CFTC Exemptive Relief Upon Effective Date of Title VII of Dodd-Frank CFTC Issues Proposed Order to Provide Relief from Certain Provisions of Title VII That Would Be Effective on July 16, 2011 SUMMARY On June 14, the Commodity Futures Trading Commission (the CFTC ) held an open meeting to propose an order providing temporary relief from certain swaps-related provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ) that will automatically take effect on July 16, 2011 (the Proposed Order ). 1 The purpose of the Proposed Order is to provide legal certainty to swap transactions after the effective date of Dodd-Frank, but prior to the effective date of the required CFTC rulemaking to implement the new Dodd-Frank regulatory regime. In general, the proposed temporary exemptive relief would expire upon the earlier of the effective date of the applicable required final rulemaking, or December 31, 2011. Comments to the Proposed Order are due by July 1, 2011. On a related note, on June 15, the Securities and Exchange Commission (the SEC ) issued an order providing temporary relief from most of the requirements of Title VII relating to security-based swaps transactions that would otherwise have applied on June 16, 2011. Although the SEC order has immediate effect, the SEC is soliciting comments until July 6, 2011. 2 SCOPE OF PROPOSED ORDER Some provisions of Dodd-Frank will take effect 60 days after the publication of the final rule implementing such provisions and other provisions that do not require rulemaking and are self-effectuating will take effect on July 16, 2011. To address these various provisions, the CFTC has defined four categories of Dodd-Frank provisions. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
Category One: These are provisions of Dodd-Frank that will not go into effect until 60 days after the required rulemakings have been finalized, and will phase into effect gradually as the CFTC promulgates those rules. Because these provisions are not self-effectuating on the Effective Date, the CFTC expressed the view that it is not necessary to provide relief with respect to Category One provisions and they are therefore outside the scope of the Proposed Order. The CFTC has posted a list of Category One Provisions on its website. 3 Category Two: The Proposed Order would exempt persons and entities from the provisions of the Commodity Exchange Act ( CEA ), as added or amended by Dodd-Frank, that reference the terms swap, swap dealer, major swap participant, or eligible contract participant. The proposed exemptive relief would apply only with respect to those requirements or portions of such provisions that specifically relate to these referenced terms. This relief also would not apply to any provisions of Title VII and/or the CEA that have become effective prior to July 16, 2011 or to CFTC final regulations. The proposed temporary exemptive relief would expire upon the earlier of the effective date of the applicable final rule further defining the relevant term or December 31, 2011. With regard to some Category Two provisions, the CFTC does not believe that it has the authority to grant extensions or exemptions from these provisions, but the CFTC staff has indicated that it would likely provide no-action relief for some of these provisions, on a case-by-case basis. According to footnote 15 of the Proposed Order, these provisions include the swap dealer segregation requirements for uncleared swaps and the duties and designation of a chief compliance officer for swap dealers and major swap participants. Absent no-action relief, these provisions will take effect on the Effective Date. At this time, it is unclear how the CFTC will implement these provisions prior to the completion of the rules on definitions and registration. At the open meeting, when asked by Commissioner Sommers whether the CFTC itself has the authority to issue no-action relief for those provisions of Dodd-Frank over which the CFTC has no exemptive authority, CFTC General Counsel Dan Berkovitz replied in the affirmative. Berkovitz noted that any noaction letter would apply to all applicable market participants, not just the single petitioner to request the relief, and that the no-action letters would be posted on the CFTC website. Category Three: The Proposed Order would provide relief from the repeal of the provisions of the CEA enacted under the CFMA that provided legal certainty to swap transactions, including Section 2(d) (regarding transactions in excluded commodities, such as rates and currencies), Section 2(e) (regarding electronic trading facilities for exempted transactions), Section 2(g) (regarding individually negotiated swap transactions) and Section 2(h) (regarding transactions in exempt commodities, such as energy and other non-agricultural, non-excluded commodities). -2-
The Proposed Order states that CFTC Part 35 will continue to be available with respect to transactions that meet its conditions therein, until Part 35 is withdrawn, amended, or replaced. Similarly, CFTC Part 32 will continue to be available with respect to commodity option transactions that meet its conditions, until Part 32 is withdrawn, amended, or replaced. Therefore, transactions that fully meet the conditions of Part 32 or Part 35 are outside the scope of the Proposed Order. For transactions that fall outside of existing Part 32 or Part 35, the Proposed Order would provide exemptive relief to the extent those transactions (and persons offering or entering into such transactions) came within the scope of any of the existing CEA Sections 2(d), 2(e), 2(g), 2(h), and 5d as in effect prior to July 16, 2011 or the line of business provision. Under the line of business provision, the relief would apply to a transaction with respect to which no more than one of the parties is entering into the transaction in conjunction with its line of business, where such party is neither an eligible contract participant nor an eligible swap participant and the transaction was not and is not marketed to the public. This proposed temporary exemptive relief would expire upon the earlier of December 31, 2011 or the repeal or replacement of Part 32 or Part 35, as applicable. According to the Proposed Order, the limitation of this exemptive relief to no more than a fixed period of time is consistent with similar limitations on transitional relief provided by the Congress elsewhere in Title VII. 4 In particular, the Proposed Order points to Section 723(c) of Dodd-Frank, which allows market participants to petition the CFTC within 60 days of enactment of Dodd-Frank to continue operating subject to Section 2(h) of the CEA, as this provision was in effect prior to the enactment of Dodd-Frank, for a one-year period. Category Four: These are self-effectuating Title VII provisions for which the CFTC is not providing exemptive relief. As a result, they are not subject to the relief provided under the Proposed Order and will go into effect on the Effective Date. The Proposed Order noted as an example that the Core Principles for derivatives clearing organizations ( DCOs ) and designated contract markets ( DCMs ) 5 and the antidisruptive trading provisions are Category Four provisions. The CFTC has posted a list of Category Four Provisions on its website. 6 Authority for Proposed Order The Proposed Order states that it was issued pursuant to (i) Section 712(f) of Dodd-Frank, which authorizes the CFTC to promulgate rules, regulations, or orders permitted by [Dodd-Frank], conduct studies and prepare reports, register persons, and exempt persons, agreements, contracts, or transactions from the provisions of the Act, under the terms contained in this Act, in order to prepare for the effective dates of the provisions of Title VII, and (ii) Section 4(c) of the CEA, as amended by Dodd- Frank, which provides the CFTC with authority to exempt certain agreements, contracts and transactions, that may otherwise be subject to the CEA, from various provisions of the CEA. -3-
In response to a question by Commissioner Sommers at the Open Meeting, General Counsel Berkovitz stated that the Proposed Order would protect against a private right of action. He did not elaborate on his basis for this conclusion. Anti-Fraud and Anti-Manipulation Provisions Although the Proposed Order states that the CEA anti-fraud and anti-manipulation provisions would not apply to terms subject to further definition, such as swaps, they will continue to apply to all transactions other than swaps, including futures, options on futures, and retail foreign exchange transactions. General Counsel Berkovitz noted that if an agreement is covered under Part 35 or the Proposed Order (and presumably Part 32, although he did not expressly address it), those agreements would remain subject to existing CEA anti-fraud and anti-manipulation authority. 7 As a related note, as discussed above, the anti-disruptive provisions in Title VII are self-effectuating provisions from which the CFTC is not providing exemptive relief. 8 Deadline for Proposed Order Both Commissioner O Malia and Commissioner Sommers raised serious concerns with the December 31, 2011 expiration of the Proposed Order. However, both Chairman Gensler and Commissioner Dunn supported the December 31 deadline, noting that the delay would allow the CFTC to re-examine its rulemaking progress at that time and to provide any appropriate exemptive relief from the requirements of Dodd-Frank, if necessary, based on the implementation schedule of the final rules. Commissioner O Malia offered an amendment to extend or eliminate the December 31 deadline, which failed by a vote of 2 to 3. CFTC OPEN MEETING Commissioner Sommers said she would reluctantly support the rulemaking, and warned against the continued legal uncertainty that will persist given the limited length of the Proposed Order and ambiguity surrounding both product and entity definitions. She expressed the strong belief that the CFTC should schedule a November 1 open meeting to review the state-of-play of required rulemakings to determine if the CFTC should extend the Proposed Order beyond December 31. Commissioner O Malia was similarly hesitant in his support, saying the relief offered is imperfect because the order relies on an arbitrary date and the CFTC has failed to produce a clear timetable for finalizing and implementing rules. Commissioner O Malia also expressed his concern regarding the Proposed Order s reliance on CFTC Part 35, given the CFTC s previously announced intention to rescind Part 35 upon the effectiveness of the Dodd-Frank provisions. Commissioner O Malia asked whether the Commission had grandfathered relief to CEA Section 2h and 5d markets and General Counsel Berkovitz confirmed that the CFTC provided relief to commercial markets and exempt boards of trade last fall. -4-
UPCOMING CFTC MEETINGS At the open meeting, the CFTC announced several dates for upcoming public meetings over the next three months to consider final Dodd-Frank rules. The open meetings will be held on July 7 and 19, August 4, and September 8 and 22. Although the agenda for these meetings is not yet final, Chairman Gensler said he expects the July and August meetings to consider rules in the following areas: anti-manipulation, large trader reporting, agricultural commodity definition, credit ratings, and the clearing determination process and the September meetings to consider the following areas: clearing, swap execution facilities and business conduct standards. He indicated that entity definitions, including swap dealer and major swap participant, are currently scheduled to be considered in November, although this timeframe could be accelerated depending on discussions with the SEC. Commissioner Sommers noted that she is working to convene a CFTC roundtable on the extraterritorial application of Title VII but has not yet been able to set a date for the roundtable. * * * Copyright Sullivan & Cromwell LLP 2011-5-
ENDNOTES 1 2 3 4 5 6 7 8 CFTC, Notice of Proposed Order and Request for Comment on Effective Date for Swap Regulation, 76 Fed. Reg. 35372 (June 17, 2011). SEC, Order Pursuant to Sections 15F(b)(6) and 36 of the Securities Exchange Act of 1934 Granting Temporary Exemptions and Other Temporary Relief, Together with Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps, and Request for Comment, Release No. 34-64678; File No. S7-24-11 (June 15, 2011), as yet unpublished in the Federal Register. For additional information on actions taken by the SEC, please see our Memoranda to Clients, Title VII of the Dodd-Frank Act SEC Announces Steps to Address July 16 Effective Date (June 10, 2011) and SEC Exemptive Relief in Connection With Effective Date of Title VII of Dodd- Frank SEC Issues Order to Provide Relief From Certain Provisions of Title VII That Would Be Effective on July 16, 2011 (). See http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cat1requiredrulemakings0614 11.pdf. 76 Fed. Reg. 35375. At the open meeting Commissioner O Malia also asked General Counsel Berkovitz how a DCM could comply with Core Principle 9 of Dodd-Frank, concerning execution of transactions by boards of trade, given that some of the statutory language requires further regulation. General Counsel Berkovitz responded that DCMs will have substantial discretion in determining how to comply with the Core Principles. In addition, Berkovitz definitively stated that DCOs should designate a Chief Compliance Officer ( CCO ), since the duties of the CCO, aside from the annual report, don t require any more rulemaking. See http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cat4requiredrulemakings0614 11.pdf. The CFTC has characterized the provisions relating to anti-manipulative practices issued under Section 753(a) of Dodd-Frank/Section 6(c) of the CEA as Category 1 provisions. The CFTC has characterized the provisions relating to anti-disruptive practices issued under Section 747 of Dodd-Frank/Section 4c(a)(5-6) of the CEA as Category 4 provisions. -6-
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