular counterparty and asset class until 120 days after SDR 
reporting under part 45 is effective for that reporting counterparty 
and asset class in order to alleviate the difficulties associated with 
compliance with both reporting requirements.
---------------------------------------------------------------------------

    \96\ See Citi (Aug. 13, 2012) at 9.
    \97\ See SIFMA (Aug. 13, 2012) at 11.
---------------------------------------------------------------------------

    Finally, as noted above, the Proposed Order stated that the 
exemptive relief for SDR reporting and LTR requirements for non-U.S. 
registrants in their swaps with non-U.S. counterparties would not 
extend to non-U.S. registrants that are affiliates or subsidiaries of 
U.S. registrants. A number of commenters, including Deutsche Bank, 
recommended that the Commission eliminate the term ``affiliate'' and 
exempt non-U.S. registrants from reporting swaps with non-U.S. 
counterparties, except where the non-U.S. registrant is a direct 
subsidiary of a U.S. registrant.\98\ Commenters expressed the concern 
that this proposed exemptive relief from SDR reporting and LTR 
requirements was too narrow in that it would not extend to a non-U.S. 
registrant by virtue of its affiliation with a U.S. SD under the common 
ownership of a non-U.S. person that is neither an SD nor an MSP.\99\
---------------------------------------------------------------------------

    \98\ See Deutsche Bank (Aug. 13, 2012) at 3; see also Cleary 
(Aug. 16, 2012) at 14-15.
    \99\ See id.
---------------------------------------------------------------------------

ii. Commission Determination on SDR Reporting and LTR Requirements
    SDR reporting is a fundamental component of Dodd-Frank's objective 
to reduce risk, increase transparency, and promote market integrity 
within the financial system generally, and the swaps market in 
particular.\100\ SDR reporting achieves the statutory objectives of 
transparency and enhanced price discovery by, among other things, 
requiring that market participants report swap transaction and pricing 
data to an SDR. SDR reporting also serves as a valuable regulatory 
tool. In particular, timely reporting of comprehensive swap transaction 
data to SDRs will be important to the Commission's ability to 
effectively monitor and address the risk exposures of individual market 
participants (including SDs and MSPs) and the concentration of risk 
within the swaps market more generally. Similarly, LTR enables the 
Commission to promptly and efficiently identify significant traders and 
collect data on their trading activity so that the Commission can 
reconstruct market events, conduct investigations, and bring 
enforcement actions as

[[Page 871]]

appropriate. In short, SDR reporting and LTR requirements are vital to 
ensuring that the Commission has a comprehensive and accurate picture 
of market activities in order to fulfill its regulatory mandate, 
including systemic risk mitigation, market monitoring, and market abuse 
prevention.
---------------------------------------------------------------------------

    \100\ See 7 U.S.C. 2(a)(13)(G).
---------------------------------------------------------------------------

    The Commission notes that Commission staff has recently granted no-
action relief with respect to certain of these reporting requirements. 
In CFTC Letter No. 12-32, Commission staff provided time-limited no-
action relief to SDs ``from certain requirements of the Commission's 
swap data reporting rules, in order to allow for a common monthly 
compliance date for swap dealers newly falling within the scope of 
these rules, and to extend the compliance date for reporting historical 
swap transaction data pursuant to Part 46 of the Commission's 
regulations.'' \101\ In CFTC Letter No. 12-39, Commission staff granted 
time-limited no-action relief to reporting parties from certain 
reporting requirements in part 43 and part 45 with respect to bespoke 
or complex products.\102\ The no-action relief granted in these letters 
is available to both U.S. and non-U.S. persons who may be subject to 
these reporting obligations.
---------------------------------------------------------------------------

    \101\ CFTC Division of Swap Dealer and Intermediary Oversight 
and Division of Market Oversight, Time-Limited No-Action Relief for 
Swap Dealers from Certain Swap Data Reporting Requirements of Part 
43, Part 45, and Part 46 of the Commission's Regulations, No-Action 
Letter No. 12-32, dated Nov. 19, 2012.
    \102\ CFTC Division of Market Oversight, Time-Limited No-Action 
Relief for Bespoke or Complex Swaps from Certain Swap Data Reporting 
Requirements of Parts 43 and 45 of the Commission's Regulations, No-
Action Letter No. 12-39, dated Nov. 19, 2012.
---------------------------------------------------------------------------

    The Commission believes that it is necessary to implement these 
reporting requirements as expeditiously as possible, and in a manner 
intended to achieve their underlying statutory objectives. Therefore, 
in light of the relief provided by the Commission staff, the Commission 
has determined that it would not further the public interest or the 
purposes of the CEA to further delay compliance with the SDR reporting 
or LTR requirements for non-U.S. registrants. For similar reasons, the 
Commission has determined to not extend exemptive relief from the SDR 
reporting or LTR requirements to U.S. registrants for their 
transactions with non-U.S. counterparties. Thus, the Commission has 
determined not to provide relief under CEA section 4(c) in this regard.
    Finally, the Commission is clarifying its proposal that only those 
non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a 
U.S.-based SD would be permitted to delay compliance with the SDR 
reporting and LTR requirements with respect to swaps with non-U.S. 
counterparties. As explained in the preamble of the Proposed Order, 
this condition was intended to limit the relief to non-U.S. registrants 
that are not ``part of a U.S-based affiliated group.'' \103\ 
Accordingly, in response to comments received, the Commission is 
clarifying that the relief from the SDR reporting and LTR requirements 
is reserved for swaps with non-U.S. counterparties that are entered 
into by non-U.S. registrants that are not part of an affiliated group 
in which the ultimate parent entity is a U.S. registrant, bank, 
financial holding company, or bank holding company.\104\ The Commission 
believes that this modification strikes the appropriate balance between 
facilitating such non-U.S. registrants' phasing in of their reporting 
obligations and achieving the critical statutory and regulatory 
objectives of the SDR reporting and LTR requirements as discussed 
above. Therefore, the Commission has determined that this provision of 
the Final Order, as modified, is consistent with the public interest 
and the purposes of the CEA and, therefore, is appropriate for 
temporary exemptive relief pursuant to CEA section 4(c).
---------------------------------------------------------------------------

    \103\ 77 FR at 41112.
    \104\ Accordingly, swaps with non-U.S. counterparties that are 
entered into by non-U.S. registrants that are part of an affiliated 
group in which the ultimate parent entity is a U.S. registrant, 
bank, financial holding company, or bank holding company, are 
subject to the SDR reporting and LTR requirements.
---------------------------------------------------------------------------

4. Privacy and Confidentiality Laws
i. Comments
    A number of commenters, both market participants and foreign 
regulators, stated that certain Dodd-Frank requirements--namely, SDR 
reporting and LTR requirements, and U.S. regulators' access to books 
and records--may conflict with local privacy and data protection 
laws.\105\ They further noted that potential solutions to such blocking 
statutes, such as mutual assistance agreements and/or client consents, 
may be available but will require time to implement. Certain 
commenters, including UBS, Citi, and Societe Generale, specifically 
requested that compliance with the reporting requirements for non-U.S. 
persons with non-U.S. counterparties, including foreign branches of 
U.S. persons, be delayed pending final interpretive guidance (and for a 
reasonable time thereafter). As an alternative, SIFMA suggested that at 
least during the term of the exemptive relief, all market participants 
(including futures commission merchants) should be permitted to mask 
client information from any reporting requirements, including SDR 
reporting and LTR, where the failure to do so would violate applicable 
foreign laws and regulations.
---------------------------------------------------------------------------

    \105\ See e.g., SIFMA (Aug. 13, 2012) at 14; Citi (Aug. 13, 
2012) at 7; UBS AG (``UBS'') (June 13, 2012) at 1; IIB (Aug. 9, 
2012) at 10; Societe Generale (Aug. 9, 2012) at 8; ISDA (Aug. 10, 
2012) at 7; Swiss Financial Market Supervisory Authority (``FINMA'') 
(July 16, 2012) at 2; Hong Kong Banks (Aug. 27, 2012) at 2-3.
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ii. Commission Determination on Privacy and Confidentiality Laws
    The Commission believes that, given the importance of the subject 
reporting requirements to market transparency and integrity, it is 
critical to apply these requirements to all registered SDs and 
MSPs.\106\ However, the Commission recognizes the potential challenges 
that non-U.S. firms may face in jurisdictions with conflicting privacy 
and confidentiality laws. As a result of these challenges, the 
Commission staff recently granted time-limited no-action relief from 
provisions of parts 20, 45, and 46 of the Commission's regulations that 
require the reporting of certain information revealing the identity of 
a counterparty or affiliated group where reporting such information 
would violate the privacy laws of a non-U.S. jurisdiction.\107\ In 
light of the

[[Page 872]]

Commission staff's decision to provide no-action relief with respect to 
this issue, the Commission has determined that it would not further the 
public interest or the purposes of the CEA to grant further relief with 
respect to the reporting requirements solely on the basis of 
potentially conflicting privacy and data protection laws. Therefore, 
the Commission declines to provide relief under CEA section 4(c) in 
this regard.
---------------------------------------------------------------------------

    \106\ See also the discussion of the importance of SDR reporting 
in section III.D.3.ii., above
    \107\ See CFTC Division of Market Oversight, Re: Time-Limited 
No-Action Relief for Part 20 Reporting Entities Regarding 
Identifying Information and Time-Limited No-Action Relief for Part 
45 and Part 46 Reporting Counterparties Regarding Legal Entity 
Identifiers, Other Enumerated Identifiers, or Other Identifying 
Terms, No-Action Letter No.12-46, Dec. 7, 2012. Further, in response 
to comments, the Commission is revising Form 7-R. This is the 
Commission form that a firm uses to apply for registration with the 
Commission. By signing Form 7-R, the firm makes a set of 
certifications, acknowledgments and undertakings. In addition, if 
the applicant is a foreign firm, the firm agrees to provide its 
books and records for inspection by the Commission, NFA, or the U.S. 
Department of Justice (``DOJ'') upon request and in a specified 
manner. Included is a statement that the foreign firm is not subject 
to any blocking, privacy or secrecy laws, and that failure to 
provide the books and records in the manner specified could result 
in enforcement action, denial or revocation of registration, or 
other consequences.
    Certain foreign firms that will be required to register with the 
Commission as SDs by a date certain may be subject to blocking, 
privacy, or secrecy laws in their home jurisdictions that could 
limit or prevent production by those firms of their books and 
records in accordance with the procedures they would be agreeing to 
by signing Form 7-R. In order to permit these firms to register as 
required by U.S. law, without violating their home country laws, the 
Commission is making the terms of the agreement in Form 7-R that a 
firm produce its books and records upon request of the Commission, 
NFA, or DOJ, subject to the provisions of any applicable blocking, 
privacy or secrecy laws. See Form 7-R at page 42, which may be found 
on NFA's Web site at https://www.nfa.futures.org/NFA-registration/templates-and-forms/Form7-R-entire.pdf.
---------------------------------------------------------------------------

    Similarly, the Commission views its access to a registrant's books 
and records as a fundamental regulatory tool necessary to properly 
monitor and examine the registrant's compliance with the CEA. 
Consistent with existing practice, the Commission intends to exercise 
its right to access a registrant's books and records and maintain its 
right to examine a registrant, regardless of the registrant's 
location.\108\ In this regard, the Commission believes that mutual 
cooperation with other regulators is equally important to achieve the 
effective and efficient supervision of cross-border activities. In 
recognition of the importance of such mutual cooperation, the 
Commission will endeavor to achieve an understanding with each relevant 
regulator and memorialize such understanding in a supervisory 
arrangement. In the Commission's view, this is a balanced and flexible 
approach that will ensure that the agency has access to information 
critical to fulfilling its statutory responsibilities, but achieved in 
a manner designed to ensure continuing cooperative relationships with 
its counterparts overseas.
---------------------------------------------------------------------------

    \108\ Under Commission regulation 23.603(i), a registered SD or 
MSP must make all records required to be maintained in accordance 
with Commission regulation 1.31 available promptly upon request to 
representatives of the Commission. Under the Final Order, the 
Commission reserves this right to access records held by registered 
SDs and MSPs, regardless of the registrant's location.
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5. Exemptive Relief for U.S. Swap Dealers
i. Comments
    The Proposed Order would permit non-U.S. registrants and foreign 
branches of U.S. registrants to delay compliance with Transaction-Level 
Requirements with respect to swaps with non-U.S. persons.\109\ The 
relief would not be available to U.S. SDs (with the exception of 
foreign branches). SIFMA requested that the Commission extend the 
relief from compliance with the Entity-Level Requirements (including 
SDR reporting) to U.S. registrants transacting with non-U.S. persons 
since it will be difficult, if not impossible, to collect the 
counterparty information that is necessary to effect compliance with 
certain of these requirements.\110\ SIFMA also supported granting U.S. 
SDs relief from swap data recordkeeping and internal conflicts 
requirements for swaps with non-U.S. persons.\111\ ISDA similarly 
argued that the rationale for exemptive relief applies equally to a 
U.S. SD transacting directly with non-U.S. persons.\112\ Cleary raised 
concerns about the disparate treatment extended to U.S. SDs and non-
U.S.-SDs under the Proposed Order in respect to Transaction-Level 
Requirements as applied to transactions with non-U.S. persons.\113\ 
Cleary requested that in the interim, for the duration of the exemptive 
relief, the Commission should exempt all SDs from Transaction-Level 
Requirements for transactions with non-U.S. persons.
---------------------------------------------------------------------------

    \109\ The Proposed Order provided that non-U.S. registrants may 
comply with Transaction-Level Requirements for transactions with 
non-U.S. counterparties only as required by the home jurisdiction 
(or in the case of foreign branches of a U.S. registrant, the 
foreign location of the branch). Cleary requested that compliance 
with the host jurisdiction also be permitted. See Cleary (Aug. 16, 
2012) at 16. In response, the Commission is clarifying the Final 
Order to allow the non-U.S. registrant (or branch of a U.S. 
registrant) to comply with only the applicable requirements of the 
local jurisdiction.
    \110\ See SIFMA (Aug. 13, 2012) at 10 (arguing that, otherwise, 
U.S. SDs would be at a competitive disadvantage and that U.S. SDs 
face the same operational difficulties as non-U.S. SDs when 
transacting in the U.S. with non-U.S. counterparties).
    \111\ Id. at 9.
    \112\ See ISDA (Aug. 10, 2012) at 7 (``in the interest of 
competitive parity between U.S. and non-U.S. entities, ISDA 
recommends that the Commission align the domestic and 
extraterritorial compliance dates of all requirements'').
    \113\ See Cleary (Aug. 16, 2012) at 11 (``during the exemption's 
phase-in period * * * the CFTC should ensure competitive parity by 
exempting all [SDs] from transaction-level requirements in 
connection with transactions with non-U.S. counterparties'').
---------------------------------------------------------------------------

ii. Commission Determination on Relief for U.S. Swap Dealers
    The Commission believes that extension of this relief to U.S. SDs' 
activities would not only be contrary to the directive in CEA section 
2(i), but also detrimental to the Commission's strong supervisory 
interests in swap activities occurring inside the United States. 
Nevertheless, the Commission has carefully considered the potential 
consequences of disparate treatment of U.S. and non-U.S. registrants 
and, where possible, has attempted to minimize the disparity between 
these registrants. A notable example of this is the relief from the 
Transactional-Level Requirements, which applies equally to both non-
U.S. persons and the overseas operations of U.S. persons (i.e., foreign 
branches or non-U.S. affiliates).
    In the Commission's view, it would be contrary to the public 
interest and the purposes of the CEA to address commenters' concerns 
about regulatory disparity by diminishing the regulatory requirements 
that apply to swap activities inside the United States. Rather, the 
Commission believes that this issue is more appropriately addressed by 
working closely with its overseas counterparts, including continued 
participation in international groups to adopt and enforce robust and 
consistent standards across jurisdictions.\114\
---------------------------------------------------------------------------

    \114\ Where appropriate, however, the Commission has provided 
relief to both U.S. and non-U.S. registrants. For example, the 
Commission recently approved interim final rules for SDs and MSPs 
that would otherwise be required to comply with certain business 
conduct and documentation requirements in provisions of subpart F, 
subpart H, and subpart I to part 23 of the Commission's Regulations. 
Specifically, the compliance date for Commission regulations 23.502 
and 23.504 is deferred until July 1, 2013. Additionally, the 
compliance date for Commission regulations 23.201(b)(3)(ii); 23.402; 
23.401(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and 
(c); 23.440; 23.450; and 23.505 is deferred until May 1, 2013. The 
compliance dates for all other provisions of subpart F, subpart H, 
and subpart I of part 23 remain unchanged. See Business Conduct and 
Documentation Requirements for Swap Dealers and Major Swap 
Participants, Interim Final Rules, Dec. 18, 2012, available at 
https://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister121812.pdf.
---------------------------------------------------------------------------

6. Relief for Transactions Involving Non-Registrants
i. Comments
    As noted above, the Proposed Order would not extend relief to swap 
counterparties that are neither SDs nor MSPs. Certain commenters, such 
as SIFMA and Deutsche Bank, asserted that this would lead to an 
anomalous result. By way of illustration, they noted that a swap 
between a non-U.S. person and a foreign branch of an SD would be exempt 
from applicable Transaction-Level Requirements, but a swap between the 
same non-U.S. person and a foreign branch of a U.S. bank that is not a 
registered SD would not be eligible for the relief.\115\ They asked 
that the Commission extend exemptive relief to non-U.S. persons who 
enter into swaps with foreign branches of U.S. persons, regardless of 
whether the U.S. person is a registered SD or MSP.
---------------------------------------------------------------------------

    \115\ See SIFMA (Aug. 13, 2012) at 12; Deutsche Bank (Aug. 13, 
2012) at 3-4 (citing SDR reporting as an example of such 
disparities).

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[[Page 873]]

ii. Commission Determination on Transactions Involving Non-Registrants
    The Commission believes that it would not be appropriate to extend 
temporary exemptive relief to swaps by a non-U.S. person with a foreign 
branch of a U.S. person that is not a registrant. As explained above, 
in crafting the scope of relief to be granted under CEA section 4(c), 
the Commission carefully balanced the need to implement the Dodd-Frank 
swap provisions as expeditiously as possible and the need to mitigate 
undue disruptions to market practices. Consistent with that objective, 
the Commission's determination to exclude swaps between non-U.S. 
persons and foreign branches of U.S. registrants from certain 
requirements was based on the fact that the U.S. registrant (of which 
the foreign branch is an integral part, not a separate entity) would be 
subject to various prudential requirements as part of the overall 
requirements applicable to registrants. In the Commission's view, these 
requirements provide a sufficient level of regulatory safeguards with 
respect to the U.S. registrants to allow for temporary relief from the 
Transactional-Level Requirements with respect to the foreign branches 
of those U.S. registrants.
    In contrast, where the foreign branch is not part of a U.S. 
registrant, the Dodd-Frank requirements applicable to that foreign 
branch are greatly reduced and may, in some cases, be absent. 
Accordingly, the Commission believes that it would not further the 
public interest to grant relief from applicable Transaction-Level 
Requirements with respect to foreign branches of other classes of U.S. 
persons, and therefore declines to issue such exemptive relief under 
CEA section 4(c).
7. Expiration Date for the Relief
i. Comments
    A number of commenters, including ISDA and SIFMA, stated that the 
expiration of the Final Order should be tied to the publication of the 
final guidance, and not simply one year after the publication of the 
Proposed Order.\116\ According to SIFMA, any transition period is 
meaningful only if measured from the date that the full scope of the 
exemptive relief is disclosed, i.e., the date of the publication of the 
final guidance.\117\ Cleary recommended that the Commission align the 
duration of the exemptive relief with implementation in other G-20 
jurisdictions.\118\
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    \116\ See ISDA (Aug. 10, 2012) at 17; SIFMA (Aug. 13, 2012) at 
14-15.
    \117\ See SIFMA (Aug. 13, 2012) at 14-15.
    \118\ See Cleary (Aug. 16, 2012) at 17. Cleary suggested, for 
example that the Commission consider a jurisdiction-by-jurisdiction 
approach under which the relief would expire for non-U.S. 
registrants as their home (or host) jurisdictions implement 
comparable requirements.
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ii. Commission Determination on Expiration Date for the Relief
    The Commission declines to adopt the commenters' suggestion. The 
Final Order maintains the expiration date in the Proposed Order. 
However, as noted in the Proposed Order, the Commission is committed to 
an orderly transition to the Dodd-Frank Act's regulatory regime.\119\ 
Consistent with this commitment to an orderly phase-in of the cross-
border application of Dodd-Frank requirements, ``[s]hould the 
Commission deem it appropriate to extend any exemptive relief, the 
Commission will be in a better position to tailor any exemption at that 
time.'' \120\
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    \119\ See Proposed Order, 77 FR at 41112. The Commission's 
commitment in this regard also was recently reflected in the Joint 
Press Statement of Leaders on Operating Principles and Areas of 
Exploration in the Regulation of the Cross-border OTC Derivatives 
Market, included in CFTC Press Release 6439-12, Dec. 4, 2012, which 
is signed by CFTC Chairman Gensler and the leaders of 11 other 
regulatory authorities (``We will consider providing appropriate 
transitional implementation periods for entities in jurisdictions 
that are implementing comparable regulations, supervision, and 
comprehensive oversight. In order to facilitate an orderly 
transition with respect to new OTC derivatives regulatory 
requirements when promulgating regulations with cross-border 
applicability, we agree to a reasonable, limited transition period 
to facilitate the implementation of such cross-border regulatory 
requirements in appropriate circumstances and in consultation with 
other jurisdictions.'').
    \120\ ``Effective Date for Swap Regulation,'' 76 FR 42508, 
42514, Jul. 19, 2011.
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8. Foreign Branches of a U.S. Swap Dealer
i. Comments
    SIFMA commented that the Commission should clarify that relief from 
the Transaction-Level Requirements is available to a foreign branch of 
a U.S. SD that enters into a swap with a non-U.S. SD.\121\ Citi 
requested that the Commission extend relief to swaps between foreign 
branches of U.S. SDs.\122\
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    \121\ See SIFMA (Aug., 13, 2012) at 10 (noting that the Proposed 
Order makes clear that a foreign branch of a U.S. SD is eligible for 
such relief with respect to swaps with a non-U.S. counterparty, but 
the definition of U.S. person (which includes branches) makes the 
treatment of swaps between a foreign branch of a U.S. SD and a non-
U.S. SD unclear).
    \122\ See Citi (Aug. 13, 2012) at 2-3 (noting that, under the 
Proposed Order, relief from the Transaction-Level Requirements would 
not be available in this scenario because a branch is deemed a U.S. 
person, and arguing that this result would make it difficult for 
such branches to hedge risk in local markets, and reduce liquidity 
for non-U.S. SDs, because U.S. SDs would be limited in their ability 
to make markets abroad via their overseas branches).
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ii. Commission Determination on Foreign Branches of a U.S. Swap Dealer
    The Commission clarifies that relief from the Transaction-Level 
Requirements is available to a swap between a foreign branch of a U.S. 
registrant and a non-U.S. SD. That is, for purposes of this relief, the 
non-U.S. SD may treat the foreign branch as a non-U.S. person.
    On the other hand, as discussed above, the Commission believes that 
a swap between two foreign branches of U.S. registrants is a swap 
between two U.S. persons, and such transactions are fully subject to 
the Transaction-Level Requirements. Nevertheless, the Commission has 
determined that it would be appropriate to provide relief during the 
effectiveness of the Final Order so that foreign branches of U.S. 
registrants\123\ may comply only with transaction-level requirements as 
may be required in the location of the foreign branch while the 
Commission further considers, and works with international regulators 
regarding, the treatment of foreign branches of U.S. registrants.
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    \123\ For purposes of this relief from Transactional-Level 
Requirements for a swap between foreign branches of U.S. 
registrants, a swap is with the foreign branch of a U.S. person when 
(i) the personnel negotiating and agreeing to the terms of the swap 
are located in the jurisdiction of such foreign branch; (ii) the 
documentation of the swap specifies that the counterparty or 
``office'' for the U.S. person is such foreign branch and (iii) the 
swap is entered into by such foreign branch in its normal course of 
business. If the swap does not meet these three criteria, it will be 
treated as a swap of the U.S. person and not as a swap of the 
foreign branch of the U.S. person, and the swap will not be eligible 
for this relief from Transaction-Level Requirements.
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    As part of its further consideration of this issue, the Commission 
is considering additional requirements to determine if a swap is with 
the foreign branch of a U.S. person. These requirements could include, 
for example, that the foreign branch is the location of employment of 
the employees negotiating the swap for the U.S. person or, if the swap 
is executed electronically, the employees managing the execution of the 
swap, that the U.S. person treats the swap as a swap of the foreign 
branch for tax purposes, that the foreign branch operates for valid 
business reasons and is not only a representative office if the U.S. 
person, and that the branch is engaged in the business of banking or 
financing and is subject to substantive regulation in the jurisdiction 
where it is located. The Commission seeks comment from

[[Page 874]]

market participants and other interested parties regarding whether it 
is appropriate to include these or other requirements in the 
determination of when a swap is with the foreign branch of a U.S. 
person.
9. Compliance Plans and Good-Faith Compliance
    The Proposed Order required that a person seeking relief under the 
order would submit to the NFA a compliance plan addressing how it plans 
to comply with applicable requirements under the CEA and related 
regulations. Commenters on this aspect of the Proposed Order questioned 
the value of the compliance plan and requested clarifications of the 
Commission's expectations concerning compliance plans.\124\ Upon 
further consideration of the regulatory implementation process, the 
Commission has determined that the submission of a compliance plan 
should not be necessary in connection with phasing in compliance with 
the Dodd-Frank requirements in the cross-border context during the 
limited time frame in which the Final Order will be in effect. 
Therefore, the Final Order does not require submission of a compliance 
plan.
---------------------------------------------------------------------------

    \124\ See, e.g., SIFMA (Aug. 27, 2012), at A-52--A-53; IIB (Aug. 
9, 2012) at 9.
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    Market participants have raised the concern that, despite their 
best efforts at compliance, there could be ``practical or technical 
limitation or interpretive uncertainty'' that might need to be resolved 
before an SD's or MSP's full compliance with the Dodd-Frank 
requirements is practically feasible.\125\ In light of these concerns, 
the Commission believes it is appropriate to provide market 
participants guidance regarding its intentions concerning its 
enforcement authority when an SD or MSP is making diligent, good faith 
implementation efforts in this period of transition. The Commission 
does not intend to bring an enforcement action against an SD or MSP for 
failing to fully comply with applicable Dodd-Frank requirements prior 
to July 12, 2013, provided that there is a practical or technical 
impediment to compliance that results in an inability to comply with 
relevant compliance deadlines, or uncertainty in interpreting, 
particular Dodd-Frank requirement(s) and the SD or MSP is acting 
reasonably and in good faith to fully comply with the applicable Dodd-
Frank requirements, which would include, at a minimum, (i) material 
progress toward timely implementation and compliance; (ii) 
identification of any implementation or interpretive issue as soon as 
reasonably possible; (iii) timely elevation of such issue(s) to the 
SD's or MSP's senior management for consideration and resolution; and 
(iv) timely consultation with other industry participants and the 
Commission as necessary to seek resolution of any such issue(s).\126\
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    \125\ See joint letter from FIA, IIB and SIFMA (Nov. 30, 2012) 
at 11; see also SIFMA (Aug. 27, 2012) at A-25, A-44; Cleary (Aug. 
16, 2012) at 4.
    \126\ This expression of intent does not confer upon any party 
any rights or defenses in any investigation or in any action that 
may be brought by the Commission. As always, the Commission will 
weigh all facts and circumstances in determining whether to commence 
an enforcement action.
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10. Relief for Principals/Associated Persons
i. Comments
    Under Commission regulation 3.10(a)(2), each applicant for SD or 
MSP registration must file, together with Form 7-R, a Form 8-R executed 
by each natural person that qualifies as a ``principal'' of the 
applicant. As part of this process, each principal is required to 
submit a fingerprint card, as well as submit to a detailed background 
check. Commission regulation 23.22 prohibits an SD or MSP from 
permitting an associated person subject to statutory disqualification 
(as defined by the CEA) from being involved in effecting swaps on 
behalf of such registrant. Citing difficulties associated with 
differences in the standards for statutory disqualification among 
jurisdictions and privacy issues associated with collecting information 
about individuals, commenters requested that only those individuals 
directly involved in the solicitation or acceptance of swaps (or 
supervising such individuals) be regarded as ``associated persons.'' 
\127\
---------------------------------------------------------------------------

    \127\ See e.g., Cleary (Aug. 16, 2012) at 13.
---------------------------------------------------------------------------

    Commenters, such as IIB and Societe Generale, urged the Commission 
to exclude directors and senior officers (but not those in charge of 
the business unit subject to regulation by the Commission) from 
principal status.\128\ Cleary contended that globally active banks 
operate under a paradigm that differs from traditional Commission 
registrants and noted the differences in governance structures and the 
roles of boards of directors in foreign jurisdictions.\129\ Under these 
circumstances, Cleary requested that the Commission grant relief, on an 
interim basis, from registration for associated persons, and from 
requirements applicable to principals, of non-U.S. registrants. 
Specifically, Cleary said, the Commission should treat as principals 
only those individuals directly engaged in the activities giving rise 
to registration.\130\
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    \128\ See IIB (Aug. 9, 2012) at 7-8; and Societe Generale (Aug. 
9, 2012) at 11.
    \129\ See Cleary (Aug. 16, 2012) at 13. Cleary stated that, in 
this connection, the Commission may wish to consider recognizing 
comparable foreign requirements for principal and associated person 
registration and obligations.
    \130\ See id.
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ii. Commission Determination on Relief for Principals/Associated 
Persons
    The Commission does not believe, at this time, that blanket relief 
from requirements applicable to principals or from associated person 
registration to address these concerns is appropriate pursuant to the 
standards required for exemptive relief under CEA section 4(c). Rather, 
the Commission believes that any relief from these requirements is 
appropriately addressed through staff action.\131\ The Commission views 
the registration of individuals to be an important facet of ensuring 
the integrity of the firm itself, and a staff process will permit 
Commission staff to tailor relief as appropriate and necessary.
---------------------------------------------------------------------------

    \131\ See CFTC Division of Swap Dealer and Intermediary 
Oversight, Re: Relief for Swap Dealers and Major Swap Participants 
from Compliance with Regulation 23.22(b) with Respect to: (1) Non-
Domestic Associated Persons who Deal only with Non-Domestic Swap 
Counterparties; and (2) Persons Employed in a Clerical or 
Ministerial Capacity, No-Action Letter No. 12-43, Dec. 7, 2012.
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IV. Section 4(c) of the CEA

    After considering the complete record in this matter, the 
Commission has determined that the requirements of CEA section 4(c) 
have been met with respect to the exemptive relief described above. 
First, in enacting section 4(c), Congress noted that the purpose of the 
provision ``is to give the Commission a means of providing certainty 
and stability to existing and emerging markets so that financial 
innovation and market development can proceed in an effective and 
competitive manner.'' \132\ As noted in the Proposed Order, the 
Commission is issuing this relief in order to ensure an orderly 
transition to the Dodd-Frank regulatory regime and to provide greater 
legal certainty to market participants regarding their obligations 
under the CEA with respect to their cross-border swap activities.
---------------------------------------------------------------------------

    \132\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
---------------------------------------------------------------------------

    This exemptive relief also will advance the congressional mandate 
concerning harmonization of international standards with respect to 
swaps, consistent with section 752(a) of the Dodd-Frank Act. In that 
section, Congress directed that, in order to ``promote effective and 
consistent global regulation of swaps and security-based swaps,'' the 
Commission, ``as appropriate, shall consult and coordinate with foreign 
regulatory

[[Page 875]]

authorities on the establishment of consistent international standards 
with respect to the regulation'' of swaps and security-based 
swaps.\133\ This relief, by providing non-U.S. registrants the latitude 
necessary to develop and modify their compliance plans as the 
regulatory structure in their respective home jurisdiction changes, 
will promote the adoption and enforcement of robust and consistent 
standards across jurisdictions.
---------------------------------------------------------------------------

    \133\ See section 752(a) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commission emphasizes that the Final Order is temporary in 
duration and reserves the Commission's enforcement authority, including 
its anti-fraud and anti-manipulation authority. As such, the Commission 
has determined that the Final Order is consistent with the public 
interest and purposes of the CEA. For similar reasons, the Commission 
has determined that the Final Order will not have a material adverse 
effect on the ability of the Commission or any contract market to 
discharge its regulatory or self-regulatory duties under the CEA. 
Finally, the Commission has determined that the Final Order is limited 
to appropriate persons within the meaning of CEA section 4c(3), since 
the SDs and MSPs eligible for the relief are likely to be the types of 
entities enumerated in that section and active in the swaps market. 
Therefore, upon due consideration, pursuant to its authority under 
section 4(c) of the CEA, the Commission hereby issues the Final Order.

V. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \134\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by 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.
---------------------------------------------------------------------------

    \134\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In connection with the Proposed Order, the Commission requested 
review and approval by OMB of a new collection of information titled 
``Exemptive Order Regarding Compliance with Certain Swap Regulations.'' 
\135\ This collection of information would have related to the 
compliance plans to be submitted to the NFA by persons seeking relief 
under the exemptive order. No comments were received on the paperwork 
burden associated with this information collection request. Because the 
Final Order does not require the submission of a compliance plan, it 
does not require a collection of information from any persons or 
entities.\136\
---------------------------------------------------------------------------

    \135\ The Commission's notice was published in the Federal 
Register. See 77 FR 43271, Jul. 24, 2012. On August 13, 2012, OMB 
approved the Commission's initial information collection request 
until February 28, 2013, and assigned OMB control number 3038-0098.
    \136\ On November 7, 2012, the Commission, by separate notice in 
the Federal Register, announced an opportunity for public comment on 
the proposed extension of OMB approval of the prior information 
collection request, with a 60-day comment period that expires on 
January 7, 2013. See 77 FR 66819 Nov. 7, 2012. Because the Final 
Order does not require submission of a compliance plan, this 
extension is no longer relevant.
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VI. Cost-Benefit Considerations Relating to the Final Order

    Section 15(a) of the CEA \137\ requires the Commission to consider 
the costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the 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.
---------------------------------------------------------------------------

    \137\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

A. Background

    Throughout the Dodd-Frank rulemaking process, the Commission has 
strived to ensure that new regulations designed to achieve Dodd-Frank's 
protections be implemented in a manner that is both timely and also 
minimizes unnecessary market disruption. In its effort to implement the 
Dodd-Frank regulations on a cross-border basis, the Commission's 
approach has not been different. In this respect, the Commission has 
attempted to be responsive to industry's concerns regarding 
implementation and the timing of new compliance obligations, and 
thereby ensure that market practices would not be unnecessarily 
disrupted during the transition to the new swap regulatory regime. At 
the same time, however, the Commission has endeavored to comply with 
the Congressional mandate to implement the new SD and MSP regulatory 
scheme in a timely manner. The Commission, therefore, also seeks to 
ensure that the implementation of these requirements is not subject to 
undue delay. The Commission believes that the Final Order strikes the 
proper balance between promoting an orderly transition to the new 
regulatory regime under the Dodd-Frank Act, while appropriately 
tailoring relief to ensure that market practices are not unnecessarily 
disrupted during such transition.
    The Final Order also reflects the Commission's recognition that 
international coordination is essential in this highly interconnected 
global market, where risks are transmitted across national borders and 
market participants operate in multiple jurisdictions.\138\ The Final 
Order would allow market participants to implement the calculations 
related to SD and MSP registration on a uniform basis and to delay 
compliance with certain Dodd-Frank requirements while the Commission 
continues to work closely with other domestic financial regulatory 
agencies and its foreign counterparts in an effort to further harmonize 
the cross-border regulatory framework.
---------------------------------------------------------------------------

    \138\ See generally CFTC-SEC Joint Report on International Swap 
Regulation Required by Section 719(c) of the Dodd Frank Act (Jan. 
31, 2012) at 105-09.
---------------------------------------------------------------------------

B. Summary of Proposed Consideration of the Costs and Benefits of the 
Exemptive Order

    In terms of costs, in the Proposed Order the Commission considered 
the potential costs incurred by swap entities to submit a compliance 
plan in order to obtain exemptive relief. As noted above, the Final 
Order does not require submission of a compliance plan and therefore 
these potential costs are no longer relevant to the Final Order.
    Apart from the direct costs of submitting a compliance plan, the 
Commission noted in the Proposed Order that it may result in indirect 
costs to the public, including the costs of continuing systemic risk to 
U.S. taxpayers due to delayed compliance with the Entity-Level 
Requirements and, to a more limited extent, Transaction-Level 
Requirements of the Dodd-Frank Act. The Commission proposed that these 
costs are not, however, susceptible to meaningful quantification due to 
a lack of data regarding several key variables.
    In terms of benefits, the proposal stated that the exemptive order 
would provide a benefit in that it would allow affected entities 
additional time to transition into the new regulatory regime in a more 
orderly manner, which promotes stability in the markets as that 
transition occurs. Another benefit proposed was the increase in 
international harmonization because the

[[Page 876]]

proposed relief provided U.S. and non-U.S. registrants the latitude 
necessary to develop and modify their compliance plans as the 
regulatory structure in their home jurisdiction changes, which would 
promote greater regulatory consistency and coordination with 
international regulators.
    The Commission explained that one of the key benefits of the 
proposed compliance plan condition is that it would ensure that non-
U.S. persons claiming the exemption would be actively and demonstrably 
considering and planning for compliance with the Entity-Level and 
Transaction-Level Requirements under the CEA, as may be applicable. In 
addition, the Commission stated that relief as proposed would allow 
foreign branches of U.S. SDs and MSPs to comply only with those 
requirements as may be required in the jurisdiction where the foreign 
branch is located for swaps with non-U.S. counterparties, effective 
concurrently with the date upon which such SDs and MSPs must first 
apply for registration until 6 months following the publication of the 
proposed order in the Federal Register.

C. Comments

    The Commission requested comments on all aspects of its proposed 
consideration of costs and benefits and any alternatives to the same. 
As discussed and considered throughout this release, the Commission 
received 26 comments on the Proposed Order, many addressing the 
potential economic and competitive effects of the proposed exemption in 
qualitative terms. None, however, provided additional data or 
information from which the Commission could modify and/or expand upon 
its dollar cost estimates of the conditions to the exemption.
    In the paragraphs that follow, the Commission summarizes and 
responds to the comments received that relate to the enumerated cost 
and benefit considerations set forth in CEA section 15(a), most notably 
considerations of protection of the market participants and the public, 
and considerations of competitiveness. The Commission believes that, 
while it is possible that the estimated dollar costs will increase or 
decrease as a result of the modifications to the proposal in this final 
order, the Commission does not expect any such changes to be 
significant.
    While most commenters expressed support for the Commission's 
objective in the Proposed Order--that is, ensuring an orderly 
transition to Dodd-Frank's regulatory framework and providing greater 
legal certainty for market participants by providing a phase-in of 
certain requirements, other commenters expressed caution that delayed 
implementation could leave the public unprotected from the types of 
risk the Dodd-Frank Act and the Commission's implementing regulations 
are intended to address.
    Public interest groups including Americans for Financial Reform, 
Public Citizen's Congress Watch, and Better Markets stated that the 
proposed delayed implementation of the Dodd-Frank derivatives regime, 
where there is a clear and direct U.S. taxpayer exposure, would deprive 
taxpayers of the protections required by the statute, such as clearing 
and margin, which these commenters believe should go into effect as 
rapidly as possible. AFR further states that although the risk to U.S. 
taxpayers related to European banks is somewhat less direct, it is real 
and has been significant, as shown by the U.S. taxpayer bailouts that 
benefitted foreign counterparties to AIG Financial Products during the 
2008 crisis.\139\
---------------------------------------------------------------------------

    \139\ See AFR (Aug. 13, 2012) at 2. See also Better Markets 
(Aug. 16, 2012) at 1.
---------------------------------------------------------------------------

    Industry commenters urged the Commission to avoid potential undue 
disruption and market dislocation by carefully phasing in 
implementation in a manner that ``appropriately balances the competing 
objectives and obstacles facing the Commission and the private sector 
and that avoids adverse market and economic impacts.'' \140\ IIB, for 
example, said that requiring non-U.S. SDs and MSPs to comply with all 
applicable Dodd Frank requirements at the time of registration or 
shortly thereafter would ``create unrealistic and unwarranted 
compliance burdens'' and therefore the Commission should provide 
additional time for compliance.\141\ Commenters also said that if the 
Commission adopts interim requirements that would apply for only a 
short time, it should take care that market participants would not be 
unnecessarily required to incur costs to comply with requirements that 
are subject to change.\142\
---------------------------------------------------------------------------

    \140\ Cleary (Aug.16, 2012) at 3.
    \141\ IIB (Aug. 9, 2012) at 2.
    \142\ See SIFMA (Aug. 13, 2012) at 5. See also letter to 
Chairman Gensler from Reps. Scott Garrett and Randy Neugebauer (June 
20, 2012) at 2 (requesting that the Commission formalize any cross 
border guidance through a rule making that includes the appropriate 
cost-benefit analysis that the law requires).
---------------------------------------------------------------------------

    Commenters also addressed the perceived competitive effects of the 
Proposed Order. Better Markets stated that, as a general matter, it 
would be inappropriate and contrary to law for the Commission to delay 
implementation of the Dodd-Frank Act to allow ``the rest of the world 
to catch up'' to the U.S.\143\ In contrast, ISDA believes that the 
Commission should align the compliance dates for U.S. and non-U.S. SDs 
and MSPs in order to avoid the ``profound effect[s] on transactional 
relationships'' that may result from ``a framework under which the 
Commission imposes on [U.S. SDs and MSPs] a substantially earlier 
rollout of Entity-level requirements and Transaction level requirements 
with non-U.S. persons in certain cases.'' \144\ This view was shared by 
other industry commenters, which recommended that ``during the 
exemption's phase-in period, while transaction-level requirements have 
not yet come into effect outside the U.S., the Commission should ensure 
competitive parity by exempting all SDs from transaction level 
requirements in connection with transactions with non-U.S. 
counterparties.'' \145\
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    \143\ Better Markets (Aug. 16, 2012) at 2.
    \144\ ISDA (Aug. 10, 2012) at 7.
    \145\ Cleary (Aug 16, 2012) at 11.
---------------------------------------------------------------------------

    Regarding the Proposed Order's treatment of SDR Reporting and LTR 
requirements, The Clearing House stated that differential treatment 
between foreign SDs and non-U.S. affiliates or subsidiaries of U.S. SDs 
would create a competitive disadvantage for overseas branches and 
affiliates of U.S. entities and would not serve the Commission's 
purpose of mitigating risk to the U.S.\146\ Deutsche Bank pointed out 
that because the Proposed Order would not provide relief to non-U.S. 
SDs and MSPs that are affiliates of U.S. SDs, members of an affiliated 
group that is based outside the U.S. but in which one of the members is 
a U.S. SD (such as, potentially, the Deutsche Bank group) would not 
benefit from the Proposed Order.\147\ In this context, Deutsche Bank 
stated that affiliates, particularly in different countries, frequently 
use different and unrelated technology systems, and therefore a non-
U.S. SD or MSP with a U.S. SD affiliate may not be able to easily use 
the reporting systems of its U.S. SD affiliate.\148\
---------------------------------------------------------------------------

    \146\ See The Clearing House (Aug. 13, 2012) at 16.
    \147\ See Deutsche Bank (Aug. 13, 2012) at 3.
    \148\ Id.
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D. Consideration of Costs and Benefits of the Final Order

    The Final Order permits, subject to the conditions specified 
therein, market participants outside the United States (i) to apply a 
limited, interim definition of the term ``U.S. person'' for a period of 
six months, (ii) to determine SD and

[[Page 877]]

MSP registration requirements in a uniform manner, (iii) to apply the 
SD de minimis aggregation requirements in a limited manner, an (iv) to 
delay compliance with certain Dodd Frank requirements specified in the 
Final Order until July 12, 2013. The Final Order reflects the 
Commission's determination to protect U.S. persons and markets through 
the cross-border application of the provisions of the Dodd-Frank Act 
and the Commission's regulations in a manner consistent with section 
2(i) of the CEA and longstanding principles of international comity. By 
carefully tailoring the scope and extent of the phasing-in provided by 
the Final Order, the Commission believes that it achieves an 
appropriately balanced approach to implementation that mitigates the 
costs of compliance while avoiding open-ended delay in protecting the 
American public from swaps activities overseas. To be sure, the 
conditions attached to the Final Order are not without cost, but the 
Commission believes that phasing-in of certain Dodd-Frank requirements 
as permitted by the Final Order will reduce overall costs to market 
participants.
    In the absence of the Final Order, non-U.S. SDs or MSPs would be 
required to be fully compliant with the Dodd-Frank regulatory regime 
without further delay. The Final Order delays compliance with a number 
of these requirements until July 12, 2013. With respect to these 
entities, therefore, the benefits include not only the avoided costs of 
compliance with certain requirements during the time that the Final 
Order is in effect, but also increased efficiency because the 
additional time allowed to phase in compliance will allow market 
participants more flexibility to implement compliance in a way that is 
compatible with their systems and practices. The additional time 
provided by the Final Order will also give foreign regulators more time 
to adopt regulations covering similar topics, which could increase the 
likelihood that substituted compliance will be an option for market 
participants. Thus, the Final Order is expected to help reduce the 
costs to market participants of implementing compliance with certain 
Dodd Frank requirements. These and other costs and benefits are 
considered below.
1. Costs
    A potential cost of the Final Order, albeit one that is difficult 
to quantify, is the potential that the relief from certain SD de 
minimis aggregation requirements and the delay in compliance permitted 
by the Final Order will leave market participants without certain 
protections flowing from the Dodd Frank Act for the period during which 
the Final Order applies. The Final Order may also, as discussed above, 
leave U.S. taxpayers exposed to systemic risks during that time 
period.\149\ The Commission believes that these costs are mitigated, 
however, by the relatively short time period of the Final Order's 
application, by the fact that certain key Dodd Frank requirements will 
apply during this time, and by the limitation of the Final Order's 
scope to non-U.S. persons. The Commission notes, however, that concerns 
about these costs are one of the bases for the limited nature of the 
Final Order, and that adoption of many of the modifications suggested 
by commenters to expand the order would potentially increase such 
costs.
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    \149\ In this context, the Commission considered whether 
additional costs could result from the provisions of the exemptive 
order that provide additional time for historical swap reporting. 
The Commission does not believe that providing additional time for 
historical swap reporting will result in any significant costs 
because the required data will still be provided within a relatively 
short period of time.
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    The Commission has also considered the possibility, raised by 
commenters, that competitive disparities will result from the delay in 
compliance permitted to non-U.S. market participants during the 
effectiveness of the Final Order. In general, the effect of the Final 
Order is that while U.S. SDs and MSPs will begin to comply with certain 
Dodd Frank requirements when they apply to be registered (which will 
begin at the end of 2012 and continue through the first part of 
2013),\150\ non-U.S. market participants will not have to comply with 
such requirements, to the extent provided under the Final Order, until 
July 12, 2013. This delay raises the potential that the earlier 
imposition of certain requirements on U.S. SDs and MSPs could also 
impose a competitive disadvantage on them. The Commission believes, 
however, that any potential competitive disadvantage from the Final 
Order is uncertain, and there are factors indicating it is unlikely to 
be significant. Moreover, the Commission's staff is minimizing, through 
a variety of no-action letters and staff guidance, the potential for 
competitive disparities by affording U.S. and non-U.S. market 
participants time-limited relief to achieve compliance with certain 
regulatory requirements before staff would recommend enforcement action 
by the Commission.\151\ For example, CFTC Letter No. 12-32 provides 
relief regarding compliance with certain requirements of the 
Commission's swap data reporting rules. In so doing, Commission staff 
allows for a common monthly compliance date for SDs newly within the 
scope of those rules, and to extend the compliance date for reporting 
historical swap transaction data pursuant to Part 46 of the 
Commission's regulations.\152\
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    \150\ See CFTC Staff Responds to Questions on Timing of Swap 
Dealer Registration Rules, CFTC Press Release 6348-12, September 10, 
2012.
    \151\ For a listing of all relevant no-action letters and staff 
guidance, see: https://www.cftc.gov/LawRegulation/DoddFrankAct/GuidanceQandA/index.htm.
    \152\ See CFTC Letter No. 12-32.
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    The potential disadvantage is uncertain because it is unknown 
whether the Dodd Frank requirements imposed on U.S. SDs and MSPs in the 
first half of 2013 will discourage potential counterparties from 
engaging in swaps with them.\153\ Specifically, it is unknown whether 
the compliance expenses incurred during that time will directly affect 
swap terms in a manner that would impose a significant 
disadvantage.\154\ Also, the Commission cannot estimate with certainty 
the likelihood that potential competitive disadvantages arising from 
the Final Order will be significant for U.S. SDs and MSPs. A variety of 
factors influence a person's choice of potential swap counterparties, 
and therefore whether the earlier imposition of certain Dodd Frank 
requirements on U.S. SDs and MSPs will cause a significant shift of 
swap business away from them is uncertain. It may be that a person 
seeking to enter into relatively few swaps would perceive a transitory 
advantage in dealing with a more lightly regulated non-U.S. person 
while the exemptive order is in effect. The Commission also considered 
that if a person has in place relationships with multiple 
counterparties (both U.S. and non-U.S.), the person may be more likely 
to enter into swaps with the non-U.S. counterparties while the Final 
Order is in effect, and the higher level of swap activity with non-U.S. 
counterparties may continue after the order expires. Also, U.S. SDs and 
MSPs

[[Page 878]]

may be driven to accept lower profit margins on swaps in order to 
prevent such shifts to non-U.S. counterparties.
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    \153\ The Commission notes, for example, that certain Dodd Frank 
requirements, such as margin and capital rules, have not been 
finalized and are unlikely to apply to U.S. SDs and MSPs in the 
first half of 2013. Also, other requirements, such as the clearing 
requirement, will be phased in during that time.
    \154\ For example, while the Commission acknowledges that the 
requirement to have a chief compliance officer in place does impose 
costs, it is unknown whether shifting the time that this requirement 
will go into effect by approximately six months will significantly 
alter the financial terms at which SDs and MSPs subject to that 
requirement would enter into swaps.
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    These negative competitive effects on U.S. SDs and MSPs would be 
more likely if compliance expenses incurred by U.S. SDs and MSPs in the 
first half of 2013 negatively affect the swap terms they offer, and if 
swap users are more sensitive to such changes in swap terms. On the 
other hand, many relationships between SDs and their counterparties are 
connected with other financial arrangements that are reflected in 
complex documentation and are difficult to modify quickly.\155\ This 
difficulty would attenuate the likelihood of a significant shift of 
swap counterparties away from U.S. SDs and MSPs during the relatively 
short period that the Final Order is in effect.
---------------------------------------------------------------------------

    \155\ In fact, the complexity of these arrangements and 
documentation is one of the reasons that foreign potential 
registrants have requested more time to come into compliance with 
the Dodd Frank requirements.
---------------------------------------------------------------------------

    The Commission has considered the potential negative competitive 
effects of the Final Order on U.S. SDs and MSPs. However, since it is 
difficult to isolate the effects of the Final Order from all other 
factors that may affect how swap users choose counterparties and the 
terms at which they enter into swaps, it is difficult to estimate on a 
quantitative basis the potential costs that could result for U.S. SDs 
and MSPs from the potential negative competitive effects of the Final 
Order. Thus, the Commission cannot reach a definitive conclusion about 
the effect of the Final Order on competition. In any event, commenters 
who raised the potential competitive effect of the Proposed Order did 
not provide any specific facts, examples or analysis to facilitate a 
detailed consideration of these concerns.
    Regarding the comments on the Proposed Order's treatment of the SDR 
reporting and LTR requirements, the Commission believes that allowing 
non-U.S. SDs and MSPs that are not part of an affiliated group in which 
the ultimate parent entity is a U.S. registrant, bank, or financial or 
bank holding company to forego reporting of swaps with non-U.S. 
counterparties during the effectiveness of the Final Order is not 
likely to impose a significant competitive disadvantage on those SDs 
and MSPs that are required to report such swaps with non-U.S. 
counterparties. Although it is possible that some non-U.S. 
counterparties may have concerns about reporting of their swap 
activities and may therefore prefer to enter into swaps with SDs and 
MSPs that are not subject to these requirements, any resulting 
advantage to those SDs and MSPs will last only until the Final Order 
expires on July 12, 2013, and as noted above the likelihood of 
significant customer shifts during that time is uncertain. As for the 
point that the relief in the Final Order should be available to members 
of an affiliated group that is based outside the U.S. but in which one 
of the members is a U.S. SD, the Final Order has been modified to 
provide this availability. Last, the commenter's point that affiliates 
in different countries may use different and unrelated technology 
systems illustrates one of the reasons that the Commission is providing 
the relief in the Final Order--i.e., to give affiliates in different 
countries time to mitigate any incompatibilities in their systems.
    In connection with the interim definition of the term ``U.S. 
person'' which may be applied by non-U.S. market participants covered 
by the Final Order, the Commission has considered the potential that 
costs could arise from applying this interim definition and then 
transitioning to a different definition at expiration of the Final 
Order. To mitigate transition costs, the Commission intends that during 
the transitional period during which the Final Order is in effect, 
market participants will make the system and operational changes 
necessary to implement any final definition of U.S. person.
2. Benefits
    The primary benefit of this Final Order is that it affords entities 
additional time to come into compliance with certain of the 
Commission's regulations. The Commission has considered the comments 
regarding the complex issues faced by non-U.S. SDs and MSPs in 
complying with the applicable Dodd-Frank requirements, and it believes 
that this additional time will be of benefit to market participants 
beyond simply delaying the time at which they will have to incur the 
costs of complying with the regulations. More importantly, this 
additional time will permit market participants to implement the 
Commission's regulations more flexibly, so that each market 
participant's implementation activities can be more closely coordinated 
with its particular situation, including factors such as the type of 
swaps it uses, the characteristics of its counterparties, and the 
nature of its internal swap processes and systems. Reduced costs may 
occur as the result of phasing in new systems, operational patterns, 
legal agreements, or other business arrangements over a longer period 
of time, particularly for SDs and MSPs outside the U.S. For example, 
different jurisdictions may have varying documentation requirements or 
business practices that would lengthen the time needed to come into 
compliance. The Final Order provides time for this.
    The Commission understands that if all market participants world-
wide were required to comply with all applicable requirements upon 
applying to register as SDs and MSPs (which will begin at the end of 
2012), some market participants would have to rush to implement 
compliance. The Commission is cognizant that compliance costs may be 
increased simply by the need to implement compliance quickly, which 
could entail, for example, retaining outside consultants rather than 
having in-house employees effect the necessary implementation steps. 
Thus, the Commission believes that by giving non-U.S. market 
participants additional time to come into compliance with certain of 
its regulations, the overall cost of compliance implementation will be 
reduced, not just delayed.
    The Final Order also benefits entities by providing categories of 
entities the same relief, which eliminates the need for entities to 
seek individualized determinations by the Commission's staff regarding 
their particular transactions or operations. Providing additional time 
to all the non-U.S. market participants covered by the Final Order may 
facilitate action by industry groups to assist in compliance efforts 
and encourage cooperation among market participants.
    In addition, the Commission believes that the delay provided by the 
Final Order may permit some non-U.S. jurisdictions to adopt regulatory 
requirements that are similar to certain of the Commission regulations 
and therefore may potentially be the basis for substituted compliance 
by market participants in those jurisdictions. Based on discussions 
with market participants, the Commission expects that substituted 
compliance would in some circumstances be less costly than compliance 
with Commission regulations, and therefore the Final Order has the 
potential to reduce costs by providing a greater opportunity for 
substituted compliance.

E. Section 15(a) Factors

1. Protection of Market Participants and the Public
    The exemptive relief provided in this Final Order will protect 
market participants and the public by facilitating a more orderly 
transition to the new regulatory regime than might

[[Page 879]]

otherwise occur in the absence of this order. In particular, non-U.S. 
persons are afforded additional time to come into compliance than would 
otherwise be the case, which contributes to greater stability and 
reliability of the swap markets during the transition process.
2. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The Commission believes that the efficiency and integrity of the 
markets will be furthered by the additional compliance time provided in 
this order and the condition that entities submit a compliance plan. As 
discussed above, the Commission is mindful of the claims that the final 
order could potentially cause competitive disparities, and has taken 
steps to mitigate those potential costs where doing so would be 
consistent with the Dodd-Frank Act and the Commission's policy 
objectives.
3. Price Discovery
    The Commission has not identified any costs or benefits of the 
proposed order with respect to price discovery.
4. Risk Management
    Entity level risk-management and capital requirements could be 
delayed by operation of the Final Order, which could weaken risk 
management. However, such potential risk is limited by the fact that 
the exemptive order is applicable for a finite time.
5. Other Public Interest Considerations
    The Commission has not identified any other public interest costs 
or benefits of the proposed order.

VII. Final Order

    The Commission, in order to provide for an orderly implementation 
of Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''), and consistent with the 
determinations set forth above, which are incorporated in this Final 
Order by reference, hereby grants, pursuant to section 4(c) of the 
Commodity Exchange Act (``CEA''), time-limited relief to non-U.S. swap 
dealers (``SDs'') and major swaps participants (``MSPs'') and to 
foreign branches of U.S. SDs and MSPs, from certain swap provisions of 
the CEA, subject to the terms and conditions below.\156\
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    \156\ As used in this Order, the terms ``Entity-Level 
Requirements'' refer to the requirements set forth in Commission 
regulations 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 
23.603, 23.605, 23.606, 23.607, 23.608 and 23.609 and parts 20, 45 
and 46 and ``Transaction-Level Requirements'' refer to the 
requirements set forth in CEA section 2(h)(8) and Commission 
regulations 23.202, 23.400 to 23.451, 23.501, 23.502, 23.503, 
23.504(a), 23.504(b)(1), (b)(2), (b)(3) and (b)(4), 23.506 and 
23.610 and part 43. To date, the Commission has not adopted final 
rules relating to the Entity-Level Requirements of capital adequacy, 
nor the Transaction-Level Requirements of margining (and 
segregation) for uncleared swaps. See sections 4s(e) and 4s(l) of 
the CEA, 7 U.S.C. 6s(e), 6s(l).
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    (1) Phase-in of ``U.S. Person'' Definition: All market 
participants, including a prospective or registered SD or MSP, must 
apply for purposes of this Final Order a ``U.S. person'' definition 
which would define the term as:
    (i) A natural person who is a resident of the United States;
    (ii) A corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or any 
form of enterprise similar to any of the foregoing, in each case that 
is (A) organized or incorporated under the laws of a state or other 
jurisdiction in the United States or (B) effective as of April 1, 2013 
for all such entities other than funds or collective investment 
vehicles, having its principal place of business in the United States;
    (iii) A pension plan for the employees, officers or principals of a 
legal entity described in (ii) above, unless the pension plan is 
primarily for foreign employees of such entity;
    (iv) An estate of a decedent who was a resident of the United 
States at the time of death, or a trust governed by the laws of a state 
or other jurisdiction in the United States if a court within the United 
States is able to exercise primary supervision over the administration 
of the trust; or
    (v) An individual account or joint account (discretionary or not) 
where the beneficial owner (or one of the beneficial owners in the case 
of a joint account) is a person described in (i) through (iv) above.
    Any person not listed in (i) to (v) above is a ``non-U.S. person'' 
for purposes of this Final Order.
    (2) De Minimis and MSP Threshold Calculations. A non-U.S. person is 
not required to include, in its calculation of the aggregate gross 
notional amount of swaps connected with its swap dealing activity for 
purposes of Commission regulation 1.3(ggg)(4), or in its calculation of 
whether it is an MSP for purposes of Commission regulation 1.3(hhh), 
(i) any swap where the counterparty is not a U.S. person, or (ii) any 
swap where the counterparty is a foreign branch of a U.S. person that 
is registered as an SD or that represents that it intends to register 
with the Commission as an SD by March 31, 2013. A non-U.S. person is 
not required to include, in its calculation of the aggregate gross 
notional amount of swaps connected with its swap dealing activity for 
purposes of Commission regulation 1.3(ggg)(4), any swap to which it is 
not a party because the swap is entered into by an affiliated central 
booking entity.
    (3) Aggregation for Purposes of the De Minimis Calculation. A non-
U.S. person that is engaged in swap dealing activities with U.S. 
persons as of the effective date of this Order is not required to 
include, in its calculation of the aggregate gross notional amount of 
swaps connected with its swap dealing activity for purposes of 
Commission regulation 1.3(ggg)(4), the aggregate gross notional amount 
of swaps connected with the swap dealing activity of its U.S. 
affiliates under common control.\157\ Further, a non-U.S. person that 
is engaged in swap dealing activities with U.S. persons as of the 
effective date of this Order and is an affiliate under common control 
with a person that is registered as an SD is also not required to 
include, in its calculation of the aggregate gross notional amount of 
swaps connected with its swap dealing activity for purposes of 
Commission regulation 1.3(ggg)(4), the aggregate gross notional amount 
of swaps connected with the swap dealing activity of any non-U.S. 
affiliate under common control that is either (i) engaged in swap 
dealing activities with U.S. persons as of the effective date of this 
Order or (ii) registered as an SD. Also, a non-U.S. person is not 
required to include, in its calculation of the aggregate gross notional 
amount of swaps connected with its swap dealing activity for purposes 
of Commission regulation 1.3(ggg)(4), the aggregate gross notional 
amount of swaps connected with the swap dealing activity of its non-
U.S. affiliates under common control with other non-U.S. persons as 
counterparties.
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    \157\ For this purpose, the Commission construes ``affiliates'' 
to include persons under common control as stated in the 
Commission's final rule further defining the term ``swap dealer,'' 
which defines control as ``the possession, direct or indirect, of 
the power to direct or cause the direction of the management and 
policies of a person, whether through the ownership of voting 
securities, by contract or otherwise.'' See Final Entities Rules, 77 
FR at 30631, fn. 437.
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    (4) Non-U.S. SDs and MSPs: A non-U.S. SD or non-U.S. MSP may delay 
compliance with respect to Entity-Level Requirements that are in effect 
as of the effective date of this Order (subject to the condition in 
paragraph (5) below).
    (5) Notwithstanding paragraph (4), (i) non-U.S. SDs and non-U.S. 
MSPs shall be required to comply with the swap data repository 
(``SDR'') reporting and LTR requirements for all swaps with

[[Page 880]]

U.S. counterparties, upon their respective compliance dates; and (ii) 
non-U.S. SDs and Non-U.S. MSPs that are part of an affiliated group in 
which the ultimate parent entity is a U.S. SD, U.S. MSP, U.S. bank, 
U.S. financial holding company, or U.S. bank holding company shall be 
required to comply with the SDR reporting and Large Trader Reporting 
requirements for swaps with non-U.S. counterparties, upon their 
respective compliance dates. However, during the pendency of this Final 
Order, non-U.S. SDs and non-U.S. MSPs that are not part of an 
affiliated group in which the ultimate parent entity is a U.S. SD, U.S. 
MSP, U.S. bank, U.S. financial holding company or U.S. bank holding 
company may delay compliance with the SDR reporting and LTR 
requirements for swaps with non-U.S. counterparties in accordance with 
paragraph (4).
    (6) With respect to Transaction-Level Requirements as applied to 
transactions with a non-U.S. counterparty, non-U.S. SDs and non-U.S. 
MSPs may comply with such Requirements only as may be required by the 
local jurisdiction of such registrants; provided, however, that such 
registrants shall comply with such requirements that are in effect for 
all swaps with U.S. counterparties.
    (7) U.S Registrant: A U.S. person shall apply to register as an SD 
or MSP by the date such registration is required and shall comply with 
all applicable Entity-Level and Transaction-Level Requirements that are 
in effect, except that: (A) with respect to Transaction-Level 
Requirements as applied to swaps with a non-U.S. counterparty 
(including a non-U.S. SD or non-U.S. MSP), a foreign branch of a U.S. 
SD or U.S. MSP may comply with those requirements only as may be 
required by the local jurisdiction of such branches and (B) with 
respect to Transaction-Level Requirements as applied to swaps between 
foreign branches of U.S. SDs or foreign branches of U.S. MSPs,\158\ 
such foreign branches may comply with those requirements only as may be 
required by the local jurisdiction of such foreign branches.
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    \158\ For purposes of this relief from Transactional-Level 
Requirements with respect to a swap between foreign branches of U.S. 
registrants, a swap is with the foreign branch of a U.S. person when 
(i) the personnel negotiating and agreeing to the terms of the swap 
are located in the jurisdiction of such foreign branch; (ii) the 
documentation of the swap specifies that the counterparty or 
``office'' for the U.S. person is such foreign branch and (iii) the 
swap is entered into by such foreign branch in its normal course of 
business.
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    (8) Expiration of Relief: The relief provided to non-U.S. SDs and 
non-U.S. MSPs (and foreign branches of a U.S. SD or MSP) in this order 
shall be effective upon approval by the Commission and expire on July 
12, 2013.
    (9) Scope of Relief: The time-limited relief provided in this 
Order: (A) Shall not affect, with respect to any swap within the scope 
of this Order, the applicability of any other CEA provision or 
Commission regulation (i.e., those outside the Entity-Level and 
Transaction-Level Requirements); (B) shall not limit the applicability 
of any CEA provision or Commission regulation to any person, entity or 
transaction except as provided in this Order; (C) shall not affect the 
applicability of any provision of the CEA or Commission regulations to 
futures contracts, or options on future contracts; and (D) shall not 
affect any effective or compliance date set forth in any Dodd-Frank Act 
rulemaking by the Commission.
    Finally, the Commission may, in its discretion, condition, suspend, 
terminate, or otherwise modify this Final Order, as appropriate, on its 
own motion.

    Issued in Washington, DC on December 21, 2012, by the 
Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.

Appendices to Final Exemptive Order Regarding Compliance With Certain 
Swap Regulations--Commission Voting Summary and Statements of 
Commissioners

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton, 
O'Malia and Wetjen voted in the affirmative; Commissioner Sommers 
voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the Final Exemptive Order Regarding Compliance with 
Certain Swap Regulations (Final Order). With this Commission action 
another important step has been taken to make swaps market reform a 
reality.
    Starting at the end of this month, domestic and foreign swap 
dealers will register. Once registered, swap dealers will report 
their trades to both regulators and the public. Foreign swap dealers 
will report their trades with U.S. persons. With these steps, the 
bright lights of transparency will, for the first time, shine on the 
swaps market. Swap dealers also will be required to implement sales 
practice standards that prohibit fraud, treat customers fairly and 
improve transparency. The public and our economy will benefit.
    The Final Order provides phased compliance for foreign swap 
dealers (including overseas affiliates of U.S. persons) and overseas 
branches of U.S. swap dealers with respect to certain requirements 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act).
    Since the enactment of the Dodd-Frank Act, the Commission has 
worked steadfastly toward a transition from an opaque unregulated 
marketplace to a transparent, regulated swaps marketplace and has 
phased in the timing for compliance to give market participants time 
to adjust to the new regulatory regime and smooth the transition.
    Today's Order is a continuation of the Commission's commitment 
to this phasing of compliance--in this case for foreign market 
participants--and is consistent with the phase-in order proposed in 
July 2012.
    The Order will remain in effect until July, 2013, as proposed in 
the July 12 order, and is intended to complement other Commission 
and staff actions that facilitate an orderly transition.
    During this transition period, a foreign swap dealer may phase 
in compliance with certain entity-level requirements. In addition, 
those entities (as well as foreign branches of U.S. swap dealers) 
are provided time-limited relief from specified transaction-level 
requirements when transacting with overseas affiliates guaranteed by 
U.S. entities (as well as with foreign branches of U.S. swap 
dealers).
    The relief period provides time for the Commission to work with 
foreign regulators as they implement comparable requirements and as 
the Commission develops a substituted compliance program. 
Substituted compliance, where appropriate, would allow for foreign 
swap dealers to meet the reform requirements of the Dodd Frank Act 
by complying with comparable and comprehensive foreign regulatory 
requirements.
    With respect to any transaction with a U.S. person, though, 
compliance will be required in accordance with previously issued 
rules and staff guidance.
    The Order incorporates a definition of ``U.S. person,'' that 
benefits from helpful comments of market participants to our initial 
proposal and continuing discussions with the international 
regulatory community.
    Under the Order, a foreign person will not be required to 
include in its calculation of swap dealing activities any swap with 
a non-U.S. person, as well as with foreign branches of U.S. swap 
dealers.
    In addition, based upon comments received on the cross-border 
interpretive guidance proposed last July, the Final Order also 
provides time-limited relief from aggregation requirements with 
respect to the de-minimis calculation for swap dealer registration. 
Specifically, the Final Order provides time-limited relief from the 
requirement that a non-U.S. person include the swap dealing 
transactions of its U.S. affiliates under common control (or any of 
its foreign affiliates that are currently dealing) in its 
calculation for determining whether or not it has exceeded the de 
minimis threshold.
    The Commission is separately seeking additional public comment 
on cross-border issues related to the term ``U.S. person,'' the 
aggregation requirements for foreign persons,

[[Page 881]]

as well as the definition of a ``foreign branch''.
    Today's Commission action assists foreign swap dealers to comply 
with the Dodd-Frank Act in an orderly fashion.
    Earlier this week in a separate action, the Commission issued an 
interim final rule allowing for more time to come into compliance on 
specific documentation requirements, providing swap dealers an 
additional four months with respect to sales practice documentation 
and six months with respect to relationship documentation.
    The Commission recognizes the importance of international 
cooperation and coordination in the regulation of this highly 
interconnected global market. To this end, the Commission staff has 
actively engaged in substantive discussions with foreign 
counterparts in an effort to better understand and develop a more 
harmonized cross-border regulatory framework.
    The Final Order also reflects comments from foreign market 
participants. For example, foreign banks requested a phase-in for 
the application of entity-level requirements. At the same time, 
foreign banks stated that the transaction-level requirements would 
apply to their transactions with U.S. persons.
    This Final Order reflects this on-going consultation with 
foreign regulatory counterparts who provided comments on the 
proposed exemptive order issued in July 2012. During this period of 
phased compliance, the Commission will continue to engage with 
foreign counterparts. As set forth in a December 4 joint press 
statement of market regulators, the Commission will meet regularly 
with foreign regulators to consult on, among other topics, the basis 
for substituted compliance, timing and sequencing of rules, clearing 
determinations, and options to address potential conflicting, 
inconsistent, and duplicative rules.
    As the Commission and the international regulatory community 
move forward, we all recognize that risk has no geographic boundary 
and money can move in and out of markets and jurisdictions in 
milliseconds. For the public to be protected, swaps market reform 
must cover transactions of overseas branches and overseas affiliates 
guaranteed by U.S. entities.
    The 2008 financial crisis demonstrated this when financial 
aftershocks spread throughout the globe and swaps executed offshore 
by U.S. financial institutions sent risk straight back to our 
shores. As a result of the crisis, eight million Americans lost 
their jobs, millions of families lost their homes, and small 
businesses across the country folded.
    Congress and the President responded with the Dodd-Frank Act, 
including the cross-border provisions of the law. Section 722(d) of 
the Dodd-Frank Act states that swaps reforms shall not apply to 
activities outside the United States unless those activities have 
``a direct and significant connection with activities in, or effect 
on, commerce of the United States.'' Congress provided that reforms 
should account for risks that may come from abroad.
    Failing to bring swaps market reform to transactions with 
overseas branches and overseas affiliates guaranteed by U.S. 
entities would mean American jobs and markets would likely move 
offshore, but, particularly in times of crisis, risk would come 
crashing back to our economy.
    The nature of modern finance is that large financial 
institutions set up hundreds, if not thousands of ``legal entities'' 
around the globe.
    They do so in an effort to respond to customer needs, funding 
opportunities, risk management and compliance with local laws. They 
do so as well, though, to lower their taxes, manage their reported 
accounting, and to minimize regulatory, capital and other 
requirements, so-called ``regulatory arbitrage.'' Many of these far-
flung legal entities, however, are still directly connected back to 
their U.S. affiliates.
    During a default or crisis, the risk that builds up offshore 
inevitably comes crashing back onto U.S. shores. When an affiliate 
of a large, international financial group has problems, the markets 
accept this will infect the rest of the group.
    This was true with AIG. Its subsidiary, AIG Financial Products, 
brought down the company and nearly toppled the U.S. economy. It was 
run out of London as a branch of a French-registered bank, though 
technically was organized in the United States.
    Lehman Brothers was another example. Among its complex web of 
affiliates was Lehman Brothers International (Europe) in London. 
When Lehman failed, the London affiliate had more than 130,000 
outstanding swaps contracts, many of them guaranteed by Lehman 
Brothers Holdings back in the United States.
    Yet another example was Citigroup, which set up numerous 
structured investment vehicles (SIVs) to move positions off its 
balance sheet for accounting purposes, as well as to lower its 
regulatory capital requirements. Yet, Citigroup had guaranteed the 
funding of these SIVs through a mechanism called a liquidity put. 
When the SIVs were about to fail, Citigroup in the United States 
assumed the huge debt, and taxpayers later bore the brunt with two 
multi-billion dollar infusions. The SIVs were launched out of London 
and incorporated in the Cayman Islands.
    Bear Stearns is another case. Bear Stearns' two sinking hedge 
funds it bailed out in 2007 were incorporated in the Cayman Islands. 
Yet again, the public assumed part of the burden when Bear Stearns 
itself collapsed nine months later.
    A decade earlier, the same was true for Long-Term Capital 
Management. When the hedge fund failed in 1998, its swaps book 
totaled in excess of $1.2 trillion notional. The vast majority were 
booked in its affiliated partnership in the Cayman Islands.
    This year's events of JPMorgan Chase, where it executed swaps 
through its London branch, are a stark reminder of this reality of 
modern finance.
    As there have been these and other financial institution 
failures in the past, in our free markets, we must be prepared for 
when other firms fail in the future. Dodd-Frank reform is about 
protecting the public from such failures in the future.
    It's my firm belief that if reforms were not to cover the 
branches and overseas affiliates of U.S. entities, either directly 
or through substituted compliance, the public will be left without 
the benefits and protections that Congress intended with Dodd-Frank.
    Foreign governments and their taxpayers also will be concerned 
about the risks engendered by the cross-border activities of 
financial institutions.
    The Final Order approved today benefitted from consultation with 
foreign regulatory counterparts. The Commission also received 
constructive comment from the public and Members of Congress.
    I am grateful to the staff of the Commission for their tireless 
work on this Order and the Commission's broader effort to implement 
swaps market reform. In accordance the directives of Congress and 
the Commission's final rules, swaps market reform is taking shape. I 
look forward to working with my colleagues to complete this 
important task.

Appendix 3--Statement of Commissioner Jill E. Sommers

    Although I am very supportive of granting temporary relief from 
certain provisions of the Dodd-Frank Act, I disagree with the 
approach and am concerned that the Commission continues to insert 
unnecessary complexities into the cross-border determinations. As I 
have said a number of times, the Commission has worked for decades 
to establish relationships with our foreign counterparts based on 
respect, trust and information sharing, which has resulted in a long 
and successful history of mutual recognition. All G20 nations have 
agreed to a comprehensive set of principles for regulating the over-
the-counter derivatives markets. Instead of recognizing these 
commitments and resolving to work towards mutual recognition of 
comparable regulatory regimes, keeping in mind the core policy 
objectives of the G20 commitments, the Commission has embarked on a 
cross-border analysis that I fear is taking us down a path of 
regulatory detail that is overly burdensome, complicated, and 
unnecessary.
    Moreover, it is a mistake to require registration and compliance 
with certain regulations before our final guidance has been issued. 
Foreign entities will not have the basic information they need to 
make informed decisions regarding the ultimate obligations of 
engaging in swaps activities with U.S. persons (the definition of 
which continues to shift) prior to having to make the decision to 
register. There is no reason why the Commission could not have 
issued broader relief until these issues are settled. We have simply 
chosen not to.
    I have consistently supported harmonization with both foreign 
and domestic regulators. Over the past few months we have received 
invaluable input from many global regulators, who have agreed to 
meet in early 2013 to inform each other on the progress made in 
finalizing reforms in their respective jurisdictions and to consult 
on possible transition periods. Future meetings will explore options 
for addressing conflicts, inconsistencies, and duplicative rules and 
examine ways in which comparability assessments and appropriate

[[Page 882]]

cross-border supervisory and enforcement arrangements may be made. 
It is my hope that these meetings will lead the Commission to listen 
to the concerns being raised by regulators around the world and to 
adopt a more reasonable approach when it finalizes the cross-border 
guidance.

Appendix 4--Statement of Commissioner Bart Chilton

    As we have set out to do from the beginning of the Dodd-Frank 
rulemaking process, we are cognizant of the need for regulators 
around the globe to harmonize rules to the extent possible in order 
to avoid market disruption and regulatory arbitrage.
    In responding to a letter from Members of the House Agriculture 
Committee's Subcommittee on General Farm Commodities and Risk 
Management, I pointed out that I expect the Commission will act 
imminently to ensure the following three broad objectives:
     Narrow the definition of U.S. person so that our 
extraterritorial reach is not too broad;
     Provide sensible aggregation requirements so that 
foreign banks won't automatically have to become U.S. swaps dealers 
just because they do business with foreign affiliates of U.S. banks;
     Provide for a phased-in compliance to July 2013 to 
allow time for other jurisdictions to implement derivative market 
reforms.
    In addition, we must ensure that, in this interim period, U.S. 
swap dealers and major swap participants can avoid a Dodd-Frank 
compliance-related enforcement action by working to comply 
reasonably and in good faith.
    Derivatives reform in the U.S. isn't taking place in a vacuum. 
And, regulators on several continents are moving at different 
speeds. Like an orchestra playing holiday music, not all sections of 
instruments necessarily start a number at the same time. Yet, they 
wind up in harmony. So too it must be in global financial reform. 
Ending up in harmony is critical to achieving our overarching 
purpose: making global financial markets safer, more transparent, 
and more effective.

Appendix 5--Statement of Commissioner Scott D. O'Malia

    I respectfully concur with the Commission's approval of this 
Order. The relief provided in the Order is timely and helps provide 
some level of clarity in the short term to market participants as 
they transition to the Commission's new swap regulatory regime. 
Crucially, it also provides time for the Commission to engage with 
foreign regulators in order to develop a coordinated, harmonized 
approach to regulating the global swap markets in the long term.
    While I generally support the relief provided, the Order should 
have done much more to provide clarity and consistency and to ensure 
a level playing field for market participants. In particular, I 
would like to note that the definition of ``U.S. Person'' contained 
in this Order is the third different definition articulated by the 
Commission within the past six months: The expansive definition in 
the Commission's July proposed guidance,\159\ the narrower 
``territorial'' definition in an October staff no-action 
letter,\160\ and now this modified territorial definition. The 
industry cannot get too used to this definition either, as there 
will be, remarkably, a fourth definition next year when the 
Commission finalizes its cross-border guidance. This is a 
regrettable lack of consistency for a concept that is so central to 
foreign swap market participants' ability to determine their 
compliance obligations.
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    \159\ Cross-Border Application of Certain Swaps Provisions of 
the Commodity Exchange Act, 77 FR 41214 (July 12, 2012).
    \160\ CFTC Division of Swap Dealer and Intermediary Oversight, 
Re: Time-Limited No-Action Relief: Swaps Only With Certain Persons 
to be Included in Calculation of Aggregate Gross Notional Amount for 
Purposes of Swap Dealer De Minimis Exception and Calculation of 
Whether a Person is a Major Swap Participant, No-Action Letter No. 
12-22, Oct. 12, 2012.
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    This Order expires July 12, 2013. The Commission should use the 
time between now and then to do two things. First, as mentioned 
above, it should actively engage with other regulators. I was 
encouraged by the joint statement released earlier this month by a 
group of international derivatives regulators (including the 
Commission),\161\ which emphasized the importance of coordination 
and committed the signatories to consult one another with regard to 
the timing and sequencing of regulation; comparability 
determinations; clearing determinations; and conflicting, 
inconsistent and duplicative rules. But these consultations over the 
next several months cannot merely be an exercise in going through 
the motions. Rather, they must be substantive, and they should 
ultimately lead to a final Commission cross-border guidance that 
addresses the strong concerns raised by fellow regulators about the 
Commission's July proposal. For their part, fellow regulators can 
make this engagement process more effective by providing detailed 
plans of their existing and upcoming regulations as well as 
concrete, specific blueprints for potential comparability and 
substituted compliance determinations.
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    \161\ Joint Press Statement of Leaders on Operating Principles 
and Areas of Exploration in the Regulation of the Cross-border OTC 
Derivatives Market, December 4, 2012.
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    Second, the Commission should use the next several months to 
revisit and revise the grossly overbroad conception of 
extraterritorial reach that it argued for in the July proposed 
guidance. Most important, the Commission needs to articulate a 
clear, logical interpretation of the ``direct and significant'' 
connection required by the statute as a prerequisite to applying our 
regulations to entities and activities abroad.\162\ As I have noted 
before, the statutory language is a limitation on the Commission's 
authority, but the proposed guidance interpreted it as the opposite. 
If the Commission develops a sufficient rationale for the ``direct 
and significant'' standard, it will have gone a long way toward 
appropriately determining the scope of its extraterritorial reach.

    \162\ 7 U.S.C. 2(i).
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[FR Doc. 2012-31736 Filed 1-4-13; 8:45 am]
BILLING CODE 6351-01-P