[Federal Register Volume 75, Number 211 (Tuesday, November 2, 2010)]
[Proposed Rules]
[Pages 67254-67258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27555]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 4
RIN 3038-AD11
Removing Any Reference to or Reliance on Credit Ratings in
Commission Regulations; Proposing Alternatives to the Use of Credit
Ratings
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing rules to implement new statutory provisions
enacted by Title IX of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. These proposed rules apply to futures commission
merchants, designated clearing organizations and commodity pool
operators. The proposed rules implement the new statutory framework
that requires agencies to replace any reference to or
[[Page 67255]]
reliance on credit ratings in their regulations with an appropriate
alternative standard.
DATES: Submit comments on or before December 2, 2010.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD11
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
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.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the established in
CFTC Regulation 145.9.\1\
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\1\ 17 CFR 145.9.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Adrianne Joves, Counsel, Office of
General Counsel, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202)
418-5420. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'')
\4\ to establish a comprehensive new regulatory framework for swaps and
security-based swaps. The legislation was enacted to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers and major
swap participants; (2) imposing clearing and trade execution
requirements on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to the
Commission's oversight.
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\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 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.
\3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq.
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In addition, Title IX of the Dodd-Frank Act addresses credit
ratings agencies. In pertinent part, Title IX requires Federal agencies
to review, modify and report on their regulations that require the use
of an assessment of the creditworthiness of a security or money market
instrument and that rely on or reference credit ratings.\5\ Section
939A of the Dodd-Frank Act directs that the Commission:
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\5\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, Sec. 939A (2010).
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(1) Review Commission regulations that require the use of an
assessment of the credit-worthiness of a security or money market
instrument;
(2) Remove any reference to or reliance on credit ratings in such
regulations and substitute an appropriate standard of credit-
worthiness;
(3) Seek to establish, to the extent possible, uniform standards of
credit-worthiness; and
(4) Report to Congress after the completion of the rulemaking
process.\6\
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\6\ Id.
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The Dodd-Frank Act contains a statutory deadline of July 21, 2011,
for completing the required review of Commission regulations for any
such reference to or reliance on credit ratings.\7\
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\7\ Id. at Sec. 939A(a).
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The Commission has completed the required review of its regulations
\8\ and has identified two categories of regulations that contain any
reliance on credit ratings: (1) Those that rely on ratings to limit how
Commission registrants might invest or deposit customer funds; and (2)
those that require disclosing a credit rating to describe an
investment's characteristics. However, not every instance identified by
this review specifically references or relies on credit ratings to
assess the credit-worthiness of a security or a money market
instrument. Nonetheless, in keeping with its efforts to fully comply
with both the spirit and letter of the Dodd-Frank Act, the Commission
is proposing to amend all of its identified regulations that rely on
credit ratings regarding financial instruments. Accordingly, the
Commission proposes amending Rules 1.49 \9\ and 4.24 \10\ to remove any
references or reliance on credit ratings and replace them with
alternative standards. Elsewhere in today's Federal Register, the
Commission is also publishing notice of its proposal to amend
Commission regulations 1.25 and 30.7, which in part proposes removing
all references to or reliance on credit ratings in those regulations.
Finally, the Commission is also publishing in today's Federal Register
notice of its proposal to amend Part 40 of its regulations. This
proposal includes removing Appendix A to Part 40,\11\ which contained
one reference to credit ratings.
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\8\ Supra note 4.
\9\ 17 CFR 1.49 (2009).
\10\ 17 CFR 4.24(h)(1)(i) (2009).
\11\ 17 CFR app. pt. 40 guideline no. 1 (2009).
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The Commission requests comment on all aspects of the proposed
rules, as well as comment on the specific provisions and issues
highlighted in the discussion below.
II. Discussion
A. Removing Reliance on or Reference to Credit Ratings To Limit How
Registrants Might Deposit Customer Funds
As noted above, after completing the required review of Commission
regulations for references to or reliance on credit ratings, two
instances were identified where credit ratings were used to help limit
how registrants might handle customer funds. Commission regulations
1.49 and 30.7, which were written to mirror one another,\12\ both
include a reference to credit ratings. The Commission is proposing to
remove those references to credit ratings from both 30.7 and 1.49. The
Commission's proposal to remove the reference to credit ratings from
regulation 30.7 is
[[Page 67256]]
being published elsewhere in today's Federal Register.
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\12\ See 68 FR 5549 (Feb. 4, 2003).
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1. Commission Regulation 1.49
Commission Regulation 1.49 \13\ places qualifications on the types
of depositories where futures commission merchants (FCMs) and
designated clearing organizations (DCOs) might place customer funds.
Similar to 30.7, 1.49 currently requires that an acceptable foreign
depository must either: (1) Have in excess of $1 billion of regulatory
capital; or (2) issue commercial paper or a long-term debt instrument
that is rated in one of the two highest rating categories by at least
one nationally recognized statistical rating organization (NRSRO).
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\13\ 17 CFR 1.49(d)(3)(i)(B) (2009).
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In keeping with the Dodd-Frank Act, the Commission proposes to
remove all ratings requirements from Regulation 1.49. This proposal is
based on the Commission's views regarding the uncertain reliability of
ratings as currently administered. Recent events in the financial
markets have revealed significant weaknesses in the ratings industry
and its ability to reliably gauge the safety of debt instruments.
Further, Congress and other Federal financial regulators have
considered eliminating or restricting rating requirements with some
frequency during the past two years.\14\
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\14\ See 74 FR 63832 (Dec. 4, 2009) (discussing the efforts of
the Securities Exchange Commission). See also 75 FR 52283 (Aug. 25,
2010) (discussing the efforts of the Federal banking agencies.)
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Finally, noting that the requirements regarding the placement of
customer funds in foreign depositories in the two regulations were
originally written to mirror one another,\15\ this proposal to remove
the reference to credit ratings in Commission regulation 1.49 is done
in concert with proposals found elsewhere in today's Federal Register
regarding Commission regulation 30.7. That proposal considers the
reference to credit ratings in Commission regulation 30.7 to be no more
useful or necessary to gauge the safety of a depository institution
than similar references found in Commission regulation 1.25. To explain
its proposal to remove references to credit ratings in Commission
regulation 1.25, the Commission notes the poor past performance of
credit ratings in gauging the safety of certain types of investments,
and its view that credit ratings are not necessary to gauge the future
ability of certain types of investments to preserve customer funds. As
a result, this proposal serves to align Commission regulation 1.49 with
proposed Commission regulations 1.25 and 30.7, and to greater simplify
the regulatory treatment of investment of customer funds.
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\15\ See supra note 11.
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Request for Comment
The Commission requests comment on whether relying on a minimum
capital requirement of $1 billion dollars in regulatory capital is an
adequate alternative standard to current Commission regulation 1.49.
The Commission also requests comment on whether there is another
standard or measure of solvency and credit-worthiness that might be
used as an appropriate, additional test of a bank's safety.
Specifically, the Commission seeks comment on whether a leverage ratio
or a capital adequacy ratio requirement consistent with or similar to
those in the Basel III accords\16\ would be an appropriate additional
safeguard for a bank or trust company located outside the United
States.
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\16\ See Press Release, Basel Committee on Banking Supervision,
Group of Governors and Heads of Supervision Announces Higher Global
Minimum Capital Standards (Sept. 12, 2010) (http://bis.org/press/p100912.pdf).
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The Commission welcomes any other comments on this proposal.
B. Removing Reliance on Credit Ratings To Help Disclose the
Characteristics of an Investment
After completing the required review of Commission regulations for
references to or reliance on credit ratings, two instances were
identified where credit ratings were used to help disclose the
characteristics of an investment. Commission regulation 4.24 \17\ and
Appendix A to Part 40 \18\ both include a reference to credit ratings.
As a result, while the references to credit ratings are not
specifically related to the credit-worthiness of securities or money
market instruments, in keeping with the spirit of the Dodd-Frank Act
the Commission is proposing to remove the references to credit ratings
from 4.24. Elsewhere in today's Federal Register the Commission is
proposing amendments to Part 40 of the Commission's regulations,
including the removal of Appendix A to Part 40.
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\17\ 17 CFR 4.24(h)(1)(i) (2009).
\18\ 17 CFR app. pt. 40 guideline no. 1 (2009).
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1. Commission Regulation 4.24
Commission Regulation 4.24 requires commodity pool operators (CPOs)
to disclose the characteristics of the commodity and other interests
that the pool will trade including, if applicable, their investment
rating. In keeping with its stated goal of complying fully with the
spirit and letter of the Dodd-Frank Act, the Commission proposes
removing the references to ratings Commission regulation 4.24 and
replacing that reference with the phrase ``credit-worthiness.'' While
CPOs may still choose to reference an investment rating to describe the
credit-worthiness of an investment in its disclosures, the Commission
notes that the CPO as appropriate should make an independent assessment
of the credit-worthiness of those investments.
Request for Comment
The Commission requests comment on what effect removing credit
ratings as one characteristic included in Commission regulation 4.24
might have on the ability of investors and others to understand the
disclosures of commodity pool operators (CPOs) regarding the
characteristics of a commodity pool. The Commission also requests
comment on the ability of CPOs to make independent assessments of the
credit-worthiness of their pool's investments.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \19\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small businesses. The rule amendments proposed herein will affect
FCMs, DCOs and CPOs. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on small entities in accordance with
the RFA.\20\ The Commission has previously determined that registered
FCMs,\21\ DCOs \22\ and CPOs \23\ are not small entities for the
purpose of the RFA. Accordingly, pursuant to 5 U.S.C. 605(b), the
Chairman, on behalf of the Commission, certifies that the proposed
rules will not have a significant economic impact on a substantial
number of small entities.
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\19\ 5 U.S.C. 601 et seq.
\20\ 47 FR 18618 (Apr. 30, 1982).
\21\ Id. at 18619.
\22\ 66 FR 45604, 45609 (Aug. 29, 2001).
\23\ 47 FR 18618-21 (Apr. 30, 1982).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \24\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The proposed rule amendments do not
require a new collection of information on the part of any entities
subject to the
[[Page 67257]]
proposed rule amendments. Accordingly, for purposes of the PRA, the
Commission certifies that these proposed rule amendments, if
promulgated in final form, would not impose any new reporting or
recordkeeping requirements.
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\24\ 44 U.S.C. 3501 et seq.
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C. Costs and Benefits of the Proposed Rules
Section 15(a) of the CEA \25\ requires the Commission to consider
the costs and benefits of its actions before issuing a rulemaking under
the Act. By its terms, section 15(a) does not require the Commission to
quantify the costs and benefits of rule or to determine whether the
benefits of the rulemaking 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 rule
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.
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\25\ 7 U.S.C. 19(a).
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Summary of proposed requirements. Proposed rule 1.49 would
facilitate greater protection of customer funds. The proposed
amendments align proposed regulation 1.49 with proposals made elsewhere
in today's Federal Register regarding Commission regulations 1.25 and
30.7. Like those proposals, the proposed amendments to Commission
regulation 1.49 are made with the primary purpose of safeguarding the
funds of customers.
Proposed amendments to Commission regulation 4.24 would lessen
reliance on credit ratings and will reduce risk in the financial system
by placing more responsibility on CPOs to fully understand the credit-
worthiness of their investments .
Costs. With respect to costs, the Commission has determined that
its proposals present minimal costs while providing the great benefits
of safeguarding customer funds and decreasing the risks associated with
CPOs not evaluating the credit-worthiness of their investments. There
may be some minimal costs associated with transferring customer funds,
if necessary, to more sound foreign depository institutions and with
CPOs improving their ability to make independent assessments regarding
the credit-worthiness of their investments.
Benefits. With respect to benefits, the Commission has determined
that the proposed rules will help safeguard customer funds and will
result in CPOs improving their understanding of the credit-worthiness
of their investments. The proposed rules help protect market
participants and the public by safeguarding customer funds and
highlighting the accountability CPOs have for understanding the credit-
worthiness of their investments. The proposed rules will not hinder the
efficiency or competitiveness of futures markets, and may improve the
financial integrity of the markets by helping to safeguard customer
funds and encourage CPOs to better understand the credit-worthiness of
their investments. The proposed rules will not have any effect on price
discovery, and may help improve sound risk management practices.
Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commenters are also invited to submit any data
or other information that they may have quantifying or qualifying the
costs and benefits of the Proposal with their comment letters.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection.
17 CFR Part 4
Advertising, Commodity futures, Commodity pool operators, Commodity
trading advisors, Consumer protection, Disclosure, Principals,
Reporting and recordkeeping requirements.
For the reasons discussed in the preamble, the Commodity Futures
Trading Commission proposed to amend 17 CFR parts 1 and 4 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1,
16, 16a, 19, 21, 23, and 24, as amended by the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124
Stat. 1376 (2010) and the Commodity Futures Modernization Act of
2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
2. Section 1.49 is amended by revising paragraph (d)(3) to read as
follows:
Sec. 1.49 Denomination of customer funds and location of
depositories.
* * * * *
(d) * * *
(3) A depository, if located outside the United States, must be:
(i) A bank or trust company that has in excess of $1 billion of
regulatory capital; or
(ii) A futures commission merchant that is registered as such with
the Commission; or
(iii) A derivatives clearing organization.
* * * * *
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
1. The authority citation for part 4 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a
and 23 as amended by the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
2. Section 4.24 is amended by revising paragraph (h)(1)(i) to read
as follows:
Sec. 4.24 General disclosures required.
* * * * *
(h) * * *
(1) * * *
(i) The approximate percentage of the pool's assets that will be
used to trade commodity interests, securities and other types of
interests, categorized by type of commodity or market sector, type of
security (debt, equity, preferred equity), whether traded or listed on
a regulated exchange market, maturity ranges and by credit worthiness,
as applicable;
* * * * *
By the Commodity Futures Trading Commission.
Dated: October 27, 2010.
David A. Stawick,
Secretary.
Statement of Chairman Gary Gensler Removing Any Reference to or
Reliance on Credit Ratings in Commission Regulations; Proposing
Alternatives to the Use of Credit Ratings
October 26, 2010
I support the proposal to remove any reliance on credit ratings
within the Commission's regulations. Under Title IX of the Dodd-Frank
Act, Congress required that the Commission review references to credit
ratings in our
[[Page 67258]]
existing regulations and to specifically remove them if they were
regarding certain financial instruments. The Commission has completed
the required review of its regulations and has identified seven
instances of references to credit ratings, five of which were regarding
those financial instruments. Today, we are proposing removing these
five references and reliance to credit ratings. This rule addresses two
of those references in Regulation 1.49, which limits the types of banks
in which futures commission merchants and derivatives clearing
organizations may place customer funds, and 4.24, which requires
commodity pool operators to disclose to their customers where they are
putting customer money. The other actions we are taking today regarding
rule certifications in Part 40 and investment of customer funds in
Regulation 1.25 and 30.7 will address the remaining instances of credit
ratings.
[FR Doc. 2010-27555 Filed 11-1-10; 8:45 am]
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