[Federal Register Volume 75, Number 179 (Thursday, September 16, 2010)]
[Notices]
[Pages 56513-56516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23142]
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COMMODITY FUTURES TRADING COMMISSION
Orders Regarding the Treatment of Petitions Seeking Grandfather
Relief for Exempt Commercial Markets and Exempt Boards of Trade
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice; final orders.
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SUMMARY: The Commission is issuing orders whereby entities currently
operating as exempt commercial markets, pursuant to Section 2(h)(3)-(7)
of the Commodity Exchange Act, or exempt boards of trade, pursuant to
Section 5d of the Commodity Exchange Act, may receive grandfather
relief to continue to operate in accordance with those provisions
notwithstanding their deletion from the Commodity Exchange Act,
effective July 15, 2011, by the Dodd-Frank Wall Street Reform and
Consumer Protection Act. The Commission's orders set forth various
conditions for such grandfather relief, including the filing of a
relief petition
[[Page 56514]]
and a swap execution facility or designated contract market application
with the Commission.
DATES: Effective Date: September 10, 2010. Comments on this notice will
be accepted until October 18, 2010.
ADDRESSES: You may submit comments or petitions for relief, identified
with ``ECM/EBOT Grandfather Relief'' in the subject line, whichever is
appropriate, by any of the following methods:
E-mail for Comments: [email protected]. E-mail for
petitions: ecmebotpetitionscftc.gov.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments and petitions will be posted as
received to http://www.cftc.gov.
FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Chief Counsel,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5481. E-mail: [email protected]; or Beverly E.
Loew, Assistant General Counsel, Office of the General Counsel, same
address. Telephone: (202) 418-5648. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\
Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act
(``CEA'') \3\ to establish a comprehensive new regulatory framework for
swaps and security-based swaps. Among other changes to the CEA, the
Dodd-Frank Act eliminated certain exempt market categories--exempt
commercial markets (``ECMs'') and exempt boards of trade (``EBOTs'')--
from the CEA; established a new regulated market category--swap
execution facilities (``SEFs''); revised certain requirements for an
extant regulated market category--designated contract markets
(``DCMs''); and authorized the Commission to grant grandfather relief
for entities in the eliminated exempt market categories in order to
assist those entities to transition their business models to a
different market category.\4\
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
\2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq.
\4\ The same provision of the Dodd-Frank Act that eliminated
EBOTs also deleted CEA Section 5a--a provision that established a
category of regulated markets known as derivatives transaction
execution facilities (``DTEFs''). See Section 734 of the Dodd-Frank
Act. The Dodd-Frank Act does not, however, authorize the Commission
to grant grandfather relief to the DTEFs. Accordingly, DTEFs are not
addressed in the Commission's subject order. Notably, the Commission
has never registered a DTEF.
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II. Background and Discussion
a. Exempt Commercial Markets and Exempt Boards of Trade
Sections 723 and 734 of the Dodd-Frank Act will strike from the CEA
enabling provisions for two categories of exempt markets established by
the Commodity Futures Modernization Act of 2000 (``CFMA'').\5\
Specifically, Section 723 of the Dodd-Frank Act will strike CEA Section
2(h)(3)-(7) and, thus, eliminate the ECM category.\6\ Similarly,
Section 734 of the Dodd-Frank Act will strike CEA Section 5d and, thus,
eliminate the EBOT category.\7\
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\5\ See Commodity Futures Modernization Act of 2000, Public Law
106-554, 114 Stat. 2763 (2000).
\6\ See Section 723(a)(1)(A) of the Dodd-Frank Act.
\7\ See Section 734(a) of the Dodd-Frank Act.
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The Commission notes that ECMs and EBOTs are both required to
operate their execution platforms as trading facilities, as that term
is defined by CEA Section 1a(34), and must limit access to a narrow
group of market participants--eligible commercial entities in the case
of ECMs and eligible contract participants in the case of EBOTs. These
requirements are not inconsistent with the execution platform and
market participant requirements for DCMs or SEFs as they are set forth
in the CEA and the Dodd-Frank Act. Accordingly, while the ECM and EBOT
provisions will be eliminated from the CEA effective July 15, 2011, the
basic structural requirements for both of those market categories
should facilitate the ability of ECMs and EBOTs to transition to either
the SEF or DCM market category; provided, of course, that they comply
with the enhanced regulatory requirements for those two categories.
Sections 723 and 734 of the Dodd-Frank Act contain similar
grandfather provisions for ECMs and EBOTs, respectively, whereby they
may petition the Commission to continue to operate as ECMs and EBOTs.
With some variation, both sections establish three basic requirements
regarding the processing of grandfather petitions.
First, entities seeking grandfather treatment must submit their
petitions to the Commission by a set deadline: ECMs must submit their
petitions within sixty days of the enactment of the Dodd-Frank Act
(i.e., by September 20, 2010) and EBOTs must submit their petitions by
the Dodd-Frank Act's effective date (i.e., by July 15, 2011). Second,
the Commission must consider all petitions in a ``prompt manner.''
Third, the Commission may grant grandfather treatment for up to one
year. In the case of EBOT petitions, the Dodd-Frank Act makes clear
that the one-year period would commence with the Dodd-Frank Act's
effective date of July 15, 2011. By contrast, the Dodd-Frank Act does
not specify what the reference date should be for the running of any
grandfather period for ECMs.
The Commission expects that many entities that currently operate as
ECMs or EBOTs will seek to become either SEFs or DCMs when the
Commission adopts regulations implementing Dodd-Frank's requirements
for those facilities. While the Commission expects to adopt SEF and DCM
regulations prior to the July 15, 2011, effective date for deleting the
ECM and EBOT provisions from the CEA, the Commission also anticipates
that concurrent with the implementation of those new provisions it will
have to process a large number of SEF and DCM applications from ECMs,
EBOTs and interdealer brokers.\8\ In order to ease this congestion of
applications, and to facilitate the transition of current ECM and EBOT
businesses to the new regulatory regime mandated by the Dodd-Frank Act,
the Commission believes that it would be appropriate to provide
grandfather relief allowing EBOTs and ECMs to continue to operate as
EBOTs and ECMs after the July 15, 2011, effective date of the Dodd-
Frank Act.
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\8\ Currently, there are 16 ECMs and 6 EBOTs with active
Notifications of Operation or Annual Certifications on file with the
Commission.
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Accordingly, the Commission is issuing orders that would establish
procedures whereby ECMs and EBOTs may petition for and receive
grandfather relief from the otherwise applicable provisions of the
Dodd-Frank Act, so long as they submit both timely and acceptable
grandfather relief requests and either DCM or SEF applications. To be
acceptable, the grandfather relief request shall contain a commitment
to provide the Commission and its staff with access to the books and
records of the ECM or EBOT relating to its business as an ECM or EBOT
in
[[Page 56515]]
accordance with the requirements in Commission Regulation 1.31, 17 CFR
1.31, effective July 15, 2011. Failure to comply with any request for
books and records in accordance with the requirements of Commission
Regulation 1.31 shall constitute a basis for revocation of the
grandfather relief. The grandfather relief will extend for as long as
the ECM or EBOT has a legitimate DCM or SEF application pending before
the Commission and, accordingly, the relief will expire upon the
Commission's approval or disapproval of the application.
b. Eligible Contract Participants Operating Pursuant to Section 2(h)(1)
Section 723 of the Dodd-Frank Act, which eliminated the ECM
category from the CEA, also deleted CEA Section 2(h)(1)-(2)--a
provision that provides an exemption for certain types of bilateral
trading conducted off of regulated markets. Although the Dodd-Frank Act
authorizes the Commission to grant grandfather relief to trading
activity that relies upon CEA Section 2(h)(1)-(2), the nature of that
trading activity is qualitatively different from trading activity on
EBOTs and ECMs, both of which must operate as trading facilities, as
that term is defined in CEA Section 1a(34). Accordingly, the issue of
grandfather treatment for Section 2(h)(1)-(2) bilateral trading will be
addressed by the Commission in a separate action.
III. Related Matters
a. Paperwork Reduction Act
The Commission has determined that these proposed orders will not
impose any new recordkeeping or information collection requirements, or
other collections of information that require approval of the Office of
Management and Budget under the Paperwork Reduction Act (``PRA'').\9\
Collections of information that may be associated with a SEF or DCM
application required as a condition for receiving relief will be
addressed within the SEF and DCM-related rulemakings implementing the
Dodd-Frank Act.
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\9\ 44 U.S.C. 3501 et seq.
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b. Cost-Benefit Analysis
Section 15(a) of the CEA \10\ requires the Commission to consider
the costs and benefits of its actions before issuing an order under the
Act. By its terms, Section 15(a) does not require the Commission to
quantify the costs and benefits of an order or to determine whether the
benefits of the order outweigh its costs; rather, it requires that the
Commission ``consider'' the costs and benefits of its actions. Section
15(a) further specifies that the costs and benefits shall be evaluated
in light of five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may in its discretion give
greater weight to any one of the five enumerated areas and could in its
discretion determine that, notwithstanding its costs, a particular
order is necessary or appropriate to protect the public interest or to
effectuate any of the provisions or accomplish any of the purposes of
the Act. The Commission has determined that providing grandfather
relief to ECMs and EBOTs, as provided in these orders, will mitigate
market disruptions by permitting ECMs and EBOTs to continue to operate
while they transition into new market categories once the Dodd-Frank
Act becomes effective.\11\
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\10\ 7 U.S.C. 19(a).
\11\ The Commission is aware of certain ECMs that have block
trade mechanisms whereby large-sized block transactions are executed
away from the ECM's central marketplace, but in accordance with the
ECM's rules, and subsequently reported to the ECM and treated as
fungible with positions established through the central marketplace.
Those block trades and resultant positions should be considered
within the scope of the ECM grandfather relief being granted by this
release.
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c. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \12\ requires that
agencies consider the impact of their rules on small businesses. The
Commission previously has determined that neither ECMs nor EBOTs are
small entities for purposes of the RFA.\13\ Accordingly, the Chairman,
on behalf of the Commission, hereby certifies pursuant to 5 U.S.C.
605(b) that these Orders, taken in connection with Sections 2(h)(3)-(7)
and 5d of the Act and with the Part 36 rules, will not have a
significant impact on a substantial number of small entities.
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\12\ 5 U.S.C. 601 et seq.
\13\ 66 FR 42256, 42268 (Aug. 10, 2001).
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IV. Orders
a. ECM Grandfather Order
After considering the complete record in this matter, the
Commission has determined to issue the following Order pursuant to its
authority under Section 723(c) of the Dodd-Frank Act:
It is hereby ordered that any ECM that meets all of the following
applicable conditions may continue to operate pursuant to the
provisions of CEA Section 2(h)(3)-(7) until July 15, 2012 (one year
after the general effective date of the Dodd-Frank Act's amendments to
the CEA): \14\
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\14\ See Section 754 of the Dodd-Frank Act.
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(1) The ECM must have filed with the Commission by September 20,
2010, a grandfather relief petition that:
(a) Is labeled ``Exempt Commercial Market Grandfather Relief
Petition Filed Pursuant to Section 723(c)(2)(A) of the Dodd-Frank
Act,''
(b) Identifies the requesting ECM,
(c) Identifies a contact person at the ECM, including that person's
contact information at the ECM, and
(d) Grants the Commission and its representatives access to the
books and records of the ECM relating to its business as an ECM in
accordance with the requirements of Commission Regulation 1.31,
starting July 15, 2011 and throughout the pendency of the grandfather
relief.
(2) The ECM must have filed a formal SEF or DCM application with
the Commission within sixty days after the effective date of final
regulations implementing the provisions of either Section 733 or 735 of
the Dodd-Frank Act, whichever is appropriate.
(3) The ECM's SEF or DCM application is currently pending before
the Commission.
b. EBOT Grandfather Order
After considering the complete record in this matter, the
Commission has determined to issue the following Order pursuant to its
authority under Section 734(c)(1) of the Dodd-Frank Act:
It is hereby ordered that any EBOT that meets all of the following
applicable conditions may continue to operate pursuant to the
provisions of CEA Section 5d up until July 15, 2012 (one year after the
general effective date of the Dodd-Frank Act's amendments to the CEA):
\15\
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\15\ See Section 754 of the Dodd-Frank Act.
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(1) The EBOT must have filed with the Commission by July 15, 2011,
a grandfather relief petition that:
(a) Is labeled ``Exempt Board of Trade Grandfather Relief Petition
Filed Pursuant to Section 734(c)(1) of the Dodd-Frank Act,''
(b) Identifies the requesting EBOT,
(c) Identifies a contact person at the EBOT, including that
person's contact information at the EBOT, and
(d) Grants the Commission and its representatives access to the
books and records of the EBOT relating to its business as an EBOT in
accordance with the requirements of Commission
[[Page 56516]]
Regulation 1.31, starting July 15, 2011 and throughout the pendency of
the grandfather relief.
(2) The EBOT must have filed a formal SEF or DCM application with
the Commission within sixty days after the effective date of final
regulations implementing the provisions of either Section 733 or 735 of
the Dodd-Frank Act, whichever is appropriate.
(3) The EBOT's SEF or DCM application is currently pending before
the Commission.
Issued in Washington, DC, on September 10, 2010, by the
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-23142 Filed 9-15-10; 8:45 am]
BILLING CODE 6351-01-P