Comparability Determination for Hong Kong: Certain Entity-Level Requirements, 78852-78864 [2013-30975]
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Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices
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
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.
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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. 2013–30979 Filed 12–26–13; 8:45 am]
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COMMODITY FUTURES TRADING
COMMISSION
Comparability Determination for Hong
Kong: Certain Entity-Level
Requirements
Commodity Futures Trading
Commission.
ACTION: Notice of Comparability
Determination for Certain Requirements
under the laws of Hong Kong.
AGENCY:
The following is the analysis
and determination of the Commodity
Futures Trading Commission
(‘‘Commission’’) regarding certain parts
of a request by the Hong Kong Monetary
Authority (‘‘HKMA’’) that the
Commission determine that laws and
regulations applicable in Hong Kong
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’’).
SUMMARY:
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 August A. Imholtz III,
Special Counsel, 202–418–5140,
aimholtz@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:
DATES:
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
‘‘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 July 12, 2013, the HKMA (the
‘‘applicant’’) submitted a request that
the Commission determine that laws
and regulations applicable in Hong
Kong 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 updated submissions on August 8
and 19, 2013. On November 11,
November 28, and December 6, 2013,
the applicant further supplemented the
application with corrections and
additional materials. The following is
2 78
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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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.
3 The
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the Commission’s analysis and
determination regarding the Internal
Business Conduct Requirements, as
detailed below.5
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II. Background
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act6
(‘‘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
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
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).
7 7 U.S.C. 2(i).
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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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
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
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
10 See
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78853
Commission’s direct access to the books
and records required to be maintained
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
III. Regulation of SDs and MSPs in
Hong Kong
The HKMA administers the Hong
Kong Banking Ordinance and is the
government authority in Hong Kong
responsible for maintaining monetary
and banking stability.15 Its main
functions are:
• Maintaining currency stability
within the framework of the Linked
Exchange Rate system;
• Promoting the stability and integrity
of the financial system, including the
banking system;
• Helping to maintain Hong Kong’s
status as an international financial
center, including the maintenance and
development of Hong Kong’s financial
infrastructure; and
• Managing the Exchange Fund.
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 a 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., §§ 23.203(b) and 23.606.
14 See supra note 9.
15 Because the applicant’s request and the
Commission’s determinations herein are based on
the comparability of the requirements applicable to
Authorized Institutions (‘‘AI’’) regulated by the
HKMA, an SD or MSP that is not an AI, or is
otherwise not subject to the requirements
applicable to AIs upon which the Commission
bases its determinations, may not be able to rely on
the Commission’s comparability determinations
herein.
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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
‘‘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
16 78
FR 45343.
FR 45343.
18 78 FR 45343.
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
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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
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
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.
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
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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
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 Part 23 (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.
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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
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
26 78
FR 45345.
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)
nor § 23.609 (Clearing member risk management).
The Commission declines to take up the request for
a comparability determination with respect to these
regulations due to the Commission’s view that there
are not laws or regulations applicable in Hong Kong
to compare with the prohibitions and requirements
of §§ 23.608 or 23.609. The Commission may
provide a comparability determination with respect
to these regulations at a later date in consequence
of further developments in the law and regulations
applicable in Hong Kong.
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
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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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
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.
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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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
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;
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• 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
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
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conflicts of interest, remediate
noncompliance issues, and report
annually to the Commission and the
board or senior officer on compliance of
the firm.
Comparable Hong Kong Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
in full force and effect in Hong Kong,
and comparable to and as
comprehensive as section 4s(k) of the
CEA and Commission regulation 3.3.
• Hong Kong Banking Ordinance,
Section 72B requires all AIs (i.e., banks,
restricted license banks and deposittaking companies), including a bank
that is registered as an SD, to appoint a
manager principally responsible for the
compliance function.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that the
primary role of the compliance function
is to ensure that the AI is in compliance
with the statutory provisions, regulatory
requirements, and codes of conduct
applicable to its banking or other
regulated activities. To this end, the
compliance function must ensure that
the compliance policies and procedures
developed by it or other departments are
adequate and effective.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that the
compliance function should have
appropriate standing and authority
within an AI, with a direct reporting
line to a designated committee (e.g.,
Audit Committee) or senior
management. AIs are required to have a
compliance function that is responsible
for ensuring the firm’s compliance with
statutory and regulatory requirements.
The compliance function must have
sufficient authority and independence
to function effectively. It should also be
able to carry out its duties on its own
initiative in all business and operating
units of the AI in which compliance risk
exists, with unfettered access to any
records or files necessary to enable it to
conduct its work.
• Under the HKMA Supervisory
Policy Manual, Module CG–1, the board
of directors is responsible for the
appointment and removal of senior
management, including the compliance
manager. The board must meet regularly
with senior management and internal
control functions (including those
responsible for internal audit, risk
management and compliance) to review
the policies and controls in order to
identify areas that need improvement
and address significant risks and issues.
• The HKMA Supervisory Policy
Manual, Module CG–1 provides that
senior managers, such as the
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compliance manager, are required to
have appropriate background and skills
to enable them to manage and supervise
the AI’s internal control and risk
management functions, including
compliance. Further, the manual also
provides guidance for assessing whether
senior management, including the CCO,
is ‘‘fit and proper.’’ One of the
considerations is whether the person
has a record of non-compliance with
various non-statutory codes or has been
reprimanded, censured, disciplined or
publicly criticized by professional or
regulatory bodies.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that the
compliance function must monitor and
test compliance. The compliance
function also must establish a
compliance program that sets out its
planned activities.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that the
compliance function must report
regularly to senior management on
compliance matters. Additionally, the
chief executive of an AI must endorse
the Certificate of Compliance submitted
to the HKMA quarterly to confirm
compliance with the specified statutory
requirements under the Hong Kong
Banking Ordinance.
Commission Determination: The
Commission finds that the provisions of
the Hong Kong Banking Ordinance and
the HKMA Supervisory Policy Manual
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, remediate
noncompliance issues, and report
regularly on compliance of the firm.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
provisions of the Hong Kong Banking
Ordinance and the HKMA Supervisory
Policy Manual that govern the
compliance manager and compliance
function within an AI are comparable to
and as comprehensive as § 3.3, with the
exception of § 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 the Hong Kong Banking
Ordinance and the HKMA Supervisory
Policy Manual are comparable to and as
comprehensive as § 3.3(f), any SD or
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MSP to which both § 3.3 and the
provisions of the Hong Kong Banking
Ordinance and the HKMA Supervisory
Policy Manual specified above are
applicable would generally be deemed
to be in compliance with § 3.3(f) if that
SD or MSP complies with the provisions
of the Hong Kong Banking Ordinance
and the HKMA Supervisory Policy
Manual specified above, subject to
certifying and furnishing the
Commission with the compliance
reports required under the provisions of
the Hong Kong Banking Ordinance and
the HKMA Supervisory Policy Manual
specified above 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.33 The Commission
adopted regulations 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606 to
implement the statute.34 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’’).35 Collectively, these
requirements help to establish a robust
and comprehensive internal risk
management program for SDs and MSPs
with respect to their swaps activities,36
33 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).
35 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.
36 ‘‘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,
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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.37
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
and other derivatives.’’ The Commission’s
regulations under 17 CFR Part 23 are limited in
scope to the swaps activities of SDs and MSPs.
37 As stated above, this notice does not address
§ 23.608 (Restrictions on counterparty clearing
relationships) nor § 23.609 (Clearing member risk
management). The Commission declines to take up
the request for a comparability determination with
respect to these regulations due to the
Commission’s view that there are not laws or
regulations applicable in Hong Kong to compare
with the prohibitions and requirements of §§ 23.608
or 23.609. The Commission may provide a
comparability determination with respect to these
regulations at a later date in consequence of further
developments in the law and regulations applicable
in Hong Kong.
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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 Hong Kong Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
in full force and effect in Hong Kong,
and comparable to and as
comprehensive as section 4s(j)(2) of the
CEA and Commission regulation 23.600.
HKMA represents to the Commission
that it generally requires AIs to have
adequate risk management policies,
procedures, systems and controls to
identify, assess, measure, monitor, and
control eight types of inherent risks
arising from their activities (on and off
balance sheet, and including swap
activities) under SA–1 Risk-based
Supervisory Approach.
HKMA also represents to the
Commission that the risk management
requirements in its guidelines apply to
swap activities conducted by AIs.
HKMA further represents to the
Commission that it has dedicated
guidelines on major types of risk (e.g.,
management of credit (including
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counterparty credit), market, liquidity
and operational risks, etc.). Specifically:
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that the
board is responsible for articulating risk
management strategies. Senior
management must develop, and the
board must approve, a risk management
framework based on risk management
strategies that is consistent with the AI’s
business goals and risk appetite. Senior
management must: formulate detailed
policies, procedures and limits for
managing different aspects of risk
arising from the AI’s business activities;
design and implement a risk
management framework; and ensure
that the relevant control systems within
the framework function as intended.
The risk management policies and
procedures must be approved by the
board or its designated committee(s).
The board also must exercise oversight
over the effectiveness of the risk
management framework.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that AIs
should have a dedicated risk
management function. The risk
management function must be
independent from the risk-taking and
operational units which it reviews. The
risk management function must have
unfettered access to information from
the risk-taking and operational units.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that a set
of limits should be put in place to
control an AI’s exposure to various
quantifiable risks associated with its
business activities and to control
different sources of risk concentration.
These limits should be documented and
approved by the board or its designated
committee(s). Limit utilization should
be closely monitored, and excesses or
exceptions should be reported promptly
to senior management for necessary
action.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that risk
management must be conducted on a
group-wide basis by managing the
relevant risks of the parent bank and its
group entities as a whole.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that a
sound risk management system should
include adequate risk measurement,
monitoring and reporting systems to
support all business activities and
related risks. The risk management
information system should be capable of
reporting excesses in limits and policy
exceptions, and alerting management of
risk exposures approaching pre-set
limits. The risk management
information system also should be able
to produce information at appropriate
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intervals, including at more frequent
intervals in times of stress as required
by management.
• The HKMA collects internal risk
exposure reports from the AIs. AIs are
required to submit quarterly capital
adequacy ratio returns to the HKMA
that address market risk. HKMA also
conducts regular surveys on AIs’
derivative exposures.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that AIs
should have in place an internally
approved and well-documented ‘‘new
product approval policy’’ which
addresses not only the development and
approval of entirely new products and
services but also significant changes in
the features of existing products and
services.
Commission Determination: The
Commission finds that the provisions of
the HKMA Supervisory Policy Manual
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 provisions of the HKMA
Supervisory Policy Manual 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 HKMA Supervisory Policy
Manual, as 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 the provisions of the
HKMA Supervisory Policy Manual are
comparable to and as comprehensive as
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§ 23.600(c)(2), any SD or MSP to which
both § 23.600 and the provisions of the
HKMA Supervisory Policy Manual
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 provisions
of the HKMA Supervisory Policy
Manual 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.
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’’).38 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 Hong Kong Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
in full force and effect in Hong Kong,
and comparable to and as
comprehensive as section 4s(j)(1) of the
38 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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CEA and Commission regulation
§ 23.601.
The applicant represents to the
Commission that AIs have a
responsibility to comply with all
applicable laws and regulations,
whether in Hong Kong or outside of
Hong Kong, including applicable
position limits established by the
Commission, a DCM, or a SEF. Under
the HKMA Supervisory Policy Manual,
module IC–1, General Risk Management
Controls paragraph 5.1.3, an AI’s
internal control system must cover
controls relating to compliance with
statutory and regulatory requirements,
which would require a system of
controls to maintain compliance with
applicable position limits established by
the Commission, a DCM, or a SEF. AI’s
must maintain adequate systems of
control to maintain a banking license
pursuant to the Banking Ordinance,
Schedule 7, paragraph 10.39
Commission Determination: The
Commission finds that the HKMA and
Banking Ordinance standards 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 HKMA and Banking Ordinance
standards specified above, while not
specific to the issue of position limit
compliance, nevertheless
comprehensively require SDs and MSPs
to monitor for regulatory compliance
generally, including monitoring for
compliance with position limits set
pursuant to applicable law (including
the CEA and Commission regulations)
and escalation of violations to senior
management (including the board of
directors) responsible for such
compliance.
Based on the foregoing and the
representations of the applicant, the
Commission hereby determines that the
compliance monitoring requirements of
the HKMA and Banking Ordinance
standards, as specified above, are
comparable to and as comprehensive as
§ 23.601. For the avoidance of doubt, the
39 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 relevant for a comparability
determination with respect to § 23.601 because
§ 23.601 requires monitoring for compliance with
external position limits set by the Commission, a
DCM, or a SEF.
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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
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 Hong Kong Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
in full force and effect in Hong Kong,
and comparable to and as
comprehensive as section 4s(h)(1)(B) of
the CEA and Commission regulation
23.602.
• The HKMA Supervisory Policy
Manual, Module CG–1 provides that the
board is ultimately responsible for
overseeing senior management to
operate within the risk appetite and
strategies prescribed by the board, on a
prudent basis and in accordance with
applicable laws, regulations and
supervisory standards.
• The HKMA Supervisory Policy
Manual, Module IC–1 provides that an
AI’s internal control system should,
among others, cover controls relating to
compliance with statutory and
regulatory requirements.
• The Hong Kong Banking Ordinance
provides that senior management are
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responsible for carrying out the
supervisory responsibilities of the AIs,
and they can be personally liable for
breaches of the Banking Ordinance
committed by AIs.
Commission Determination: The
Commission finds that the provisions of
the Hong Kong Banking Ordinance and
the HKMA Supervisory Policy Manual
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 of the Hong Kong
Banking Ordinance and the HKMA
Supervisory Policy Manual specified
above, Hong Kong laws 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 the Hong Kong Banking
Ordinance and the HKMA Supervisory
Policy Manual, 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.
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Comparable Hong Kong Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
in full force and effect in Hong Kong,
and comparable to and as
comprehensive as Commission
regulation 23.603.
• HKMA Supervisory Policy Manual,
Module TM–G–2 on Business
Continuity Planning requires all AIs to
have adequate and regularly tested
business continuity plans.
Commission Determination: The
Commission finds that the provisions of
the HKMA Supervisory Policy Manual
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 the HKMA
Supervisory Policy Manual 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 the HKMA Supervisory Policy
Manual, as specified above, are
comparable to and as comprehensive as
§ 23.603.
tkelley on DSK3SPTVN1PROD with NOTICES
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
clearing services and activities to a
particular customer, including:
• Whether to offer clearing services to
a particular customer;
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• 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
interest regarding the decision of a
counterparty to execute a derivative on
a SEF or DCM, or to clear a derivative
through a DCO.
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Comparable Hong Kong Law and
Regulations: The applicants have
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
in full force and effect in Hong Kong,
and comparable to and as
comprehensive as Commission
regulation 23.605.
The applicant represents to the
Commission that AIs that are active in
the OTC derivative market are typically
also registered with the Hong Kong
Securities and Futures Commission
(‘‘HKSFC’’) and hence subject to the
HKSFC’s Code of Conduct. These AI’s
registered with the HKSFC include the
current SD established in Hong Kong.
Pursuant to Section 16 of the HKSFC’s
Code of Conduct, registrants must have:
• Mechanisms ensuring that analysts’
trading activities or financial interests
do not prejudice their investment
research and recommendations;
• Mechanisms ensuring that analysts’
investment research and
recommendations are not prejudiced by
the trading activities, financial interests
or business relationships of the firms
that employ them;
• Reporting lines for analysts and
their compensation arrangements that
are structured to eliminate or severely
limit actual and potential conflicts of
interest;
• Written internal procedures or
controls to identify and eliminate,
avoid, manage, or disclose actual and
potential analyst conflicts of interest;
• Procedures to ensure that undue
influence of securities issuers,
institutional investors, and other
outside parties on analysts is eliminated
or managed;
• Controls to ensure that disclosures
of actual and potential conflicts of
interest are complete, timely, clear,
concise, specific, and prominent; and
• Policies to ensure that analysts are
held to high integrity standards.
The HKMA Supervisory Policy
Manual, Module CG–1 requires that the
board of directors of an AI establish,
implement, and maintain written
policies that address the various
conflicts of interest that may arise in the
AI’s business, and that provide for the
prevention or management of these
conflicts.
In addition, the Banking Ordinance
requires an AI to carry on its business
with integrity, prudence and the
appropriate degree of professional
competence. The applicant represents
that if an AI permits conflicts of interest
(whether general or particular) to
continue, it would raise doubts with the
HKMA as to whether the AI is carrying
on its business with integrity, prudence
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and the appropriate degree of
professional competence. Carrying on
business in such a manner is one of the
continuing authorization criteria under
the Banking Ordinance. A failure to
comply with such criterion is a ground
for revocation of that AI’s authorization
to conduct banking or deposit-taking
business in Hong Kong.
Finally, the HKMA has represented to
the Commission that, as part of its
oversight and enforcement of the
foregoing standards for AIs, the HKMA
would require any AI (including an AI
that is an SD) to adopt measures to
prevent or manage any conflicts of
interests that may areis or be
discovered, including those involving
the provision of clearing services by a
clearing member of a DCO that is an
affiliate of the AI, or the decision of a
counterparty to execute a derivative on
a SEF or DCM, or clear a derivative
through a DCO. The measures include
information barriers, segregation of
duties, and, as appropriate, disclosures.
Commission Determination: The
Commission finds that the HKSFC and
Banking Ordinance standards 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 in the
Banking Ordinance and the HKMA
Supervisory Policy Manual 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 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
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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
requirements found in Hong Kong’s
laws 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
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 Hong Kong Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
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78861
in full force and effect in Hong Kong,
and comparable to and as
comprehensive as Commission
regulation 23.606.
Under Section 56 of the Hong Kong
Banking Ordinance, AIs are required to
produce records and information
whenever requested by the HKMA,
including information and records
relating to the AI’s OTC derivatives or
swaps activities. Under the Banking
Ordinance, the failure to produce
records and information when requested
by the HKMA is a criminal offense. The
HKMA represents that in order to
produce records and information
whenever requested by the HKMA, AIs
must necessarily have adequate systems
and infrastructure to enable them to
retrieve such records and information.
Commission Determination: The
Commission finds that the Banking
Ordinance standards specified above are
generally identical in intent to § 23.606
because such standards seek to ensure
that AIs capture and store
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
requirements of the Hong Kong Banking
Ordinance 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
regulator. The applicant has not
submitted any provision of law or
regulations applicable in Hong Kong
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 the Hong Kong Banking
Ordinance are comparable to and as
comprehensive as § 23.606(a)(2), any SD
or MSP to which both § 23.606 and the
Banking Ordinance standards specified
above are applicable would generally be
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deemed to be in compliance with
§ 23.606(a)(2) if that SD or MSP
complies with the Banking Ordinance
standards 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).
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).
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).40
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
40 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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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 Hong Kong Law and
Regulations: The applicant has
represented to the Commission that the
following provisions of law and
regulations applicable in Hong Kong are
in full force and effect in Hong Kong,
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 20 of Schedule 2 to the Hong
Kong Anti-Money Laundering and
Counter-Terrorist Financing (Financial
Institution) Ordinance (Cap 615) (the
‘‘AML–CTF Ordinance’’) provides that
financial institutions must keep all
documents, data, and information
related to each transaction it carries out.
The AML–CTF Ordinance provides that
financial institutions must keep all files
relating to each customer account and
all business correspondence with each
customer. The AML–CTF Ordinance
provides that transaction records must
be kept for six years after the transaction
is completed.
The HKMA represents to the
Commission that the recordkeeping
requirements in the AML–CTF
Ordinance apply to all transactions that
an AI carries out with each of its
customers, including swap and OTC
derivative transactions.41
Commission Determination: The
Commission finds that the Hong Kong
41 The HKMA noted that a record keeping
requirement specific to OTC derivative transactions
is intended to be included in the forthcoming law
implementing the regulatory regime for such
transactions. Pursuant to such regulatory regime,
the HKMA tentatively expects that records of OTC
derivatives transactions (including swaps) will be
required to be maintained for the duration of the
contract plus six years thereafter. The retention
period for voice recordings is to be decided. The
HKMA will set out specific recordkeeping
requirements in the regulations or guidelines to be
issued to supplement the new regulatory regime.
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standards specified above are generally
identical in intent to §§ 23.201 and
23.203 because such standards 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 Hong Kong standards 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
Hong Kong standards 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
recordkeeping requirements of the Hong
Kong AML–CTF Ordinance 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 MSPs 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 law
or regulations applicable in Hong Kong
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 the Hong Kong AML–
CTF Ordinance are comparable to and
as comprehensive as § 23.203(b)(2), any
SD or MSP to which both § 23.203 and
the Hong Kong AML–CTF Ordinance
are applicable would generally be
deemed to be in compliance with
§ 23.203(b)(2) if that SD or MSP
complies with the Hong Kong AML–
CTF Ordinance, 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
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U.S. prudential regulator in accordance
with § 23.203(b)(2).
Issued in Washington, DC on December 20,
2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendices to Comparability
Determination for Hong Kong: 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.
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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.
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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-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
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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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
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
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.
E:\FR\FM\27DEN1.SGM
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78864
Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices
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.
VerDate Mar<15>2010
23:48 Dec 26, 2013
Jkt 232001
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:
PO 00000
Frm 00055
Fmt 4703
Sfmt 4703
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).
E:\FR\FM\27DEN1.SGM
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Agencies
[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78852-78864]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30975]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Comparability Determination for Hong Kong: Certain Entity-Level
Requirements
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Comparability Determination for Certain Requirements
under the laws of Hong Kong.
-----------------------------------------------------------------------
SUMMARY: The following is the analysis and determination of the
Commodity Futures Trading Commission (``Commission'') regarding certain
parts of a request by the Hong Kong Monetary Authority (``HKMA'') that
the Commission determine that laws and regulations applicable in Hong
Kong 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, and August A. Imholtz III, Special Counsel, 202-
418-5140, aimholtz@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 ``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 July 12, 2013, the HKMA (the ``applicant'') submitted a request
that the Commission determine that laws and regulations applicable in
Hong Kong 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 updated submissions on August 8 and 19,
2013. On November 11, November 28, and December 6, 2013, the applicant
further supplemented the application with corrections and additional
materials. The following is
[[Page 78853]]
the Commission's analysis and determination regarding the Internal
Business Conduct Requirements, as detailed below.\5\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\6\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
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\ 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).
---------------------------------------------------------------------------
\7\ 7 U.S.C. 2(i).
\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.)
---------------------------------------------------------------------------
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.
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\
---------------------------------------------------------------------------
\10\ See the Guidance, 78 FR 45342-44.
---------------------------------------------------------------------------
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 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\
---------------------------------------------------------------------------
\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 a 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 9.
---------------------------------------------------------------------------
III. Regulation of SDs and MSPs in Hong Kong
The HKMA administers the Hong Kong Banking Ordinance and is the
government authority in Hong Kong responsible for maintaining monetary
and banking stability.\15\ Its main functions are:
---------------------------------------------------------------------------
\15\ Because the applicant's request and the Commission's
determinations herein are based on the comparability of the
requirements applicable to Authorized Institutions (``AI'')
regulated by the HKMA, an SD or MSP that is not an AI, or is
otherwise not subject to the requirements applicable to AIs upon
which the Commission bases its determinations, may not be able to
rely on the Commission's comparability determinations herein.
---------------------------------------------------------------------------
Maintaining currency stability within the framework of the
Linked Exchange Rate system;
Promoting the stability and integrity of the financial
system, including the banking system;
Helping to maintain Hong Kong's status as an international
financial center, including the maintenance and development of Hong
Kong's financial infrastructure; and
Managing the Exchange Fund.
[[Page 78854]]
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\
---------------------------------------------------------------------------
\16\ 78 FR 45343.
\17\ 78 FR 45343.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\18\ 78 FR 45343.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
[[Page 78855]]
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\
---------------------------------------------------------------------------
\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 Part 23 (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) nor Sec. 23.609 (Clearing
member risk management). The Commission declines to take up the
request for a comparability determination with respect to these
regulations due to the Commission's view that there are not laws or
regulations applicable in Hong Kong to compare with the prohibitions
and requirements of Sec. Sec. 23.608 or 23.609. The Commission may
provide a comparability determination with respect to these
regulations at a later date in consequence of further developments
in the law and regulations applicable in Hong Kong.
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 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;
[[Page 78856]]
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 Hong Kong Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, and comparable to and as comprehensive as section 4s(k) of
the CEA and Commission regulation 3.3.
Hong Kong Banking Ordinance, Section 72B requires all AIs
(i.e., banks, restricted license banks and deposit-taking companies),
including a bank that is registered as an SD, to appoint a manager
principally responsible for the compliance function.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that the primary role of the compliance function is to ensure that the
AI is in compliance with the statutory provisions, regulatory
requirements, and codes of conduct applicable to its banking or other
regulated activities. To this end, the compliance function must ensure
that the compliance policies and procedures developed by it or other
departments are adequate and effective.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that the compliance function should have appropriate standing and
authority within an AI, with a direct reporting line to a designated
committee (e.g., Audit Committee) or senior management. AIs are
required to have a compliance function that is responsible for ensuring
the firm's compliance with statutory and regulatory requirements. The
compliance function must have sufficient authority and independence to
function effectively. It should also be able to carry out its duties on
its own initiative in all business and operating units of the AI in
which compliance risk exists, with unfettered access to any records or
files necessary to enable it to conduct its work.
Under the HKMA Supervisory Policy Manual, Module CG-1, the
board of directors is responsible for the appointment and removal of
senior management, including the compliance manager. The board must
meet regularly with senior management and internal control functions
(including those responsible for internal audit, risk management and
compliance) to review the policies and controls in order to identify
areas that need improvement and address significant risks and issues.
The HKMA Supervisory Policy Manual, Module CG-1 provides
that senior managers, such as the compliance manager, are required to
have appropriate background and skills to enable them to manage and
supervise the AI's internal control and risk management functions,
including compliance. Further, the manual also provides guidance for
assessing whether senior management, including the CCO, is ``fit and
proper.'' One of the considerations is whether the person has a record
of non-compliance with various non-statutory codes or has been
reprimanded, censured, disciplined or publicly criticized by
professional or regulatory bodies.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that the compliance function must monitor and test compliance. The
compliance function also must establish a compliance program that sets
out its planned activities.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that the compliance function must report regularly to senior management
on compliance matters. Additionally, the chief executive of an AI must
endorse the Certificate of Compliance submitted to the HKMA quarterly
to confirm compliance with the specified statutory requirements under
the Hong Kong Banking Ordinance.
Commission Determination: The Commission finds that the provisions
of the Hong Kong Banking Ordinance and the HKMA Supervisory Policy
Manual 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, remediate noncompliance issues, and report regularly on
compliance of the firm.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the provisions of the Hong Kong
Banking Ordinance and the HKMA Supervisory Policy Manual that govern
the compliance manager and compliance function within an AI are
comparable to and as comprehensive as Sec. 3.3, with the exception of
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 the Hong Kong Banking Ordinance and the HKMA
Supervisory Policy Manual are comparable to and as comprehensive as
Sec. 3.3(f), any SD or
[[Page 78857]]
MSP to which both Sec. 3.3 and the provisions of the Hong Kong Banking
Ordinance and the HKMA Supervisory Policy Manual specified above are
applicable would generally be deemed to be in compliance with Sec.
3.3(f) if that SD or MSP complies with the provisions of the Hong Kong
Banking Ordinance and the HKMA Supervisory Policy Manual specified
above, subject to certifying and furnishing the Commission with the
compliance reports required under the provisions of the Hong Kong
Banking Ordinance and the HKMA Supervisory Policy Manual specified
above 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.\33\ The Commission adopted regulations 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606 to implement the statute.\34\ 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'').\35\ Collectively, these
requirements help to establish a robust and comprehensive internal risk
management program for SDs and MSPs with respect to their swaps
activities,\36\ 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.\37\
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\33\ 7 U.S.C. 6s(j).
\34\ 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).
\35\ 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.
\36\ ``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.
\37\ As stated above, this notice does not address Sec. 23.608
(Restrictions on counterparty clearing relationships) nor Sec.
23.609 (Clearing member risk management). The Commission declines to
take up the request for a comparability determination with respect
to these regulations due to the Commission's view that there are not
laws or regulations applicable in Hong Kong to compare with the
prohibitions and requirements of Sec. Sec. 23.608 or 23.609. The
Commission may provide a comparability determination with respect to
these regulations at a later date in consequence of further
developments in the law and regulations applicable in Hong Kong.
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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 Hong Kong Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, and comparable to and as comprehensive as section 4s(j)(2)
of the CEA and Commission regulation 23.600.
HKMA represents to the Commission that it generally requires AIs to
have adequate risk management policies, procedures, systems and
controls to identify, assess, measure, monitor, and control eight types
of inherent risks arising from their activities (on and off balance
sheet, and including swap activities) under SA-1 Risk-based Supervisory
Approach.
HKMA also represents to the Commission that the risk management
requirements in its guidelines apply to swap activities conducted by
AIs.
HKMA further represents to the Commission that it has dedicated
guidelines on major types of risk (e.g., management of credit
(including
[[Page 78858]]
counterparty credit), market, liquidity and operational risks, etc.).
Specifically:
The HKMA Supervisory Policy Manual, Module IC-1 provides
that the board is responsible for articulating risk management
strategies. Senior management must develop, and the board must approve,
a risk management framework based on risk management strategies that is
consistent with the AI's business goals and risk appetite. Senior
management must: formulate detailed policies, procedures and limits for
managing different aspects of risk arising from the AI's business
activities; design and implement a risk management framework; and
ensure that the relevant control systems within the framework function
as intended. The risk management policies and procedures must be
approved by the board or its designated committee(s). The board also
must exercise oversight over the effectiveness of the risk management
framework.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that AIs should have a dedicated risk management function. The risk
management function must be independent from the risk-taking and
operational units which it reviews. The risk management function must
have unfettered access to information from the risk-taking and
operational units.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that a set of limits should be put in place to control an AI's exposure
to various quantifiable risks associated with its business activities
and to control different sources of risk concentration. These limits
should be documented and approved by the board or its designated
committee(s). Limit utilization should be closely monitored, and
excesses or exceptions should be reported promptly to senior management
for necessary action.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that risk management must be conducted on a group-wide basis by
managing the relevant risks of the parent bank and its group entities
as a whole.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that a sound risk management system should include adequate risk
measurement, monitoring and reporting systems to support all business
activities and related risks. The risk management information system
should be capable of reporting excesses in limits and policy
exceptions, and alerting management of risk exposures approaching pre-
set limits. The risk management information system also should be able
to produce information at appropriate intervals, including at more
frequent intervals in times of stress as required by management.
The HKMA collects internal risk exposure reports from the
AIs. AIs are required to submit quarterly capital adequacy ratio
returns to the HKMA that address market risk. HKMA also conducts
regular surveys on AIs' derivative exposures.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that AIs should have in place an internally approved and well-
documented ``new product approval policy'' which addresses not only the
development and approval of entirely new products and services but also
significant changes in the features of existing products and services.
Commission Determination: The Commission finds that the provisions
of the HKMA Supervisory Policy Manual 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 provisions of the HKMA Supervisory Policy
Manual 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 HKMA Supervisory Policy Manual, as 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 the provisions of the HKMA Supervisory Policy Manual
are comparable to and as comprehensive as Sec. 23.600(c)(2), any SD or
MSP to which both Sec. 23.600 and the provisions of the HKMA
Supervisory Policy Manual 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 provisions of the HKMA Supervisory Policy
Manual 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'').\38\ 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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\38\ 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 Hong Kong Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, and comparable to and as comprehensive as section 4s(j)(1)
of the
[[Page 78859]]
CEA and Commission regulation Sec. 23.601.
The applicant represents to the Commission that AIs have a
responsibility to comply with all applicable laws and regulations,
whether in Hong Kong or outside of Hong Kong, including applicable
position limits established by the Commission, a DCM, or a SEF. Under
the HKMA Supervisory Policy Manual, module IC-1, General Risk
Management Controls paragraph 5.1.3, an AI's internal control system
must cover controls relating to compliance with statutory and
regulatory requirements, which would require a system of controls to
maintain compliance with applicable position limits established by the
Commission, a DCM, or a SEF. AI's must maintain adequate systems of
control to maintain a banking license pursuant to the Banking
Ordinance, Schedule 7, paragraph 10.\39\
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\39\ 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 relevant for a
comparability determination with respect 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.
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Commission Determination: The Commission finds that the HKMA and
Banking Ordinance standards 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 HKMA and Banking Ordinance
standards specified above, while not specific to the issue of position
limit compliance, nevertheless comprehensively require SDs and MSPs to
monitor for regulatory compliance generally, including monitoring for
compliance with position limits set pursuant to applicable law
(including the CEA and Commission regulations) and escalation of
violations to senior management (including the board of directors)
responsible for such compliance.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the compliance monitoring
requirements of the HKMA and Banking Ordinance standards, 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 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 Hong Kong Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, and comparable to and as comprehensive as section
4s(h)(1)(B) of the CEA and Commission regulation 23.602.
The HKMA Supervisory Policy Manual, Module CG-1 provides
that the board is ultimately responsible for overseeing senior
management to operate within the risk appetite and strategies
prescribed by the board, on a prudent basis and in accordance with
applicable laws, regulations and supervisory standards.
The HKMA Supervisory Policy Manual, Module IC-1 provides
that an AI's internal control system should, among others, cover
controls relating to compliance with statutory and regulatory
requirements.
The Hong Kong Banking Ordinance provides that senior
management are responsible for carrying out the supervisory
responsibilities of the AIs, and they can be personally liable for
breaches of the Banking Ordinance committed by AIs.
Commission Determination: The Commission finds that the provisions
of the Hong Kong Banking Ordinance and the HKMA Supervisory Policy
Manual 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 of the Hong Kong
Banking Ordinance and the HKMA Supervisory Policy Manual specified
above, Hong Kong laws 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 the Hong Kong Banking Ordinance and
the HKMA Supervisory Policy Manual, 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.
[[Page 78860]]
Comparable Hong Kong Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, and comparable to and as comprehensive as Commission
regulation 23.603.
HKMA Supervisory Policy Manual, Module TM-G-2 on Business
Continuity Planning requires all AIs to have adequate and regularly
tested business continuity plans.
Commission Determination: The Commission finds that the provisions
of the HKMA Supervisory Policy Manual 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 the
HKMA Supervisory Policy Manual 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 the HKMA
Supervisory Policy Manual, 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
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 Hong Kong Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, and comparable to and as comprehensive as Commission
regulation 23.605.
The applicant represents to the Commission that AIs that are active
in the OTC derivative market are typically also registered with the
Hong Kong Securities and Futures Commission (``HKSFC'') and hence
subject to the HKSFC's Code of Conduct. These AI's registered with the
HKSFC include the current SD established in Hong Kong.
Pursuant to Section 16 of the HKSFC's Code of Conduct, registrants
must have:
Mechanisms ensuring that analysts' trading activities or
financial interests do not prejudice their investment research and
recommendations;
Mechanisms ensuring that analysts' investment research and
recommendations are not prejudiced by the trading activities, financial
interests or business relationships of the firms that employ them;
Reporting lines for analysts and their compensation
arrangements that are structured to eliminate or severely limit actual
and potential conflicts of interest;
Written internal procedures or controls to identify and
eliminate, avoid, manage, or disclose actual and potential analyst
conflicts of interest;
Procedures to ensure that undue influence of securities
issuers, institutional investors, and other outside parties on analysts
is eliminated or managed;
Controls to ensure that disclosures of actual and
potential conflicts of interest are complete, timely, clear, concise,
specific, and prominent; and
Policies to ensure that analysts are held to high
integrity standards.
The HKMA Supervisory Policy Manual, Module CG-1 requires that the
board of directors of an AI establish, implement, and maintain written
policies that address the various conflicts of interest that may arise
in the AI's business, and that provide for the prevention or management
of these conflicts.
In addition, the Banking Ordinance requires an AI to carry on its
business with integrity, prudence and the appropriate degree of
professional competence. The applicant represents that if an AI permits
conflicts of interest (whether general or particular) to continue, it
would raise doubts with the HKMA as to whether the AI is carrying on
its business with integrity, prudence
[[Page 78861]]
and the appropriate degree of professional competence. Carrying on
business in such a manner is one of the continuing authorization
criteria under the Banking Ordinance. A failure to comply with such
criterion is a ground for revocation of that AI's authorization to
conduct banking or deposit-taking business in Hong Kong.
Finally, the HKMA has represented to the Commission that, as part
of its oversight and enforcement of the foregoing standards for AIs,
the HKMA would require any AI (including an AI that is an SD) to adopt
measures to prevent or manage any conflicts of interests that may areis
or be discovered, including those involving the provision of clearing
services by a clearing member of a DCO that is an affiliate of the AI,
or the decision of a counterparty to execute a derivative on a SEF or
DCM, or clear a derivative through a DCO. The measures include
information barriers, segregation of duties, and, as appropriate,
disclosures.
Commission Determination: The Commission finds that the HKSFC and
Banking Ordinance standards 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 in the Banking Ordinance and the HKMA
Supervisory Policy Manual 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 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 requirements found in Hong
Kong's laws 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 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 Hong Kong Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, and comparable to and as comprehensive as Commission
regulation 23.606.
Under Section 56 of the Hong Kong Banking Ordinance, AIs are
required to produce records and information whenever requested by the
HKMA, including information and records relating to the AI's OTC
derivatives or swaps activities. Under the Banking Ordinance, the
failure to produce records and information when requested by the HKMA
is a criminal offense. The HKMA represents that in order to produce
records and information whenever requested by the HKMA, AIs must
necessarily have adequate systems and infrastructure to enable them to
retrieve such records and information.
Commission Determination: The Commission finds that the Banking
Ordinance standards specified above are generally identical in intent
to Sec. 23.606 because such standards seek to ensure that AIs capture
and store 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 requirements of the Hong Kong
Banking Ordinance 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 Hong Kong 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 the Hong Kong Banking Ordinance are comparable to and
as comprehensive as Sec. 23.606(a)(2), any SD or MSP to which both
Sec. 23.606 and the Banking Ordinance standards specified above are
applicable would generally be
[[Page 78862]]
deemed to be in compliance with Sec. 23.606(a)(2) if that SD or MSP
complies with the Banking Ordinance standards 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).
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).
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).\40\
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\40\ 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 Hong Kong Law and Regulations: The applicant has
represented to the Commission that the following provisions of law and
regulations applicable in Hong Kong are in full force and effect in
Hong Kong, 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 20 of Schedule 2 to the Hong Kong Anti-Money Laundering and
Counter-Terrorist Financing (Financial Institution) Ordinance (Cap 615)
(the ``AML-CTF Ordinance'') provides that financial institutions must
keep all documents, data, and information related to each transaction
it carries out. The AML-CTF Ordinance provides that financial
institutions must keep all files relating to each customer account and
all business correspondence with each customer. The AML-CTF Ordinance
provides that transaction records must be kept for six years after the
transaction is completed.
The HKMA represents to the Commission that the recordkeeping
requirements in the AML-CTF Ordinance apply to all transactions that an
AI carries out with each of its customers, including swap and OTC
derivative transactions.\41\
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\41\ The HKMA noted that a record keeping requirement specific
to OTC derivative transactions is intended to be included in the
forthcoming law implementing the regulatory regime for such
transactions. Pursuant to such regulatory regime, the HKMA
tentatively expects that records of OTC derivatives transactions
(including swaps) will be required to be maintained for the duration
of the contract plus six years thereafter. The retention period for
voice recordings is to be decided. The HKMA will set out specific
recordkeeping requirements in the regulations or guidelines to be
issued to supplement the new regulatory regime.
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Commission Determination: The Commission finds that the Hong Kong
standards specified above are generally identical in intent to
Sec. Sec. 23.201 and 23.203 because such standards 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 Hong Kong standards
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 Hong Kong standards
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 recordkeeping requirements of
the Hong Kong AML-CTF Ordinance 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 MSPs 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 law or regulations applicable in Hong
Kong 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 the Hong Kong AML-CTF Ordinance are comparable to and
as comprehensive as Sec. 23.203(b)(2), any SD or MSP to which both
Sec. 23.203 and the Hong Kong AML-CTF Ordinance are applicable would
generally be deemed to be in compliance with Sec. 23.203(b)(2) if that
SD or MSP complies with the Hong Kong AML-CTF Ordinance, 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
[[Page 78863]]
U.S. prudential regulator in accordance with Sec. 23.203(b)(2).
Issued in Washington, DC on December 20, 2013, by the
Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendices to Comparability Determination for Hong Kong: 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.
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\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).
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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.
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\8\ Yen-denominated interest rate swaps are subject to the
mandatory clearing requirement in both the U.S. and Japan.
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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 78864]]
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.
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\9\ Exemptive Order Regarding Compliance With Certain Swap
Regulations, 78 FR 43785 (Jul. 22, 2013).
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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.
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\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. 2013-30975 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P