Comparability Determination for Australia: Certain Entity-Level Requirements, 78864-78878 [2013-30974]
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78864
Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices
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Regulations (‘‘Exemptive Order’’),9 the
Commission failed to complete an important
piece of the cross-border regime, namely,
supervisory memoranda of understanding
(‘‘MOUs’’) between the Commission and
fellow regulators.
I have previously stated that these MOUs,
if done right, can be a key part of the global
harmonization effort because they provide
mutually agreed-upon solutions for
differences in regulatory regimes.10
Accordingly, I stated that the Commission
should be able to review MOUs alongside the
respective comparability determinations and
vote on them at the same time. Without these
MOUs, our fellow regulators are left
wondering whether and how any differences,
such as direct access to books and records,
will be resolved.
Finally, as I have consistently maintained,
the substituted compliance process should
allow other regulatory bodies to engage with
the full Commission.11 While I am pleased
that the Notices are being voted on by the
Commission, the full Commission only
gained access to the comment letters from
foreign regulators on the Commission’s
comparability determination draft proposals
a few days ago. This is hardly a transparent
process.
Unclear Path Forward
Looking forward to next steps, the
Commission must provide answers to several
outstanding questions regarding these
comparability determinations. In doing so,
the Commission must collaborate with
foreign regulators to increase global
harmonization.
First, there is uncertainty surrounding the
timing and outcome of the MOUs. Critical
questions regarding information sharing,
cooperation, supervision, and enforcement
will remain unanswered until the
Commission and our fellow regulators
execute these MOUs.
Second, the Commission has issued timelimited no-action relief for the swap data
repository reporting requirements. These
comparability determinations will be done as
separate notices. However, the timing and
process for these determinations remain
uncertain.
Third, the Commission has failed to
provide clarity on the process for addressing
the comparability determinations that it
declined to undertake at this time. The
Notices only state that the Commission may
address these requests in a separate notice at
a later date given further developments in the
law and regulations of other jurisdictions. To
promote certainty in the financial markets,
the Commission must provide a clear path
forward for market participants and foreign
regulators.
The following steps would be a better
approach: (1) The Commission should extend
the Exemptive Order to allow foreign
regulators to further implement their
9 Exemptive
Order Regarding Compliance With
Certain Swap Regulations, 78 FR 43785 (Jul. 22,
2013).
10 https://www.cftc.gov/PressRoom/
SpeechesTestimony/opaomalia-29.
11 https://www.cftc.gov/PressRoom/
SpeechesTestimony/omaliastatement071213b.
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regulatory regimes and coordinate with them
to implement a harmonized substituted
compliance process; (2) the Commission
should implement a flexible, outcomes-based
approach to the substituted compliance
process and apply it similarly to all
jurisdictions; and (3) the Commission should
work closely with our fellow regulators to
expeditiously implement MOUs that resolve
regulatory differences and address regulatory
oversight issues.
Conclusion
While I support the narrow comparability
determinations that the Commission has
made, it was my hope that the Commission
would work with foreign regulators to
implement a substituted compliance process
that would increase the global harmonization
effort. I am disappointed that the
Commission has failed to implement such a
process.
I do believe that in the longer term, the
swaps regulations of the major jurisdictions
will converge. At this time, however, the
Commission’s comparability determinations
have done little to alleviate the burden of
regulatory uncertainty and duplicative
compliance with both U.S. and foreign
regulations.
The G–20 process delineated and put in
place the swaps market reforms in G–20
member nations. It is then no surprise that
the Commission must learn to coordinate
with foreign regulators to minimize
confusion and disruption in bringing much
needed clarity to the swaps market. For all
these shortcomings, I respectfully dissent
from the Commission’s approval of the
Notices.
[FR Doc. 2013–30975 Filed 12–26–13; 8:45 am]
BILLING CODE 6351–01–P
COMMODITY FUTURES TRADING
COMMISSION
Comparability Determination for
Australia: Certain Entity-Level
Requirements
Commodity Futures Trading
Commission.
ACTION: Notice of Comparability
Determination for Certain Requirements
under Australian Regulation.
AGENCY:
The following is the analysis
and determination of the Commodity
Futures Trading Commission
(‘‘Commission’’) regarding certain parts
of a request by the Australian Bankers
Association (‘‘ABA’’) that the
Commission determine that laws and
regulations applicable in in the
Commonwealth of Australia
(‘‘Australia’’) provide a sufficient basis
for an affirmative finding of
comparability with respect to the
following regulatory obligations
applicable to swap dealers (‘‘SDs’’) and
major swap participants (‘‘MSPs’’)
registered with the Commission: (i)
Chief compliance officer; (ii) risk
SUMMARY:
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management; and (iii) swap data
recordkeeping (collectively, the
‘‘Internal Business Conduct
Requirements’’).
DATES: Effective Date: This
determination will become effective
immediately upon publication in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary
Barnett, Director, 202–418–5977,
gbarnett@cftc.gov, Frank Fisanich, Chief
Counsel, 202–418–5949, ffisanich@
cftc.gov, Adam Kezsbom, Special
Counsel, 202–418–5372, akezsbom@
cftc.gov, Israel Goodman, Special
Counsel, 202–418–6715, igoodman@
cftc.gov, Division of Swap Dealer and
Intermediary Oversight, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
On July 26, 2013, the Commission
published in the Federal Register its
‘‘Interpretive Guidance and Policy
Statement Regarding Compliance with
Certain Swap Regulations’’ (the
‘‘Guidance’’).1 In the Guidance, the
Commission set forth its interpretation
of the manner in which it believes that
section 2(i) of the Commodity Exchange
Act (‘‘CEA’’) applies Title VII’s swap
provisions to activities outside the U.S.
and informed the public of some of the
policies that it expects to follow,
generally speaking, in applying Title VII
and certain Commission regulations in
contexts covered by section 2(i). Among
other matters, the Guidance generally
described the policy and procedural
framework under which the
Commission would consider a
substituted compliance program with
respect to Commission regulations
applicable to entities located outside the
U.S. Specifically, the Commission
addressed a recognition program where
compliance with a comparable
regulatory requirement of a foreign
jurisdiction would serve as a reasonable
substitute for compliance with the
attendant requirements of the CEA and
the Commission’s regulations
promulgated thereunder.
In addition to the Guidance, on July
22, 2013, the Commission issued the
Exemptive Order Regarding Compliance
with Certain Swap Regulations (the
1 78 FR 45292 (July 26, 2013). The Commission
originally published proposed and further proposed
guidance on July 12, 2012 and January 7, 2013,
respectively. See Cross-Border Application of
Certain Swaps Provisions of the Commodity
Exchange Act, 77 FR 41214 (July 12, 2012) and
Further Proposed Guidance Regarding Compliance
with Certain Swap Regulations, 78 FR 909 (Jan. 7,
2013).
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Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices
‘‘Exemptive Order’’).2 Among other
things, the Exemptive Order provided
time for the Commission to consider
substituted compliance with respect to
six jurisdictions where non-U.S. SDs are
currently organized. In this regard, the
Exemptive Order generally provided
non-U.S. SDs and MSPs in the six
jurisdictions with conditional relief
from certain requirements of
Commission regulations (those referred
to as ‘‘Entity-Level Requirements’’ in the
Guidance) until the earlier of December
21, 2013, or 30 days following the
issuance of a substituted compliance
determination.3
On April 22, 2013, the ABA (the
‘‘applicant’’) submitted a request that
the Commission determine that laws
and regulations applicable in Australia
provide a sufficient basis for an
affirmative finding of comparability
with respect to certain Entity-Level
Requirements, including the Internal
Business Conduct Requirements.4 The
applicant provided Commission staff
with an updated submission on June 7,
2013. On November 8, 2013, the
application was further supplemented
with corrections and additional
materials. The following is the
Commission’s analysis and
determination regarding the Internal
Business Conduct Requirements, as
detailed below.5
II. Background
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act 6
(‘‘Dodd-Frank Act’’ or ‘‘Dodd-Frank’’),
which, in Title VII, established a new
regulatory framework for swaps.
Section 722(d) of the Dodd-Frank Act
amended the CEA by adding section
2(i), which provides that the swap
provisions of the CEA (including any
CEA rules or regulations) apply to crossborder 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
2 78
FR 43785 (July 22, 2013).
Entity-Level Requirements under the
Exemptive Order consist of 17 CFR 1.31, 3.3,
23.201, 23.203, 23.600, 23.601, 23.602, 23.603,
23.605, 23.606, 23.608, 23.609, and parts 45 and 46
of the Commission’s regulations.
4 For purposes of this notice, the Internal
Business Conduct Requirements consist of 17 CFR
3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 23.603,
23.605, and 23.606.
5 This notice does not address swap data
repository reporting (‘‘SDR Reporting’’). The
Commission may provide a comparability
determination with respect to the SDR Reporting
requirement in a separate notice.
6 Public Law 111–203, 124 Stat. 1376 (2010).
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rules or regulations as are necessary or
appropriate to prevent evasion of the
swap provisions of the CEA enacted
under Title VII of the Dodd-Frank Act.7
In the three years since its enactment,
the Commission has finalized 68 rules
and orders to implement Title VII of the
Dodd-Frank Act. The finalized rules
include those promulgated under
section 4s of the CEA, which address
registration of SDs and MSPs and other
substantive requirements applicable to
SDs and MSPs. With few exceptions, the
delayed compliance dates for the
Commission’s regulations implementing
such section 4s requirements applicable
to SDs and MSPs have passed and new
SDs and MSPs are now required to be
in full compliance with such regulations
upon registration with the
Commission.8 Notably, the requirements
under Title VII of the Dodd-Frank Act
related to SDs and MSPs by their terms
apply to all registered SDs and MSPs,
irrespective of where they are located,
albeit subject to the limitations of CEA
section 2(i).
To provide guidance as to the
Commission’s views regarding the scope
of the cross-border application of Title
VII of the Dodd-Frank Act, the
Commission set forth in the Guidance
its interpretation of the manner in
which it believes that Title VII’s swap
provisions apply to activities outside
the U.S. pursuant to section 2(i) of the
CEA. Among other matters, the
Guidance generally described the policy
and procedural framework under which
the Commission would consider a
substituted compliance program with
respect to Commission regulations
applicable to entities located outside the
U.S. Specifically, the Commission
addressed a recognition program where
compliance with a comparable
regulatory requirement of a foreign
jurisdiction would serve as a reasonable
substitute for compliance with the
attendant requirements of the CEA and
the Commission’s regulations. With
respect to the standards forming the
basis for any determination of
comparability (‘‘comparability
determination’’ or ‘‘comparability
finding’’), the Commission stated:
In evaluating whether a particular category
of foreign regulatory requirement(s) is
comparable and comprehensive to the
applicable requirement(s) under the CEA and
Commission regulations, the Commission
will take into consideration all relevant
factors, including but not limited to, the
comprehensiveness of those requirement(s),
77
U.S.C. 2(i).
compliance dates are summarized on the
Compliance Dates page of the Commission’s Web
site. (https://www.cftc.gov/LawRegulation/
DoddFrankAct/ComplianceDates/index.htm.)
8 The
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the scope and objectives of the relevant
regulatory requirement(s), the
comprehensiveness of the foreign regulator’s
supervisory compliance program, as well as
the home jurisdiction’s authority to support
and enforce its oversight of the registrant. In
this context, comparable does not necessarily
mean identical. Rather, the Commission
would evaluate whether the home
jurisdiction’s regulatory requirement is
comparable to and as comprehensive as the
corresponding U.S. regulatory
requirement(s).9
Upon a comparability finding,
consistent with CEA section 2(i) and
comity principles, the Commission’s
policy generally is that eligible entities
may comply with a substituted
compliance regime, subject to any
conditions the Commission places on its
finding, and subject to the
Commission’s retention of its
examination authority and its
enforcement authority.10
In this regard, the Commission notes
that a comparability determination
cannot be premised on whether an SD
or MSP must disclose comprehensive
information to its regulator in its home
jurisdiction, but rather on whether
information relevant to the
Commission’s oversight of an SD or
MSP would be directly available to the
Commission and any U.S. prudential
regulator of the SD or MSP.11 The
Commission’s direct access to the books
and records required to be maintained
9 78
FR 45342–45.
the Guidance, 78 FR 45342–44.
11 Under §§ 23.203 and 23.606, all records
required by the CEA and the Commission’s
regulations to be maintained by a registered SD or
MSP shall be maintained in accordance with
Commission regulation 1.31 and shall be open for
inspection by representatives of the Commission,
the United States Department of Justice, or any
applicable U.S. prudential regulator.
In its Final Exemptive Order Regarding
Compliance with Certain Swap Regulations, 78 FR
858 (Jan. 7, 2013), the Commission noted that an
applicant for registration as an SD or MSP must file
a Form 7–R with the National Futures Association
and that Form 7–R was being modified at that time
to address existing blocking, privacy, or secrecy
laws of foreign jurisdictions that applied to the
books and records of SDs and MSPs acting in those
jurisdictions. See id. at 871–72 n. 107. The
modifications to Form 7–R were a temporary
measure intended to allow SDs and MSPs to apply
for registration in a timely manner in recognition
of the existence of the blocking, privacy, and
secrecy laws. In the Guidance, the Commission
clarified that the change to Form 7–R impacts the
registration application only and does not modify
the Commission’s authority under the CEA and its
regulations to access records held by registered SDs
and MSPs. Commission access to a registrant’s
books and records is a fundamental regulatory tool
necessary to properly monitor and examine each
registrant’s compliance with the CEA and the
regulations adopted pursuant thereto. The
Commission has maintained an ongoing dialogue
on a bilateral and multilateral basis with foreign
regulators and with registrants to address books and
records access issues and may consider appropriate
measures where requested to do so.
10 See
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by an SD or MSP registered with the
Commission is a core requirement of the
CEA 12 and the Commission’s
regulations,13 and is a condition to
registration.14
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III. Regulation of SDs and MSPs in
Australia
On April 22, 2013, the applicant
submitted a request that the
Commission assess the comparability of
laws and regulations applicable in
Australia with the CEA and the
Commission’s regulations promulgated
thereunder. The applicant provided
Commission staff with an updated
submission on June 7, 2013. On
November 8, 2013, the application was
further supplemented with corrections
and additional materials.
As represented to the Commission by
the applicant, currently all five
Australian registered SDs are Australian
authorized deposit-taking institutions
(‘‘ADIs’’) and holders of an Australian
financial services license (‘‘AFSL’’).
Thus, for the purposes of the
Commission’s comparability
determination, the Commission will
consider the laws and regulations
applicable to the five SD ADIs with
respect to their swap activities. The
relevant laws and regulations are
administered by two agencies; the
Australian Prudential Regulatory
Authority (‘‘APRA’’) and the Australian
Securities and Investments Commission
(‘‘ASIC’’).15
APRA is the prudential regulator of
the Australian financial services
industry and oversees the banking
industry. It has developed a regulatory
framework for Australian ADIs under
the Banking Act 1959 (the ‘‘Banking
Act’’) that is based on the banking
supervision principles published by the
Basel Committee on Banking
Supervision. This regulatory framework
is set out in a number of different
prudential standards that govern the
activities of ADIs.
ASIC is Australia’s corporate,
markets, and financial services
regulator. ASIC licenses and monitors
financial services businesses to ensure
they operate efficiently, honestly, and
12 See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of
the CEA.
13 See e.g., §§ 23.203(b) and 23.606.
14 See supra note 10.
15 Because the applicant’s request and the
Commissions determinations herein are based on
the comparability of Australian requirements
applicable to ADIs and AFSL holders, an SD or
MSP that is not an ADI or AFSL holder, or is
otherwise not subject to the requirements
applicable to ADIs and AFSL holders upon which
the Commission bases its determinations, may not
be able to rely on the Commission’s comparability
determinations herein.
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fairly. ASIC administers, among other
things, the following legislation and
regulations: the Corporations Act 2001
(the ‘‘Corporations Act’’), the
Corporations Regulations 2001, and the
Australian Securities and Investments
Commission Act 2001 (the ‘‘ASIC Act’’).
Under the Corporations Act, an
Australian entity that undertakes
specified activities, including dealing or
market making in derivatives (including
swaps) is required to hold an AFSL. The
AFSL regime establishes a number of
general licensing obligations that all
licensees must comply with. ASIC has
also issued regulatory guidance which
sets out its expectations of how
licensees may comply with their
licensing obligations in a range of
situations and taking into account the
nature, size, and complexity of their
financial services business.
IV. Comparable and
Comprehensiveness Standard
The Commission’s comparability
analysis will be based on a comparison
of specific foreign requirements against
the specific related CEA provisions and
Commission regulations as categorized
and described in the Guidance. As
explained in the Guidance, within the
framework of CEA section 2(i) and
principles of international comity, the
Commission may make a comparability
determination on a requirement-byrequirement basis, rather than on the
basis of the foreign regime as a whole.16
In making its comparability
determinations, the Commission may
include conditions that take into
account timing and other issues related
to coordinating the implementation of
reform efforts across jurisdictions.17
In evaluating whether a particular
category of foreign regulatory
requirement(s) is comparable and
comprehensive to the corollary
requirement(s) under the CEA and
Commission regulations, the
Commission will take into consideration
all relevant factors, including, but not
limited to:
• The comprehensiveness of those
requirement(s),
• The scope and objectives of the
relevant regulatory requirement(s),
• The comprehensiveness of the
foreign regulator’s supervisory
compliance program, and
• The home jurisdiction’s authority to
support and enforce its oversight of the
registrant.18
In making a comparability
determination, the Commission takes an
16 78
FR 45343.
FR 45343.
18 78 FR 45343.
17 78
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‘‘outcome-based’’ approach. An
‘‘outcome-based’’ approach means that
when evaluating whether a foreign
jurisdiction’s regulatory requirements
are comparable to, and as
comprehensive as, the corollary areas of
the CEA and Commission regulations,
the Commission ultimately focuses on
regulatory outcomes (i.e., the home
jurisdiction’s requirements do not have
to be identical).19 This approach
recognizes that foreign regulatory
systems differ and their approaches vary
and may differ from how the
Commission chose to address an issue,
but that the foreign jurisdiction’s
regulatory requirements nonetheless
achieve the regulatory outcome sought
to be achieved by a certain provision of
the CEA or Commission regulation.
In doing its comparability analysis the
Commission may determine that no
comparability determination can be
made 20 and that the non-U.S. SD or
non-U.S. MSP, U.S. bank that is an SD
or MSP with respect to its foreign
branches, or non-registrant, to the extent
applicable under the Guidance, may be
required to comply with the CEA and
Commission regulations.
The starting point in the
Commission’s analysis is a
consideration of the regulatory
objectives of the foreign jurisdiction’s
regulation of swaps and swap market
participants. As stated in the Guidance,
jurisdictions may not have swap
specific regulations in some areas, and
instead have regulatory or supervisory
regimes that achieve comparable and
comprehensive regulation to the DoddFrank Act requirements, but on a more
general, entity-wide, or prudential,
basis.21 In addition, portions of a foreign
regulatory regime may have similar
regulatory objectives, but the means by
which these objectives are achieved
with respect to swaps market activities
may not be clearly defined, or may not
19 78 FR 45343. The Commission’s substituted
compliance program would generally be available
for SDR Reporting, as outlined in the Guidance,
only if the Commission has direct access to all of
the data elements that are reported to a foreign trade
repository pursuant to the substituted compliance
program. Thus, direct access to swap data is a
threshold matter to be addressed in a comparability
evaluation for SDR Reporting. Moreover, the
Commission explains in the Guidance that, due to
its technical nature, a comparability evaluation for
SDR Reporting ‘‘will generally entail a detailed
comparison and technical analysis.’’ A more
particularized analysis will generally be necessary
to determine whether data stored in a foreign trade
repository provides for effective Commission use, in
furtherance of the regulatory purposes of the DoddFrank Act. See 78 FR 45345.
20 A finding of comparability may not be possible
for a number of reasons, including the fact that the
foreign jurisdiction has not yet implemented or
finalized particular requirements.
21 78 FR 45343.
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expressly include specific regulatory
elements that the Commission
concludes are critical to achieving the
regulatory objectives or outcomes
required under the CEA and the
Commission’s regulations. In these
circumstances, the Commission will
work with the regulators and registrants
in these jurisdictions to consider
alternative approaches that may result
in a determination that substituted
compliance applies.22
Finally, the Commission will
generally rely on an applicant’s
description of the laws and regulations
of the foreign jurisdiction in making its
comparability determination. The
Commission considers an application to
be a representation by the applicant that
the laws and regulations submitted are
in full force and effect, that the
description of such laws and regulations
is accurate and complete, and that,
unless otherwise noted, the scope of
such laws and regulations encompasses
the swaps activities23 thnsp; of SDs
and MSPs 24 in the relevant
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22 As
explained in the Guidance, such
‘‘approaches used will vary depending on the
circumstances relevant to each jurisdiction. One
example would include coordinating with the
foreign regulators in developing appropriate
regulatory changes or new regulations, particularly
where changes or new regulations already are being
considered or proposed by the foreign regulators or
legislative bodies. As another example, the
Commission may, after consultation with the
appropriate regulators and market participants,
include in its substituted compliance determination
a description of the means by which certain swaps
market participants can achieve substituted
compliance within the construct of the foreign
regulatory regime. The identification of the means
by which substituted compliance is achieved would
be designed to address the regulatory objectives and
outcomes of the relevant Dodd-Frank Act
requirements in a manner that does not conflict
with a foreign regulatory regime and reduces the
likelihood of inconsistent regulatory obligations.
For example, the Commission may specify that
[SDs] and MSPs in the jurisdiction undertake
certain recordkeeping and documentation for swap
activities that otherwise is only addressed by the
foreign regulatory regime with respect to financial
activities generally. In addition, the substituted
compliance determination may include provisions
for summary compliance and risk reporting to the
Commission to allow the Commission to monitor
whether the regulatory outcomes are being
achieved. By using these approaches, in the interest
of comity, the Commission would seek to achieve
its regulatory objectives with respect to the
Commission’s registrants that are operating in
foreign jurisdictions in a manner that works in
harmony with the regulatory interests of those
jurisdictions.’’ 78 FR 45343–44.
23 ‘‘Swaps activities’’ is defined in Commission
regulation 23.600(a)(7) to mean, ‘‘with respect to a
registrant, such registrant’s activities related to
swaps and any product used to hedge such swaps,
including, but not limited to, futures, options, other
swaps or security-based swaps, debt or equity
securities, foreign currency, physical commodities,
and other derivatives.’’ The Commission’s
regulations under 17 CFR Part 23 are limited in
scope to the swaps activities of SDs and MSPs.
24 No SD or MSP that is not legally required to
comply with a law or regulation determined to be
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jurisdictions.25 Further, as stated in the
Guidance, the Commission expects that
an applicant would notify the
Commission of any material changes to
information submitted in support of a
comparability determination (including,
but not limited to, changes in the
relevant supervisory or regulatory
regime) as, depending on the nature of
the change, the Commission’s
comparability determination may no
longer be valid.26
The Guidance provided a detailed
discussion of the Commission’s policy
regarding the availability of substituted
compliance 27 for the Internal Business
Conduct Requirements.28
V. Supervisory Arrangement
In the Guidance, the Commission
stated that, in connection with a
determination that substituted
compliance is appropriate, it would
expect to enter into an appropriate
memorandum of understanding
(‘‘MOU’’) or similar arrangement 29 with
comparable may voluntarily comply with such law
or regulation in lieu of compliance with the CEA
and the relevant Commission regulation. Each SD
or MSP that seeks to rely on a comparability
determination is responsible for determining
whether it is subject to the laws and regulations
found comparable. Currently, there are no MSPs
organized outside the U.S. and the Commission
therefore cautions any non-financial entity
organized outside the U.S. and applying for
registration as an MSP to carefully consider
whether the laws and regulations determined to be
comparable herein are applicable to such entity.
25 The Commission has provided the relevant
foreign regulator(s) with opportunities to review
and correct the applicant’s description of such laws
and regulations on which the Commission will base
its comparability determination. The Commission
relies on the accuracy and completeness of such
review and any corrections received in making its
comparability determinations. A comparability
determination based on an inaccurate description of
foreign laws and regulations may not be valid.
26 78 FR 45345.
27 See 78 FR 45348–50. The Commission notes
that registrants and other market participants are
responsible for determining whether substituted
compliance is available pursuant to the Guidance
based on the comparability determination
contained herein (including any conditions or
exceptions), and its particular status and
circumstances.
28 This notice does not address § 23.608
(Restrictions on counterparty clearing
relationships). The Commission declines to take up
the request for a comparability determination with
respect to this regulation due to the Commission’s
view that there are not laws or regulations
applicable in Australia to compare with the
prohibitions and requirements of § 23.608. The
Commission may provide a comparability
determination with respect to this regulation at a
later date in consequence of further developments
in the law and regulations applicable in Australia.
This notice also does not address capital
adequacy because the Commission has not yet
finalized rules for SDs and MSPs in this area, nor
SDR Reporting. The Commission may provide a
comparability determination with respect to these
requirements at a later date or in a separate notice.
29 An MOU is one type of arrangement between
or among regulators. Supervisory arrangements
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the relevant foreign regulator(s).
Although existing arrangements would
indicate a foreign regulator’s ability to
cooperate and share information, ‘‘going
forward, the Commission and relevant
foreign supervisor(s) would need to
establish supervisory MOUs or other
arrangements that provide for
information sharing and cooperation in
the context of supervising [SDs] and
MSPs.’’ 30
The Commission is in the process of
developing its registration and
supervision regime for provisionallyregistered SDs and MSPs. This new
initiative includes setting forth
supervisory arrangements with
authorities that have joint jurisdiction
over SDs and MSPs that are registered
with the Commission and subject to
U.S. law. Given the developing nature of
the Commission’s regime and the fact
that the Commission has not negotiated
prior supervisory arrangements with
certain authorities, the negotiation of
supervisory arrangements presents a
unique opportunity to develop close
working relationships between and
among authorities, as well as highlight
any potential issues related to
cooperation and information sharing.
Accordingly, the Commission is
negotiating such a supervisory
arrangement with each applicable
foreign regulator of an SD or MSP. The
Commission expects that the
arrangement will establish expectations
for ongoing cooperation, address direct
access to information,31 provide for
notification upon the occurrence of
specified events, memorialize
understandings related to on-site
visits,32 and include protections related
could include, as appropriate, cooperative
arrangements that are memorialized and executed
as addenda to existing MOUs or, for example, as
independent bilateral arrangements, statements of
intent, declarations, or letters.
30 78 FR 45344.
31 Section 4s(j)(3) and (4) of the CEA and
Commission regulation 23.606 require a registered
SD or MSP to make all records required to be
maintained in accordance with Commission
regulation 1.31 available promptly upon request to,
among others, representatives of the Commission.
See also 7 U.S.C. 6s(f); 17 CFR 23.203. In the
Guidance, the Commission states that it ‘‘reserves
this right to access records held by registered [SDs]
and MSPs, including those that are non-U.S.
persons who may comply with the Dodd-Frank
recordkeeping requirement through substituted
compliance.’’ 78 FR 45345 n. 472; see also id. at
45342 n. 461 (affirming the Commission’s authority
under the CEA and its regulations to access books
and records held by registered SDs and MSPs as ‘‘a
fundamental regulatory tool necessary to properly
monitor and examine each registrant’s compliance
with the CEA and the regulations adopted pursuant
thereto’’).
32 The Commission retains its examination
authority, both during the application process as
well as upon and after registration of an SD or MSP.
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to the use and confidentiality of nonpublic information shared pursuant to
the arrangement.
These arrangements will establish a
roadmap for how authorities will
consult, cooperate, and share
information. As with any such
arrangement, however, nothing in these
arrangements will supersede domestic
laws or resolve potential conflicts of
law, such as the application of domestic
secrecy or blocking laws to regulated
entities.
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VI. Comparability Determination and
Analysis
The following section describes the
requirements imposed by specific
sections of the CEA and the
Commission’s regulations for the
Internal Business Conduct
Requirements that are the subject of this
comparability determination, and the
Commission’s regulatory objectives with
respect to such requirements.
Immediately following a description of
the requirement(s) and regulatory
objective(s) of the specific Internal
Business Conduct Requirements that the
requestor submitted for a comparability
determination, the Commission
provides a description of the foreign
jurisdiction’s comparable laws,
regulations, or rules and whether such
laws, regulations, or rules meet the
applicable regulatory objective.
The Commission’s determinations in
this regard and the discussion in this
section are intended to inform the
public of the Commission’s views
regarding whether the foreign
jurisdiction’s laws, regulations, or rules
may be comparable and comprehensive
as those requirements in the DoddFrank Act (and Commission regulations
promulgated thereunder) and therefore,
may form the basis of substituted
compliance. In turn, the public (in the
foreign jurisdiction, in the United
States, and elsewhere) retains its ability
to present facts and circumstances that
would inform the determinations set
forth in this notice.
As was stated in the Guidance, the
Commission recognizes the complex
and dynamic nature of the global swap
market and the need to take an
adaptable approach to cross-border
issues, particularly as it continues to
work closely with foreign regulators to
address potential conflicts with respect
See 78 FR 45342 (stating Commission policy that
‘‘eligible entities may comply with a substituted
compliance regime under certain circumstances,
subject, however, to the Commission’s retention of
its examination authority’’) and 45344 n. 471
(stating that the ‘‘Commission may, as it deems
appropriate and necessary, conduct an on-site
examination of the applicant’’).
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to each country’s respective regulatory
regime. In this regard, the Commission
may review, modify, or expand the
determinations herein in light of
comments received and future
developments.
A. Chief Compliance Officer (§ 3.3)
Commission Requirement:
Implementing section 4s(k) of the CEA,
Commission regulation 3.3 generally
sets forth the following requirements for
SDs and MSPs:
• An SD or MSP must designate an
individual as Chief Compliance Officer
(‘‘CCO’’);
• The CCO must have the
responsibility and authority to develop
the regulatory compliance policies and
procedures of the SD or MSP;
• The CCO must report to the board
of directors or the senior officer of the
SD or MSP;
• Only the board of directors or a
senior officer may remove the CCO;
• The CCO and the board of directors
must meet at least once per year;
• The CCO must have the background
and skills appropriate for the
responsibilities of the position;
• The CCO must not be subject to
disqualification from registration under
sections 8a(2) or (3) of the CEA;
• Each SD and MSP must include a
designation of a CCO in its registration
application;
• The CCO must administer the
regulatory compliance policies of the SD
or MSP;
• The CCO must take reasonable steps
to ensure compliance with the CEA and
Commission regulations, and resolve
conflicts of interest;
• The CCO must establish procedures
for detecting and remediating noncompliance issues;
• The CCO must annually prepare
and sign an ‘‘annual compliance report’’
containing: (i) A description of policies
and procedures reasonably designed to
ensure compliance; (ii) an assessment of
the effectiveness of such policies and
procedures; (iii) a description of
material non-compliance issues and the
action taken; (iv) recommendations of
improvements in compliance policies;
and (v) a certification by the CCO or
CEO that, to the best of such officer’s
knowledge and belief, the annual report
is accurate and complete under penalty
of law; and
• The annual compliance report must
be furnished to the CFTC within 90 days
after the end of the fiscal year of the SD
or MSP, simultaneously with its annual
financial condition report.
Regulatory Objective: The
Commission believes that compliance
by SDs and MSPs with the CEA and the
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Commission’s rules greatly contributes
to the protection of customers, orderly
and fair markets, and the stability and
integrity of the market intermediaries
registered with the Commission. The
Commission expects SDs and MSPs to
strictly comply with the CEA and the
Commission’s rules and to devote
sufficient resources to ensuring such
compliance. Thus, through its CCO rule,
the Commission seeks to ensure firms
have designated a qualified individual
as CCO that reports directly to the board
of directors or the senior officer of the
firm and that has the independence,
responsibility, and authority to develop
and administer compliance policies and
procedures reasonably designed to
ensure compliance with the CEA and
Commission regulations, resolve
conflicts of interest, remediate
noncompliance issues, and report
annually to the Commission and the
board or senior officer on compliance of
the firm.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
section 4s(k) of the CEA and
Commission regulation 3.3.
• APRA prudential standard CPS
520—Fit and Proper (‘‘CPS 520’’)
requires the appointment of
‘‘responsible persons.’’ CPS 520 states
that responsible persons must be fit and
proper, and that the ultimate
responsibility for ensuring that an
institution’s responsible persons are fit
and proper remains with the board of
directors.
• ASIC Regulatory Guide 105
Licensing: Organisational competence
requires AFSL licensees to appoint
‘‘responsible managers’’ who have direct
responsibility for significant day-to-day
decisions about the financial services
provided, and for maintaining
organizational competence of the entity.
Such responsible managers must have
the relevant skill and experience and be
of good fame and character.
• ASIC Regulatory Guide 104
Licensing: Meeting the general
obligations (‘‘RG 104’’) also requires
AFSL holders to allocate to a director or
senior manager responsibility for
overseeing the AFSL holder’s
compliance measures, and reporting to
the governing body (including having
ready access to the governing body).
• When ASIC assesses an application
for an AFSL, ASIC requires applicants
to describe whether their compliance
arrangements are generally consistent
with ‘‘Australian Standard 3806’’ (‘‘AS
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3806’’).33 AS 3806 provides principles
and guidance for designing, developing,
implementing, maintaining and
improving a flexible, responsive
effective and measurable compliance
program within an organization.
Although this is a non-governmental
standard, ASIC refers to AS 3806 in its
regulatory guidance for AFSL licensees
and asks AFSL holders to refer to the
standards when complying with their
regulatory obligations.
• AFSL licensees must comply with
section 912A of the Corporations Act,
which, among other obligations,
requires that such entities: Do all things
necessary to ensure that the financial
services covered by the license are
provided efficiently, honestly and fairly;
have adequate arrangements in place for
managing conflicts of interest that may
arise wholly, or partially, in relation to
activities undertaken by the licensee or
a representative of the licensee in the
provision of financial services as part of
the financial services business of the
licensee or the representative; comply
with any conditions on the license;
comply with the financial services laws;
take reasonable steps to ensure that
representatives comply with the
financial services laws; maintain the
competence to provide the financial
services covered by the license; ensure
that representatives are adequately
trained and competent to provide those
financial services; and if those financial
services are provided to retail clients,
have a dispute resolution system.
• AFSL licensees are also required
under section 912D of the Corporations
Act to report to ASIC any significant
breach (or likely breach) of its regulatory
obligations. ASIC Regulatory Guide 78
Breach reporting by AFS licensees
expands on this obligation and requires
AFSL holders to have a documented
process for, amongst other things,
rectifying breaches and ensuring that
arrangements are in place to prevent the
recurrence of the breach.
• ADIs are also required under APRA
prudential standard APS 310 Audit and
Related Matters (‘‘APS 310’’) to provide
APRA a high-level description of its risk
management systems covering all major
areas of risk and annually, within three
months of its annual balance date,
provide APRA with a declaration from
its CEO endorsed by the board that
attests that: they have established
systems to monitor and manage those
risk including, where appropriate, by
setting and requiring adherence to a
33 AS 3806 is a standard published by ‘‘Standards
Australia,’’ a non-government standards
organization. Australian Standards are not legal
documents, but can be referenced in Australian
legislation and become mandatory.
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series of prudent limits, and by
adequate and timely reporting
processes; the risk management systems
are operating effectively and are
adequate with regard to the risks they
are designed to control; and the
descriptions of risk management
systems provided to APRA are accurate
and current.34
Commission Determination: The
Commission finds that the provisions
and requirements under the Australian
regimes specified above are generally
identical in intent to § 3.3 by seeking to
ensure firms have designated a qualified
individual as the compliance officer that
reports directly to a sufficiently senior
function of the firm and that has the
independence, responsibility, and
authority to develop and administer
compliance policies and procedures
reasonably designed to ensure
compliance with the CEA and
Commission regulations, resolve
conflicts of interest, remediate
noncompliance issues, and report
annually on compliance of the firm.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
CCO requirements of the provisions of
Australian law and regulations specified
above are comparable to and as
comprehensive as § 3.3, with the
exception of § 3.3(e) concerning
preparing and signing an annual
compliance report and § 3.3(f)
concerning certifying and furnishing an
annual compliance report to the
Commission.
Notwithstanding that the Commission
has not determined that the
requirements of Australian law and
regulations are comparable to and as
comprehensive as §§ 3.3(e) and 3.3(f),
any SD or MSP to which both § 3.3 and
the Australian law and regulations
specified above are applicable would
generally be deemed to be in
compliance with §§ 3.3(e) and (f) if that
SD or MSP complies with the Australian
law and regulations specified above,
subject to preparing and signing an
annual compliance report in accordance
34 Not relevant for the Commission’s
comparability determination herein, the applicant
also referenced APRA draft prudential standard
CPS 220 Risk Management (‘‘Draft CPS 220’’),
which was released by APRA on May 9, 2013. This
draft prudential standard, if finalized in a form
similar to its draft form, will require each ADI
(including SD ADIs) to have a designated
compliance function that assists senior management
in effectively managing compliance risks. It will
also require that the compliance function be
adequately staffed by appropriately trained and
competent persons who have sufficient authority to
perform their role effectively, and have a reporting
line independent from business lines. APRA
expects to finalize Draft CPS 220 prior to its
implementation date of January 1, 2015.
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with § 3.3(e) and certifying and
furnishing the Commission with an
annual compliance report in accordance
with § 3.3(f). The Commission notes that
it generally expects registrants to submit
required reports to the Commission in
the English language.
B. Risk Management Duties (§§ 23.600—
23.609)
Section 4s(j) of the CEA requires each
SD and MSP to establish internal
policies and procedures designed to,
among other things, address risk
management, monitor compliance with
position limits, prevent conflicts of
interest, and promote diligent
supervision, as well as maintain
business continuity and disaster
recovery programs.35 The Commission
adopted regulations 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606 to
implement the statute.36 The
Commission also adopted regulation
23.609, which requires certain risk
management procedures for SDs or
MSPs that are clearing members of a
derivatives clearing organization
(‘‘DCO’’).37 Collectively, these
requirements help to establish a robust
and comprehensive internal risk
management program for SDs and MSPs
with respect to their swaps activities,38
which is critical to effective systemic
risk management for the overall swaps
market. In making its comparability
determination with regard to these risk
management duties, the Commission
will consider each regulation
individually.39
35 7
U.S.C. 6s(j).
Final Swap Dealer and MSP Recordkeeping
Rule, 77 FR 20128 (April 3, 2012) (relating to risk
management program, monitoring of position
limits, business continuity and disaster recovery,
conflicts of interest policies and procedures, and
general information availability, respectively).
37 See Customer Documentation Rule, 77 FR
21278. Also, SDs must comply with Commission
regulation 23.608, which prohibits SDs providing
clearing services to customers from entering into
agreements that would: (i) Disclose the identity of
a customer’s original executing counterparty; (ii)
limit the number of counterparties a customer may
trade with; (iii) impose counterparty-based position
limits; (iv) impair a customer’s access to execution
of a trade on terms that have a reasonable
relationship to the best terms available; or (v)
prevent compliance with specified time frames for
acceptance of trades into clearing.
38 ‘‘Swaps activities’’ is defined in Commission
regulation 23.600(a)(7) to mean, ‘‘with respect to a
registrant, such registrant’s activities related to
swaps and any product used to hedge such swaps,
including, but not limited to, futures, options, other
swaps or security-based swaps, debt or equity
securities, foreign currency, physical commodities,
and other derivatives.’’ The Commission’s
regulations under 17 CFR Part 23 are limited in
scope to the swaps activities of SDs and MSPs.
39 As stated above, this notice does not address
§ 23.608 (Restrictions on counterparty clearing
relationships). The Commission declines to take up
36 See
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1. Risk Management Program for SDs
and MSPs (§ 23.600)
Commission Requirement:
Implementing section 4s(j)(2) of the
CEA, Commission regulation 23.600
generally requires that:
• Each SD or MSP must establish and
enforce a risk management program
consisting of a system of written risk
management policies and procedures
designed to monitor and manage the
risks associated with the swap activities
of the firm, including without
limitation, market, credit, liquidity,
foreign currency, legal, operational, and
settlement risks, and furnish a copy of
such policies and procedures to the
CFTC upon application for registration
and upon request;
• The SD or MSP must establish a
risk management unit independent from
the business trading unit;
• The risk management policies and
procedures of the SD or MSP must be
approved by the firm’s governing body;
• Risk tolerance limits and exceptions
therefrom must be reviewed and
approved quarterly by senior
management and annually by the
governing body;
• The risk management program must
have a system for detecting breaches of
risk tolerance limits and alerting
supervisors and senior management, as
appropriate;
• The risk management program must
account for risks posed by affiliates and
be integrated at the consolidated entity
level;
• The risk management unit must
provide senior management and the
governing body with quarterly risk
exposure reports and upon detection of
any material change in the risk exposure
of the SD or MSP;
• Risk exposure reports must be
furnished to the CFTC within five
business days following provision to
senior management;
• The risk management program must
have a new product policy for assessing
the risks of new products prior to
engaging in such transactions;
• The risk management program must
have policies and procedures providing
for trading limits, monitoring of trading,
processing of trades, and separation of
personnel in the trading unit from
personnel in the risk management unit;
and
the request for a comparability determination with
respect to this regulation due to the Commission’s
view that there are not laws or regulations
applicable in Australia to compare with the
prohibitions and requirements of § 23.608. The
Commission may provide a comparability
determination with respect to this regulation at a
later date in consequence of further developments
in the law and regulations applicable in Australia.
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• The risk management program must
be reviewed and tested at least annually
and upon any material change in the
business of the SD or MSP.
Regulatory Objective: Through the
required system of risk management, the
Commission seeks to ensure that firms
are adequately managing the risks of
their swaps activities to prevent failure
of the SD or MSP, which could result in
losses to counterparties doing business
with the SD or MSP, and systemic risk
more generally. To this end, the
Commission believes the risk
management program of an SD or MSP
must contain at least the following
critical elements:
• Identification of risk categories;
• Establishment of risk tolerance
limits for each category of risk and
approval of such limits by senior
management and the governing body;
• An independent risk management
unit to administer a risk management
program; and
• Periodic oversight of risk exposures
by senior management and the
governing body.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
section 4s(j)(2) of the CEA and
Commission regulation 23.600.40
• The regulatory framework for ADIs
under the Banking Act is based on the
banking supervision principles
published by the Basel Committee on
Banking Supervision.41 This prudential
framework includes requirements
(largely set out in detailed and separate
prudential standards) regarding capital
adequacy, credit risk, market risk,
liquidity, credit quality, large exposures,
associations with related entities,
outsourcing, business continuity
management, audit and related
arrangements for prudential reporting,
40 Not relevant for the Commission’s
comparability determination herein, the applicant
also referenced Draft CPS 220. Draft CPS 220 seeks
to introduce additional requirements in respect of
the risk management framework for ADIs. APRA
expects to finalize CPS 220 prior to its
implementation date of January 1, 2015. Under
Draft CPS 220, an APRA-regulated institution must
have policies and procedures that provide the board
with a comprehensive institution-wide view of its
material risks. Draft CPS 220 also requires the risk
management function of an ADI be ‘‘operationally
independent’’ and must be headed by a designated
Chief Risk Officer (‘‘CRO’’). The CRO must be
involved in, and have the authority to provide
effective challenge to, activities and decisions that
may materially affect the institution’s risk profile.
41 The Corporations Act requires AFSL holders to
comply with risk management requirements,
however, this requirement does not apply where an
entity is regulated by APRA. See section 912A(1)(h).
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governance, and fit and proper
management.
• In particular, APS 310 (discussed
above) requires an ADI’s board and
management to ensure that the ADI
meets prudential and statutory
requirements and has management
practices to limit risks to prudent levels.
APS 310 mandates that the ADI’s risk
management practices must be detailed
in descriptions of risk management
systems that must be regularly reviewed
and updated, at least annually, to take
account of changing circumstances.
• APRA Prudential standard APS 116
Capital Adequacy: Market Risk (‘‘APS
116’’) states that the board, or a board
committee, of an ADI must ensure that
the ADI has in place adequate systems
to identify, measure and manage market
risk, including identifying
responsibilities, providing adequate
separation of duties and avoiding
conflicts of interest.
• For certain trading positions, APS
116 states that an ADI must have
‘‘clearly defined policies and
procedures for the active management of
positions such that: positions are
managed on a trading desk; position
limits are set and monitored for
appropriateness; positions are markedto-market daily and when marking-tomodel the parameters are assessed on a
daily basis; and positions are reported to
senior management as an integral part of
the institution’s risk management
process.
• If an ADI has received approval to
apply an ‘‘internal model’’ for market
risk, as opposed to the ‘‘standard
method’’ of calculating capital
requirements, APS 116 requires the ADI
to have an independent risk control unit
that is responsible for the design and
implementation of the ADI’s market risk
management system. The risk control
unit must produce and analyze daily
reports on the output of the ADI’s risk
measurement model, including an
evaluation of limit utilization. This risk
control unit must be independent from
business trading and other risk taking
units and must report directly to senior
management of the ADI.
• If an ADI has received approval to
apply an ‘‘internal model’’ for market
risk, APS 116 states that the board or a
board committee and senior
management of an ADI must be actively
involved in the risk control process.
Daily reports must be prepared by the
independent risk control unit and must
be reviewed by a level of management
with sufficient seniority and authority
to enforce reductions of positions.
• APS 116 states that an ADI must
ensure that an independent review of
the risk measurement system and
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overall risk management process is
carried out initially (i.e., at the time
when model approval is sought) and
then regularly as part of the ADI’s
internal audit process.
Commission Determination: The
Commission finds that the provisions of
Australian law and regulations specified
above are generally identical in intent to
§ 23.600 by requiring a system of risk
management that seeks to ensure that
firms are adequately managing the risks
of their swaps activities to prevent
failure of the SD or MSP, which could
result in losses to counterparties doing
business with the SD or MSP, and
systemic risk more generally.
Specifically, the Commission finds that
the Australian provisions specified
above comprehensively require SDs and
MSPs to establish risk management
programs containing the following
critical elements:
• Identification of risk categories;
• Establishment of risk tolerance
limits for each category of risk and
approval of such limits by senior
management and the governing body;
• An independent risk management
unit to administer a risk management
program; and
• Periodic oversight of risk exposures
by senior management and the
governing body.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
risk management program requirements
of the provisions of Australian law and
regulations specified above, are
comparable to and as comprehensive as
§ 23.600, with the exception of
§ 23.600(c)(2) concerning the
requirement that each SD and MSP
produce a quarterly risk exposure report
and provide such report to its senior
management, governing body, and the
Commission.
Notwithstanding that the Commission
has not determined that the
requirements of Australian law and
regulations are comparable to and as
comprehensive as § 23.600(c)(2), any SD
or MSP to which both § 23.600 and the
Australian law and regulations specified
above are applicable would generally be
deemed to be in compliance with
§ 23.600(c)(2) if that SD or MSP
complies with the Australian law and
regulations specified above, subject to
compliance with the requirement that it
produce quarterly risk exposure reports
and provide such reports to its senior
management, governing body, and the
Commission in accordance with
§ 23.600(c)(2). The Commission notes
that it generally expects reports
furnished to the Commission by
registrants to be in the English language.
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2. Monitoring of Position Limits
(§ 23.601)
Commission Requirement:
Implementing section 4s(j)(1) of the
CEA, Commission regulation 23.601
requires each SD or MSP to establish
and enforce written policies and
procedures that are reasonably designed
to monitor for, and prevent violations
of, applicable position limits established
by the Commission, a designated
contract market (‘‘DCM’’), or a swap
execution facility (‘‘SEF’’).42 The
policies and procedures must include
an early warning system and provide for
escalation of violations to senior
management (including the firm’s
governing body).
Regulatory Objective: Generally,
position limits are implemented to
ensure market integrity, fairness,
orderliness, and accurate pricing in the
commodity markets. Commission
regulation 23.601 thus seeks to ensure
that SDs and MSPs have established the
necessary policies and procedures to
monitor the trading of the firm to
prevent violations of applicable position
limits established by the Commission, a
DCM, or a SEF. As part of its Risk
Management Program, § 23.601 is
intended to ensure that established
position limits are not breached by the
SD or MSP.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
section 4s(j)(1) of the CEA and
Commission regulation 23.601.
• Section 912A(1)(ca) of the
Corporations Act, which requires AFSL
holders to take reasonable steps to
ensure its representatives comply with
the financial services laws, which
would include regulatory position
limits.
• APS 310 (discussed above) requires
an ADI’s board and management to
ensure that the ADI meets prudential
and statutory requirements and has
management practices to limit risks to
prudent levels.
In addition to the foregoing, the
applicant also submitted various
guidelines and required best practices
concerning the setting of internal risk
tolerance limits and monitoring for
compliance with such internal limits.
42 The setting of position limits by the
Commission, a DCM, or a SEF is subject to
requirements under the CEA and Commission
regulations other than § 23.601. The setting of
position limits and compliance with such limits is
not subject to the Commission’s substituted
compliance regime.
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Although the Commission recognizes
these as prudent risk management
practices, the Commission does not
believe that these provisions are
comparable to § 23.601 because § 23.601
requires monitoring for compliance with
external position limits set by the
Commission, a DCM, or a SEF.
Commission Determination: The
Commission finds that the Australian
provisions specified above are generally
identical in intent to § 23.601 by
requiring SDs and MSPs to establish
necessary policies and procedures to
monitor the trading of the firm to
prevent violations of applicable position
limits established by applicable laws
and regulations, including those of the
Commission, a DCM, or a SEF.
Specifically, the Commission finds that
the provisions of Australian law and
regulations specified above, while not
specific to the issue of position limit
compliance, nevertheless
comprehensively require SDs and MSPs
to monitor for regulatory compliance
generally, which includes monitoring
for compliance with position limits set
pursuant to applicable law and the
responsibility of senior management
(including the board of directors) for
such compliance.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
compliance monitoring requirements of
Australian law and regulations, as
specified above, are comparable to and
as comprehensive as § 23.601. For the
avoidance of doubt, the Commission
notes that this determination may not be
relied on to relieve an SD or MSP from
its obligation to strictly comply with
any applicable position limit
established by the Commission, a DCM,
or a SEF.
3. Diligent Supervision (§ 23.602)
Commission Requirement:
Commission regulation 23.602
implements section 4s(h)(1)(B) of the
CEA and requires each SD and MSP to
establish a system to diligently
supervise all activities relating to its
business performed by its partners,
members, officers, employees, and
agents. The system must be reasonably
designed to achieve compliance with
the CEA and CFTC regulations.
Commission regulation 23.602 requires
that the supervisory system must
specifically designate qualified persons
with authority to carry out the
supervisory responsibilities of the SD or
MSP for all activities relating to its
business as an SD or MSP.
Regulatory Objective: The
Commission’s diligent supervision rule
seeks to ensure that SDs and MSPs
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strictly comply with the CEA and the
Commission’s rules. To this end,
through § 23.602, the Commission seeks
to ensure that each SD and MSP not
only establishes the necessary policies
and procedures that would lead to
compliance with the CEA and
Commission regulations, but also
establishes an effective system of
internal oversight and enforcement of
such policies and procedures to ensure
that such policies and procedures are
diligently followed.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
section 4s(h)(1)(B) of the CEA and
Commission regulation 23.602.
• CPS 520 (discussed above) sets
forth the fitness requirements for all
APRA regulated institutions. These
standards apply to all directors and
senior managers of an ADI as well as
other ‘‘responsible persons.’’ The
applicable key requirements of this
prudential standard are: an ADI must
have a Fit and Proper policy that meets
certain standards; the fitness and
propriety of a responsible person must
generally be assessed prior to initial
appointment and then re-assessed
annually; and an ADI must take steps to
ensure that a person is not appointed to,
or does not continue to hold, a
responsible person position for which
they are not qualified.
• Section 912A(1)(ca) of the
Corporations Act requires that an AFSL
licensee take reasonable steps to ensure
that its representatives comply with the
financial services laws.
• RG 104 (discussed above) sets forth
guidance for an AFSL licensee with
respect to supervision. These regulatory
guidelines require that an AFSL licensee
have measures for monitoring and
supervising their representatives to
determine whether they are complying
with the financial services laws. They
also require that an AFSL licensee take
measures to ensure that their
representatives who provide financial
services have, and maintain the
necessary knowledge and skills, to
competently provide those services.
Commission Determination: The
Commission finds that the provisions of
Australian law and regulations specified
above are generally identical in intent to
§ 23.602 because such standards seek to
ensure that SDs and MSPs strictly
comply with applicable law, which
would include the CEA and the
Commission’s regulations. Through the
provisions specified above, Australian
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law and regulations seek to ensure that
each SD and MSP not only establishes
the necessary policies and procedures
that would lead to compliance with
applicable law, which would include
the CEA and Commission regulations,
but also establishes an effective system
of internal oversight and enforcement of
such policies and procedures to ensure
that such policies and procedures are
diligently followed.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
internal supervision requirements of the
provisions of Australian law and
regulations, as specified above, are
comparable to and as comprehensive as
§ 23.602.
4. Business Continuity and Disaster
Recovery (§ 23.603)
Commission Requirement: To ensure
the proper functioning of the swaps
markets and the prevention of systemic
risk more generally, Commission
regulation 23.603 requires each SD and
MSP, as part of its risk management
program, to establish a business
continuity and disaster recovery plan
that includes procedures for, and the
maintenance of, back-up facilities,
systems, infrastructure, personnel, and
other resources to achieve the timely
recovery of data and documentation and
to resume operations generally within
the next business day after the
disruption.
Regulatory Objective: Commission
regulation 23.603 is intended to ensure
that any market disruption affecting SDs
and MSPs, whether caused by natural
disaster or otherwise, is minimized in
length and severity. To that end, this
requirement seeks to ensure that entities
adequately plan for disruptions and
devote sufficient resources capable of
carrying out an appropriate plan within
one business day, if necessary.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
Commission regulation 23.603.
APRA prudential standard CPS 232
Business Continuity Management (‘‘CPS
232’’) requires each ADI to implement a
whole-of-business approach to business
continuity management. Specifically,
CPS 232 states that:
• A regulated institution must
identify, assess, and manage potential
business continuity risks to ensure that
it is able to meet its financial and
service obligations to its depositors,
policyholders and other creditors;
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• The board of a regulated institution
must consider business continuity risks
and controls as part of its overall risk
management systems and approve a
Business Continuity Management
Policy;
• A regulated institution must
develop and maintain a Business
Continuity Plan that documents
procedures and information which
enable the regulated institution to
manage business disruptions;
• A regulated institution must review
the Business Continuity Plan annually
and periodically arrange for its review
by the internal audit function or an
external expert; and
• A regulated institution must notify
APRA in the event of certain
disruptions.
Commission Determination: The
Commission finds that the provisions of
Australian law and regulations specified
above are generally identical in intent to
§ 23.603 because such standards seek to
ensure that any market disruption
affecting SDs and MSPs, whether caused
by natural disaster or otherwise, is
minimized in length and severity. To
that end, the Commission finds that the
provisions of Australian law and
regulations specified above seek to
ensure that entities adequately plan for
disruptions and devote sufficient
resources capable of carrying out an
appropriate plan in a timely manner.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
business continuity and disaster
recovery requirements of the provisions
of Australian law and regulations, as
specified above, are comparable to and
as comprehensive as § 23.603.
5. Conflicts of Interest (§ 23.605)
Commission Requirement: Section
4s(j)(5) of the CEA and Commission
regulation 23.605(c) generally require
each SD or MSP to establish structural
and institutional safeguards to ensure
that the activities of any person within
the firm relating to research or analysis
of the price or market for any
commodity or swap are separated by
appropriate informational partitions
within the firm from the review,
pressure, or oversight of persons whose
involvement in pricing, trading, or
clearing activities might potentially bias
their judgment or supervision.
In addition, section 4s(j)(5) of the CEA
and Commission regulation 23.605(d)(1)
generally prohibits an SD or MSP from
directly or indirectly interfering with or
attempting to influence the decision of
any clearing unit of any affiliated
clearing member of a DCO to provide
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clearing services and activities to a
particular customer, including:
• Whether to offer clearing services to
a particular customer;
• Whether to accept a particular
customer for clearing derivatives;
• Whether to submit a customer’s
transaction to a particular DCO;
• Whether to set or adjust risk
tolerance levels for a particular
customer; or
• Whether to set a customer’s fees
based on criteria other than those
generally available and applicable to
other customers.
Commission regulation 23.605(d)(2)
generally requires each SD or MSP to
create and maintain an appropriate
informational partition between
business trading units of the SD or MSP
and clearing units of any affiliated
clearing member of a DCO to reasonably
ensure compliance with the Act and the
prohibitions set forth in § 23.605(d)(1)
outlined above.
The Commission observes that
§ 23.605(d) works in tandem with
Commission regulation 1.71, which
requires FCMs that are clearing
members of a DCO and affiliated with
an SD or MSP to create and maintain an
appropriate informational partition
between business trading units of the
SD or MSP and clearing units of the
FCM to reasonably ensure compliance
with the Act and the prohibitions set
forth in § 1.71(d)(1), which are the same
as the prohibitions set forth in
§ 23.605(d)(1) outlined above.
Finally, § 23.605(e) requires that each
SD or MSP have policies and
procedures that mandate the disclosure
to counterparties of material incentives
or conflicts of interest regarding the
decision of a counterparty to execute a
derivative on a swap execution facility
or DCM or to clear a derivative through
a DCO.
Regulatory Objective: Commission
regulation 23.605(c) seeks to ensure that
research provided to the general public
by an SD or MSP is unbiased and free
from the influence of the interests of an
SD or MSP arising from the SD’s or
MSP’s trading business.
In addition, the § 23.605(d) (working
in tandem with § 1.71) seeks to ensure
open access to the clearing of swaps by
requiring that access to and the
provision of clearing services provided
by an affiliate of an SD or MSP are not
influenced by the interests of an SD’s or
MSP’s trading business.
Finally, § 23.605(e) seeks to ensure
equal access to trading venues and
clearinghouses, as well as orderly and
fair markets, by requiring that each SD
and MSP disclose to counterparties any
material incentives or conflicts of
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interest regarding the decision of a
counterparty to execute a derivative on
a SEF or DCM, or to clear a derivative
through a DCO.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
Commission regulation 23.605(c).
• Section 912A(1)(aa) of the
Corporations Act requires AFSL
licensees to have adequate arrangements
for the management of conflicts of
interest that may arise wholly, or
partially, in relation to activities
undertaken by a licensee or a
representative of the licensee in the
provision of financial services.
• ASIC Regulatory Guide 181
Licensing: Managing conflicts of interest
and ASIC Regulatory Guide 79 Research
report providers: Improving the quality
of investment research (specific to
research reports provided in Australia),
set out ASIC’s expectations regarding
how financial service licensees are to
manage conflicts of interest that arise in
relation to the financial services that
they provide. The conflicts management
obligation requires that all conflicts of
interest be adequately managed,
recognizing that many conflicts of
interest can be managed by a
combination of internal controls and
disclosures. Where conflicts cannot be
adequately managed through internal
controls and/or disclosure, the ASIC
guidelines require that an AFSL holder
must avoid the conflict or refrain from
providing the affected financial service.
• Section 941A of the Corporations
Act requires AFSL licensees to provide
a Financial Services Guide to retail
clients if they provide a financial
service to the client.
• Section 942B(2)(f) of the
Corporations Act states that the
Financial Services Guide must provide
disclosures about relationships that may
influence the provision of the financial
service.43
The applicant has represented to the
Commission that ASIC and APRA, in
the process of their oversight and
enforcement of the foregoing Australian
law and regulations for ADIs and ASFL
licensees, would require any SD or MSP
subject to such law and regulations to
resolve or mitigate conflicts of interests
43 In addition to the foregoing, the applicant
referenced Draft CPS 220. This draft prudential
standard, if finalized in a form similar to its draft
form, will require each ADI (including SD ADIs) to
have policies and procedures for identifying,
monitoring, and managing potential and actual
conflicts of interest.
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in the provision of clearing services by
a clearing member of a DCO that is an
affiliate of the SD or MSP, or the
decision of a counterparty to execute a
derivative on a SEF or DCM, or clear a
derivative through a DCO, through
appropriate information firewalls and
disclosures.
Commission Determination: The
Commission finds that the provisions of
Australian law and regulations specified
above with respect to conflicts of
interest that may arise in producing or
distributing research are generally
identical in intent to § 23.605(c) because
such standards seek to ensure that
research provided to the general public
by an SD is unbiased and free from the
influence of the interests of an SD
arising from the SD’s trading business.
With respect to conflicts of interest
that may arise in the provision of
clearing services by an affiliate of an SD
or MSP, the Commission further finds
that although the general conflicts of
interest prevention requirements under
the Australian law and regulations
specified above do not require with
specificity that access to and the
provision of clearing services provided
by an affiliate of an SD or MSP not be
improperly influenced by the interests
of an SD’s or MSP’s trading business,
such general requirements would
require prevention and remediation of
such improper influence when
recognized or discovered. Thus such
standards would ensure open access to
clearing.
Finally, although not as specific as the
requirements of § 23.605(e) (Undue
influence on counterparties), the
Commission finds that the general
disclosure requirements of the
Australian law and regulations specified
above would ensure equal access to
trading venues and clearinghouses by
requiring that each SD and MSP
disclose to counterparties any material
incentives or conflicts of interest
regarding the decision of a counterparty
to execute a derivative on a SEF or
DCM, or to clear a derivative through a
DCO.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
provisions of Australian law and
regulations specified above in relation
to conflicts of interest are comparable to
and as comprehensive as § 23.605.
6. Availability of Information for
Disclosure and Inspection (§ 23.606)
Commission Requirement:
Commission regulation 23.606
implements sections 4s(j)(3) and (4) of
the CEA, and requires each SD and MSP
to disclose to the Commission, and an
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SD’s or MSP’s U.S. prudential regulator
(if any) comprehensive information
about its swap activities, and to
establish and maintain reliable internal
data capture, processing, storage, and
other operational systems sufficient to
capture, process, record, store, and
produce all information necessary to
satisfy its duties under the CEA and
Commission regulations. Such systems
must be designed to provide such
information to the Commission and an
SD’s or MSP’s U.S. prudential regulator
within the time frames set forth in the
CEA and Commission regulations and
upon request.
Regulatory Objective: Commission
regulation 23.606 seeks to ensure that
each SD and MSP captures and
maintains comprehensive information
about their swap activities, and is able
to retrieve and disclose such
information to the Commission and its
U.S. prudential regulator, if any, as
necessary for compliance with the CEA
and the Commission’s regulations and
for purposes of Commission oversight,
as well as oversight by the SD’s or
MSP’s U.S. prudential regulator, if any.
The Commission observes that it
would be impossible to meet the
regulatory objective of § 23.606 unless
the required information is available to
the Commission and any U.S.
prudential regulator under the foreign
legal regime. Thus, a comparability
determination with respect to the
information access provisions of
§ 23.606 would be premised on whether
the relevant information would be
available to the Commission and any
U.S. prudential regulator of the SD or
MSP, not on whether an SD or MSP
must disclose comprehensive
information to its regulator in its home
jurisdiction.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
Commission regulation 23.606.
Section 912C of the Corporations Act
and sections 29–33 of the ASIC Act
enable ASIC to gather information from
AFSL licensees, including:
• A statement containing specified
information about the financial services
provided by the AFSL holder or its
representatives, or the financial services
business carried on by the licensee;
• Inspection of books without charge;
• Issuance of a notice to a body
corporate to produce books about the
affairs of the body corporate;
• Issuance of a notice to a person who
carries out a financial services business
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to produce books relating to, among
other things, a dealing in financial
products, or the character or financial
position of the business;
• Issuance of a notice to produce
books relating to the supply of financial
services; and
• Issuance of a notice to produce
documents in the person’s possession
that relate to the affairs of the body
corporate.
In addition, Section 988A of the
Corporations Act requires AFSL license
holders to keep financial records that
correctly record and explain the
transactions and financial position of
the financial services business carried
out by the licensee.
Part 2.3 of the ASIC Derivative
Transaction Rules (Reporting) 2013
places certain requirements on reporting
entities (which includes the five SD
ADIs as reporting entities from October
1, 2013). Specifically, Rule 2.3.1
requires reporting entities to keep
records in relation to OTC derivatives
transactions (including swaps) that
enable the reporting entity to
demonstrate it has complied with the
Derivative Transaction Rules, and must
keep the records for a period of at least
five years from the date the record is
made or amended. Reporting entities
must also keep a record of all
information that it is required to be
reported under such rules.
Rule 2.3.2 further requires a reporting
entity to, on request by ASIC, provide
ASIC within a reasonable time with
records or other information relating to
compliance with or determining
whether there has been compliance with
the Rules.
Commission Determination: The
Commission finds that the Australian
law and regulations specified above are
generally identical in intent to § 23.606
because such standards seek to ensure
that each SD and MSP captures and
stores comprehensive information about
their swap activities, and are able to
retrieve and disclose such information
as necessary for compliance with
applicable law and for purposes of
regulatory oversight.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
Australian law and regulations with
respect to the availability of information
for inspection and disclosure, as
specified above, are comparable to, and
as comprehensive as, § 23.606, with the
exception of § 23.606(a)(2) concerning
the requirement that an SD or MSP
make information required by
§ 23.606(a)(1) available promptly upon
request to Commission staff and the staff
of an applicable U.S. prudential
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regulator. The applicant has not
submitted any provision of law or
regulations applicable in Australia upon
which the Commission could make a
finding that SDs and MSPs would be
required to retrieve and disclose
comprehensive information about their
swap activities to the Commission or
any U.S. prudential regulator as
necessary for compliance with the CEA
and Commission regulations, and for
purposes of Commission oversight and
the oversight of any U.S. prudential
regulator.
Notwithstanding that the Commission
has not determined that the
requirements of Australian law and
regulations are comparable to and as
comprehensive as § 23.606(a)(2), any SD
or MSP to which both § 23.606 and the
Australian law and regulations specified
above are applicable would generally be
deemed to be in compliance with
§ 23.606(a)(2) if that SD or MSP
complies with the Australian law and
regulations specified above, subject to
compliance with the requirement that it
produce information to Commission
staff and the staff of an applicable U.S.
prudential regulator in accordance with
§ 23.606(a)(2).
7. Clearing Member Risk Management
(§ 23.609)
Commission Requirement:
Commission regulation 23.609 generally
requires each SD or MSP that is a
clearing member of a DCO to:
• Establish risk-based limits based on
position size, order size, margin
requirements, or similar factors;
• Screen orders for compliance with
the risk-based limits;
• Monitor for adherence to the riskbased limits intra-day and overnight;
• Conduct stress tests under extreme
but plausible conditions of all positions
at least once per week;
• Evaluate its ability to meet initial
margin requirements at least once per
week;
• Evaluate its ability to meet variation
margin requirements in cash at least
once per week;
• Evaluate its ability to liquidate
positions it clears in an orderly manner,
and estimate the cost of liquidation; and
• Test all lines of credit at least once
per year.
Regulatory Objective: Through
Commission regulation 23.609, the
Commission seeks to ensure the
financial integrity of the markets and
the clearing system, to avoid systemic
risk, and to protect customer funds.
Effective risk management by SDs and
MSPs that are clearing members is
essential to achieving these objectives.
A failure of risk management can cause
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a clearing member to become insolvent
and default to a DCO. Such default can
disrupt the markets and the clearing
system and harm customers.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
Commission regulation 23.609.
• The regulatory framework for ADIs
under the Banking Act is based on the
banking supervision principles
published by the Basel Committee on
Banking Supervision.44 This prudential
framework includes requirements
(largely set out in detailed and separate
prudential standards) regarding capital
adequacy, credit risk, market risk,
liquidity, credit quality, large exposures,
associations with related entities,
outsourcing, business continuity
management, audit and related
arrangements for prudential reporting,
governance, and fit and proper
management.
• In particular, APS 310 (discussed
above) requires an ADI’s board and
management to ensure that the ADI
meets prudential and statutory
requirements and has management
practices to limit risks to prudent levels.
APS 310 mandates that the ADI’s risk
management practices must be detailed
in descriptions of risk management
systems that must be regularly reviewed
and updated, at least annually, to take
account of changing circumstances.
• APRA Prudential standard APS 116
Capital Adequacy: Market Risk (‘‘APS
116’’) states that the board, or a board
committee, of an ADI must ensure that
the ADI has in place adequate systems
to identify, measure and manage market
risk, including identifying
responsibilities, providing adequate
separation of duties and avoiding
conflicts of interest.
• For certain trading positions, APS
116 states that an ADI must have
‘‘clearly defined policies and
procedures for the active management of
positions such that: Positions are
managed on a trading desk; position
limits are set and monitored for
appropriateness; positions are markedto-market daily and when marking-tomodel the parameters are assessed on a
daily basis; and positions are reported to
senior management as an integral part of
the institution’s risk management
process.
44 The Corporations Act requires AFSL holders to
comply with risk management requirements,
however, this requirement does not apply where an
entity is regulated by APRA. See section 912A(1)(h).
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• If an ADI has received approval to
apply an ‘‘internal model’’ for market
risk, as opposed to the ‘‘standard
method’’ of calculating capital
requirements, APS 116 requires the ADI
to have an independent risk control unit
that is responsible for the design and
implementation of the ADI’s market risk
management system. The risk control
unit must produce and analyze daily
reports on the output of the ADI’s risk
measurement model, including an
evaluation of limit utilization. This risk
control unit must be independent from
business trading and other risk taking
units and must report directly to senior
management of the ADI.
• If an ADI has received approval to
apply an ‘‘internal model’’ for market
risk, APS 116 states that the board or a
board committee and senior
management of an ADI must be actively
involved in the risk control process.
Daily reports must be prepared by the
independent risk control unit and must
be reviewed by a level of management
with sufficient seniority and authority
to enforce reductions of positions.
• APS 116 states that an ADI must
ensure that an independent review of
the risk measurement system and
overall risk management process is
carried out initially (i.e., at the time
when model approval is sought) and
then regularly as part of the ADI’s
internal audit process.
Further, on June 4, 2013, APRA
issued a letter to all ADIs, including the
Australian SDs outlining the framework
for the application of risk management
requirements to the Australian banks’
membership of CCPs. Such a framework
should include, at a minimum:
application of appropriate systems and
controls to monitor, on a continuing
basis, the risk that membership of and
conduct of business through a CCP or
multiple CCPs may create and to
manage such risk. This would include
application of limits on potential risk
exposures. These clearly articulated
conditions together with APRA’s
prudential standards are designed to
achieve a comparable regulatory
outcome as Commission regulation
23.609.
Specifically, APRA has represented to
the Commission that, in the process of
its oversight and enforcement of the
foregoing Australian law, regulations,
and prudential standards, any SD or
MSP subject to such standards that is a
clearing member of a DCO would be
expected to have established risk-based
limits and a compliance and assessment
framework for these limits consistent
with the Commission’s requirements for
a clearing member and set out in the
SD’s or MSP’s risk management policy
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framework. APRA would expect banks
in Australia to adhere to their risk limit
policies and any targeted review would
examine the banks’ risk management
policy framework that captures these
regulatory obligations.
Commission Determination: The
Commission finds that the Australian
law and regulations specified above are
generally identical in intent to § 23.609
because such standards seek to ensure
the financial integrity of the markets
and the clearing system, to avoid
systemic risk, and to protect customer
funds.
The Commission notes that the
Australian law and regulations specified
above are not as specific as § 23.609
with respect to ensuring that SDs and
MSPs that are clearing members of a
DCO establish detailed procedures and
limits for clearing member risk
management purposes. Nevertheless,
the Commission finds that the general
requirements under the Australian law
and regulations specified above,
implemented in the context of clearing
member risk management and pursuant
to the representations of ASIC and
APRA, meet the Commission’s
regulatory objective specified above.
Based on the foregoing and the
representations above, the Commission
hereby determines that the clearing
member risk management requirements
of the Australian law and regulations
specified above are comparable to and
as comprehensive as § 23.609.
C. Swap Data Recordkeeping (§§ 23.201
and 23.203)
Commission Requirement: Sections
4s(f)(1)(B) and 4s(g)(1) of the CEA, and
Commission regulation 23.201 generally
require SDs and MSPs to retain records
of each transaction, each position held,
general business records (including
records related to complaints and sales
and marketing materials), records
related to governance, financial records,
records of data reported to SDRs, and
records of real-time reporting data along
with a record of the date and time the
SD or MSP made such reports.
Transaction records must be kept in a
form and manner identifiable and
searchable by transaction and
counterparty.
Commission regulation 23.203,
requires SDs and MSPs to maintain
records of a swap transaction until the
termination, maturity, expiration,
transfer, assignment, or novation date of
the transaction, and for a period of five
years after such date. Records must be
‘‘readily accessible’’ for the first 2 years
of the 5 year retention period (consistent
with § 1.31).
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The Commission notes that the
comparability determination below with
respect to §§ 23.201 and 23.203
encompasses both swap data
recordkeeping generally and swap data
recordkeeping relating to complaints
and marketing and sales materials in
accordance with § 23.201(b)(3) and
(4).45
Regulatory Objective: Through the
Commission’s regulations requiring SDs
and MSPs to keep comprehensive
records of their swap transactions and
related data, the Commission seeks to
ensure the effectiveness of the internal
controls of SDs and MSPs, and
transparency in the swaps market for
regulators and market participants.
The Commission’s regulations require
SDs and MSPs to keep swap data in a
level of detail sufficient to enable
regulatory authorities to understand an
SD’s or MSP’s swaps business and to
assess its swaps exposure.
By requiring comprehensive records
of swap data, the Commission seeks to
ensure that SDs and MSPs employ
effective risk management, and strictly
comply with Commission regulations.
Further, such records facilitate effective
regulatory oversight.
The Commission observes that it
would be impossible to meet the
regulatory objective of §§ 23.201 and
23.203 unless the required information
is available to the Commission and any
U.S. prudential regulator under the
foreign legal regime. Thus, a
comparability determination with
respect to the information access
provisions of § 23.203 would be
premised on whether the relevant
information would be available to the
Commission and any U.S. prudential
regulator of the SD or MSP, not on
whether an SD or MSP must disclose
comprehensive information to its
regulator in its home jurisdiction.
Comparable Australian Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Australia are
in full force and effect in Australia, and
comparable to and as comprehensive as
sections 4s(f)(1)(B) and 4s(g)(1) of the
CEA and §§ 23.201 and 23.203.
• Section 286 of the Corporations Act
requires firms to keep financial records
that correctly record and explain its
transactions, financial position and
performance for 7 years after the
transactions are completed.
• Section 988A of the Corporations
Act requires AFSL licensees to keep
45 See the Guidance for a discussion of the
availability of substituted compliance with respect
to swap data recordkeeping, 78 FR 45332–33.
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financial records that correctly record
and explain the transactions and
financial position of the licensee’s
financial services business.
• Section 988E of the Corporations
Act specifies a list of categories of
information to be shown in the records
of an AFSL licensee, including records
of all money received or paid by the
licensee; acquisitions and disposals of
financial products, the charges and
credits arising from them, and the
names of the person acquiring or
disposing of each of those products; all
income from commissions, interest and
other sources and all payments of
interest, commissions and other
expenses; and records pertaining to the
securities or managed investment
products that are the property of the
licensee or held by the licensee for other
persons.
• Corporations regulation 7.8.11
further specifies categories of
information to be shown in records,
including all financial products dealt
with by the AFSL licensee under
instructions from another person; and
records pertaining to property held by
the licensee for another person.
• Corporations regulation 7.8.12
further specifies categories of
information to be shown in records,
including separate particulars of every
transaction by the AFSL licensee, the
date of such transactions, and copies of
acknowledgments of the receipt of
financial products or documents of title
to financial products.
Part 2.3 of the ASIC Derivative
Transaction Rules (Reporting) 2013
places certain requirements on reporting
entities (which includes the five SD
ADIs as reporting entities from October,
1 2013). Specifically, Rule 2.3.1 requires
reporting entities to keep records in
relation to OTC derivatives transactions
(including swaps) that enable the
reporting entity to demonstrate it has
complied with the Derivative
Transaction Rules, and must keep the
records for a period of at least five years
from the date the record is made or
amended. Reporting entities must also
keep a record of all information that it
is required to be reported under such
rules.
Rule 2.3.2 further requires a reporting
entity to, on request by ASIC, provide
ASIC within a reasonable time with
records or other information relating to
compliance with or determining
whether there has been compliance with
the Rules.
Commission Determination: The
Commission finds that the provisions of
Australian law and regulations specified
above are generally identical in intent to
§§ 23.201 and 23.203 because such
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Fmt 4703
Sfmt 4703
provisions seek to ensure the
effectiveness of the internal controls of
SDs and MSPs, and transparency in the
swaps market for regulators and market
participants.
In addition, the Commission finds
that the provisions of Australian law
and regulations specified above require
SDs and MSPs to keep swap data in a
level of detail sufficient to enable
regulatory authorities to understand an
SD’s or MSP’s swaps business and to
assess its swaps exposure.
Finally, the Commission finds that the
provisions of Australian law and
regulations specified above, by requiring
comprehensive records of swap data,
seek to ensure that SDs and MSPs
employ effective risk management, seek
to ensure that SDs and MSPs strictly
comply with applicable regulatory
requirements (including the CEA and
Commission regulations), and that such
records facilitate effective regulatory
oversight.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
requirements of Australian law and
regulation with respect to swap data
recordkeeping, as specified above, are
comparable to, and as comprehensive
as, §§ 23.201 and 23.203, with the
exception of § 23.203(b)(2) concerning
the requirement that an SD or MSP
make records required by § 23.201 open
to inspection by any representative of
the Commission, the United States
Department of Justice, or any applicable
U.S. prudential regulator. The applicant
has not submitted any provision of
Australian law or regulation upon
which the Commission could make a
finding that SDs and MSPs would be
required to make records required by
§ 23.201 open to inspection by any
representative of the Commission, the
United States Department of Justice, or
any applicable U.S. prudential
regulator.
Notwithstanding that the Commission
has not determined that the
requirements of Australian law and
regulations are comparable to and as
comprehensive as § 23.203(b)(2), any SD
or MSP to which both § 23.203 and the
Australian law and regulations specified
above are applicable would generally be
deemed to be in compliance with
§ 23.203(b)(2) if that SD or MSP
complies with the Australian law and
regulations specified above, subject to
compliance with the requirement that it
make records required by § 23.201 open
to inspection by any representative of
the Commission, the United States
Department of Justice, or any applicable
U.S. prudential regulator in accordance
with § 23.203(b)(2).
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Issued in Washington, DC on December 20,
2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendices to Comparability
Determination for Australia: Certain
Entity-Level Requirements
Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Chilton and Wetjen voted in
the affirmative. Commissioner O’Malia voted
in the negative.
Appendix 2—Statement of Chairman
Gary Gensler and Commissioners
Chilton and Wetjen
We support the Commission’s approval of
broad comparability determinations that will
be used for substituted compliance purposes.
For each of the six jurisdictions that has
registered swap dealers, we carefully
reviewed each regulatory provision of the
foreign jurisdictions submitted to us and
compared the provision’s intended outcome
to the Commission’s own regulatory
objectives. The resulting comparability
determinations for entity-level requirements
permit non-U.S. swap dealers to comply with
regulations in their home jurisdiction as a
substitute for compliance with the relevant
Commission regulations.
These determinations reflect the
Commission’s commitment to coordinating
our efforts to bring transparency to the swaps
market and reduce its risks to the public. The
comparability findings for the entity-level
requirements are a testament to the
comparability of these regulatory systems as
we work together in building a strong
international regulatory framework.
In addition, we are pleased that the
Commission was able to find comparability
with respect to swap-specific transactionlevel requirements in the European Union
and Japan.
The Commission attained this benchmark
by working cooperatively with authorities in
Australia, Canada, the European Union, Hong
Kong, Japan, and Switzerland to reach
mutual agreement. The Commission looks
forward to continuing to collaborate with
both foreign authorities and market
participants to build on this progress in the
months and years ahead.
tkelley on DSK3SPTVN1PROD with NOTICES
Appendix 3—Dissenting Statement of
Commissioner Scott D. O’Malia
I respectfully dissent from the Commodity
Futures Trading Commission’s
(‘‘Commission’’) approval of the Notices of
Comparability Determinations for Certain
Requirements under the laws of Australia,
Canada, the European Union, Hong Kong,
Japan, and Switzerland (collectively,
‘‘Notices’’). While I support the narrow
comparability determinations that the
Commission has made, moving forward, the
Commission must collaborate with foreign
regulators to harmonize our respective
regimes consistent with the G–20 reforms.
However, I cannot support the Notices
because they: (1) Are based on the legally
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unsound cross-border guidance
(‘‘Guidance’’); 1 (2) are the result of a flawed
substituted compliance process; and (3) fail
to provide a clear path moving forward. If the
Commission’s objective for substituted
compliance is to develop a narrow rule-byrule approach that leaves unanswered major
regulatory gaps between our regulatory
framework and foreign jurisdictions, then I
believe that the Commission has successfully
achieved its goal today.
Determinations Based on Legally Unsound
Guidance
As I previously stated in my dissent, the
Guidance fails to articulate a valid statutory
foundation for its overbroad scope and
inconsistently applies the statute to different
activities.2 Section 2(i) of the Commodity
Exchange Act (‘‘CEA’’) states that the
Commission does not have jurisdiction over
foreign activities unless ‘‘those activities
have a direct and significant connection with
activities in, or effect on, commerce of the
United States * * *’’ 3 However, the
Commission never properly articulated how
and when this limiting standard on the
Commission’s extraterritorial reach is met,
which would trigger the application of Title
VII of the Dodd-Frank Act 4 and any
Commission regulations promulgated
thereunder to swap activities that are outside
of the United States. Given this statutorily
unsound interpretation of the Commission’s
extraterritorial authority, the Commission
often applies CEA section 2(i) inconsistently
and arbitrarily to foreign activities.
Accordingly, because the Commission is
relying on the legally deficient Guidance to
make its substituted compliance
determinations, and for the reasons discussed
below, I cannot support the Notices. The
Commission should have collaborated with
foreign regulators to agree on and implement
a workable regime of substituted compliance,
and then should have made determinations
pursuant to that regime.
Flawed Substituted Compliance Process
Substituted compliance should not be a
case of picking a set of foreign rules identical
to our rules, determining them to be
‘‘comparable,’’ but then making no
determination regarding rules that require
extensive gap analysis to assess to what
extent each jurisdiction is, or is not,
comparable based on overall outcomes of the
regulatory regimes. While I support the
narrow comparability determinations that the
Commission has made, I am concerned that
in a rush to provide some relief, the
Commission has made substituted
compliance determinations that only afford
narrow relief and fail to address major
regulatory gaps between our domestic
regulatory framework and foreign
jurisdictions. I will address a few examples
below.
1 Interpretive Guidance and Policy Statement
Regarding Compliance with Certain Swap
Regulations, 78 FR 45292 (Jul. 26, 2013).
2 https://www.cftc.gov/PressRoom/
SpeechesTestimony/omaliastatement071213b.
3 CEA section 2(i); 7 U.S.C. 2(i).
4 Title VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Public Law 111–203,
124 Stat. 1376 (2010).
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Frm 00068
Fmt 4703
Sfmt 4703
78877
First, earlier this year, the OTC Derivatives
Regulators Group (‘‘ODRG’’) agreed to a
number of substantive understandings to
improve the cross-border implementation of
over-the-counter derivatives reforms.5 The
ODRG specifically agreed that a flexible,
outcomes-based approach, based on a broad
category-by-category basis, should form the
basis of comparability determinations.6
However, instead of following this
approach, the Commission has made its
comparability determinations on a rule-byrule basis. For example, in Japan’s
Comparability Determination for
Transaction-Level Requirements, the
Commission has made a positive
comparability determination for some of the
detailed requirements under the swap trading
relationship documentation provisions, but
not for other requirements.7 This detailed
approach clearly contravenes the ODRG’s
understanding.
Second, in several areas, the Commission
has declined to consider a request for a
comparability determination, and has also
failed to provide an analysis regarding the
extent to which the other jurisdiction is, or
is not, comparable. For example, the
Commission has declined to address or
provide any clarity regarding the European
Union’s regulatory data reporting
determination, even though the European
Union’s reporting regime is set to begin on
February 12, 2014. Although the Commission
has provided some limited relief with respect
to regulatory data reporting, the lack of
clarity creates unnecessary uncertainty,
especially when the European Union’s
reporting regime is set to begin in less than
two months.
Similarly, Japan receives no consideration
for its mandatory clearing requirement, even
though the Commission considers Japan’s
legal framework to be comparable to the U.S.
framework. While the Commission has
declined to provide even a partial
comparability determination, at least in this
instance the Commission has provided a
reason: the differences in the scope of entities
and products subject to the clearing
requirement.8 Such treatment creates
uncertainty and is contrary to increased
global harmonization efforts.
Third, in the Commission’s rush to meet
the artificial deadline of December 21, 2013,
as established in the Exemptive Order
Regarding Compliance with Certain Swap
Regulations (‘‘Exemptive Order’’),9 the
5 https://www.cftc.gov/PressRoom/PressReleases/
pr6678–13.
6 https://www.cftc.gov/ucm/groups/public/@
newsroom/documents/file/odrgreport.pdf. The
ODRG agreed to six understandings. Understanding
number 2 states that ‘‘[a] flexible, outcomes-based
approach should form the basis of final assessments
regarding equivalence or substituted compliance.’’
7 The Commission made a positive comparability
determination for Commission regulations
23.504(a)(2), (b)(1), (b)(2), (b)(3), (b)(4), (c), and (d),
but not for Commission regulations 23.504(b)(5) and
(b)(6).
8 Yen-denominated interest rate swaps are subject
to the mandatory clearing requirement in both the
U.S. and Japan.
9 Exemptive Order Regarding Compliance With
Certain Swap Regulations, 78 FR 43785 (Jul. 22,
2013).
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tkelley on DSK3SPTVN1PROD with NOTICES
Regulations (‘‘Exemptive Order’’),9 the
Commission failed to complete an important
piece of the cross-border regime, namely,
supervisory memoranda of understanding
(‘‘MOUs’’) between the Commission and
fellow regulators.
I have previously stated that these MOUs,
if done right, can be a key part of the global
harmonization effort because they provide
mutually agreed-upon solutions for
differences in regulatory regimes.10
Accordingly, I stated that the Commission
should be able to review MOUs alongside the
respective comparability determinations and
vote on them at the same time. Without these
MOUs, our fellow regulators are left
wondering whether and how any differences,
such as direct access to books and records,
will be resolved.
Finally, as I have consistently maintained,
the substituted compliance process should
allow other regulatory bodies to engage with
the full Commission.11 While I am pleased
that the Notices are being voted on by the
Commission, the full Commission only
gained access to the comment letters from
foreign regulators on the Commission’s
comparability determination draft proposals
a few days ago. This is hardly a transparent
process.
Unclear Path Forward
Looking forward to next steps, the
Commission must provide answers to several
outstanding questions regarding these
comparability determinations. In doing so,
the Commission must collaborate with
foreign regulators to increase global
harmonization.
First, there is uncertainty surrounding the
timing and outcome of the MOUs. Critical
questions regarding information sharing,
cooperation, supervision, and enforcement
will remain unanswered until the
Commission and our fellow regulators
execute these MOUs.
Second, the Commission has issued timelimited no-action relief for the swap data
repository reporting requirements. These
comparability determinations will be done as
separate notices. However, the timing and
process for these determinations remain
uncertain.
Third, the Commission has failed to
provide clarity on the process for addressing
the comparability determinations that it
declined to undertake at this time. The
Notices only state that the Commission may
address these requests in a separate notice at
a later date given further developments in the
law and regulations of other jurisdictions. To
promote certainty in the financial markets,
the Commission must provide a clear path
forward for market participants and foreign
regulators.
The following steps would be a better
approach: (1) The Commission should extend
the Exemptive Order to allow foreign
regulators to further implement their
9 Exemptive
Order Regarding Compliance With
Certain Swap Regulations, 78 FR 43785 (Jul. 22,
2013).
10 https://www.cftc.gov/PressRoom/
SpeechesTestimony/opaomalia-29.
11 https://www.cftc.gov/PressRoom/
SpeechesTestimony/omaliastatement071213b.
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regulatory regimes and coordinate with them
to implement a harmonized substituted
compliance process; (2) the Commission
should implement a flexible, outcomes-based
approach to the substituted compliance
process and apply it similarly to all
jurisdictions; and (3) the Commission should
work closely with our fellow regulators to
expeditiously implement MOUs that resolve
regulatory differences and address regulatory
oversight issues.
Conclusion
While I support the narrow comparability
determinations that the Commission has
made, it was my hope that the Commission
would work with foreign regulators to
implement a substituted compliance process
that would increase the global harmonization
effort. I am disappointed that the
Commission has failed to implement such a
process.
I do believe that in the longer term, the
swaps regulations of the major jurisdictions
will converge. At this time, however, the
Commission’s comparability determinations
have done little to alleviate the burden of
regulatory uncertainty and duplicative
compliance with both U.S. and foreign
regulations.
The G–20 process delineated and put in
place the swaps market reforms in G–20
member nations. It is then no surprise that
the Commission must learn to coordinate
with foreign regulators to minimize
confusion and disruption in bringing much
needed clarity to the swaps market. For all
these shortcomings, I respectfully dissent
from the Commission’s approval of the
Notices.
[FR Doc. 2013–30974 Filed 12–26–13; 8:45 am]
BILLING CODE 6351–01–P
COMMODITY FUTURES TRADING
COMMISSION
Comparability Determination for the
European Union: Certain TransactionLevel Requirements
Commodity Futures Trading
Commission.
ACTION: Notice of Comparability
Determination for Certain Requirements
under the European Market
Infrastructure Regulation.
AGENCY:
The following is the analysis
and determination of the Commodity
Futures Trading Commission
(‘‘Commission’’) regarding certain parts
of a joint request by the European
Commission (‘‘EC’’) and the European
Securities and Markets Authority
(‘‘ESMA’’) that the Commission
determine that laws and regulations
applicable in the European Union
(‘‘EU’’) provide a sufficient basis for an
affirmative finding of comparability
with respect to the following regulatory
obligations applicable to swap dealers
(‘‘SDs’’) and major swap participants
SUMMARY:
PO 00000
Frm 00069
Fmt 4703
Sfmt 4703
(‘‘MSPs’’) registered with the
Commission: (i) swap trading
relationship documentation; (ii) swap
portfolio reconciliation and
compression; (iii) trade confirmation;
and (iv) daily trading records
(collectively, the ‘‘Business Conduct
Requirements’’).
DATES: Effective Date: This
determination will become effective
immediately upon publication in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary
Barnett, Director, 202–418–5977,
gbarnett@cftc.gov, Frank Fisanich, Chief
Counsel, 202–418–5949, ffisanich@
cftc.gov, and Ellie Jester, Special
Counsel, 202–418–5874, ajester@
cftc.gov, Division of Swap Dealer and
Intermediary Oversight, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
On July 26, 2013, the Commission
published in the Federal Register its
‘‘Interpretive Guidance and Policy
Statement Regarding Compliance with
Certain Swap Regulations’’
(‘‘Guidance’’).1 In the Guidance, the
Commission set forth its interpretation
of the manner in which it believes that
section 2(i) of the Commodity Exchange
Act (‘‘CEA’’) applies Title VII’s swap
provisions to activities outside the U.S.
and informed the public of some of the
policies that it expects to follow,
generally speaking, in applying Title VII
and certain Commission regulations in
contexts covered by section 2(i). Among
other matters, the Guidance generally
described the policy and procedural
framework under which the
Commission would consider a
substituted compliance program with
respect to Commission regulations
applicable to entities located outside the
U.S. Specifically, the Commission
addressed a recognition program where
compliance with a comparable
regulatory requirement of a foreign
jurisdiction would serve as a reasonable
substitute for compliance with the
attendant requirements of the CEA and
the Commission’s regulations
promulgated thereunder.
In addition to the Guidance, on July
22, 2013, the Commission issued the
1 78 FR 45292 (July 26, 2013). The Commission
originally published proposed and further proposed
guidance on July 12, 2012 and January 7, 2013,
respectively. See Cross-Border Application of
Certain Swaps Provisions of the Commodity
Exchange Act, 77 FR 41214 (July 12, 2012) and
Further Proposed Guidance Regarding Compliance
with Certain Swap Regulations,78 FR 909 (Jan. 7,
2013).
E:\FR\FM\27DEN1.SGM
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Agencies
[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78864-78878]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30974]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Comparability Determination for Australia: Certain Entity-Level
Requirements
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Comparability Determination for Certain Requirements
under Australian Regulation.
-----------------------------------------------------------------------
SUMMARY: The following is the analysis and determination of the
Commodity Futures Trading Commission (``Commission'') regarding certain
parts of a request by the Australian Bankers Association (``ABA'') that
the Commission determine that laws and regulations applicable in in the
Commonwealth of Australia (``Australia'') provide a sufficient basis
for an affirmative finding of comparability with respect to the
following regulatory obligations applicable to swap dealers (``SDs'')
and major swap participants (``MSPs'') registered with the Commission:
(i) Chief compliance officer; (ii) risk management; and (iii) swap data
recordkeeping (collectively, the ``Internal Business Conduct
Requirements'').
DATES: Effective Date: This determination will become effective
immediately upon publication in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977,
gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202-418-5949,
ffisanich@cftc.gov, Adam Kezsbom, Special Counsel, 202-418-5372,
akezsbom@cftc.gov, Israel Goodman, Special Counsel, 202-418-6715,
igoodman@cftc.gov, Division of Swap Dealer and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
On July 26, 2013, the Commission published in the Federal Register
its ``Interpretive Guidance and Policy Statement Regarding Compliance
with Certain Swap Regulations'' (the ``Guidance'').\1\ In the Guidance,
the Commission set forth its interpretation of the manner in which it
believes that section 2(i) of the Commodity Exchange Act (``CEA'')
applies Title VII's swap provisions to activities outside the U.S. and
informed the public of some of the policies that it expects to follow,
generally speaking, in applying Title VII and certain Commission
regulations in contexts covered by section 2(i). Among other matters,
the Guidance generally described the policy and procedural framework
under which the Commission would consider a substituted compliance
program with respect to Commission regulations applicable to entities
located outside the U.S. Specifically, the Commission addressed a
recognition program where compliance with a comparable regulatory
requirement of a foreign jurisdiction would serve as a reasonable
substitute for compliance with the attendant requirements of the CEA
and the Commission's regulations promulgated thereunder.
---------------------------------------------------------------------------
\1\ 78 FR 45292 (July 26, 2013). The Commission originally
published proposed and further proposed guidance on July 12, 2012
and January 7, 2013, respectively. See Cross-Border Application of
Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214
(July 12, 2012) and Further Proposed Guidance Regarding Compliance
with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013).
---------------------------------------------------------------------------
In addition to the Guidance, on July 22, 2013, the Commission
issued the Exemptive Order Regarding Compliance with Certain Swap
Regulations (the
[[Page 78865]]
``Exemptive Order'').\2\ Among other things, the Exemptive Order
provided time for the Commission to consider substituted compliance
with respect to six jurisdictions where non-U.S. SDs are currently
organized. In this regard, the Exemptive Order generally provided non-
U.S. SDs and MSPs in the six jurisdictions with conditional relief from
certain requirements of Commission regulations (those referred to as
``Entity-Level Requirements'' in the Guidance) until the earlier of
December 21, 2013, or 30 days following the issuance of a substituted
compliance determination.\3\
---------------------------------------------------------------------------
\2\ 78 FR 43785 (July 22, 2013).
\3\ The Entity-Level Requirements under the Exemptive Order
consist of 17 CFR 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602,
23.603, 23.605, 23.606, 23.608, 23.609, and parts 45 and 46 of the
Commission's regulations.
---------------------------------------------------------------------------
On April 22, 2013, the ABA (the ``applicant'') submitted a request
that the Commission determine that laws and regulations applicable in
Australia provide a sufficient basis for an affirmative finding of
comparability with respect to certain Entity-Level Requirements,
including the Internal Business Conduct Requirements.\4\ The applicant
provided Commission staff with an updated submission on June 7, 2013.
On November 8, 2013, the application was further supplemented with
corrections and additional materials. The following is the Commission's
analysis and determination regarding the Internal Business Conduct
Requirements, as detailed below.\5\
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\4\ For purposes of this notice, the Internal Business Conduct
Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606.
\5\ This notice does not address swap data repository reporting
(``SDR Reporting''). The Commission may provide a comparability
determination with respect to the SDR Reporting requirement in a
separate notice.
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II. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act \6\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework
for swaps.
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\6\ Public Law 111-203, 124 Stat. 1376 (2010).
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Section 722(d) of the Dodd-Frank Act amended the CEA by adding
section 2(i), which provides that the swap provisions of the CEA
(including any CEA rules or regulations) 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 rules or regulations as are necessary or
appropriate to prevent evasion of the swap provisions of the CEA
enacted under Title VII of the Dodd-Frank Act.\7\
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\7\ 7 U.S.C. 2(i).
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In the three years since its enactment, the Commission has
finalized 68 rules and orders to implement Title VII of the Dodd-Frank
Act. The finalized rules include those promulgated under section 4s of
the CEA, which address registration of SDs and MSPs and other
substantive requirements applicable to SDs and MSPs. With few
exceptions, the delayed compliance dates for the Commission's
regulations implementing such section 4s requirements applicable to SDs
and MSPs have passed and new SDs and MSPs are now required to be in
full compliance with such regulations upon registration with the
Commission.\8\ Notably, the requirements under Title VII of the Dodd-
Frank Act related to SDs and MSPs by their terms apply to all
registered SDs and MSPs, irrespective of where they are located, albeit
subject to the limitations of CEA section 2(i).
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\8\ 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.)
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To provide guidance as to the Commission's views regarding the
scope of the cross-border application of Title VII of the Dodd-Frank
Act, the Commission set forth in the Guidance its interpretation of the
manner in which it believes that Title VII's swap provisions apply to
activities outside the U.S. pursuant to section 2(i) of the CEA. Among
other matters, the Guidance generally described the policy and
procedural framework under which the Commission would consider a
substituted compliance program with respect to Commission regulations
applicable to entities located outside the U.S. Specifically, the
Commission addressed a recognition program where compliance with a
comparable regulatory requirement of a foreign jurisdiction would serve
as a reasonable substitute for compliance with the attendant
requirements of the CEA and the Commission's regulations. With respect
to the standards forming the basis for any determination of
comparability (``comparability determination'' or ``comparability
finding''), the Commission stated:
In evaluating whether a particular category of foreign
regulatory requirement(s) is comparable and comprehensive to the
applicable requirement(s) under the CEA and Commission regulations,
the Commission will take into consideration all relevant factors,
including but not limited to, the comprehensiveness of those
requirement(s), the scope and objectives of the relevant regulatory
requirement(s), the comprehensiveness of the foreign regulator's
supervisory compliance program, as well as the home jurisdiction's
authority to support and enforce its oversight of the registrant. In
this context, comparable does not necessarily mean identical.
Rather, the Commission would evaluate whether the home
jurisdiction's regulatory requirement is comparable to and as
comprehensive as the corresponding U.S. regulatory
requirement(s).\9\
\9\ 78 FR 45342-45.
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Upon a comparability finding, consistent with CEA section 2(i) and
comity principles, the Commission's policy generally is that eligible
entities may comply with a substituted compliance regime, subject to
any conditions the Commission places on its finding, and subject to the
Commission's retention of its examination authority and its enforcement
authority.\10\
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\10\ See the Guidance, 78 FR 45342-44.
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In this regard, the Commission notes that a comparability
determination cannot be premised on whether an SD or MSP must disclose
comprehensive information to its regulator in its home jurisdiction,
but rather on whether information relevant to the Commission's
oversight of an SD or MSP would be directly available to the Commission
and any U.S. prudential regulator of the SD or MSP.\11\ The
Commission's direct access to the books and records required to be
maintained
[[Page 78866]]
by an SD or MSP registered with the Commission is a core requirement of
the CEA \12\ and the Commission's regulations,\13\ and is a condition
to registration.\14\
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\11\ Under Sec. Sec. 23.203 and 23.606, all records required by
the CEA and the Commission's regulations to be maintained by a
registered SD or MSP shall be maintained in accordance with
Commission regulation 1.31 and shall be open for inspection by
representatives of the Commission, the United States Department of
Justice, or any applicable U.S. prudential regulator.
In its Final Exemptive Order Regarding Compliance with Certain
Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted
that an applicant for registration as an SD or MSP must file a Form
7-R with the National Futures Association and that Form 7-R was
being modified at that time to address existing blocking, privacy,
or secrecy laws of foreign jurisdictions that applied to the books
and records of SDs and MSPs acting in those jurisdictions. See id.
at 871-72 n. 107. The modifications to Form 7-R were a temporary
measure intended to allow SDs and MSPs to apply for registration in
a timely manner in recognition of the existence of the blocking,
privacy, and secrecy laws. In the Guidance, the Commission clarified
that the change to Form 7-R impacts the registration application
only and does not modify the Commission's authority under the CEA
and its regulations to access records held by registered SDs and
MSPs. Commission access to a registrant's books and records is a
fundamental regulatory tool necessary to properly monitor and
examine each registrant's compliance with the CEA and the
regulations adopted pursuant thereto. The Commission has maintained
an ongoing dialogue on a bilateral and multilateral basis with
foreign regulators and with registrants to address books and records
access issues and may consider appropriate measures where requested
to do so.
\12\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the
CEA.
\13\ See e.g., Sec. Sec. 23.203(b) and 23.606.
\14\ See supra note 10.
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III. Regulation of SDs and MSPs in Australia
On April 22, 2013, the applicant submitted a request that the
Commission assess the comparability of laws and regulations applicable
in Australia with the CEA and the Commission's regulations promulgated
thereunder. The applicant provided Commission staff with an updated
submission on June 7, 2013. On November 8, 2013, the application was
further supplemented with corrections and additional materials.
As represented to the Commission by the applicant, currently all
five Australian registered SDs are Australian authorized deposit-taking
institutions (``ADIs'') and holders of an Australian financial services
license (``AFSL''). Thus, for the purposes of the Commission's
comparability determination, the Commission will consider the laws and
regulations applicable to the five SD ADIs with respect to their swap
activities. The relevant laws and regulations are administered by two
agencies; the Australian Prudential Regulatory Authority (``APRA'') and
the Australian Securities and Investments Commission (``ASIC'').\15\
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\15\ Because the applicant's request and the Commissions
determinations herein are based on the comparability of Australian
requirements applicable to ADIs and AFSL holders, an SD or MSP that
is not an ADI or AFSL holder, or is otherwise not subject to the
requirements applicable to ADIs and AFSL holders upon which the
Commission bases its determinations, may not be able to rely on the
Commission's comparability determinations herein.
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APRA is the prudential regulator of the Australian financial
services industry and oversees the banking industry. It has developed a
regulatory framework for Australian ADIs under the Banking Act 1959
(the ``Banking Act'') that is based on the banking supervision
principles published by the Basel Committee on Banking Supervision.
This regulatory framework is set out in a number of different
prudential standards that govern the activities of ADIs.
ASIC is Australia's corporate, markets, and financial services
regulator. ASIC licenses and monitors financial services businesses to
ensure they operate efficiently, honestly, and fairly. ASIC
administers, among other things, the following legislation and
regulations: the Corporations Act 2001 (the ``Corporations Act''), the
Corporations Regulations 2001, and the Australian Securities and
Investments Commission Act 2001 (the ``ASIC Act''). Under the
Corporations Act, an Australian entity that undertakes specified
activities, including dealing or market making in derivatives
(including swaps) is required to hold an AFSL. The AFSL regime
establishes a number of general licensing obligations that all
licensees must comply with. ASIC has also issued regulatory guidance
which sets out its expectations of how licensees may comply with their
licensing obligations in a range of situations and taking into account
the nature, size, and complexity of their financial services business.
IV. Comparable and Comprehensiveness Standard
The Commission's comparability analysis will be based on a
comparison of specific foreign requirements against the specific
related CEA provisions and Commission regulations as categorized and
described in the Guidance. As explained in the Guidance, within the
framework of CEA section 2(i) and principles of international comity,
the Commission may make a comparability determination on a requirement-
by-requirement basis, rather than on the basis of the foreign regime as
a whole.\16\ In making its comparability determinations, the Commission
may include conditions that take into account timing and other issues
related to coordinating the implementation of reform efforts across
jurisdictions.\17\
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\16\ 78 FR 45343.
\17\ 78 FR 45343.
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In evaluating whether a particular category of foreign regulatory
requirement(s) is comparable and comprehensive to the corollary
requirement(s) under the CEA and Commission regulations, the Commission
will take into consideration all relevant factors, including, but not
limited to:
The comprehensiveness of those requirement(s),
The scope and objectives of the relevant regulatory
requirement(s),
The comprehensiveness of the foreign regulator's
supervisory compliance program, and
The home jurisdiction's authority to support and enforce
its oversight of the registrant.\18\
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\18\ 78 FR 45343.
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In making a comparability determination, the Commission takes an
``outcome-based'' approach. An ``outcome-based'' approach means that
when evaluating whether a foreign jurisdiction's regulatory
requirements are comparable to, and as comprehensive as, the corollary
areas of the CEA and Commission regulations, the Commission ultimately
focuses on regulatory outcomes (i.e., the home jurisdiction's
requirements do not have to be identical).\19\ This approach recognizes
that foreign regulatory systems differ and their approaches vary and
may differ from how the Commission chose to address an issue, but that
the foreign jurisdiction's regulatory requirements nonetheless achieve
the regulatory outcome sought to be achieved by a certain provision of
the CEA or Commission regulation.
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\19\ 78 FR 45343. The Commission's substituted compliance
program would generally be available for SDR Reporting, as outlined
in the Guidance, only if the Commission has direct access to all of
the data elements that are reported to a foreign trade repository
pursuant to the substituted compliance program. Thus, direct access
to swap data is a threshold matter to be addressed in a
comparability evaluation for SDR Reporting. Moreover, the Commission
explains in the Guidance that, due to its technical nature, a
comparability evaluation for SDR Reporting ``will generally entail a
detailed comparison and technical analysis.'' A more particularized
analysis will generally be necessary to determine whether data
stored in a foreign trade repository provides for effective
Commission use, in furtherance of the regulatory purposes of the
Dodd-Frank Act. See 78 FR 45345.
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In doing its comparability analysis the Commission may determine
that no comparability determination can be made \20\ and that the non-
U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to
its foreign branches, or non-registrant, to the extent applicable under
the Guidance, may be required to comply with the CEA and Commission
regulations.
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\20\ A finding of comparability may not be possible for a number
of reasons, including the fact that the foreign jurisdiction has not
yet implemented or finalized particular requirements.
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The starting point in the Commission's analysis is a consideration
of the regulatory objectives of the foreign jurisdiction's regulation
of swaps and swap market participants. As stated in the Guidance,
jurisdictions may not have swap specific regulations in some areas, and
instead have regulatory or supervisory regimes that achieve comparable
and comprehensive regulation to the Dodd-Frank Act requirements, but on
a more general, entity-wide, or prudential, basis.\21\ In addition,
portions of a foreign regulatory regime may have similar regulatory
objectives, but the means by which these objectives are achieved with
respect to swaps market activities may not be clearly defined, or may
not
[[Page 78867]]
expressly include specific regulatory elements that the Commission
concludes are critical to achieving the regulatory objectives or
outcomes required under the CEA and the Commission's regulations. In
these circumstances, the Commission will work with the regulators and
registrants in these jurisdictions to consider alternative approaches
that may result in a determination that substituted compliance
applies.\22\
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\21\ 78 FR 45343.
\22\ As explained in the Guidance, such ``approaches used will
vary depending on the circumstances relevant to each jurisdiction.
One example would include coordinating with the foreign regulators
in developing appropriate regulatory changes or new regulations,
particularly where changes or new regulations already are being
considered or proposed by the foreign regulators or legislative
bodies. As another example, the Commission may, after consultation
with the appropriate regulators and market participants, include in
its substituted compliance determination a description of the means
by which certain swaps market participants can achieve substituted
compliance within the construct of the foreign regulatory regime.
The identification of the means by which substituted compliance is
achieved would be designed to address the regulatory objectives and
outcomes of the relevant Dodd-Frank Act requirements in a manner
that does not conflict with a foreign regulatory regime and reduces
the likelihood of inconsistent regulatory obligations. For example,
the Commission may specify that [SDs] and MSPs in the jurisdiction
undertake certain recordkeeping and documentation for swap
activities that otherwise is only addressed by the foreign
regulatory regime with respect to financial activities generally. In
addition, the substituted compliance determination may include
provisions for summary compliance and risk reporting to the
Commission to allow the Commission to monitor whether the regulatory
outcomes are being achieved. By using these approaches, in the
interest of comity, the Commission would seek to achieve its
regulatory objectives with respect to the Commission's registrants
that are operating in foreign jurisdictions in a manner that works
in harmony with the regulatory interests of those jurisdictions.''
78 FR 45343-44.
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Finally, the Commission will generally rely on an applicant's
description of the laws and regulations of the foreign jurisdiction in
making its comparability determination. The Commission considers an
application to be a representation by the applicant that the laws and
regulations submitted are in full force and effect, that the
description of such laws and regulations is accurate and complete, and
that, unless otherwise noted, the scope of such laws and regulations
encompasses the swaps activities\23 \ of SDs and MSPs \24\ in the
relevant jurisdictions.\25\ Further, as stated in the Guidance, the
Commission expects that an applicant would notify the Commission of any
material changes to information submitted in support of a comparability
determination (including, but not limited to, changes in the relevant
supervisory or regulatory regime) as, depending on the nature of the
change, the Commission's comparability determination may no longer be
valid.\26\
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\23\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR Part 23 are limited in scope
to the swaps activities of SDs and MSPs.
\24\ No SD or MSP that is not legally required to comply with a
law or regulation determined to be comparable may voluntarily comply
with such law or regulation in lieu of compliance with the CEA and
the relevant Commission regulation. Each SD or MSP that seeks to
rely on a comparability determination is responsible for determining
whether it is subject to the laws and regulations found comparable.
Currently, there are no MSPs organized outside the U.S. and the
Commission therefore cautions any non-financial entity organized
outside the U.S. and applying for registration as an MSP to
carefully consider whether the laws and regulations determined to be
comparable herein are applicable to such entity.
\25\ The Commission has provided the relevant foreign
regulator(s) with opportunities to review and correct the
applicant's description of such laws and regulations on which the
Commission will base its comparability determination. The Commission
relies on the accuracy and completeness of such review and any
corrections received in making its comparability determinations. A
comparability determination based on an inaccurate description of
foreign laws and regulations may not be valid.
\26\ 78 FR 45345.
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The Guidance provided a detailed discussion of the Commission's
policy regarding the availability of substituted compliance \27\ for
the Internal Business Conduct Requirements.\28\
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\27\ See 78 FR 45348-50. The Commission notes that registrants
and other market participants are responsible for determining
whether substituted compliance is available pursuant to the Guidance
based on the comparability determination contained herein (including
any conditions or exceptions), and its particular status and
circumstances.
\28\ This notice does not address Sec. 23.608 (Restrictions on
counterparty clearing relationships). The Commission declines to
take up the request for a comparability determination with respect
to this regulation due to the Commission's view that there are not
laws or regulations applicable in Australia to compare with the
prohibitions and requirements of Sec. 23.608. The Commission may
provide a comparability determination with respect to this
regulation at a later date in consequence of further developments in
the law and regulations applicable in Australia.
This notice also does not address capital adequacy because the
Commission has not yet finalized rules for SDs and MSPs in this
area, nor SDR Reporting. The Commission may provide a comparability
determination with respect to these requirements at a later date or
in a separate notice.
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V. Supervisory Arrangement
In the Guidance, the Commission stated that, in connection with a
determination that substituted compliance is appropriate, it would
expect to enter into an appropriate memorandum of understanding
(``MOU'') or similar arrangement \29\ with the relevant foreign
regulator(s). Although existing arrangements would indicate a foreign
regulator's ability to cooperate and share information, ``going
forward, the Commission and relevant foreign supervisor(s) would need
to establish supervisory MOUs or other arrangements that provide for
information sharing and cooperation in the context of supervising [SDs]
and MSPs.'' \30\
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\29\ An MOU is one type of arrangement between or among
regulators. Supervisory arrangements could include, as appropriate,
cooperative arrangements that are memorialized and executed as
addenda to existing MOUs or, for example, as independent bilateral
arrangements, statements of intent, declarations, or letters.
\30\ 78 FR 45344.
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The Commission is in the process of developing its registration and
supervision regime for provisionally-registered SDs and MSPs. This new
initiative includes setting forth supervisory arrangements with
authorities that have joint jurisdiction over SDs and MSPs that are
registered with the Commission and subject to U.S. law. Given the
developing nature of the Commission's regime and the fact that the
Commission has not negotiated prior supervisory arrangements with
certain authorities, the negotiation of supervisory arrangements
presents a unique opportunity to develop close working relationships
between and among authorities, as well as highlight any potential
issues related to cooperation and information sharing.
Accordingly, the Commission is negotiating such a supervisory
arrangement with each applicable foreign regulator of an SD or MSP. The
Commission expects that the arrangement will establish expectations for
ongoing cooperation, address direct access to information,\31\ provide
for notification upon the occurrence of specified events, memorialize
understandings related to on-site visits,\32\ and include protections
related
[[Page 78868]]
to the use and confidentiality of non-public information shared
pursuant to the arrangement.
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\31\ Section 4s(j)(3) and (4) of the CEA and Commission
regulation 23.606 require a registered SD or MSP to make all records
required to be maintained in accordance with Commission regulation
1.31 available promptly upon request to, among others,
representatives of the Commission. See also 7 U.S.C. 6s(f); 17 CFR
23.203. In the Guidance, the Commission states that it ``reserves
this right to access records held by registered [SDs] and MSPs,
including those that are non-U.S. persons who may comply with the
Dodd-Frank recordkeeping requirement through substituted
compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461
(affirming the Commission's authority under the CEA and its
regulations to access books and records held by registered SDs and
MSPs as ``a fundamental regulatory tool necessary to properly
monitor and examine each registrant's compliance with the CEA and
the regulations adopted pursuant thereto'').
\32\ The Commission retains its examination authority, both
during the application process as well as upon and after
registration of an SD or MSP. See 78 FR 45342 (stating Commission
policy that ``eligible entities may comply with a substituted
compliance regime under certain circumstances, subject, however, to
the Commission's retention of its examination authority'') and 45344
n. 471 (stating that the ``Commission may, as it deems appropriate
and necessary, conduct an on-site examination of the applicant'').
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These arrangements will establish a roadmap for how authorities
will consult, cooperate, and share information. As with any such
arrangement, however, nothing in these arrangements will supersede
domestic laws or resolve potential conflicts of law, such as the
application of domestic secrecy or blocking laws to regulated entities.
VI. Comparability Determination and Analysis
The following section describes the requirements imposed by
specific sections of the CEA and the Commission's regulations for the
Internal Business Conduct Requirements that are the subject of this
comparability determination, and the Commission's regulatory objectives
with respect to such requirements. Immediately following a description
of the requirement(s) and regulatory objective(s) of the specific
Internal Business Conduct Requirements that the requestor submitted for
a comparability determination, the Commission provides a description of
the foreign jurisdiction's comparable laws, regulations, or rules and
whether such laws, regulations, or rules meet the applicable regulatory
objective.
The Commission's determinations in this regard and the discussion
in this section are intended to inform the public of the Commission's
views regarding whether the foreign jurisdiction's laws, regulations,
or rules may be comparable and comprehensive as those requirements in
the Dodd-Frank Act (and Commission regulations promulgated thereunder)
and therefore, may form the basis of substituted compliance. In turn,
the public (in the foreign jurisdiction, in the United States, and
elsewhere) retains its ability to present facts and circumstances that
would inform the determinations set forth in this notice.
As was stated in the Guidance, the Commission recognizes the
complex and dynamic nature of the global swap market and the need to
take an adaptable approach to cross-border issues, particularly as it
continues to work closely with foreign regulators to address potential
conflicts with respect to each country's respective regulatory regime.
In this regard, the Commission may review, modify, or expand the
determinations herein in light of comments received and future
developments.
A. Chief Compliance Officer (Sec. 3.3)
Commission Requirement: Implementing section 4s(k) of the CEA,
Commission regulation 3.3 generally sets forth the following
requirements for SDs and MSPs:
An SD or MSP must designate an individual as Chief
Compliance Officer (``CCO'');
The CCO must have the responsibility and authority to
develop the regulatory compliance policies and procedures of the SD or
MSP;
The CCO must report to the board of directors or the
senior officer of the SD or MSP;
Only the board of directors or a senior officer may remove
the CCO;
The CCO and the board of directors must meet at least once
per year;
The CCO must have the background and skills appropriate
for the responsibilities of the position;
The CCO must not be subject to disqualification from
registration under sections 8a(2) or (3) of the CEA;
Each SD and MSP must include a designation of a CCO in its
registration application;
The CCO must administer the regulatory compliance policies
of the SD or MSP;
The CCO must take reasonable steps to ensure compliance
with the CEA and Commission regulations, and resolve conflicts of
interest;
The CCO must establish procedures for detecting and
remediating non-compliance issues;
The CCO must annually prepare and sign an ``annual
compliance report'' containing: (i) A description of policies and
procedures reasonably designed to ensure compliance; (ii) an assessment
of the effectiveness of such policies and procedures; (iii) a
description of material non-compliance issues and the action taken;
(iv) recommendations of improvements in compliance policies; and (v) a
certification by the CCO or CEO that, to the best of such officer's
knowledge and belief, the annual report is accurate and complete under
penalty of law; and
The annual compliance report must be furnished to the CFTC
within 90 days after the end of the fiscal year of the SD or MSP,
simultaneously with its annual financial condition report.
Regulatory Objective: The Commission believes that compliance by
SDs and MSPs with the CEA and the Commission's rules greatly
contributes to the protection of customers, orderly and fair markets,
and the stability and integrity of the market intermediaries registered
with the Commission. The Commission expects SDs and MSPs to strictly
comply with the CEA and the Commission's rules and to devote sufficient
resources to ensuring such compliance. Thus, through its CCO rule, the
Commission seeks to ensure firms have designated a qualified individual
as CCO that reports directly to the board of directors or the senior
officer of the firm and that has the independence, responsibility, and
authority to develop and administer compliance policies and procedures
reasonably designed to ensure compliance with the CEA and Commission
regulations, resolve conflicts of interest, remediate noncompliance
issues, and report annually to the Commission and the board or senior
officer on compliance of the firm.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as section 4s(k) of
the CEA and Commission regulation 3.3.
APRA prudential standard CPS 520--Fit and Proper (``CPS
520'') requires the appointment of ``responsible persons.'' CPS 520
states that responsible persons must be fit and proper, and that the
ultimate responsibility for ensuring that an institution's responsible
persons are fit and proper remains with the board of directors.
ASIC Regulatory Guide 105 Licensing: Organisational
competence requires AFSL licensees to appoint ``responsible managers''
who have direct responsibility for significant day-to-day decisions
about the financial services provided, and for maintaining
organizational competence of the entity. Such responsible managers must
have the relevant skill and experience and be of good fame and
character.
ASIC Regulatory Guide 104 Licensing: Meeting the general
obligations (``RG 104'') also requires AFSL holders to allocate to a
director or senior manager responsibility for overseeing the AFSL
holder's compliance measures, and reporting to the governing body
(including having ready access to the governing body).
When ASIC assesses an application for an AFSL, ASIC
requires applicants to describe whether their compliance arrangements
are generally consistent with ``Australian Standard 3806'' (``AS
[[Page 78869]]
3806'').\33\ AS 3806 provides principles and guidance for designing,
developing, implementing, maintaining and improving a flexible,
responsive effective and measurable compliance program within an
organization. Although this is a non-governmental standard, ASIC refers
to AS 3806 in its regulatory guidance for AFSL licensees and asks AFSL
holders to refer to the standards when complying with their regulatory
obligations.
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\33\ AS 3806 is a standard published by ``Standards Australia,''
a non-government standards organization. Australian Standards are
not legal documents, but can be referenced in Australian legislation
and become mandatory.
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AFSL licensees must comply with section 912A of the
Corporations Act, which, among other obligations, requires that such
entities: Do all things necessary to ensure that the financial services
covered by the license are provided efficiently, honestly and fairly;
have adequate arrangements in place for managing conflicts of interest
that may arise wholly, or partially, in relation to activities
undertaken by the licensee or a representative of the licensee in the
provision of financial services as part of the financial services
business of the licensee or the representative; comply with any
conditions on the license; comply with the financial services laws;
take reasonable steps to ensure that representatives comply with the
financial services laws; maintain the competence to provide the
financial services covered by the license; ensure that representatives
are adequately trained and competent to provide those financial
services; and if those financial services are provided to retail
clients, have a dispute resolution system.
AFSL licensees are also required under section 912D of the
Corporations Act to report to ASIC any significant breach (or likely
breach) of its regulatory obligations. ASIC Regulatory Guide 78 Breach
reporting by AFS licensees expands on this obligation and requires AFSL
holders to have a documented process for, amongst other things,
rectifying breaches and ensuring that arrangements are in place to
prevent the recurrence of the breach.
ADIs are also required under APRA prudential standard APS
310 Audit and Related Matters (``APS 310'') to provide APRA a high-
level description of its risk management systems covering all major
areas of risk and annually, within three months of its annual balance
date, provide APRA with a declaration from its CEO endorsed by the
board that attests that: they have established systems to monitor and
manage those risk including, where appropriate, by setting and
requiring adherence to a series of prudent limits, and by adequate and
timely reporting processes; the risk management systems are operating
effectively and are adequate with regard to the risks they are designed
to control; and the descriptions of risk management systems provided to
APRA are accurate and current.\34\
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\34\ Not relevant for the Commission's comparability
determination herein, the applicant also referenced APRA draft
prudential standard CPS 220 Risk Management (``Draft CPS 220''),
which was released by APRA on May 9, 2013. This draft prudential
standard, if finalized in a form similar to its draft form, will
require each ADI (including SD ADIs) to have a designated compliance
function that assists senior management in effectively managing
compliance risks. It will also require that the compliance function
be adequately staffed by appropriately trained and competent persons
who have sufficient authority to perform their role effectively, and
have a reporting line independent from business lines. APRA expects
to finalize Draft CPS 220 prior to its implementation date of
January 1, 2015.
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Commission Determination: The Commission finds that the provisions
and requirements under the Australian regimes specified above are
generally identical in intent to Sec. 3.3 by seeking to ensure firms
have designated a qualified individual as the compliance officer that
reports directly to a sufficiently senior function of the firm and that
has the independence, responsibility, and authority to develop and
administer compliance policies and procedures reasonably designed to
ensure compliance with the CEA and Commission regulations, resolve
conflicts of interest, remediate noncompliance issues, and report
annually on compliance of the firm.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the CCO requirements of the
provisions of Australian law and regulations specified above are
comparable to and as comprehensive as Sec. 3.3, with the exception of
Sec. 3.3(e) concerning preparing and signing an annual compliance
report and Sec. 3.3(f) concerning certifying and furnishing an annual
compliance report to the Commission.
Notwithstanding that the Commission has not determined that the
requirements of Australian law and regulations are comparable to and as
comprehensive as Sec. Sec. 3.3(e) and 3.3(f), any SD or MSP to which
both Sec. 3.3 and the Australian law and regulations specified above
are applicable would generally be deemed to be in compliance with
Sec. Sec. 3.3(e) and (f) if that SD or MSP complies with the
Australian law and regulations specified above, subject to preparing
and signing an annual compliance report in accordance with Sec. 3.3(e)
and certifying and furnishing the Commission with an annual compliance
report in accordance with Sec. 3.3(f). The Commission notes that it
generally expects registrants to submit required reports to the
Commission in the English language.
B. Risk Management Duties (Sec. Sec. 23.600--23.609)
Section 4s(j) of the CEA requires each SD and MSP to establish
internal policies and procedures designed to, among other things,
address risk management, monitor compliance with position limits,
prevent conflicts of interest, and promote diligent supervision, as
well as maintain business continuity and disaster recovery
programs.\35\ The Commission adopted regulations 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606 to implement the statute.\36\ The
Commission also adopted regulation 23.609, which requires certain risk
management procedures for SDs or MSPs that are clearing members of a
derivatives clearing organization (``DCO'').\37\ Collectively, these
requirements help to establish a robust and comprehensive internal risk
management program for SDs and MSPs with respect to their swaps
activities,\38\ which is critical to effective systemic risk management
for the overall swaps market. In making its comparability determination
with regard to these risk management duties, the Commission will
consider each regulation individually.\39\
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\35\ 7 U.S.C. 6s(j).
\36\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR
20128 (April 3, 2012) (relating to risk management program,
monitoring of position limits, business continuity and disaster
recovery, conflicts of interest policies and procedures, and general
information availability, respectively).
\37\ See Customer Documentation Rule, 77 FR 21278. Also, SDs
must comply with Commission regulation 23.608, which prohibits SDs
providing clearing services to customers from entering into
agreements that would: (i) Disclose the identity of a customer's
original executing counterparty; (ii) limit the number of
counterparties a customer may trade with; (iii) impose counterparty-
based position limits; (iv) impair a customer's access to execution
of a trade on terms that have a reasonable relationship to the best
terms available; or (v) prevent compliance with specified time
frames for acceptance of trades into clearing.
\38\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR Part 23 are limited in scope
to the swaps activities of SDs and MSPs.
\39\ As stated above, this notice does not address Sec. 23.608
(Restrictions on counterparty clearing relationships). The
Commission declines to take up the request for a comparability
determination with respect to this regulation due to the
Commission's view that there are not laws or regulations applicable
in Australia to compare with the prohibitions and requirements of
Sec. 23.608. The Commission may provide a comparability
determination with respect to this regulation at a later date in
consequence of further developments in the law and regulations
applicable in Australia.
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[[Page 78870]]
1. Risk Management Program for SDs and MSPs (Sec. 23.600)
Commission Requirement: Implementing section 4s(j)(2) of the CEA,
Commission regulation 23.600 generally requires that:
Each SD or MSP must establish and enforce a risk
management program consisting of a system of written risk management
policies and procedures designed to monitor and manage the risks
associated with the swap activities of the firm, including without
limitation, market, credit, liquidity, foreign currency, legal,
operational, and settlement risks, and furnish a copy of such policies
and procedures to the CFTC upon application for registration and upon
request;
The SD or MSP must establish a risk management unit
independent from the business trading unit;
The risk management policies and procedures of the SD or
MSP must be approved by the firm's governing body;
Risk tolerance limits and exceptions therefrom must be
reviewed and approved quarterly by senior management and annually by
the governing body;
The risk management program must have a system for
detecting breaches of risk tolerance limits and alerting supervisors
and senior management, as appropriate;
The risk management program must account for risks posed
by affiliates and be integrated at the consolidated entity level;
The risk management unit must provide senior management
and the governing body with quarterly risk exposure reports and upon
detection of any material change in the risk exposure of the SD or MSP;
Risk exposure reports must be furnished to the CFTC within
five business days following provision to senior management;
The risk management program must have a new product policy
for assessing the risks of new products prior to engaging in such
transactions;
The risk management program must have policies and
procedures providing for trading limits, monitoring of trading,
processing of trades, and separation of personnel in the trading unit
from personnel in the risk management unit; and
The risk management program must be reviewed and tested at
least annually and upon any material change in the business of the SD
or MSP.
Regulatory Objective: Through the required system of risk
management, the Commission seeks to ensure that firms are adequately
managing the risks of their swaps activities to prevent failure of the
SD or MSP, which could result in losses to counterparties doing
business with the SD or MSP, and systemic risk more generally. To this
end, the Commission believes the risk management program of an SD or
MSP must contain at least the following critical elements:
Identification of risk categories;
Establishment of risk tolerance limits for each category
of risk and approval of such limits by senior management and the
governing body;
An independent risk management unit to administer a risk
management program; and
Periodic oversight of risk exposures by senior management
and the governing body.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as section 4s(j)(2)
of the CEA and Commission regulation 23.600.\40\
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\40\ Not relevant for the Commission's comparability
determination herein, the applicant also referenced Draft CPS 220.
Draft CPS 220 seeks to introduce additional requirements in respect
of the risk management framework for ADIs. APRA expects to finalize
CPS 220 prior to its implementation date of January 1, 2015. Under
Draft CPS 220, an APRA-regulated institution must have policies and
procedures that provide the board with a comprehensive institution-
wide view of its material risks. Draft CPS 220 also requires the
risk management function of an ADI be ``operationally independent''
and must be headed by a designated Chief Risk Officer (``CRO''). The
CRO must be involved in, and have the authority to provide effective
challenge to, activities and decisions that may materially affect
the institution's risk profile.
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The regulatory framework for ADIs under the Banking Act is
based on the banking supervision principles published by the Basel
Committee on Banking Supervision.\41\ This prudential framework
includes requirements (largely set out in detailed and separate
prudential standards) regarding capital adequacy, credit risk, market
risk, liquidity, credit quality, large exposures, associations with
related entities, outsourcing, business continuity management, audit
and related arrangements for prudential reporting, governance, and fit
and proper management.
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\41\ The Corporations Act requires AFSL holders to comply with
risk management requirements, however, this requirement does not
apply where an entity is regulated by APRA. See section 912A(1)(h).
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In particular, APS 310 (discussed above) requires an ADI's
board and management to ensure that the ADI meets prudential and
statutory requirements and has management practices to limit risks to
prudent levels. APS 310 mandates that the ADI's risk management
practices must be detailed in descriptions of risk management systems
that must be regularly reviewed and updated, at least annually, to take
account of changing circumstances.
APRA Prudential standard APS 116 Capital Adequacy: Market
Risk (``APS 116'') states that the board, or a board committee, of an
ADI must ensure that the ADI has in place adequate systems to identify,
measure and manage market risk, including identifying responsibilities,
providing adequate separation of duties and avoiding conflicts of
interest.
For certain trading positions, APS 116 states that an ADI
must have ``clearly defined policies and procedures for the active
management of positions such that: positions are managed on a trading
desk; position limits are set and monitored for appropriateness;
positions are marked-to-market daily and when marking-to-model the
parameters are assessed on a daily basis; and positions are reported to
senior management as an integral part of the institution's risk
management process.
If an ADI has received approval to apply an ``internal
model'' for market risk, as opposed to the ``standard method'' of
calculating capital requirements, APS 116 requires the ADI to have an
independent risk control unit that is responsible for the design and
implementation of the ADI's market risk management system. The risk
control unit must produce and analyze daily reports on the output of
the ADI's risk measurement model, including an evaluation of limit
utilization. This risk control unit must be independent from business
trading and other risk taking units and must report directly to senior
management of the ADI.
If an ADI has received approval to apply an ``internal
model'' for market risk, APS 116 states that the board or a board
committee and senior management of an ADI must be actively involved in
the risk control process. Daily reports must be prepared by the
independent risk control unit and must be reviewed by a level of
management with sufficient seniority and authority to enforce
reductions of positions.
APS 116 states that an ADI must ensure that an independent
review of the risk measurement system and
[[Page 78871]]
overall risk management process is carried out initially (i.e., at the
time when model approval is sought) and then regularly as part of the
ADI's internal audit process.
Commission Determination: The Commission finds that the provisions
of Australian law and regulations specified above are generally
identical in intent to Sec. 23.600 by requiring a system of risk
management that seeks to ensure that firms are adequately managing the
risks of their swaps activities to prevent failure of the SD or MSP,
which could result in losses to counterparties doing business with the
SD or MSP, and systemic risk more generally. Specifically, the
Commission finds that the Australian provisions specified above
comprehensively require SDs and MSPs to establish risk management
programs containing the following critical elements:
Identification of risk categories;
Establishment of risk tolerance limits for each category
of risk and approval of such limits by senior management and the
governing body;
An independent risk management unit to administer a risk
management program; and
Periodic oversight of risk exposures by senior management
and the governing body.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the risk management program
requirements of the provisions of Australian law and regulations
specified above, are comparable to and as comprehensive as Sec.
23.600, with the exception of Sec. 23.600(c)(2) concerning the
requirement that each SD and MSP produce a quarterly risk exposure
report and provide such report to its senior management, governing
body, and the Commission.
Notwithstanding that the Commission has not determined that the
requirements of Australian law and regulations are comparable to and as
comprehensive as Sec. 23.600(c)(2), any SD or MSP to which both Sec.
23.600 and the Australian law and regulations specified above are
applicable would generally be deemed to be in compliance with Sec.
23.600(c)(2) if that SD or MSP complies with the Australian law and
regulations specified above, subject to compliance with the requirement
that it produce quarterly risk exposure reports and provide such
reports to its senior management, governing body, and the Commission in
accordance with Sec. 23.600(c)(2). The Commission notes that it
generally expects reports furnished to the Commission by registrants to
be in the English language.
2. Monitoring of Position Limits (Sec. 23.601)
Commission Requirement: Implementing section 4s(j)(1) of the CEA,
Commission regulation 23.601 requires each SD or MSP to establish and
enforce written policies and procedures that are reasonably designed to
monitor for, and prevent violations of, applicable position limits
established by the Commission, a designated contract market (``DCM''),
or a swap execution facility (``SEF'').\42\ The policies and procedures
must include an early warning system and provide for escalation of
violations to senior management (including the firm's governing body).
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\42\ The setting of position limits by the Commission, a DCM, or
a SEF is subject to requirements under the CEA and Commission
regulations other than Sec. 23.601. The setting of position limits
and compliance with such limits is not subject to the Commission's
substituted compliance regime.
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Regulatory Objective: Generally, position limits are implemented to
ensure market integrity, fairness, orderliness, and accurate pricing in
the commodity markets. Commission regulation 23.601 thus seeks to
ensure that SDs and MSPs have established the necessary policies and
procedures to monitor the trading of the firm to prevent violations of
applicable position limits established by the Commission, a DCM, or a
SEF. As part of its Risk Management Program, Sec. 23.601 is intended
to ensure that established position limits are not breached by the SD
or MSP.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as section 4s(j)(1)
of the CEA and Commission regulation 23.601.
Section 912A(1)(ca) of the Corporations Act, which
requires AFSL holders to take reasonable steps to ensure its
representatives comply with the financial services laws, which would
include regulatory position limits.
APS 310 (discussed above) requires an ADI's board and
management to ensure that the ADI meets prudential and statutory
requirements and has management practices to limit risks to prudent
levels.
In addition to the foregoing, the applicant also submitted various
guidelines and required best practices concerning the setting of
internal risk tolerance limits and monitoring for compliance with such
internal limits. Although the Commission recognizes these as prudent
risk management practices, the Commission does not believe that these
provisions are comparable to Sec. 23.601 because Sec. 23.601 requires
monitoring for compliance with external position limits set by the
Commission, a DCM, or a SEF.
Commission Determination: The Commission finds that the Australian
provisions specified above are generally identical in intent to Sec.
23.601 by requiring SDs and MSPs to establish necessary policies and
procedures to monitor the trading of the firm to prevent violations of
applicable position limits established by applicable laws and
regulations, including those of the Commission, a DCM, or a SEF.
Specifically, the Commission finds that the provisions of Australian
law and regulations specified above, while not specific to the issue of
position limit compliance, nevertheless comprehensively require SDs and
MSPs to monitor for regulatory compliance generally, which includes
monitoring for compliance with position limits set pursuant to
applicable law and the responsibility of senior management (including
the board of directors) for such compliance.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the compliance monitoring
requirements of Australian law and regulations, as specified above, are
comparable to and as comprehensive as Sec. 23.601. For the avoidance
of doubt, the Commission notes that this determination may not be
relied on to relieve an SD or MSP from its obligation to strictly
comply with any applicable position limit established by the
Commission, a DCM, or a SEF.
3. Diligent Supervision (Sec. 23.602)
Commission Requirement: Commission regulation 23.602 implements
section 4s(h)(1)(B) of the CEA and requires each SD and MSP to
establish a system to diligently supervise all activities relating to
its business performed by its partners, members, officers, employees,
and agents. The system must be reasonably designed to achieve
compliance with the CEA and CFTC regulations. Commission regulation
23.602 requires that the supervisory system must specifically designate
qualified persons with authority to carry out the supervisory
responsibilities of the SD or MSP for all activities relating to its
business as an SD or MSP.
Regulatory Objective: The Commission's diligent supervision rule
seeks to ensure that SDs and MSPs
[[Page 78872]]
strictly comply with the CEA and the Commission's rules. To this end,
through Sec. 23.602, the Commission seeks to ensure that each SD and
MSP not only establishes the necessary policies and procedures that
would lead to compliance with the CEA and Commission regulations, but
also establishes an effective system of internal oversight and
enforcement of such policies and procedures to ensure that such
policies and procedures are diligently followed.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as section
4s(h)(1)(B) of the CEA and Commission regulation 23.602.
CPS 520 (discussed above) sets forth the fitness
requirements for all APRA regulated institutions. These standards apply
to all directors and senior managers of an ADI as well as other
``responsible persons.'' The applicable key requirements of this
prudential standard are: an ADI must have a Fit and Proper policy that
meets certain standards; the fitness and propriety of a responsible
person must generally be assessed prior to initial appointment and then
re-assessed annually; and an ADI must take steps to ensure that a
person is not appointed to, or does not continue to hold, a responsible
person position for which they are not qualified.
Section 912A(1)(ca) of the Corporations Act requires that
an AFSL licensee take reasonable steps to ensure that its
representatives comply with the financial services laws.
RG 104 (discussed above) sets forth guidance for an AFSL
licensee with respect to supervision. These regulatory guidelines
require that an AFSL licensee have measures for monitoring and
supervising their representatives to determine whether they are
complying with the financial services laws. They also require that an
AFSL licensee take measures to ensure that their representatives who
provide financial services have, and maintain the necessary knowledge
and skills, to competently provide those services.
Commission Determination: The Commission finds that the provisions
of Australian law and regulations specified above are generally
identical in intent to Sec. 23.602 because such standards seek to
ensure that SDs and MSPs strictly comply with applicable law, which
would include the CEA and the Commission's regulations. Through the
provisions specified above, Australian law and regulations seek to
ensure that each SD and MSP not only establishes the necessary policies
and procedures that would lead to compliance with applicable law, which
would include the CEA and Commission regulations, but also establishes
an effective system of internal oversight and enforcement of such
policies and procedures to ensure that such policies and procedures are
diligently followed.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the internal supervision
requirements of the provisions of Australian law and regulations, as
specified above, are comparable to and as comprehensive as Sec.
23.602.
4. Business Continuity and Disaster Recovery (Sec. 23.603)
Commission Requirement: To ensure the proper functioning of the
swaps markets and the prevention of systemic risk more generally,
Commission regulation 23.603 requires each SD and MSP, as part of its
risk management program, to establish a business continuity and
disaster recovery plan that includes procedures for, and the
maintenance of, back-up facilities, systems, infrastructure, personnel,
and other resources to achieve the timely recovery of data and
documentation and to resume operations generally within the next
business day after the disruption.
Regulatory Objective: Commission regulation 23.603 is intended to
ensure that any market disruption affecting SDs and MSPs, whether
caused by natural disaster or otherwise, is minimized in length and
severity. To that end, this requirement seeks to ensure that entities
adequately plan for disruptions and devote sufficient resources capable
of carrying out an appropriate plan within one business day, if
necessary.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as Commission
regulation 23.603.
APRA prudential standard CPS 232 Business Continuity Management
(``CPS 232'') requires each ADI to implement a whole-of-business
approach to business continuity management. Specifically, CPS 232
states that:
A regulated institution must identify, assess, and manage
potential business continuity risks to ensure that it is able to meet
its financial and service obligations to its depositors, policyholders
and other creditors;
The board of a regulated institution must consider
business continuity risks and controls as part of its overall risk
management systems and approve a Business Continuity Management Policy;
A regulated institution must develop and maintain a
Business Continuity Plan that documents procedures and information
which enable the regulated institution to manage business disruptions;
A regulated institution must review the Business
Continuity Plan annually and periodically arrange for its review by the
internal audit function or an external expert; and
A regulated institution must notify APRA in the event of
certain disruptions.
Commission Determination: The Commission finds that the provisions
of Australian law and regulations specified above are generally
identical in intent to Sec. 23.603 because such standards seek to
ensure that any market disruption affecting SDs and MSPs, whether
caused by natural disaster or otherwise, is minimized in length and
severity. To that end, the Commission finds that the provisions of
Australian law and regulations specified above seek to ensure that
entities adequately plan for disruptions and devote sufficient
resources capable of carrying out an appropriate plan in a timely
manner.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the business continuity and
disaster recovery requirements of the provisions of Australian law and
regulations, as specified above, are comparable to and as comprehensive
as Sec. 23.603.
5. Conflicts of Interest (Sec. 23.605)
Commission Requirement: Section 4s(j)(5) of the CEA and Commission
regulation 23.605(c) generally require each SD or MSP to establish
structural and institutional safeguards to ensure that the activities
of any person within the firm relating to research or analysis of the
price or market for any commodity or swap are separated by appropriate
informational partitions within the firm from the review, pressure, or
oversight of persons whose involvement in pricing, trading, or clearing
activities might potentially bias their judgment or supervision.
In addition, section 4s(j)(5) of the CEA and Commission regulation
23.605(d)(1) generally prohibits an SD or MSP from directly or
indirectly interfering with or attempting to influence the decision of
any clearing unit of any affiliated clearing member of a DCO to provide
[[Page 78873]]
clearing services and activities to a particular customer, including:
Whether to offer clearing services to a particular
customer;
Whether to accept a particular customer for clearing
derivatives;
Whether to submit a customer's transaction to a particular
DCO;
Whether to set or adjust risk tolerance levels for a
particular customer; or
Whether to set a customer's fees based on criteria other
than those generally available and applicable to other customers.
Commission regulation 23.605(d)(2) generally requires each SD or
MSP to create and maintain an appropriate informational partition
between business trading units of the SD or MSP and clearing units of
any affiliated clearing member of a DCO to reasonably ensure compliance
with the Act and the prohibitions set forth in Sec. 23.605(d)(1)
outlined above.
The Commission observes that Sec. 23.605(d) works in tandem with
Commission regulation 1.71, which requires FCMs that are clearing
members of a DCO and affiliated with an SD or MSP to create and
maintain an appropriate informational partition between business
trading units of the SD or MSP and clearing units of the FCM to
reasonably ensure compliance with the Act and the prohibitions set
forth in Sec. 1.71(d)(1), which are the same as the prohibitions set
forth in Sec. 23.605(d)(1) outlined above.
Finally, Sec. 23.605(e) requires that each SD or MSP have policies
and procedures that mandate the disclosure to counterparties of
material incentives or conflicts of interest regarding the decision of
a counterparty to execute a derivative on a swap execution facility or
DCM or to clear a derivative through a DCO.
Regulatory Objective: Commission regulation 23.605(c) seeks to
ensure that research provided to the general public by an SD or MSP is
unbiased and free from the influence of the interests of an SD or MSP
arising from the SD's or MSP's trading business.
In addition, the Sec. 23.605(d) (working in tandem with Sec.
1.71) seeks to ensure open access to the clearing of swaps by requiring
that access to and the provision of clearing services provided by an
affiliate of an SD or MSP are not influenced by the interests of an
SD's or MSP's trading business.
Finally, Sec. 23.605(e) seeks to ensure equal access to trading
venues and clearinghouses, as well as orderly and fair markets, by
requiring that each SD and MSP disclose to counterparties any material
incentives or conflicts of interest regarding the decision of a
counterparty to execute a derivative on a SEF or DCM, or to clear a
derivative through a DCO.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as Commission
regulation 23.605(c).
Section 912A(1)(aa) of the Corporations Act requires AFSL
licensees to have adequate arrangements for the management of conflicts
of interest that may arise wholly, or partially, in relation to
activities undertaken by a licensee or a representative of the licensee
in the provision of financial services.
ASIC Regulatory Guide 181 Licensing: Managing conflicts of
interest and ASIC Regulatory Guide 79 Research report providers:
Improving the quality of investment research (specific to research
reports provided in Australia), set out ASIC's expectations regarding
how financial service licensees are to manage conflicts of interest
that arise in relation to the financial services that they provide. The
conflicts management obligation requires that all conflicts of interest
be adequately managed, recognizing that many conflicts of interest can
be managed by a combination of internal controls and disclosures. Where
conflicts cannot be adequately managed through internal controls and/or
disclosure, the ASIC guidelines require that an AFSL holder must avoid
the conflict or refrain from providing the affected financial service.
Section 941A of the Corporations Act requires AFSL
licensees to provide a Financial Services Guide to retail clients if
they provide a financial service to the client.
Section 942B(2)(f) of the Corporations Act states that the
Financial Services Guide must provide disclosures about relationships
that may influence the provision of the financial service.\43\
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\43\ In addition to the foregoing, the applicant referenced
Draft CPS 220. This draft prudential standard, if finalized in a
form similar to its draft form, will require each ADI (including SD
ADIs) to have policies and procedures for identifying, monitoring,
and managing potential and actual conflicts of interest.
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The applicant has represented to the Commission that ASIC and APRA,
in the process of their oversight and enforcement of the foregoing
Australian law and regulations for ADIs and ASFL licensees, would
require any SD or MSP subject to such law and regulations to resolve or
mitigate conflicts of interests in the provision of clearing services
by a clearing member of a DCO that is an affiliate of the SD or MSP, or
the decision of a counterparty to execute a derivative on a SEF or DCM,
or clear a derivative through a DCO, through appropriate information
firewalls and disclosures.
Commission Determination: The Commission finds that the provisions
of Australian law and regulations specified above with respect to
conflicts of interest that may arise in producing or distributing
research are generally identical in intent to Sec. 23.605(c) because
such standards seek to ensure that research provided to the general
public by an SD is unbiased and free from the influence of the
interests of an SD arising from the SD's trading business.
With respect to conflicts of interest that may arise in the
provision of clearing services by an affiliate of an SD or MSP, the
Commission further finds that although the general conflicts of
interest prevention requirements under the Australian law and
regulations specified above do not require with specificity that access
to and the provision of clearing services provided by an affiliate of
an SD or MSP not be improperly influenced by the interests of an SD's
or MSP's trading business, such general requirements would require
prevention and remediation of such improper influence when recognized
or discovered. Thus such standards would ensure open access to
clearing.
Finally, although not as specific as the requirements of Sec.
23.605(e) (Undue influence on counterparties), the Commission finds
that the general disclosure requirements of the Australian law and
regulations specified above would ensure equal access to trading venues
and clearinghouses by requiring that each SD and MSP disclose to
counterparties any material incentives or conflicts of interest
regarding the decision of a counterparty to execute a derivative on a
SEF or DCM, or to clear a derivative through a DCO.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the provisions of Australian law
and regulations specified above in relation to conflicts of interest
are comparable to and as comprehensive as Sec. 23.605.
6. Availability of Information for Disclosure and Inspection (Sec.
23.606)
Commission Requirement: Commission regulation 23.606 implements
sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to
disclose to the Commission, and an
[[Page 78874]]
SD's or MSP's U.S. prudential regulator (if any) comprehensive
information about its swap activities, and to establish and maintain
reliable internal data capture, processing, storage, and other
operational systems sufficient to capture, process, record, store, and
produce all information necessary to satisfy its duties under the CEA
and Commission regulations. Such systems must be designed to provide
such information to the Commission and an SD's or MSP's U.S. prudential
regulator within the time frames set forth in the CEA and Commission
regulations and upon request.
Regulatory Objective: Commission regulation 23.606 seeks to ensure
that each SD and MSP captures and maintains comprehensive information
about their swap activities, and is able to retrieve and disclose such
information to the Commission and its U.S. prudential regulator, if
any, as necessary for compliance with the CEA and the Commission's
regulations and for purposes of Commission oversight, as well as
oversight by the SD's or MSP's U.S. prudential regulator, if any.
The Commission observes that it would be impossible to meet the
regulatory objective of Sec. 23.606 unless the required information is
available to the Commission and any U.S. prudential regulator under the
foreign legal regime. Thus, a comparability determination with respect
to the information access provisions of Sec. 23.606 would be premised
on whether the relevant information would be available to the
Commission and any U.S. prudential regulator of the SD or MSP, not on
whether an SD or MSP must disclose comprehensive information to its
regulator in its home jurisdiction.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as Commission
regulation 23.606.
Section 912C of the Corporations Act and sections 29-33 of the ASIC
Act enable ASIC to gather information from AFSL licensees, including:
A statement containing specified information about the
financial services provided by the AFSL holder or its representatives,
or the financial services business carried on by the licensee;
Inspection of books without charge;
Issuance of a notice to a body corporate to produce books
about the affairs of the body corporate;
Issuance of a notice to a person who carries out a
financial services business to produce books relating to, among other
things, a dealing in financial products, or the character or financial
position of the business;
Issuance of a notice to produce books relating to the
supply of financial services; and
Issuance of a notice to produce documents in the person's
possession that relate to the affairs of the body corporate.
In addition, Section 988A of the Corporations Act requires AFSL
license holders to keep financial records that correctly record and
explain the transactions and financial position of the financial
services business carried out by the licensee.
Part 2.3 of the ASIC Derivative Transaction Rules (Reporting) 2013
places certain requirements on reporting entities (which includes the
five SD ADIs as reporting entities from October 1, 2013). Specifically,
Rule 2.3.1 requires reporting entities to keep records in relation to
OTC derivatives transactions (including swaps) that enable the
reporting entity to demonstrate it has complied with the Derivative
Transaction Rules, and must keep the records for a period of at least
five years from the date the record is made or amended. Reporting
entities must also keep a record of all information that it is required
to be reported under such rules.
Rule 2.3.2 further requires a reporting entity to, on request by
ASIC, provide ASIC within a reasonable time with records or other
information relating to compliance with or determining whether there
has been compliance with the Rules.
Commission Determination: The Commission finds that the Australian
law and regulations specified above are generally identical in intent
to Sec. 23.606 because such standards seek to ensure that each SD and
MSP captures and stores comprehensive information about their swap
activities, and are able to retrieve and disclose such information as
necessary for compliance with applicable law and for purposes of
regulatory oversight.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the Australian law and
regulations with respect to the availability of information for
inspection and disclosure, as specified above, are comparable to, and
as comprehensive as, Sec. 23.606, with the exception of Sec.
23.606(a)(2) concerning the requirement that an SD or MSP make
information required by Sec. 23.606(a)(1) available promptly upon
request to Commission staff and the staff of an applicable U.S.
prudential regulator. The applicant has not submitted any provision of
law or regulations applicable in Australia upon which the Commission
could make a finding that SDs and MSPs would be required to retrieve
and disclose comprehensive information about their swap activities to
the Commission or any U.S. prudential regulator as necessary for
compliance with the CEA and Commission regulations, and for purposes of
Commission oversight and the oversight of any U.S. prudential
regulator.
Notwithstanding that the Commission has not determined that the
requirements of Australian law and regulations are comparable to and as
comprehensive as Sec. 23.606(a)(2), any SD or MSP to which both Sec.
23.606 and the Australian law and regulations specified above are
applicable would generally be deemed to be in compliance with Sec.
23.606(a)(2) if that SD or MSP complies with the Australian law and
regulations specified above, subject to compliance with the requirement
that it produce information to Commission staff and the staff of an
applicable U.S. prudential regulator in accordance with Sec.
23.606(a)(2).
7. Clearing Member Risk Management (Sec. 23.609)
Commission Requirement: Commission regulation 23.609 generally
requires each SD or MSP that is a clearing member of a DCO to:
Establish risk-based limits based on position size, order
size, margin requirements, or similar factors;
Screen orders for compliance with the risk-based limits;
Monitor for adherence to the risk-based limits intra-day
and overnight;
Conduct stress tests under extreme but plausible
conditions of all positions at least once per week;
Evaluate its ability to meet initial margin requirements
at least once per week;
Evaluate its ability to meet variation margin requirements
in cash at least once per week;
Evaluate its ability to liquidate positions it clears in
an orderly manner, and estimate the cost of liquidation; and
Test all lines of credit at least once per year.
Regulatory Objective: Through Commission regulation 23.609, the
Commission seeks to ensure the financial integrity of the markets and
the clearing system, to avoid systemic risk, and to protect customer
funds. Effective risk management by SDs and MSPs that are clearing
members is essential to achieving these objectives. A failure of risk
management can cause
[[Page 78875]]
a clearing member to become insolvent and default to a DCO. Such
default can disrupt the markets and the clearing system and harm
customers.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as Commission
regulation 23.609.
The regulatory framework for ADIs under the Banking Act is
based on the banking supervision principles published by the Basel
Committee on Banking Supervision.\44\ This prudential framework
includes requirements (largely set out in detailed and separate
prudential standards) regarding capital adequacy, credit risk, market
risk, liquidity, credit quality, large exposures, associations with
related entities, outsourcing, business continuity management, audit
and related arrangements for prudential reporting, governance, and fit
and proper management.
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\44\ The Corporations Act requires AFSL holders to comply with
risk management requirements, however, this requirement does not
apply where an entity is regulated by APRA. See section 912A(1)(h).
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In particular, APS 310 (discussed above) requires an ADI's
board and management to ensure that the ADI meets prudential and
statutory requirements and has management practices to limit risks to
prudent levels. APS 310 mandates that the ADI's risk management
practices must be detailed in descriptions of risk management systems
that must be regularly reviewed and updated, at least annually, to take
account of changing circumstances.
APRA Prudential standard APS 116 Capital Adequacy: Market
Risk (``APS 116'') states that the board, or a board committee, of an
ADI must ensure that the ADI has in place adequate systems to identify,
measure and manage market risk, including identifying responsibilities,
providing adequate separation of duties and avoiding conflicts of
interest.
For certain trading positions, APS 116 states that an ADI
must have ``clearly defined policies and procedures for the active
management of positions such that: Positions are managed on a trading
desk; position limits are set and monitored for appropriateness;
positions are marked-to-market daily and when marking-to-model the
parameters are assessed on a daily basis; and positions are reported to
senior management as an integral part of the institution's risk
management process.
If an ADI has received approval to apply an ``internal
model'' for market risk, as opposed to the ``standard method'' of
calculating capital requirements, APS 116 requires the ADI to have an
independent risk control unit that is responsible for the design and
implementation of the ADI's market risk management system. The risk
control unit must produce and analyze daily reports on the output of
the ADI's risk measurement model, including an evaluation of limit
utilization. This risk control unit must be independent from business
trading and other risk taking units and must report directly to senior
management of the ADI.
If an ADI has received approval to apply an ``internal
model'' for market risk, APS 116 states that the board or a board
committee and senior management of an ADI must be actively involved in
the risk control process. Daily reports must be prepared by the
independent risk control unit and must be reviewed by a level of
management with sufficient seniority and authority to enforce
reductions of positions.
APS 116 states that an ADI must ensure that an independent
review of the risk measurement system and overall risk management
process is carried out initially (i.e., at the time when model approval
is sought) and then regularly as part of the ADI's internal audit
process.
Further, on June 4, 2013, APRA issued a letter to all ADIs,
including the Australian SDs outlining the framework for the
application of risk management requirements to the Australian banks'
membership of CCPs. Such a framework should include, at a minimum:
application of appropriate systems and controls to monitor, on a
continuing basis, the risk that membership of and conduct of business
through a CCP or multiple CCPs may create and to manage such risk. This
would include application of limits on potential risk exposures. These
clearly articulated conditions together with APRA's prudential
standards are designed to achieve a comparable regulatory outcome as
Commission regulation 23.609.
Specifically, APRA has represented to the Commission that, in the
process of its oversight and enforcement of the foregoing Australian
law, regulations, and prudential standards, any SD or MSP subject to
such standards that is a clearing member of a DCO would be expected to
have established risk-based limits and a compliance and assessment
framework for these limits consistent with the Commission's
requirements for a clearing member and set out in the SD's or MSP's
risk management policy framework. APRA would expect banks in Australia
to adhere to their risk limit policies and any targeted review would
examine the banks' risk management policy framework that captures these
regulatory obligations.
Commission Determination: The Commission finds that the Australian
law and regulations specified above are generally identical in intent
to Sec. 23.609 because such standards seek to ensure the financial
integrity of the markets and the clearing system, to avoid systemic
risk, and to protect customer funds.
The Commission notes that the Australian law and regulations
specified above are not as specific as Sec. 23.609 with respect to
ensuring that SDs and MSPs that are clearing members of a DCO establish
detailed procedures and limits for clearing member risk management
purposes. Nevertheless, the Commission finds that the general
requirements under the Australian law and regulations specified above,
implemented in the context of clearing member risk management and
pursuant to the representations of ASIC and APRA, meet the Commission's
regulatory objective specified above.
Based on the foregoing and the representations above, the
Commission hereby determines that the clearing member risk management
requirements of the Australian law and regulations specified above are
comparable to and as comprehensive as Sec. 23.609.
C. Swap Data Recordkeeping (Sec. Sec. 23.201 and 23.203)
Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the
CEA, and Commission regulation 23.201 generally require SDs and MSPs to
retain records of each transaction, each position held, general
business records (including records related to complaints and sales and
marketing materials), records related to governance, financial records,
records of data reported to SDRs, and records of real-time reporting
data along with a record of the date and time the SD or MSP made such
reports. Transaction records must be kept in a form and manner
identifiable and searchable by transaction and counterparty.
Commission regulation 23.203, requires SDs and MSPs to maintain
records of a swap transaction until the termination, maturity,
expiration, transfer, assignment, or novation date of the transaction,
and for a period of five years after such date. Records must be
``readily accessible'' for the first 2 years of the 5 year retention
period (consistent with Sec. 1.31).
[[Page 78876]]
The Commission notes that the comparability determination below
with respect to Sec. Sec. 23.201 and 23.203 encompasses both swap data
recordkeeping generally and swap data recordkeeping relating to
complaints and marketing and sales materials in accordance with Sec.
23.201(b)(3) and (4).\45\
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\45\ See the Guidance for a discussion of the availability of
substituted compliance with respect to swap data recordkeeping, 78
FR 45332-33.
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Regulatory Objective: Through the Commission's regulations
requiring SDs and MSPs to keep comprehensive records of their swap
transactions and related data, the Commission seeks to ensure the
effectiveness of the internal controls of SDs and MSPs, and
transparency in the swaps market for regulators and market
participants.
The Commission's regulations require SDs and MSPs to keep swap data
in a level of detail sufficient to enable regulatory authorities to
understand an SD's or MSP's swaps business and to assess its swaps
exposure.
By requiring comprehensive records of swap data, the Commission
seeks to ensure that SDs and MSPs employ effective risk management, and
strictly comply with Commission regulations. Further, such records
facilitate effective regulatory oversight.
The Commission observes that it would be impossible to meet the
regulatory objective of Sec. Sec. 23.201 and 23.203 unless the
required information is available to the Commission and any U.S.
prudential regulator under the foreign legal regime. Thus, a
comparability determination with respect to the information access
provisions of Sec. 23.203 would be premised on whether the relevant
information would be available to the Commission and any U.S.
prudential regulator of the SD or MSP, not on whether an SD or MSP must
disclose comprehensive information to its regulator in its home
jurisdiction.
Comparable Australian Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Australia are in full force and effect in
Australia, and comparable to and as comprehensive as sections
4s(f)(1)(B) and 4s(g)(1) of the CEA and Sec. Sec. 23.201 and 23.203.
Section 286 of the Corporations Act requires firms to keep
financial records that correctly record and explain its transactions,
financial position and performance for 7 years after the transactions
are completed.
Section 988A of the Corporations Act requires AFSL
licensees to keep financial records that correctly record and explain
the transactions and financial position of the licensee's financial
services business.
Section 988E of the Corporations Act specifies a list of
categories of information to be shown in the records of an AFSL
licensee, including records of all money received or paid by the
licensee; acquisitions and disposals of financial products, the charges
and credits arising from them, and the names of the person acquiring or
disposing of each of those products; all income from commissions,
interest and other sources and all payments of interest, commissions
and other expenses; and records pertaining to the securities or managed
investment products that are the property of the licensee or held by
the licensee for other persons.
Corporations regulation 7.8.11 further specifies
categories of information to be shown in records, including all
financial products dealt with by the AFSL licensee under instructions
from another person; and records pertaining to property held by the
licensee for another person.
Corporations regulation 7.8.12 further specifies
categories of information to be shown in records, including separate
particulars of every transaction by the AFSL licensee, the date of such
transactions, and copies of acknowledgments of the receipt of financial
products or documents of title to financial products.
Part 2.3 of the ASIC Derivative Transaction Rules (Reporting) 2013
places certain requirements on reporting entities (which includes the
five SD ADIs as reporting entities from October, 1 2013). Specifically,
Rule 2.3.1 requires reporting entities to keep records in relation to
OTC derivatives transactions (including swaps) that enable the
reporting entity to demonstrate it has complied with the Derivative
Transaction Rules, and must keep the records for a period of at least
five years from the date the record is made or amended. Reporting
entities must also keep a record of all information that it is required
to be reported under such rules.
Rule 2.3.2 further requires a reporting entity to, on request by
ASIC, provide ASIC within a reasonable time with records or other
information relating to compliance with or determining whether there
has been compliance with the Rules.
Commission Determination: The Commission finds that the provisions
of Australian law and regulations specified above are generally
identical in intent to Sec. Sec. 23.201 and 23.203 because such
provisions seek to ensure the effectiveness of the internal controls of
SDs and MSPs, and transparency in the swaps market for regulators and
market participants.
In addition, the Commission finds that the provisions of Australian
law and regulations specified above require SDs and MSPs to keep swap
data in a level of detail sufficient to enable regulatory authorities
to understand an SD's or MSP's swaps business and to assess its swaps
exposure.
Finally, the Commission finds that the provisions of Australian law
and regulations specified above, by requiring comprehensive records of
swap data, seek to ensure that SDs and MSPs employ effective risk
management, seek to ensure that SDs and MSPs strictly comply with
applicable regulatory requirements (including the CEA and Commission
regulations), and that such records facilitate effective regulatory
oversight.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the requirements of Australian
law and regulation with respect to swap data recordkeeping, as
specified above, are comparable to, and as comprehensive as, Sec. Sec.
23.201 and 23.203, with the exception of Sec. 23.203(b)(2) concerning
the requirement that an SD or MSP make records required by Sec. 23.201
open to inspection by any representative of the Commission, the United
States Department of Justice, or any applicable U.S. prudential
regulator. The applicant has not submitted any provision of Australian
law or regulation upon which the Commission could make a finding that
SDs and MSPs would be required to make records required by Sec. 23.201
open to inspection by any representative of the Commission, the United
States Department of Justice, or any applicable U.S. prudential
regulator.
Notwithstanding that the Commission has not determined that the
requirements of Australian law and regulations are comparable to and as
comprehensive as Sec. 23.203(b)(2), any SD or MSP to which both Sec.
23.203 and the Australian law and regulations specified above are
applicable would generally be deemed to be in compliance with Sec.
23.203(b)(2) if that SD or MSP complies with the Australian law and
regulations specified above, subject to compliance with the requirement
that it make records required by Sec. 23.201 open to inspection by any
representative of the Commission, the United States Department of
Justice, or any applicable U.S. prudential regulator in accordance with
Sec. 23.203(b)(2).
[[Page 78877]]
Issued in Washington, DC on December 20, 2013, by the
Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendices to Comparability Determination for Australia: Certain
Entity-Level Requirements
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton and
Wetjen voted in the affirmative. Commissioner O'Malia voted in the
negative.
Appendix 2--Statement of Chairman Gary Gensler and Commissioners
Chilton and Wetjen
We support the Commission's approval of broad comparability
determinations that will be used for substituted compliance
purposes. For each of the six jurisdictions that has registered swap
dealers, we carefully reviewed each regulatory provision of the
foreign jurisdictions submitted to us and compared the provision's
intended outcome to the Commission's own regulatory objectives. The
resulting comparability determinations for entity-level requirements
permit non-U.S. swap dealers to comply with regulations in their
home jurisdiction as a substitute for compliance with the relevant
Commission regulations.
These determinations reflect the Commission's commitment to
coordinating our efforts to bring transparency to the swaps market
and reduce its risks to the public. The comparability findings for
the entity-level requirements are a testament to the comparability
of these regulatory systems as we work together in building a strong
international regulatory framework.
In addition, we are pleased that the Commission was able to find
comparability with respect to swap-specific transaction-level
requirements in the European Union and Japan.
The Commission attained this benchmark by working cooperatively
with authorities in Australia, Canada, the European Union, Hong
Kong, Japan, and Switzerland to reach mutual agreement. The
Commission looks forward to continuing to collaborate with both
foreign authorities and market participants to build on this
progress in the months and years ahead.
Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia
I respectfully dissent from the Commodity Futures Trading
Commission's (``Commission'') approval of the Notices of
Comparability Determinations for Certain Requirements under the laws
of Australia, Canada, the European Union, Hong Kong, Japan, and
Switzerland (collectively, ``Notices''). While I support the narrow
comparability determinations that the Commission has made, moving
forward, the Commission must collaborate with foreign regulators to
harmonize our respective regimes consistent with the G-20 reforms.
However, I cannot support the Notices because they: (1) Are
based on the legally unsound cross-border guidance (``Guidance'');
\1\ (2) are the result of a flawed substituted compliance process;
and (3) fail to provide a clear path moving forward. If the
Commission's objective for substituted compliance is to develop a
narrow rule-by-rule approach that leaves unanswered major regulatory
gaps between our regulatory framework and foreign jurisdictions,
then I believe that the Commission has successfully achieved its
goal today.
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\1\ Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,
2013).
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Determinations Based on Legally Unsound Guidance
As I previously stated in my dissent, the Guidance fails to
articulate a valid statutory foundation for its overbroad scope and
inconsistently applies the statute to different activities.\2\
Section 2(i) of the Commodity Exchange Act (``CEA'') states that the
Commission does not have jurisdiction over foreign activities unless
``those activities have a direct and significant connection with
activities in, or effect on, commerce of the United States * * *''
\3\ However, the Commission never properly articulated how and when
this limiting standard on the Commission's extraterritorial reach is
met, which would trigger the application of Title VII of the Dodd-
Frank Act \4\ and any Commission regulations promulgated thereunder
to swap activities that are outside of the United States. Given this
statutorily unsound interpretation of the Commission's
extraterritorial authority, the Commission often applies CEA section
2(i) inconsistently and arbitrarily to foreign activities.
---------------------------------------------------------------------------
\2\ https://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
\3\ CEA section 2(i); 7 U.S.C. 2(i).
\4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
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Accordingly, because the Commission is relying on the legally
deficient Guidance to make its substituted compliance
determinations, and for the reasons discussed below, I cannot
support the Notices. The Commission should have collaborated with
foreign regulators to agree on and implement a workable regime of
substituted compliance, and then should have made determinations
pursuant to that regime.
Flawed Substituted Compliance Process
Substituted compliance should not be a case of picking a set of
foreign rules identical to our rules, determining them to be
``comparable,'' but then making no determination regarding rules
that require extensive gap analysis to assess to what extent each
jurisdiction is, or is not, comparable based on overall outcomes of
the regulatory regimes. While I support the narrow comparability
determinations that the Commission has made, I am concerned that in
a rush to provide some relief, the Commission has made substituted
compliance determinations that only afford narrow relief and fail to
address major regulatory gaps between our domestic regulatory
framework and foreign jurisdictions. I will address a few examples
below.
First, earlier this year, the OTC Derivatives Regulators Group
(``ODRG'') agreed to a number of substantive understandings to
improve the cross-border implementation of over-the-counter
derivatives reforms.\5\ The ODRG specifically agreed that a
flexible, outcomes-based approach, based on a broad category-by-
category basis, should form the basis of comparability
determinations.\6\
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\5\ https://www.cftc.gov/PressRoom/PressReleases/pr6678-13.
\6\ https://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings.
Understanding number 2 states that ``[a] flexible, outcomes-based
approach should form the basis of final assessments regarding
equivalence or substituted compliance.''
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However, instead of following this approach, the Commission has
made its comparability determinations on a rule-by-rule basis. For
example, in Japan's Comparability Determination for Transaction-
Level Requirements, the Commission has made a positive comparability
determination for some of the detailed requirements under the swap
trading relationship documentation provisions, but not for other
requirements.\7\ This detailed approach clearly contravenes the
ODRG's understanding.
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\7\ The Commission made a positive comparability determination
for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3),
(b)(4), (c), and (d), but not for Commission regulations
23.504(b)(5) and (b)(6).
---------------------------------------------------------------------------
Second, in several areas, the Commission has declined to
consider a request for a comparability determination, and has also
failed to provide an analysis regarding the extent to which the
other jurisdiction is, or is not, comparable. For example, the
Commission has declined to address or provide any clarity regarding
the European Union's regulatory data reporting determination, even
though the European Union's reporting regime is set to begin on
February 12, 2014. Although the Commission has provided some limited
relief with respect to regulatory data reporting, the lack of
clarity creates unnecessary uncertainty, especially when the
European Union's reporting regime is set to begin in less than two
months.
Similarly, Japan receives no consideration for its mandatory
clearing requirement, even though the Commission considers Japan's
legal framework to be comparable to the U.S. framework. While the
Commission has declined to provide even a partial comparability
determination, at least in this instance the Commission has provided
a reason: the differences in the scope of entities and products
subject to the clearing requirement.\8\ Such treatment creates
uncertainty and is contrary to increased global harmonization
efforts.
---------------------------------------------------------------------------
\8\ Yen-denominated interest rate swaps are subject to the
mandatory clearing requirement in both the U.S. and Japan.
---------------------------------------------------------------------------
Third, in the Commission's rush to meet the artificial deadline
of December 21, 2013, as established in the Exemptive Order
Regarding Compliance with Certain Swap
[[Page 78878]]
Regulations (``Exemptive Order''),\9\ the Commission failed to
complete an important piece of the cross-border regime, namely,
supervisory memoranda of understanding (``MOUs'') between the
Commission and fellow regulators.
---------------------------------------------------------------------------
\9\ Exemptive Order Regarding Compliance With Certain Swap
Regulations, 78 FR 43785 (Jul. 22, 2013).
---------------------------------------------------------------------------
I have previously stated that these MOUs, if done right, can be
a key part of the global harmonization effort because they provide
mutually agreed-upon solutions for differences in regulatory
regimes.\10\ Accordingly, I stated that the Commission should be
able to review MOUs alongside the respective comparability
determinations and vote on them at the same time. Without these
MOUs, our fellow regulators are left wondering whether and how any
differences, such as direct access to books and records, will be
resolved.
---------------------------------------------------------------------------
\10\ https://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.
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Finally, as I have consistently maintained, the substituted
compliance process should allow other regulatory bodies to engage
with the full Commission.\11\ While I am pleased that the Notices
are being voted on by the Commission, the full Commission only
gained access to the comment letters from foreign regulators on the
Commission's comparability determination draft proposals a few days
ago. This is hardly a transparent process.
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\11\ https://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
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Unclear Path Forward
Looking forward to next steps, the Commission must provide
answers to several outstanding questions regarding these
comparability determinations. In doing so, the Commission must
collaborate with foreign regulators to increase global
harmonization.
First, there is uncertainty surrounding the timing and outcome
of the MOUs. Critical questions regarding information sharing,
cooperation, supervision, and enforcement will remain unanswered
until the Commission and our fellow regulators execute these MOUs.
Second, the Commission has issued time-limited no-action relief
for the swap data repository reporting requirements. These
comparability determinations will be done as separate notices.
However, the timing and process for these determinations remain
uncertain.
Third, the Commission has failed to provide clarity on the
process for addressing the comparability determinations that it
declined to undertake at this time. The Notices only state that the
Commission may address these requests in a separate notice at a
later date given further developments in the law and regulations of
other jurisdictions. To promote certainty in the financial markets,
the Commission must provide a clear path forward for market
participants and foreign regulators.
The following steps would be a better approach: (1) The
Commission should extend the Exemptive Order to allow foreign
regulators to further implement their regulatory regimes and
coordinate with them to implement a harmonized substituted
compliance process; (2) the Commission should implement a flexible,
outcomes-based approach to the substituted compliance process and
apply it similarly to all jurisdictions; and (3) the Commission
should work closely with our fellow regulators to expeditiously
implement MOUs that resolve regulatory differences and address
regulatory oversight issues.
Conclusion
While I support the narrow comparability determinations that the
Commission has made, it was my hope that the Commission would work
with foreign regulators to implement a substituted compliance
process that would increase the global harmonization effort. I am
disappointed that the Commission has failed to implement such a
process.
I do believe that in the longer term, the swaps regulations of
the major jurisdictions will converge. At this time, however, the
Commission's comparability determinations have done little to
alleviate the burden of regulatory uncertainty and duplicative
compliance with both U.S. and foreign regulations.
The G-20 process delineated and put in place the swaps market
reforms in G-20 member nations. It is then no surprise that the
Commission must learn to coordinate with foreign regulators to
minimize confusion and disruption in bringing much needed clarity to
the swaps market. For all these shortcomings, I respectfully dissent
from the Commission's approval of the Notices.
[FR Doc. 2013-30974 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P