Request for No-Action Relief with Regard to Commodity Exchange Act Sections 4d and 4n and Commission Rule 3.10

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1 CEA 4d, and 4n Commission Rule 3.10 Gary Barnett, Esq. Director Division of Swap Dealer and Intermediary Oversight Commodity Futures Trading Commission Three Lafayette Center st Street, NW Washington, DC Re: Request for No-Action Relief with Regard to Commodity Exchange Act Sections 4d and 4n and Commission Rule 3.10 Dear Mr. Barnett: The undersigned trade associations (the Associations ) are writing, on behalf of our members and their affiliates, to request that the Division of Swap Dealer and Intermediary Oversight (the Division ) of the Commodity Futures Trading Commission (the Commission ) issue a no-action letter confirming that, subject to the conditions specified in this letter, the Division will not recommend that the Commission commence enforcement action against any Agent Swap Dealer, Agent Affiliate or De Minimis Swap Dealer (each as defined below), or their respective employees, for failure to register as an introducing broker ( IB ), commodity trading advisor ( CTA ) or associated person under the circumstances, and subject to the conditions, described below.

2 Page 2 I. Background Currently, many of the Associations members deal in swaps within the U.S. or from abroad with U.S. persons in a wide variety of circumstances, including in many cases through multiple U.S. and non-u.s. affiliates. It is not uncommon for affiliated entities to provide certain forms of support to an affiliated swap dealer in connection with its swap dealing activities. Whether due to logistical considerations (such as time zones), pre-existing lending, trading or other counterparty relationships, or expertise in a particular swap or asset category, swap transactions may be solicited, negotiated, structured, recommended, and accepted as agent, by one registered swap dealer (an Agent Swap Dealer ) on behalf of a second, affiliated swap dealer that is the principal counterparty to the swap. In addition, employees 1 of our members non-swap dealer affiliates (an Agent Affiliate ) may solicit, negotiate, recommend, structure, and accept as agent orders for, swaps to be entered into by an affiliated swap dealer that is the principal counterparty to the swap. 2 These Agent Affiliates are typically regulated as banks or brokerage firms in their local jurisdiction. An Agent Swap Dealer or Agent Affiliate might also act as agent on behalf of an affiliated swap dealer over the life of a swap, such as by managing life cycle events or providing valuations. In many cases, our members have affiliates that will be eligible for the de minimis exception to the swap dealer definition ( De Minimis Swap Dealers ). These De Minimis Swap Dealers, and their employees, solicit, negotiate, recommend, structure, and accept orders for, swaps to be entered into by the De Minimis Swap Dealer. In addition, our members Agent Swap Dealers may solicit, negotiate, recommend, structure, and accept as agent orders for, swaps to be entered into by an affiliated De Minimis Swap Dealer that is the principal counterparty to the swap. II. Agent Swap Dealers We request that the Division confirm that, under the circumstances and subject to the conditions specified below, the Division will not recommend that the Commission commence enforcement action against any Agent Swap Dealers or their employees for failure to register as an IB or CTA in connection with IB activities, and incidental swap advisory activities, 1 In some cases, such as when working pursuant to a secondment arrangement or employed by an affiliated services company providing administrative or employee management services (such as employee benefits, payroll, recruiting or risk/safety management), an individual may be directly authorized to conduct business for, and under the supervision of, an entity in a similar capacity to an employee even if technically employed by another entity. For purposes of this letter, such an individual is considered to be an employee of the entity for which he or she is conducting business. 2 These agency arrangements are generally circumscribed by parameters established by the affiliated swap dealer or the relevant group of which the Agent Affiliate and swap dealer affiliate are members.

3 Page 3 performed by such Agent Swap Dealers on behalf of any of their swap dealer affiliates, 3 as described below. A. Analysis 1. IB Registration As amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ), the Commodity Exchange Act s ( CEA ) IB definition includes any person who is engaged in soliciting or in accepting orders (other than in a clerical capacity 4 ) for the purchase or sale of swaps, but who does not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom. 5 As they relate to swaps, IB activities typically consist of soliciting, negotiating, recommending, structuring, and/or accepting orders for swaps, as agent, on behalf of the principal counterparty to the swap. The Commission has adopted an exclusion from the IB definition that applies to associated persons of a swap dealer, but not to the employing swap dealer itself. 6 Under the Commission s exclusion, employees of an Agent Swap Dealer performing IB activities with respect to swaps executed as agent on behalf of an affiliated swap dealer acting as principal counterparty to the swap are not subject to registration as IBs. 7 However, a technical issue arises for the employing Agent Swap Dealer itself in circumstances where it receives compensation from a registered swap dealer for sales and marketing activities performed by the Agent Swap Dealer s employees in connection with cost and/or revenue allocation arrangements with the registered swap dealer acting as principal counterparty. 8 These allocation arrangements are generally required for cross-border tax accounting. In addition, 3 We believe the considerations relevant to the discussion in this section are applicable whether the Agent Swap Dealer (who must be registered with the Commission as a swap dealer) is acting as agent on behalf of a registered swap dealer affiliate or an affiliate eligible to rely on the de minimis exclusion from swap dealer status These would include functions performed by middle/back office personnel. CEA Section 1a(31). Commission Rule 1.3(mm)(2)(i). 7 Section 1a(4) of the CEA and Commission Rule 1.3(aa) define an associated person of a swap dealer to include, among other things, any natural person associated with a swap dealer as an agent... in any capacity that involves... [t]he solicitation or acceptance of swaps (other than in a clerical or ministerial capacity)... or... [t]he supervision of any person or persons so engaged. Under this definition, employees of an Agent Swap Dealer engaged in sales and marketing activities involving swaps on behalf of its swap dealer affiliates would be considered to be associated persons of such swap dealers. 8 The Commission has stated that it would not consider the employer of an associated person of a swap dealer to be an IB due to the activities of the associated person of the swap dealer. 77 Fed. Reg (Nov. 2, 2012) at n. 16. However, it is not clear on the face of that guidance whether the Commission s position would also apply where the employer of the associated person received compensation from the swap dealer for the associated person s activities.

4 Page 4 because the term associated person only covers a natural person, the Agent Swap Dealer would not be eligible for the proposed exclusion from the IB definition for associated persons of a swap dealer. This is true even though the Agent Swap Dealers would already be subject to swap dealer regulation themselves. In this regard, we note that Commission Rule 1.3(mm) has long provided exceptions from the IB definition for other Commission registrants (such as a futures commission merchant ( FCM ), CTA, floor trader, associated person or commodity pool operator). A key rationale for these exclusions is that such registrants are already subject to regulation with respect to their IB activities, and that the additional imposition of IB registration and regulation would be unnecessary. 9 The same is true for Agent Swap Dealers. Under existing Commission rules, the Agent Swap Dealer and its employees would be subject to comprehensive regulation and supervision in connection with their IB activities, including the Commission s business conduct standards. Additionally, under proposed Commission Rule 3.12(f)(ii), in circumstances where the affiliated swap dealer acting as principal is registered with the Commission, both the Agent Swap Dealer and its registered swap dealer affiliate would be jointly and severally responsible for the IB activities of the Agent Swap Dealer with respect to customers common to it and the registered swap dealer affiliate. 10 Additional application of the IB regulatory regime would therefore be duplicative and burdensome, with little incremental regulatory benefit CTA Registration As amended by Dodd-Frank, the CEA s CTA definition includes, among other persons, any person who, for compensation or profit, engages in the business of advising others as to the value of or the advisability of trading in any swap. 12 The Commission has noted that swap dealers would likely be acting as CTAs when they make recommendations to their counterparties, and particularly recommendations that are tailored to the needs of their counterparty. 13 In response to commenters concerns about the implications of swap dealers being treated as CTAs, and in light of the statutory and regulatory scheme under the CEA s external business conduct provisions, the Commission determined to adopt an exclusion in Commission Rule 4.6 from the CTA definition for a registered swap dealer, and any principal or employee 9 See 48 Fed. Reg , (Aug. 3, 1983) (discussing adoption of exclusions from the IB definition for Commission registrants). 10 See 77 Fed. Reg (June 15, 2012). 11 By way of example, requiring an Agent Swap Dealer to register as an IB would subject the associated persons of the Agent Swap Dealer to registration as associated persons of an IB, in contradiction to Congress decision not to require the registration of associated persons of a swap dealer or the Commission s decision to exclude such associated persons from the IB definition. 12 CEA Section 1a(12). 13 See 77 Fed. Reg. 9734, 9739 (Feb. 17, 2012).

5 Page 5 thereof, whose commodity interest and swap advisory activities are solely incidental to the conduct of its business as a swap dealer. We believe that the solicitation and acceptance, as agent, of swap orders to be executed by an affiliate that acts as principal counterparty should be regarded as a subset of the activities routinely engaged in by swap dealers. It is unclear as a technical matter, however, whether an Agent Swap Dealer making recommendations to a person that becomes a counterparty to the Agent Swap Dealer s affiliate would be deemed to doing so solely incidental to the conduct of its business as a swap dealer. It is therefore not entirely clear whether, in these circumstances, an Agent Swap Dealer would be eligible for the exclusion in Rule 4.6 in circumstances where it provides incidental recommendations or advice to a counterparty who enters the swap with the Agent Swap Dealer s affiliate, and not the Agent Swap Dealer itself. We note that, in these circumstances, the Agent Swap Dealer and its employees would nevertheless be subject to Commission regulation of their swap advisory activities, including the Commission s external business conduct standards, to the same extent as the affiliated registered swap dealer, and any recommendation or advice (for which the Associations request relief herein) would be solely incidental to such activities. Accordingly, we believe the same policy and legal considerations underlying the incidental swap dealer exclusion under Commission Rule 4.6 apply to Agent Swap Dealers and their employees, whether the Agent Swap Dealers act as agent or principal counterparty in connection with the relevant swap. B. Relief Requested Accordingly, we respectfully request that the Division grant no-action relief from IB and CTA registration to Agent Swap Dealers and their employees in circumstances where the regulated activity is conducted as agent by the Agent Swap Dealer on behalf of an affiliated swap dealer in connection with a swap to which the affiliated swap dealer is or is to be a principal. III. Agent Affiliates We request that the Division confirm that, under the circumstances and subject to the conditions specified below, the Division will not recommend that the Commission commence enforcement action against any Agent Affiliate or its employees for failure to register as an IB or CTA in connection with IB activities, and incidental swap advisory activities, performed by such Agent Affiliate on behalf of any of its affiliated registered swap dealers. A. Analysis 1. IB Registration As in the case of Agent Swap Dealers (discussed in Part II above), employees of an Agent Affiliate engaged in IB activities on behalf of a registered swap dealer affiliate would be expressly excluded from IB registration under proposed Commission rules, but the employing Agent Affiliate would not. As a result, a technical issue arises in the case of an Agent Affiliate

6 Page 6 itself in circumstances where it receives compensation from a registered swap dealer for IB activities performed by the Agent Affiliate s employees in connection with cost and/or revenue allocation arrangements with the registered swap dealer acting as principal counterparty to the swap. In this regard, we note that Commission staff have previously granted no-action relief from IB registration in analogous circumstances in which employees of a bank affiliated with an FCM introduced futures customers to the FCM without the bank registering as an IB. The staff s no-action position was based upon, among other things, (1) the bank being subject to Federal and New York State banking regulations; (2) all employees of the bank that introduced customers to the FCM being registered as associated persons of the FCM; (3) each office where the IB activities took place being a branch office of the FCM and listed as such in the appropriate forms filed with the National Futures Association ( NFA ); (3) a registered associated person of the FCM, appropriately designated as a branch office manager, supervising the futures-related activities of the bank s employees registered as associated persons of the FCM; and (5) the FCM being liable for the activities of the such associated persons, as provided for under the CEA and Commission rules. 14 In the instant case, under existing Commission rules, employees of an Agent Affiliate would similarly be subject to regulation and supervision in connection with IB activities performed by them as agent on behalf of an affiliated registered swap dealer, including the Commission s business conduct standards. The registered swap dealer would also be liable for the activities of the employees of the Agent Affiliate when acting on the swap dealer s behalf, as provided for under the CEA and Commission rules CTA Registration As noted in Part II.A.2 above, the Commission determined to adopt an exclusion in Commission Rule 4.6 from the CTA definition for a registered swap dealer, and any principal or employee thereof, whose commodity interest and swap advisory activities is solely incidental to the conduct of its business as a swap dealer. Again, as a technical matter, because the exclusion in Commission Rule 4.6 applies solely to principals or employees of a registered swap dealer, it would not be directly applicable to an Agent Affiliate or its employees when acting on behalf of an affiliated registered swap dealer. 16 However, under Commission rules, the Agent Affiliate and its employees would 14 See CFTC Staff Letter 03-13, Comm. Fut. L. Rep. 29,438 (Mar. 19, 2003). See, also CFTC Staff Letter 97-85, Comm. Fut. L. Rep. 27,182 (Oct. 8, 1997) (similar relief) and CFTC Staff Letter 07-17, Comm. Fut. L. Rep. 30,609 (April 1, 2007) (similar relief in the context a Rule affiliate of a U.S. FCM). 15 We note that neither the CEA nor Commission or NFA rules provide for the registration of associated persons of a swap dealer or the listing of branch offices of a swap dealer; therefore, those conditions in the prior no-action relief would not be relevant in the instant case. 16 The existing exemptions in Commission Rule 4.14 from registration as a CTA for IBs and associated persons whose trading advice is solely in connection with their business as IBs or employment as associated persons,

7 Page 7 be subject to Commission regulation of their swap advisory activities, including the Commission s business conduct standards, to the same extent as the affiliated registered swap dealer, and any recommendation or advice (for which the Associations request relief herein) would be solely incidental to such activities. Accordingly, we believe the same policy and legal considerations underlying adoption of the incidental registered swap dealer exclusion in Commission Rule 4.6 apply equally to each Firm s Agent Affiliates and their employees. B. Relief Requested Accordingly, we respectfully request that the Division grant no-action relief from IB and CTA registration to Agent Affiliates and their employees when engaged in IB activities, and providing incidental swap trading advice, as agent on behalf of an affiliated swap dealer in connection with a swap to which the affiliated swap dealer is or is to be a principal, subject to the following conditions: (a) Employees of an Agent Affiliate engaged in IB activities on behalf of a registered swap dealer affiliate in swaps and providing incidental swap trading advice would comply with all Commission requirements, including Commission business conduct rules, applicable to them as agents of a registered swap dealer; and (b) The registered swap dealer affiliate of an Agent Affiliate would be liable for the activities of the Agent Affiliate acting on behalf of the swap dealer, as provided for under the CEA and Commission rules. IV. De Minimis Swap Dealers Acting as Principal We request that the Division confirm that, under the circumstances and subject to the conditions specified below, the Division will not recommend that the Commission commence enforcement action against a De Minimis Swap Dealer or its employees for failure to register as an IB or CTA in connection with IB activities, and incidental swap advisory activities, performed in connection with its de minimis swap dealing activity. A. Analysis Section 1a(49)(D) of the CEA provides that the Commission shall exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customer. Pursuant to this provision, the Commission adopted Rule 1.3(ggg)(4)(i), which provides that a person that is not currently registered as a swap dealer shall be deemed not to be a swap dealer as a result of its swap dealing activity involving counterparties, so long as the swap positions resulting from those dealing activities of such person (or any other entity controlling, controlled by or under common control with the person) entered into over the course of the immediately preceding 12 months (or respectively, would not be available to the Agent Affiliate or their employees because they would not be registered as IBs or associated persons.

8 Page 8 following the effective date of final rules implementing the CEA s swap definition, if that period is less than 12 months) have an aggregate gross notional amount of no more than $3 billion, subject to a phase in level of an aggregate gross notional amount of no more than $8 billion, and aggregate gross notional amount of no more than $25 million with regard to swaps in which the counterparty is a special entity. Additionally, Commission Rule 1.3(ggg)(4)(iii) provides that a person that has not registered as a swap dealer by virtue of satisfying the requirements of the above de minimis exception, but that no longer can take advantage of the de minimis exception, will not be deemed to be a swap dealer until the earlier of the date on which it submits a complete application for registration as a swap dealer, or two months after the end of the month in which that person is no longer eligible for the exception. A potential IB registration issue arises for the De Minimis Swap Dealer and employees of the De Minimis Swap Dealer, since the exclusion from the IB definition technically would not apply either to the De Minimis Swap Dealer or to its employees (because a De Minimis Swap Dealer is excluded from the swap dealer definition, its employees would not be defined as associated persons of a swap dealer, other than in the circumstances covered in Part III above where the De Minimis Swap Dealer is acting as agent on behalf of an affiliated registered swap dealer). 17 In adopting Commission Rule 1.3(ggg)(4), the Commission sought to balance the regulatory interests served by the regulation of swap dealing activities against the interests served by the de minimis exception, including regulatory efficiency, legal certainty, reduced costs for clients and the promotion of competition. 18 Requiring the associated persons of a De Minimis Swap Dealer to register as IBs because they solicit and accept swaps which qualify for the recognized de minimis threshold would significantly undermine the usefulness of the exception and its phase-in provisions. On the other hand, the Dodd-Frank regime for the regulation of solicitation and marketing in connection with swap dealing is embodied primarily in the external business conduct rules applicable to registered swap dealers. As a result, providing relief from IB registration for activities in connection with de minimis swap dealing activity would not seem to present any different or greater risks or policy concerns than the de minimis exception itself. In addition, the protections afforded under the CEA s general anti-fraud rules remain applicable to swap dealers and their affiliates regardless of their registration status. As a matter of logic, the policy judgments underlying an express statutory exemption covering a broad range of activity would appear, by definition, to be equally applicable to a more limited subset of those activities. 17 A De Minimis Swap Dealer and its employees would not, however, be subject to CTA registration because the exclusion in Rule 4.6 from the CTA definition for swap advisory activities incidental to swap dealing applies to a person, and its principals and employees, that is excluded or exempt from swap dealer registration Fed. Reg , (May 23, 2012).

9 Page 9 Additionally, we note that, absent the relief requested herein, associated persons of swap dealers that will register at year s end, but rely on the de minimis exemption between October 12 and then, would be required to register as IBs on an interim basis in connection with any activity regulated under those provisions. B. Relief Requested Accordingly, we propose that the Division grant no-action relief from IB registration to the employees of De Minimis Swap Dealers when engaged in IB activities in connection with swap dealing activities that qualify for the de minimis exception or the phase-in therefrom in Rule 1.3(ggg)(4). V. Associated Persons of Agent Affiliates and Agent Swap Dealers We request that the Division grant no-action relief from associated person registration for employees of an Agent Affiliate or Agent Swap Dealer acting in the capacity of associated persons of the affiliated swap dealer 19 that is the counterparty to swaps solicited and negotiated by such employees, where the Agent Affiliate or Agent Swap Dealer is, for other reasons, registered as an IB or FCM. A. Analysis In some cases, an Agent Affiliate or Agent Swap Dealer may, for other reasons (such as its futures activities), be registered with the Commission as an IB or FCM. In those cases, the question arises whether an employee of the Agent Affiliate or Agent Swap Dealer who is engaged in the solicitation or acceptance of swaps on behalf of the affiliated swap dealer would, in addition to acting in the capacity of an associated person of the affiliated swap dealer, be considered to be acting in the capacity of an associated person of an IB or FCM. 20 Requiring such employee to register as an associated person of an IB or FCM in such circumstance would be inconsistent with the fact that such individual, were he or she employed by the affiliated swap dealer, would not be subject to registration. Additionally, even if not registered as associated persons of an IB or FCM, such an employee will be an associated 19 We believe the considerations relevant to the discussion in this section are applicable whether the Agent Affiliate or Agent Swap Dealer is acting as agent on behalf of a registered swap dealer affiliate or an affiliate eligible to rely on the de minimis exclusion from swap dealer status, because in both cases the associated persons of the swap dealer affiliate are not subject to registration as such. 20 Commission Rule 1.3(aa) defines an associated person of an IB or FCM to include any employee of the IB or FCM in any capacity which involves the solicitation or acceptance of customers orders. The term order is defined in Rule 1.3(kkkk) to mean an instruction or authorization provided by a customer to an IB or FCM regarding trading in a commodity interest (including a swap) on behalf of a customer. Although the term customer, as defined in Rule 1.3(k), excludes the owner or holder of a proprietary account (including, for instance, an affiliate) for purposes of section 4d of the CEA, and the regulations that implement sections 4d and 4f and Rule 1.35, the order definition states that the owner or holder of a proprietary account shall otherwise be deemed to be a customer.

10 Page 10 person of a swap dealer. As such, the employee (i) will be subject to the Commission s business conduct rules and (ii) may not be subject to a statutory disqualification. Moreover, provided that he or she is not engaged in any activities subject to regulation by the Commission other than those performed by him or her in his or her capacity as an associated person of a swap dealer, 21 subjecting him or her to registration as an associated person of an IB or FCM would have little additional policy benefit. It would, however, introduce substantial additional administrative costs and complications, particularly because, as we understand from our members, firms in many cases would need to register hundreds of additional associated persons if such registration was required. Additionally, while the registration process is still underway, such employees would not be able to interact with counterparties of the affiliated swap dealer. B. Relief Requested Accordingly, we respectfully request that the Division grant no-action relief from registration and regulation as an associated person of an IB or FCM to employees of a registered IB or FCM that is also an Agent Affiliate or Agent Swap Dealer, where such employees are engaged in soliciting, negotiating, recommending, structuring, and/or accepting orders for swaps, as agent, on behalf of an affiliated swap dealer but otherwise not engaged in activities subject to regulation by the Commission (including the solicitation or acceptance of orders for futures or the handling of customer funds or property). 22 VI. Temporary No-Action Relief for Other Affiliates Acting in an IB or CTA Capacity In Staff Letter 12-15, the Division granted temporary no-action relief from registration as an IB or CTA or associated person thereof (among other registration capacities) where the requirement to be registered arises solely from the swaps activity of a person, provided that the person satisfied certain conditions specified in the letter, including completion and filing an application for registration with the NFA on or before December 31, In granting the relief, the Division noted that it is mindful of the need to strike an appropriate balance between the regulatory objectives of registering persons intermediating transactions subject to the jurisdiction of the Commission and providing those persons with sufficient time to comply with their new regulatory requirements. We believe that the same considerations support additional temporary relief from IB, CTA and associated person registration in the limited context of entities (and the employees thereof) that do not qualify for relief granted in response to this request and for which the requirement to be registered as an IB or CTA arises solely as a result of engaging in IB activities, and providing incidental swap trading advice, as agent on behalf of an affiliated swap dealer in connection with a swap to which the affiliated swap dealer is or is to be a principal. In the limited time before December 31, 2012, such entities will not be in a position to prepare and submit their registration applications to the NFA. 21 For instance, such employees would not be engaged in the solicitation or acceptance of orders for futures, nor the handling of customer funds or property. 22 In the alternative, if the Division does not grant this relief on a permanent basis, we respectfully request that it grant it on an interim basis until March 31, 2013.

11 Page 11 Accordingly, we respectfully request that the Division extend the relief provided in Part III.A of Staff Letter until March 31, 2013 for an entity (and the employees thereof) that does not qualify for relief granted in response to this request and for which the requirement to be registered as an IB, CTA or associated person arises solely as a result of engaging in IB activities, and providing incidental swap trading advice, as agent on behalf of an affiliated swap dealer in connection with a swap to which the affiliated swap dealer is or is to be a principal. * * * Based on the foregoing, we respectfully request that the Division issue no-action relief to the Associations confirming that the Division will not recommend enforcement action against any Agent Affiliates, Agent Swap Dealers, or De Minimis Swap Dealers, or their respective employees, for failure to register as an IB, CTA or associated person under the circumstances and subject to the conditions described above. Please do not hesitate to contact the undersigned for any further information the Commission or its staff may require in connection with this request. Very truly yours, Walt Lukken President & Chief Executive Officer The Futures Industry Association Sarah A. Miller Chief Executive Officer Institute of International Bankers Chief Executive Officer Institute of International Bankers Kenneth E. Bentsen, Jr. Executive Vice President Public Policy and Advocacy SIFMA