Adaptation of Regulations To Incorporate Swaps

Federal RegisterNov 2, 2012

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 4, 5, 7, 8, 15, 16, 18, 21, 22, 36, 38, 41, 140, 145, 155, and 166

RIN Number 3038-AD53

Adaptation of Regulations To Incorporate Swaps

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rules.

SUMMARY:

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “DFA”) established a comprehensive new statutory framework for swaps and security-based swaps. The Dodd-Frank Act repeals some sections of the Commodity Exchange Act (“CEA” or “Act”), amends others, and adds a number of new provisions. The DFA also requires the Commodity Futures Trading Commission (“CFTC” or “Commission”) to promulgate a number of rules to implement the new framework. The Commission has proposed and finalized numerous rules to satisfy its obligations under the DFA. This rulemaking makes a number of conforming amendments to integrate the CFTC's regulations more fully with the new framework created by the Dodd-Frank Act.

DATES:

Effective January 2, 2013.

FOR FURTHER INFORMATION CONTACT:

Peter A. Kals, Special Counsel, 202-418-5466,

pkals@cftc.gov,

Division of Clearing and Risk; Elizabeth Miller, Attorney-Advisor, 202-418-5450,

emiller@cftc.gov,

Division of Swap Dealer and Intermediary Oversight; David E. Aron, Counsel, 202-418-6621,

daron@cftc.gov,

Office of General Counsel; Alexis Hall-Bugg, Attorney-Advisor, 202-418-6711,

ahallbugg@cftc.gov,

Division of Market Oversight; Katherine Driscoll, Senior Trial Attorney, 202-418-5544,

kdriscoll@cftc.gov,

Division of Enforcement, Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Amended Regulations

A. Part 1

1. Regulation 1.3: Definitions

a. General Changes

b. Various Amended and New Definitions (Regulation 1.3)

c. Regulation 1.3(t): Open Contract

d. Regulation 1.3(ll): Physical

e. Regulation 1.3(ss): Foreign Board of Trade

f. Regulation 1.3(yy): Commodity Interest

g. Regulation 1.3(z): Bona Fide Hedging Transactions and Positions

h. Lack of a Definition of “End-User” in Regulation 1.3

2. Regulation 1.4: Use of Electronic Signatures

3. Regulation 1.31: Books and Records; Keeping and Inspection

4. Regulations 1.33: Monthly and Confirmation Statements

5. Regulation 1.35: Records of Cash Commodity, Futures and Option Transactions

6. Regulation 1.37: Customer's or Option Customer's Name, Address, and Occupation Recorded; Record of Guarantor or Controller of Account

7. Regulation 1.39: Simultaneous Buying and Selling Orders of Different Principals; Execution of, for and Between Principals

8. Regulation 1.40: Crop, Market Information Letters, Reports; Copies Required

9. Regulation 1.59: Activities of Self-Regulatory Employees, Governing Board Members, Committee Members and Consultants

10. Regulation 1.63: Service on Self-Regulatory Organization Governing Boards or Committees by Persons With Disciplinary Histories

11. Regulation 1.67: Notification of Final Disciplinary Action Involving Financial Harm to a Customer

12. Regulation 1.68: Customer Election Not To Have Funds, Carried by a Futures Commission Merchant for Trading on a Registered Derivatives Trading Execution Facility, Separately Accounted for and Segregated

13. Regulations 1.44, 1.53, and 1.62—Deletion of Regulations Inapplicable to Designated Contract Markets

14. Technical Changes to Part 1 in Order to Accommodate Recently Finalized Part 22 and Corresponding Changes to Part 22

B. Part 7

C. Part 8

D. Parts 15, 18, 21, and 36

E. Parts 41, 140 and 145

F. Parts 155 and 156

G. Other General Changes to CFTC Regulations

1. Removal of References to DTEFs

2. Other Conforming Changes

III. Administrative Compliance

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

C. Consideration of Costs and Benefits

I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Act into law.

Title VII of the Dodd-Frank Act

(“Title VII”) amended the CEA

to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted, among other reasons, 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 (“SDs”), security-based swap dealers, major swap participants (“MSPs”), and major security-based swap participants; (2) imposing clearing and trade execution requirements on swaps and security-based swaps, subject to certain exceptions; (3) creating rigorous recordkeeping and real-time reporting regimes; and (4) enhancing the rulemaking and enforcement authorities of the Commissions with respect to, among others, all registered entities and intermediaries subject to the Commission's oversight.

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 is available at

http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.”

7 U.S.C. 1

et seq.

(2006).

To apply its regulatory regime to the swap activity of intermediaries, the Commission must make a number of changes to its regulations to conform them to the Dodd-Frank Act. On June 7, 2011, the Commission published in the

Federal Register

a proposal to make such changes (“the Proposal”).

There was a 60-day period for the public to comment on the Proposal, which ended on August 8, 2011. The Commission received 39 comment letters from a variety of institutions, including designated contract markets (“DCMs”), agricultural trade associations, and agricultural cooperatives.

The Commission has determined to adopt the proposed rules primarily in the form proposed with certain modifications, discussed below, to address the comments the Commission received. With respect to certain of the proposed changes to regulation 1.35

(regarding recording of oral communications and the scope of written communications) and related amendments to regulation 1.31, the Commission has determined to address those changes in a final rule in a separate release.

Adaptation of Regulations to Incorporate Swaps, 76 FR 33066 (June 7, 2011) (“Proposing Release”).

Comment letters are available in the comment file on

www.cftc.gov.

All Commission regulations are in Chapter I of Title 17 of the CFR.

The Commission is mindful of, and continues to consider, the comments received on the Proposal's amendments to regulation 1.35 (records of commodity interest and cash commodity transactions). Those comments were submitted by various groups, including DCMs, representatives of the FCM and IB communities, energy

end-users, and agricultural trade associations and cooperatives.

These commenters focused primarily on: the proposed oral communications recordkeeping requirement, in general; the proposed requirement that all members of a DCM or SEF, including unregistered commercial end-users and non-intermediaries, keep records of the oral communications that lead to the execution of a cash commodity transaction; and the proposed requirement that each record be maintained in a separately identifiable electronic file identifiable by transaction and counterparty. Many of the comments were directed specifically toward narrowing the scope of the proposed changes to regulation 1.35 regarding recording of oral communications and written communications (and related amendments to regulation 1.31).

Commenters on this issue include: American Cotton Shippers Association; Agribusiness Association of Iowa; Agribusiness Association of Ohio; Agribusiness Council of Indiana; Trade Association of American Cotton Cooperatives; Commodity Markets Council; Falmouth Farm Supply; American Feed Industry Association; Grain and Feed Association of Illinois; Minnesota Grain and Feed Association; National Grain and Feed Association; Oklahoma Grain and Feed Association; Rocky Mountain Agribusiness Association; South Dakota Grain and Feed Association; Land O'Lakes; National Council of Farmer Cooperatives; American Gas Association; National Gas Supply Association; Fertilizer Institute; American Petroleum Institute; Electric Power Supply Association; National Rural Electric Cooperative Association; American Public Power Association; Large Public Power Council; Edison Electric Institute; Working Group of Commercial Energy Firms; IntercontinentalExchange Inc.; Kansas City Board of Trade; Minneapolis Grain Exchange; CME Group; Futures Industry Association; Barclays Capital; Henderson & Lyman; National Introducing Brokers Association; and National Futures Association.

The amendments adopted by this rulemaking primarily affect part 1 of the Commission's regulations, but also affect parts 4, 5, 7, 8, 15, 16, 18, 21, 22, 36, 41, 140, 145, 155, and 166. This rulemaking contains amendments of three different types: ministerial, accommodating, and substantive. Many of the amendments are purely ministerial—for instance, several changes update definitions to conform them to the CEA as amended by the Dodd-Frank Act; add to the Commission's regulations new terms created by the Dodd-Frank Act; remove all regulations and references pertaining to derivatives transaction execution facilities (“DTEFs”), a category of trading facility added to the CEA by section 111 of the Commodity Futures Modernization Act of 2000 (“CFMA”),

which the DFA eliminated; correct various statutory cross-references to the CEA in the regulations; and remove regulations in whole or in part that were rendered moot by the CFMA.

Public Law 106-554, 114 Stat. 2763 (2000).

The accommodating amendments are essential to the implementation of the DFA in that they propose to add swaps, swap markets, and swap entities to numerous definitions and regulations, but are more than ministerial because they require some judgment in drafting. Accommodating amendments include, among other things, amending numerous definitions in regulation 1.3 to reference or include swaps; creating new definitions as necessary in regulation 1.3; amending recordkeeping requirements to include information on swap transactions; adding references to swaps and swap execution facilities (“SEFs”) in various part 1 regulations; and amending parts 15, 18, 21, and 36 to implement the DFA's grandfathering and phase-out of exempt boards of trade and exempt commercial markets.

The substantive amendments are changes that align requirements or procedures across futures and swap markets. They consist of amendments to regulation 1.31 that harmonize some of the current part 1 recordkeeping requirements with some of those applicable to SDs and MSPs under part 23 regulations

and amend procedures pertaining to the post-execution allocation of bunched orders (regulation 1.35(a)). Under the amendments to the bunched orders provisions, “eligible account managers” can allocate such orders post-execution similarly to how they currently do so with futures.

See

Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (adopting for SDs and MSPs reporting and recordkeeping standards now found in 17 CFR 23.201-23.203).

To aid the public in understanding the numerous changes to different parts of the CFTC's regulations adopted by this release, the Commission will also publish on its Web site a “redline” of the affected regulations which will clearly reflect the additions and deletions.

The redline does not, in and of itself, have any legal authority.

II. Comments Received and Amended Regulations

A. General Comments

Several commenters argued that the Proposal was premature because many other rules remained to be proposed and finalized,

and subsequent final rulemakings may dictate which conforming amendments will be necessary. A joint letter by certain Electric Utility Trade Associations (“the ETA”) contended that the incomplete nature of the swap regulatory regime renders it unable to “effectively comment,” because it lacks a full understanding of the entire swap regulatory landscape. In the ETA's view, the “premature” nature of the Proposal rises to the level of a violation of the Administrative Procedures Act (“APA”).

The ETA commented further that because the Proposal updated certain regulations by treating swaps equivalently to futures, the Proposal “represents a fundamental misunderstanding” of the executing electric industry swap market, and, consequently, should be withdrawn. The ETA also noted that, “[f]rom time to time, the Commission's staff has declined to consider whether nonfinancial commodity and related swap markets are indeed different in any meaningful way from other markets,” and that the ETA “continues to urge the Commission to engage in a considered analysis of such differences and the implications of such differences for its rulemaking process.” The CME Group (“CME”) argued that the Commission should have waited to propose the voice and electronic recordkeeping requirements in regulation 1.35(a) until SEFs register, the Dodd-Frank Act clearing and exchange trading requirements take effect, and Dodd-Frank Act recordkeeping and reporting requirements take effect. The Electric Power Supply Association (“EPSA”) commented that final rules defining swap, SD, and MSP must be published prior to proposing a rule conforming the Commission's regulations to the Dodd-Frank Act and related regulations. Therefore, EPSA argued, the Proposal should be withdrawn. Mr. Chris Barnard generally supported the Proposal, commenting that the proposed changes were either common sense or required by the DFA.

A joint letter by the American Gas Association, Commodity Markets Council, National Gas Supply Association, and the Fertilizer Institute (“AGA et al.”); Commodity Markets Council (“CMC”); Electric Power Supply Association; certain Electric Utility Trade Associations; and the Working Group of Commercial Energy Firms (“Working Group”).

See

ETA Letter (claiming that “[t]he [Proposal] cannot fairly apprise interested persons of the nature of the Commission's rulemaking, nor can it provide notice of `the terms of substance of the proposed rule or a description of the subjects and issues involved,' as required by the [APA], when the proposed rules purport to adapt to a moving target.”).

The Commission believes it was appropriate to have published the Proposal when it did. The purpose of this rulemaking is to conform the Commission's regulations to the CEA as

revised by the DFA where necessary (to avoid conflicting statutory and regulatory definitions of the same term, for example) or desirable (

e.g.,

to make retention periods for records of all swap transactions consistent with those recently adopted for the records of swap transactions of SDs). The Commission viewed many of these changes to be non-controversial. For example, the DFA amended the definition of FCM in section 1a of the CEA to permit FCMs to execute and clear swaps for customers in addition to futures. Accordingly, the Proposal updated regulation 1.3's definition of FCM, as well as recordkeeping requirements in regulations 1.31, 1.33, and 1.35, so that an FCM's duties with respect to swaps would mirror its duties with respect to futures. Because IBs and FCMs can execute or clear cleared swaps analogously to futures, the Commission believes that certain of the requirements in regulations 1.31, 1.33, and 1.35, which describe recordkeeping requirements for FCMs and IBs, can and should apply equivalently to an FCM's futures and cleared swaps business. In response to the ETA's comment that the Proposal inappropriately equated swaps with futures, the Commission notes that part 23 of the Commission's regulations addresses issues unique to the swap market by describing recordkeeping and other “business conduct” requirements for SDs and MSPs.

The Commission believes it is appropriate to make these conforming changes at this time. In adopting this final rule, the Commission is incorporating any changes necessitated by other final Dodd-Frank Act rulemakings.

Part 1

1. Regulation 1.3: Definitions

a. General Changes

The Commission is revising regulation 1.3 so that its definitions, which are used throughout the Commission's regulations, incorporate relevant provisions of the DFA. For instance, amended regulation 1.3 updates current definitions to conform them to the Dodd-Frank Act's amendments of the same terms in the CEA's definitions section,

and also includes definitions specifically added by the Dodd-Frank Act to the CEA. This is the case for many of the definitions in proposed regulation 1.3, including “commodity pool operator,” “commodity trading advisor,” “futures commission merchant,” “introducing broker,” “floor broker,” “floor trader,” “swap data repository,” and “swap execution facility.” For example, section 721(a)(5) of the DFA amended the definition of “commodity pool operator” (“CPO”) in CEA section 1a to add swaps to those contracts for which soliciting funds for a collective investment renders a person a CPO. Consequently, today's final rulemaking updates the definition of CPO in regulation 1.3 to match the DFA's new definition of that term. The Commission did not receive comments about the Proposal's revised definitions of “commodity pool operator,” “commodity trading advisor,” “futures commission merchant,” “floor broker,” “floor trader,” “swap data repository,” and “swap execution facility.” The Commission is adopting these definitions as proposed.

CEA section 1a, 7 U.S.C. 1a.

In response to the proposed conforming amendments to the definition of “introducing broker,” Financial Services Roundtable (“FSR”) commented that a small commercial lender facilitating a swap transaction between a borrower and a third party, solely in connection with the lender's loan origination or syndication, should not have to register as an introducing broker (“IB”), but could possibly be required to do so under the amended definition. FSR commented further that such a result would be inconsistent with a 2004 staff no-action letter,

in which the Commission's Division of Clearing and Intermediary Oversight explained that the purpose of registering and regulating IBs is to protect the public from sales abuses—according to FSR, such a concern does not exist in the situation FSR described. Specifically, FSR recommended that the Commission further define the term “introducing broker” to specifically exclude the lenders it described, or in the alternative, that the Commission issue interpretative guidance addressing this issue.

CFTC No-Action Letter No. 04-34 at 3 (Sept. 16, 2004).

The Commission declines to further define the term “introducing broker” as FSR requested, and is adopting the term as proposed. However, the Commission believes that in the situation described by FSR, the small commercial lender would not be required to register as an IB, as long as it did not receive compensation from the third party with whom the lender arranges the borrower's swap. This analysis is based solely on the facts as presented by FSR in its comment letter and is consistent with previously issued staff no-action or interpretative letters.

Staff can issue further guidance, as appropriate, on a case-by-case basis under regulation 140.99.

FSR stated that the lenders it described receive compensation “in connection with lending and retaining risk and not in connection with introducing a [swap provider].” A key element of both the previous and amended definitions of IB is that the person engages in the described conduct “for compensation or profit, whether direct or indirect.” 17 CFR 1.3(mm). This analysis is consistent with past Commission guidance requiring an individual to register as an IB based on referring customers to a commodity trading advisor and receiving compensation in return. CFTC Interp. Letter No. 86-27 (Introducing Broker Registration Requirements), Comm. Fut. L. Rep. (CCH) ¶ 23,364, CFTC (Nov. 24, 1986). This letter emphasized that “the presence or absence or[sic] per-trade compensation is not determinative of whether one falls within the definition of an introducing broker. The Commission's final rule expressly eliminated the form and manner of compensation as the principal measure of whether registration as an introducing broker would be required * * * [P]ursuant to the express terms of the introducing broker definition in rule 1.3(mm), any compensation (without regard to whether such compensation is per-trade or otherwise) for the solicitation or acceptance of orders * * * brings one within the definition.”

Id.

(footnotes omitted). Therefore, if the lenders FSR described receive compensation from the swap providers for their customer referrals, then the lenders would fall within the definition and be required to register as IBs.

Separately, the Commission notes that the activity of an associated person “AP” of an SD may resemble the swap activity of an IB. The definition of IB in regulation 1.3(mm), as amended by today's final rule, excludes an AP, including an AP of an SD. Pursuant to paragraph (6) of the definition of AP in regulation 1.3(aa), an AP of an SD could be an agent of the SD while not an employee of the SD. This may be the case, for example, where an employee of an affiliate of the SD is authorized to negotiate swap transactions on behalf of the SD. Where such an agency relationship is present, the Commission would not consider the employer of such an AP of an SD to be an IB due to the activities of that AP of the SD.

Additionally, the Proposal revised the definition of “self-regulatory organization” (“SRO”) (regulation 1.3(ee)) to include SEFs, a new category of regulated markets under the DFA, and derivatives clearing organizations (“DCOs”). The Commission did not receive any comments concerning its proposal to amend this definition. Today's final rulemaking amends the definition of SRO by including SEFs. However, it does not amend the definition of SRO to include DCOs. Upon further reflection, the Commission has determined that the part 1 regulations applicable to SROs need not apply to DCOs in light of recently finalized regulations in part 39 implementing the Act's Core Principles for DCOs.

For example, paragraph (6) of regulation 39.12(a) (“Participant and product eligibility”) requires a DCO to have the ability to enforce compliance

with its participation requirements and to establish procedures for the suspension and orderly removal of clearing members that no longer meet the requirements. Moreover, the Commission is in the midst of other rulemakings pertaining to the responsibilities of SROs and DCOs,

e.g.,

proposed regulations regarding the governance of DCOs.

DCO General Provisions and Core Principles, 76 FR 69334 (Nov. 8, 2011).

Requirements for DCOs, DCMs, and SEFs Regarding the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);

and

Governance Requirements for DCOs, DCMs, and SEFs; Additional Requirements Regarding the Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011).

b. Various Amended and New Definitions (Regulation 1.3)

The Commission is (1) simplifying or clarifying certain existing regulation 1.3 definitions, and (2) adding several new definitions to regulation 1.3, pursuant to amendments to the CEA by the Dodd-Frank Act, existing regulations, and other amendments in the Proposal.

The term “contract market,” for instance, is not defined under the CEA, and is currently defined under regulation 1.3(h) as “a board of trade designated by the Commission as a contract market under the Commodity Exchange Act or in accordance with the provisions of part 33 of this chapter.” In certain provisions throughout the Commission's regulations, contract markets are also referred to as “designated contract markets.” Because both terms are used interchangeably within the regulations, the Commission has decided to revise the definition to mean contract market and designated contract market (“DCM”). Proposed regulation 1.3(h) contained one definition identified by the title “Contract market; designated contract market.” The proposed definition also corrected an erroneous cross-reference to part 33 as the regulations applicable to DCMs, which the Commission is correcting by changing it to a reference to part 38 of the Commission's regulations. No commenters addressed these changes. The Commission is adopting the definition in regulation 1.3(h) as proposed with one modification to reflect the fact that the Commission designates a board of trade as a contract market “under the Act and in accordance with part 38” as opposed to “under the Act or in accordance with part 38.”

The Proposal contained a similar clarification regarding the definition of “customer.” It simplified the definition of “customer” by combining two existing definitions, “customer; commodity customer” in regulation 1.3(k) and “option customer” in regulation 1.3(jj), and by adding swaps to the proposed definition. Therefore, the proposed definition included swap customers, commodity customers, and option customers, referring to them all with the single term, “customer.” Furthermore, the Commission proposed to revise all references to “commodity customer” and “option customer” throughout the Commission's regulations, but particularly in part 1, to simply refer to “customer.”

The proposed revisions retained references to requirements specific to certain contracts.

Today's final rulemaking revises the definition of “customer” (regulation 1.3(k)), as proposed, and deletes the definition of “option customer” (regulation 1.3(jj)), as proposed. The Commission did not receive comments about the proposed deletion of the term “option customer.”

The Commission proposed to remove references to commodity customers and option customers, replacing them with references to simply “customer,” in the following regulations: 17 CFR 1.3, 1.20-1.24, 1.26, 1.27, 1.30, 1.32-1.34, 1.35-1.37, 1.46, 1.57, 1.59, 155.3, 155.4, and 166.5.

For example, proposed regulation 1.33 (Monthly and confirmation statements) required an FCM to document a customer's positions in futures contracts differently from its option or swap positions. Proposed regulation 1.33 preserved these distinctions, even though it referred only to “customers” as opposed to “commodity customers,” “option customers,” and “swap customers.”

ETA commented that counterparties to electricity swap contracts are not customers analogous to futures customers, and, therefore, by expanding the “customer” concept to include entities that execute swaps, the Commission would impose “significant and inappropriate obligations” on swap counterparties. The Commission has decided to finalize the definition of customer, as proposed. ETA is correct that counterparties to bilaterally-executed swaps are principals, which is unlike trading futures, where FCMs are agents of their customers. However, FCMs will execute and clear swap transactions, as agents, equivalently to the manner in which they currently execute and clear futures transactions.

The Commission proposed to define the term “confirmation” to reflect its differing use in various regulations depending on whether a transaction is executed by an FCM, IB or CTA on the one hand, or by an SD or MSP on the other hand. In the first case, the registrant is acting as an agent. In the second, it is acting as a principal.

No commenters addressed the proposed definition of “confirmation,” and the Commission has decided to adopt it as proposed.

A single entity could be registered in more than one capacity, for example, as both an SD and a CTA. Which rules were applicable would depend on the capacity in which such an entity was performing a particular function.

The Commission proposed to add to regulation 1.3 a definition of the term “registered entity,” currently provided in CEA section 1a(40), as revised by the Dodd-Frank Act. The proposed definition of “registered entity” is identical to its CEA counterpart and would include DCOs, DCMs, SEFs, swap data repositories (“SDRs”) and certain electronic trading facilities. To correspond with this new definition, the Commission also proposed to replace the current “Member of a contract market” definition with a new definition of “Member,” in regulation 1.3(q), which would be nearly identical to the “Member of a registered entity” definition provided in CEA section 1a(34), also as revised by the Dodd-Frank Act.

The proposed “Member” definition was broadened to accommodate newly established SEFs, and it includes those “owning or holding membership in, or admitted to membership representation on, the registered entity; or having trading privileges on the registered entity.” Additionally, for ease of reference, proposed regulation 1.3 added several terms defined under the CEA, using identical definitions, including “electronic trading facility,” “organized exchange,” and “trading facility.”

In accordance with the removal of DTEF references from many other Commission regulations, the proposed “Member” definition would not include DTEF references currently in the definition of “Member of a registered entity” found in CEA section 1a(34).

See

7 U.S.C. 1a(34).

The ETA commented that the Commission should wait to define “registered entity,” “organized exchange,” “electronic trading facility,” and “trading facility” until the Commission enters into an MOU with FERC and publishes rules defining the scope of its jurisdiction over nonfinancial energy commodity swaps. According to the ETA, a SEF should not be deemed a registered entity. In addition, the ETA does not believe SEF participants should fall within the Commission's proposed definition of “member,” suggesting that it is inappropriate or premature to require SEF participants to have the same recordkeeping requirements as DCM members under regulation 1.35.

The Commission disagrees with the ETA's comment that it should wait to define the terms “registered entity,” “organized exchange,” “electronic trading facility” and “trading facility” until the Commission enters into an MOU with FERC and publishes rules defining the scope of its jurisdiction

over nonfinancial energy commodity swaps. As explained in the Proposal, the definitions proposed for each of those terms are identical to their statutory definitions under the CEA. The Commission may further define these terms in the future if necessitated by an MOU with FERC or by Commission rules defining the scope of its jurisdiction over nonfinancial energy commodity swaps.

With respect to the ETA's assertion that SEFs should not be deemed “registered entities,” the Commission notes that SEFs are already deemed “registered entities” under section 1a(40) of the CEA. Lastly, the term “member,” as defined under the CEA, includes “with respect to a registered entity * * * an individual, association, partnership, corporation or trust * * * having trading privileges on the registered entity.”

Accordingly, the CEA considers participants on a SEF “members” by virtue of their having trading privileges on the SEF. For the foregoing reasons, the Commission is adopting the definitions of “registered entity,” “organized exchange,” “electronic trading facility,” “trading facility,” and “member” as proposed.

CEA section 1a(34), 7 U.S.C. 1a(34).

The Commission also proposed to add a definition of the term “order.” This term had not previously been defined by Commission regulations, although it is used in several of them,

e.g.,

17 CFR 1.35, 155.3, and 155.4. In light of this, and with the addition of new categories of registrants (SDs and MSPs) who act as principals rather than agents, clarification of this term is appropriate. No commenters addressed the proposed definition, and the Commission is adopting it as proposed.

Because proposed amendments to regulation 1.31 incorporated the term “prudential regulator,” as added to the CEA by the Dodd-Frank Act, the Commission proposed to define the term in regulation 1.3.

The proposed definition of “prudential regulator” in regulation 1.3 is coextensive with the definition in section 1a(39) of the Act and lists the various prudential regulators. No commenters addressed this proposed definition, but the amendments to regulation 1.31 adopted today no longer reference the term “prudential regulator.” Nonetheless, the Commission has determined to adopt the definition as proposed, in anticipation of future rulemakings and regulations possibly using the term “prudential regulator.”

Proposing Release, 76 FR at 33068 and 33070. Pursuant to proposed regulation 1.31, records of swap transactions must be presented, upon request, to “any applicable prudential regulator as that term is defined in section 1a(39) of the Act.”

Id.

at 33088.

The Commission also proposed to add the term “registrant” to regulation 1.3 so that certain regulations in part 1 could refer to various intermediaries (

e.g.,

FCMs, IBs, CPOs), their employees (associated persons), and other registrants (MSPs). Because the DFA created a definition of and several Commission regulations refer to “associated persons of swap dealers or major swap participants,” the Commission proposed to add that term to regulation 1.3 as well. No commenters addressed these changes, but the Commission will only be adopting the definition of “registrant” as proposed. Since the Proposal's publication, a separate final rulemaking establishing the registration process for SDs and MSPs amended the existing definition of “associated person” found in regulation 1.3(aa) to incorporate associated persons of SDs and MSPs in a manner consistent with CEA section 1a, as amended by the Dodd-Frank Act.

In light of that rulemaking, the Commission is not adopting a separate definition of “associated person of swap dealers and major swap participants” in regulation 1.3.

Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2615 and 2625 (Jan. 19, 2012).

The Commission also proposed, and is hereby adopting, a definition of the term “retail forex customer” in regulation 1.3 because it appears in several regulations in part 1 and currently is only defined in part 5. The definition is identical in all material respects to the definition of this term as it currently appears in regulation 5.1(k).

The Commission did not receive any comments to the Proposal's addition of a definition of “retail forex customer” to regulation 1.3.

17 CFR 5.1(k) currently defines “retail forex customer” as “a person, other than an eligible contract participant as defined in section 1a(12) of the Act, acting on its own behalf and trading in any account, agreement, contract or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.” This final rulemaking amends the definition in part 5 only to reflect the renumbering of section 1a of the CEA by the Dodd-Frank Act, and adds an identically amended definition to regulation 1.3.

See infra

Part II.G.2.

The Commission is also finalizing the revised definition of “strike price” (regulation 1.3(kk)) as proposed so that this definition encompasses swaps in addition to futures. The Commission received no comments about this proposal.

c. Regulation 1.3(t): Open Contract

The Proposal changed the defined term from “open contract” to “open position” and added provisions for commodity option transactions and swaps. CME commented that it is unclear whether the proposed definition is intended to cover options on swaps. If so, then the word “commodity” should be deleted from the phrase, “commodity option transaction.” According to CME's comment letter to the Proposal, the Commission should also clarify whether, or which, options are covered by proposed paragraph (t)(3) (swaps). CME also argues that proposed paragraph (t)(3) does not adequately characterize open positions in cleared swaps. Proposed paragraph (t)(1)'s terminology, CME believes, more appropriately characterizes cleared swaps because, like futures, cleared swaps may be fulfilled by delivery or they may be offset.

The Commission has decided to finalize the definition with a few modifications. The final definition retains the original title of the term, “open contract.” It also narrows its applicability from all swaps to only Cleared Swaps, as regulation 22.1 defines that term.

Regulation 22.1 was promulgated as part of Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012).

The Commission notes that the option component of the definition (paragraph (t)(2)) covers all options:

i.e.,

options on futures; options on swaps (“swaptions”); and options on commodities.

In response to CME's comment, the Commission notes that although, pursuant to the Dodd-Frank Act, swaptions and options on commodities (other than options on futures) are swaps, it is nevertheless appropriate for the definition of “open contract” to describe them with language suitable only to options and not to other swaps. In other words, the definition of “open contract” merely describes types of contracts; it is not intended to classify these contracts for regulatory purposes or to elaborate on the definition of “swap,” which the Commission recently published in final form.

Section 4c of the CEA grants the Commission authority over all three of these categories of options.

See

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (Aug. 13, 2012).

Because the only references in the regulations to the term “open contracts” apply to cleared contracts,

i.e.

futures contracts and Cleared Swaps, the final definition only includes Cleared Swaps in paragraph (t)(3). The final rule also

modifies paragraph (t)(3) to reflect the fact that Cleared Swaps can be fulfilled by delivery or by offset against other Cleared Swaps, as is the case with futures. Thus, paragraph (t)(3) states in final form, “swaps that have not been fulfilled by delivery; not offset; not expired; and not been terminated.”

In the Proposal, pursuant to the revision of the definition of “open contract” in regulation 1.3(t), the Commission proposed to change “open contract” to “open position” in regulations 1.33 (“Monthly and confirmation statements”) and 1.34 (“Monthly record, `point balance' ”). The Commission did not receive comments about these changes. In light of the fact that the Commission is retaining the title “open contract,” in the final revisions to regulation 1.3(t), the Commission is preserving those references to “open contract” in regulations 1.33 and 1.34.

See infra

section II.A.4. (discussing amendments to regulation 1.33).

d. Regulation 1.3(ll): Physical

i. Proposal

As part of the Proposal, the Commission explained that current regulation 1.3(ll) defines “physical” as “any good, article, service, right or interest upon which a commodity option may be traded in accordance with the Act and these regulations.”

The Commission noted that, other than the reference to options, the term “physical” was similar to the definition of “commodity” in regulation 1.3(e), which includes, in relevant part “all * * * goods and articles * * * and all services, rights and interests in which contracts for future delivery are presently or in the future dealt in.” The quoted portions of the “physical” and “commodity” definitions are effectively the same, differing only in the potential overlying instrument with respect to which the respective terms are defined. In addition, the Commission noted that the introductory language in regulation 1.3 provides that “[t]he following terms, as used in the rules and regulations of this chapter, shall have the meaning hereby assigned to them, unless the context otherwise requires.”

Proposing Release, 76 FR at 33068-69.

Id.

at 33069.

In the Proposal, the Commission also traced the history of the term “physical” in its regulations, noting that the definition of “physical” was first added to its regulations “to enable trading, on DCMs, in options to buy or sell an underlying commodity” and that the definition had not been substantively amended.

The Commission added that, in 1982, when the Commission proposed to add the definition of “physical” to its regulations, “cash-settled futures on non-physical commodities had just been introduced in the form of the Chicago Mercantile Exchange's Eurodollar futures” and that, “[i]n that context * * * it made sense to name such options based on physical commodities, which constituted the vast majority of commodities covered by then-existing futures contracts.”

While options may have primarily been written on physical commodities in 1982, the Commission noted in the Proposal that “[a]t present * * * options may be traded on both physically deliverable and non-physically deliverable commodities, such as interest rates and temperatures” and that, given that change, using the term “physical” to refer to an option on both physically deliverable and non-physically deliverable commodities may be confusing.

The Commission added that the intended-to-be-physically-settled element of the forward exclusion from the swap definition “would be meaningless if `physical' included non-physical.”

Id.

at 33069.

Id.

In light of (1) The overlapping definitions of “commodity” and “physical” in Commission regulation 1.3, (2) the fact that options now are written on a wide range of non-physical commodities, and (3) the Commission's desire that the term “physical” not be interpreted to permit cash settled transactions to rely on the forward exclusion from the swap definition (unless otherwise permitted by Commission interpretations with respect to such exclusion, such as those discussed in the Commission's rulemaking jointly (with the Securities and Exchange Commission) further defining “swap”), the Commission, in the Proposal, requested comment on various possible approaches to the definition of “physical” in regulation 1.3(ll). One possible approach on which the Commission requested comment was whether it should eliminate the definition, on the theory that its meaning is self-evident, and rely on the ability of interested parties to interpret the term “physical.” The Commission also requested comment on not amending the definition in reliance upon the introductory language in regulation 1.3, which applies the regulation 1.3(ll) definition of “physical” unless the context otherwise requires.

ii. Comments

Three commenters addressed the definition of physical in regulation 1.3(ll). The ETA commented that the proposed definition of “physical” should be withdrawn because addressing it in terms of swaps is premature prior to the Commission publishing the further definition of “swap,” including, in particular, defining the term “nonfinancial commodity,” which the ETA characterized as a key component of the forward exclusion from the swap definition. The ETA stated that, in proposing such a substantive rule, the Commission must explain how defining “physical” would affect all of its regulations and requested that the Commission re-propose any revised definition of “physical” with a “comprehensive analysis of the way such word, whether used as an adjective or an adverb, interrelates with the Dodd-Frank statutory term `nonfinancial commodity,' as well as the concepts of `cash market,' `physical market channels' and the `bona fide hedging exemption'.”

The Environmental Markets Association (“EMA”) believes that the “very broad” definition of the word “physical” in current Commission regulations “certainly” encompasses environmental commodities, which the EMA states are subject to the forward exclusion from the definition of swap. The EMA requested that the CFTC issue a final rule clarifying that environmental commodities are not swaps even though intangible, that they are nonfinancial commodities that can rely on the forward exclusion, and that intangibility of a commodity does not prevent it from being “physically settled.” The Coalition for Emission Reduction Policy (“CERP”) similarly argued that environmental and other intangible commodity transactions that result in actual delivery of a commodity, intangible or not, as opposed to transactions that settle in cash, can be subject to the forward exclusion because such transactions can be physically settled. CERP also claimed that the Commission's proposed interpretation of forward contracts in nonfinancial commodities in the definition of “swap” supports its interpretation of “physically settled” in that forward sales of environmental commodities are commercial merchandising transactions because both buyer and seller ultimately need and intend the transfer of ownership of the emission allowances or offset credits.

EMA also expressed that the Commission's request for comment with regard to whether the definition of “physical” should rely on the “common sense meaning” of the word was unclear. In particular, EMA argued that environmental commodities traded in the spot or forward markets are physically delivered via a registry or an exchange of paperwork and eventually consumed through retirement. Further, according to EMA, environmental commodities are goods because Uniform Commercial Code (“UCC”) section 2105(1) defines “good” as “anything that can be moved other than money.”

iii. Final Rules

The Commission is removing from regulation 1.3(ll) the definition of “physical,” which term will therefore have the meaning dictated by the context of the individual Commission regulations in which it appears. In addition, the Commission is adopting conforming changes to other regulations to address the deletion of the definition. The Commission is adopting these changes for ease of reference for market participants and to reduce confusion in interpreting the Commission's regulations, consistent with the spirit of Executive Order 13563, which seeks, among other goals, to eliminate agency regulations that have outlived their usefulness.

As explained further below, these modifications are not intended to alter the substantive provisions of the Commission's regulations.

See

Executive Order 13563 of January 18, 2011, Improving Regulation and Regulatory Review, at section 6(a), 76 FR 3821, 3822 (Jan. 21, 2011) (stating “To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.”).

When the Commission added the definition of “physical” to regulation 1.3 in 1982, the intent was to distinguish between options on futures contracts and other options subject to the Commission's jurisdiction; the Commission termed such other options “options on physicals.” The Commission added the “physical” definition because, while the 1982 rulemaking including provisions applicable both to DCM-listed options on futures and DCM-listed options on commodities, it also contained regulations applicable solely to options on futures. Thus, the purpose of the definition was “principally to enable the Commission to differentiate, where necessary, between references to options on physicals and options on futures contracts.”

Although the intent of Commission regulation 1.3(ll) was only to address the distinction between options on futures and other options, the Commission believes that the use of such a broad term to apply to a narrow circumstance can create confusion because the definition is not expressly so limited. While the introduction to regulation 1.3 says that the definitions therein have the meanings set forth therein unless the context otherwise requires, determining when regulation 1.3(ll) applies as drafted and when the context dictates a different meaning can be subjective and result in confusion.

Domestic Exchange-Traded Commodity Options; Expansion of Pilot Program To Include Options on Physicals, 47 FR 56996, 56998 (Dec. 22, 1982).

The Commission did not intend, when it promulgated the definition in regulation 1.3(ll), to apply it to circumstances such as the definition of “physically” settled. Given the intent of the definition of the term “physical” (to distinguish options on futures from other options) and the introductory language in regulation 1.3 regarding contextual interpretations of the defined terms therein, in regulations where it is not necessary to distinguish between different types of options, the definition of “physical” in Commission regulation 1.3(ll) is not useful and can be overbroad. For example, the definition of “physical” is not useful with respect to the term “physical safeguards” in regulation 160.30, which pertains to procedures to safeguard customer records and information. Because the scope of the definition of “physical” essentially includes options on any commodity, which would include non-physical commodities such as temperatures and interest rates, effectively, the restriction that “physical” in regulation 1.3(ll) is limited to any goods, article, service, right or interest upon which a commodity may be traded in accordance with the CEA and the Commission's regulations is not much of a restriction at all.

The Commission also notes that it recently promulgated final and interim final rules amending parts 32 and 33 of the Commission's regulations.

While part 33 continues to address options on futures contracts, the other options subject to the Commission's jurisdiction that also were previously addressed in part 33 now are addressed in part 32 rather than in part 33. Further, the Commission no longer refers to such other options as “options on physicals.” Instead, the Commission generally uses the term “commodity option” as a reference to both options on futures and other CFTC-jurisdictional options. Where the Commission distinguishes the regulatory treatment for options on futures from the regulatory treatment of other options, it specifically identifies options on futures as “commodity option transactions on a contract of sale of a commodity for future delivery.” With these recent amendments, the definition of “physical” in regulation 1.3(ll) will not help to distinguish between options on futures and other commodity options because the rules generally addressing the regulatory treatment of other commodity options no longer use the term “physical” to refer to such transactions.

Commodity Options, 77 FR 25320 (Apr. 27, 2012).

In light of these considerations, the Commission believes that deleting the definition of physical will reduce the potential for confusion on the part of market participants, as the appropriate definition of that term will be based on the context of the individual rules in which the term is utilized. These amendments will also serve the goals of Executive Order 13563 by amending the Commission's regulations because they no longer are “effective[] in achieving the objectives for which they were adopted.”

Reducing Regulatory Burden; Retrospective Review Under E.O. 13563, 76 FR 38328 (June 30, 2011).

Further, various Commission regulations relating to options also refer to a “physical” when discussing an option on a commodity. In order to conform those regulations with the adapting changes discussed above, the Commission is adopting a number of non-substantive changes including, but not limited to, replacing certain references to “physical” with references to “commodity.” Where appropriate, the Commission is also replacing references to “underlying physical” with references to “underlying commodity.”

For the reasons discussed above, these conforming amendments will not result in substantive changes. Therefore, the Commission is amending the following regulations as described above: Regulations 1.3(kk); 1.3(ll); 1.17(c)(1)(iii), (c)(5)(ii)(A), and (c)(5)(xiii)(C); 1.33; 1.34(b); 1.35(b)(2)(iii), (b)(3), (d) and (e); 1.39(a) and (a)(3); 1.46(a)(1)(iii) and (iv); 4.23(a) and (b); 4.33(b)(1); 15.00(p)(1)(ii); 16.00(a); and 16.01(a)(1)(ii) and (iv), and (b)(1)(ii) and (iv). The Commission is leaving unchanged other references to “physical” in its existing definitions because, given the context in which the term is used in those rules, such

references are limited to physical commodities.

The Commission is replacing the word “physical” in regulations 1.17(c)(1)(iii) and 1.17(c)(5)(xi) with the word “commodity,” and is replacing the word “physical” in regulation 1.17(c)(5)(ii)(A) with the term “physical commodity.” In so doing, the Commission does not intend to change the meaning of any of these paragraphs. Thus, final regulations 1.17(c)(1)(iii) and 1.17(c)(5)(xi) will continue to apply to options that overly any commodity, not just a tangible commodity. By contrast, final regulation 1.17(c)(5)(ii)(A) will continue to apply to the options described therein, which cover tangible commodities only.

While some commenters requested that the Commission interpret “physical” for purposes of the term “physically settled” within the forward exclusion for swaps, or generally address the definition of “physical” as it relates to other terms, the Commission declines to do so for purposes of this release. The conforming amendments to the definition of physical are non-substantive changes that are designed to increase clarity for market participants. As noted above, rather than have a definition of physical that applies unless the context “otherwise requires,” the Commission will apply the definition based on the particular context of the applicable regulation. Because the current definition already applies in this manner, the modifications addressed herein do not amount to a substantive change in the regulations.

e. Regulation 1.3(ss): Foreign Board of Trade

The Commission proposed to amend the definition of foreign board of trade to mean “any board of trade, exchange or market located outside the United States, its territories or possessions, whether incorporated or unincorporated where foreign futures, foreign options, or foreign swap transactions are entered into.” The Commission received no comments regarding the proposed definition of “foreign board of trade” and is modifying the proposed definition to make it consistent with the definition provided in the final rulemaking for Registration of Foreign Boards of Trade.

Accordingly, new regulation 1.3(ss) defines the term “foreign board of trade” as “any board of trade, exchange or market located outside the United States, its territories or possessions, whether incorporated or unincorporated.”

Registration of Foreign Boards of Trade, 76 FR 80674 (Dec. 23, 2011).

f. Regulation 1.3(yy): Commodity Interest

The Commission proposed adding “swap” to the definition of “commodity interest” in regulation 1.3(yy).

Currently, commodity interest is defined as: “(1) Any contract for the purchase or sale of a commodity for future delivery; (2) Any contract, agreement or transaction subject to Commission regulation under section 4c or 19 of the Act; and (3) Any contract, agreement or transaction subject to Commission jurisdiction under section 2(c)(2) of the Act.” At the time of the proposal, the term was cross-referenced by 33 other Commission regulations and appendices to parts of Commission regulations.

Generally, the term “commodity interest” is meant to encompass all agreements, contracts and transactions within the Commission's jurisdiction, though not all such agreements, contracts and transactions are expressly set forth therein.

Proposing Release, 76 FR at 33069.

See

17 CFR 1.12, 1.56, 1.59, 3.10, 3.12, 3.21, 4.6, 4.7, 4.10, 4.12-4.14, 4.22-4.25, 4.30-4.34, 4.36, 4.41, 30.3, 160.3-160.5, and 166.1-166.3; 17 CFR pt. 3 app. B, 17 CFR pt. 4 app. A, and 17 CFR pt. 190 app. B.

For example, the term “contract for the purchase or sale of a commodity for future delivery” in current regulation 1.3(yy)(1) encompasses security futures products. Similarly, the term “swap” would include mixed swaps (though mixed swaps are swaps, they also are security-based swaps, so the Commission shares authority over mixed swaps with the SEC). Of course, the impact of the scope of proposed regulation 1.3(yy) is only as extensive as the other regulations referencing it.

The Dodd-Frank Act added a definition of the term “swap” to the CEA.

DFA section 712(d)(1) requires the Commission to further define the term “swap” jointly with the Securities and Exchange Commission (“SEC”), and the Commission has recently adopted regulations further defining the term “swap,” among other terms, jointly with the SEC.

DFA section 721(a)(21); codified at 7 U.S.C. 1a(47).

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (August 13, 2012) (adopting 17 CFR 1.3(xxx), which defines the term “Swap”).

In their comment letter, the ETA objected to the Proposal's addition of the term “swap” to the definition of commodity interest because, as discussed on page 6, above, the ETA objected to the manner in which the Proposal analogized swaps to futures. The Commission believes it is appropriate to add “swap” to the definition of commodity interest because the Dodd-Frank Act amended various intermediary definitions in section 1a of the Act (the Dodd-Frank Act updated the definitions of CPO, CTA, FCM, IB, Floor Trader and Floor Broker) to include their use of swaps. For example, the Act's present definition of FCM, as amended by the Dodd-Frank Act, authorizes this intermediary to accept customer orders for “swaps” in addition to accepting customer orders for “the purchase or sale of any commodity for future delivery.” If the Commission did not update the definition of “commodity interest” to include swaps, then various regulations applicable to intermediaries using the term “commodity interest” would not apply to intermediaries' swap activities. The Commission has reviewed all uses of the term “commodity interest” throughout the regulations and believes they appropriately refer to both futures and swaps.

Thus, the Commission has decided to finalize a revised definition of “commodity interest” by adding paragraph (yy)(4) to include swaps. The final version adopted today makes only minor changes to the proposed paragraph. Whereas the proposed paragraph referenced “any swap as defined in the Act, the Commission's regulations, a Commission order or interpretation, or a joint interpretation or order issued by the Commission and the [SEC],” amended regulation 1.3(yy)(4) now states “any swap as defined in the Act, by the Commission, or jointly by the Commission and the Securities and Exchange Commission.” The Commission is making this change because, for the purposes of the definition of “commodity interest,” it does not matter whether the Commission defines a swap pursuant to an order, interpretation, or joint interpretation.

g. Regulation 1.3(z): Bona Fide Hedging Transactions and Positions

The Proposal made technical amendments to this definition by omitting references to regulations 1.47 and 1.48 because the proposed rule on Position Limits deleted those regulations

and omitting references to “option customers” on account of this rulemaking's deletion of that term. The Commission is not promulgating these amendments in this rulemaking because the final rule on Position Limits has already extensively revised regulation

1.3(z).

Mr. Chris Barnard commented that the definition of “bona fide hedging transactions and positions” should be amended to state that such transactions “are not held for a purpose that is in the nature of speculation or trading” and “not held to hedge or mitigate the risk of another position, unless that other position itself is held for the purpose of reducing risk.” Mr. Barnard commented further that the determination of whether a transaction meets the definition should be made at the time the transaction is entered into, considering the circumstances existing at that time. The Commission has decided not to amend regulation 1.3(z) pursuant to these comments, which address substantive issues that are beyond the scope of this rulemaking.

Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011).

Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011).

h. Lack of a Definition of “End-User” in Regulation 1.3

The ETA requested that the Commission, the SEC, and prudential regulators agree on a definition of “end-user” because the DFA does not define this term and regulators have used the term inconsistently. The Proposal did not add a definition of “end-user” to regulation 1.3 because the DFA did not add a definition of that term to CEA section 1a. The Proposal's intention was to conform the Commission's regulations to the DFA's revisions to the CEA.

The Commission has decided not to add a definition of “end-user.” The Commission has no reason to define “end-user” because the Commission's regulations do not use this term, and even the recently adopted Commission regulations implementing the CEA's end-user exception to clearing do not define it.

The issue of whether the Commission's regulations should use the term “end-user” is beyond the scope of this final rulemaking.

Recently adopted regulation 39.6 establishes the end-user exception to clearing by defining which parties are eligible to opt out of the clearing requirement pursuant to section 2(h)(7) of the CEA, as amended by the DFA.

See

End-User Exception to the Clearing Requirement for Swaps, 77 FR 42560 (July 19, 2012).

2. Regulation 1.4: Use of Electronic Signatures

The Commission proposed to revise regulation 1.4 to extend the benefit of electronic signatures and other electronic actions to SDs and MSPs. Section 731 of the Dodd-Frank Act amended the CEA by adding new section 4s(i)(1), requiring SDs and MSPs to “conform with such standards as may be prescribed by the Commission by rule or regulation that relate to timely and accurate confirmation, processing, netting, documentation, and valuation of all swaps,”

and adding new section 4s(i)(2), requiring the Commission to adopt rules “governing documentation standards for swap dealers and major swap participants.”

7 U.S.C. 6s(i)(1).

7 U.S.C. 6s(i)(2).

Pursuant to the foregoing authority, the Commission has adopted new regulation 23.501(a)(1), which requires “[e]ach swap dealer and major swap participant entering into a swap transaction with a counterparty that is a swap dealer or major swap participant [to] execute a confirmation for the swap transaction,” according to a specified schedule.

Also pursuant to the foregoing authority, the Commission has adopted a new regulation 23.501(a)(2), which requires “[e]ach swap dealer and major swap participant entering into a swap transaction with a counterparty that is not a swap dealer or a major swap participant [to] send an acknowledgment of such swap transaction” according to a specified schedule.

Regulation 23.500(a) defines such an “acknowledgment” as “a written or electronic record of all of the terms of a swap signed and sent by one counterparty to the other.”

In proposing the confirmation and acknowledgment rules, the Commission explained that “[w]hen one party acknowledges the terms of a swap and its counterparty verifies it, the result is the issuance of a confirmation.”

Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904, 55961 (September 11, 2012).

Id.

Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and Major Swap Participants, 75 FR 81519, 81522 (Dec. 28, 2010).

Regulation 1.4 currently provides that an FCM, IB, CPO and CTA receiving an electronically signed document is in compliance with Commission regulations requiring signed documents, provided that such entity generally accepts electronic signatures.

The rationale for allowing the existing entities listed in regulation 1.4 to use electronic signatures (

i.e.,

“[a]s part of [the Commission's] ongoing efforts to facilitate the use of electronic technology and media”)

applies equally to SDs and MSPs. No commenters addressed the amendments to regulation 1.4, and the Commission is adopting them as proposed. Therefore, the Commission is hereby adding SDs and MSPs to the list of entities covered by regulation 1.4 and amending its structure to account for the provisions of the Commission's confirmation and acknowledgement obligations discussed above.

17 CFR 1.4. The regulation also requires that the signatures in question comply with applicable Federal laws and Commission regulations, and requires the relevant entity to employ reasonable safeguards regarding the use of electronic signatures, including safeguards against alteration of the record of the electronic signature.

Id.

Use of Electronic Signatures by Customers, Participants and Clients of Registrants, 64 FR 47151 (Aug. 30, 1999).

This includes revision to the title of regulation 1.4 to reflect these changes. Regulation 1.4, as amended by this release, is entitled “Use of electronic signatures, acknowledgments and verifications.”

3. Regulation 1.31: Books and Records; Keeping and Inspection

a. Record Retention Period and Inspection

To conform the existing recordkeeping requirements under regulation 1.31 to the recordkeeping requirements under proposed regulation 23.203(b) for SDs and MSPs relating to their swap transactions, the Commission proposed to amend regulation 1.31 to require that records of a swap transaction or related cash or forward transaction, including records of oral communications, be kept until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction and for five years after such date.

Certain proposed amendments to § 1.35 (regarding recording of communications), and related amendments to § 1.31, are not addressed in this final rule. The Commission intends to address these amendments in a final rule in a separate

Federal Register

release.

CME suggested that conversations should only have to be retained for six months after the execution of a transaction. FIA commented that the Commission failed to provide a justification for requiring that a swap record be maintained for the life of the swap plus five years. Encana requested clarification that regulation 1.31 does not apply to a non-financial end-user who enters into swaps, but is not an FCM, IB, or member of a DCM or SEF. Encana also made a general request that the Commission specify in its final rules which recordkeeping and reporting rules apply to non-financial end-users.

In contrast to other commenters, Mr. Chris Barnard asserted that all records should be kept indefinitely and scanned after two years, arguing that there is no technological or practical reason to limit the record retention period. Mr. Barnard specifically commented that records of voice communications also should be

kept indefinitely. To support the asserted usefulness of such records, Mr. Barnard cited a 2009 IOSCO report stating that telephone records could benefit enforcement investigations.

http://www.iosco.org/news/pdf/IOSCONEWS137.pdf.

The Commission also proposed to amend regulation 1.31 to conform to the proposed regulation 23.203(b)(2) requirement for SDs and MSPs and their swap transactions by proposing to require that all records kept pursuant to the Act or the Commission's regulations be made available for inspection to any applicable prudential regulator, as that term is defined in section 1a(39) of the Act, or, in connection with security-based swap agreements described in section 1a(47)(A)(v) of the Act, the SEC. By contrast, existing regulation 1.31, which pertains to “all books and records required to be kept by the Act or by these regulations,” requires that records be kept for five years and be made available only to the Commission and the Department of Justice.

The Commission did not receive comment on this proposed revision.

17 CFR 1.31(a) (emphasis added).

b. Final Rule

The Commission has determined to adopt the proposed revision to regulation 1.31 regarding record retention periods with two modifications. First, in final regulation 1.31, the retention period for records of oral communications leading to the execution of a swap or related cash or forward transaction, as required of SDs and MSPs under regulation 23.202(a)(1) and (b)1), respectively, will be one year (rather than five years after the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, as proposed). This modification is consistent with the final provision for an SD's or MSP's oral communications under new regulation 23.203(b)(2) in the Reporting, Recordkeeping, and Daily Trading Record Requirements final rulemaking.

The Commission believes that this retention period for SDs and MSPs with respect to records of oral communications leading to the execution of a swap or related cash or forward transaction will enable it to adequately execute its enforcement responsibilities under the Act and these regulations while minimizing the storage costs imposed on these affected entities.

See

Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128, 20204 (Apr. 3, 2012) (“Provided, however, that records of oral communications communicated by telephone, voicemail, mobile device, or other digital or electronic media pursuant to § 23.202(a)(1) and (b)(1) shall be kept for a period of one year.”).

As noted above, the proposed amendments to regulation 1.35 that would require the recording of certain oral communications by certain entities in addition to SDs and MSPs will be the subject of a separate final release. The Commission will consider any related amendments to regulation 1.31 at that same time.

With respect to Encana's request for clarification concerning the applicability of regulation 1.31 to commercial end-users, regulation 1.31 applies to all records required to be kept by the Act or the Commission's regulations, for example, records required to be kept under regulations 1.35, 18.05 and 23.202. If these rules require end-users to keep records (

e.g.,

regulation 18.05, Maintenance of Books and Records), then those records must be kept in accordance with regulation 1.31.

In response to CME's comment that although the Commission suggests that the retention period for swaps applies only to SDs and MSPs, as addressed in proposed regulation 23.203(b), the proposed amendment to regulation 1.31 is ambiguous in that it could be read to apply to all entities, the Commission clarifies that the final provision in regulation 1.31 regarding the retention period for records of swap transactions is triggered by the type of record and not the entity that is required to keep the record. Therefore, although regulation 23.203(b) only applies to SDs and MSPs with regard to their swap transactions, the final corresponding provision in regulation 1.31 applies to anyone who is required by the Act or by these regulations to keep records of, among other things, swap transactions.

Until such time as the Commission adopts amendments to regulation 1.35 regarding the recording of oral communications, only SDs and MSPs are required, pursuant to regulation 23.202, to record certain oral communications relating to swap transactions and related cash and forward transactions. However, regulation 1.35, as amended herein, requires certain other entities, in addition to SDs and MSPs, to keep certain records of all transactions relating to their business of dealing in, among other things, swap transactions. As noted in text, regulation 1.31 as amended herein, applies to these records.

Second, the Commission also has determined not to adopt the proposed revisions to regulation 1.31(a)(1), (b)(2)(ii), (b)(2)(v)(B), (b)(3)(i), (b)(3)(ii)(C), (b)(3)(iii)(A), and (b)(4)(i) regarding the parties to whom documents must be made available for inspection. The proposed revisions were intended to require only SDs and MSPs to make the records that the CEA or the Commission's regulations require them to maintain available for inspection to, in addition to the Commission and DOJ, any applicable prudential regulator (and, in the case of security-based swap agreement records, to the SEC). However, as drafted, the proposed regulation text would have applied to all persons covered by regulation 1.31, not just to SDs and MSPs. The Commission's final swap recordkeeping rules require SDs and MSPs to make the records that the CEA or the Commission's regulations require them to maintain available for inspection to, in addition to the Commission and DOJ, any applicable prudential regulator or, in the case of security-based swap agreements, to the SEC, capturing the intent of the proposed revisions to regulation 1.31(a)(1), (b)(2)(ii), (b)(2)(v)(B), (b)(3)(i), (b)(3)(ii)(C), (b)(3)(iii)(A), and (b)(4)(i).

Therefore, those proposed revisions have become superfluous. Consequently, the final rule provides that, instead of having to make records available for inspection to the Commission, the Department of Justice, any applicable prudential regulator or, in the case of security-based swap agreements, to the Securities and Exchange Commission, persons covered by regulation 1.31 will continue to be required to make records available for inspection only to the Commission and the Department of Justice.

17 CFR 23.203(b).

c. Format of Retained Records

The Commission also proposed revising regulation 1.31(a)(1), (a)(2), and (b) to require that: all books and records required to be kept by the Act or by the Commission's regulations be kept in their original form (for paper records) or native file format (for electronic records); and production of such records be made in a form specified by the Commission.

CME believes that the native file format requirement should not require the retention of raw, unprocessed data generated or transmitted by an electronic trading or clearing system. Otherwise, CME argued, DCOs and DCMs would have to change the way they retain records. CME stated that its recommendation is not intended to alter the type or format of data that DCOs and DCMs currently capture and store for both business and regulatory purposes. Rather, it asked the Commission to clarify that the “native file format” provision does not impose a new or additional recordkeeping requirement on DCOs and DCMs as it relates to their electronic trading or clearing systems.

CME also asked for clarification as to which proposed revisions to regulation 1.31 apply only to swaps. MGEX sought clarification that proposed regulation 1.31 does not require a firm to keep both paper and electronic records concerning the same communications.

CME commented that the original form requirement is confusing and superfluous in light of current regulation 1.31(b), which permits the storage of paper records on microfilm, microfiche, or a similar medium, and that it is not clear what the Commission means by “native file format.” Similarly, NFA requested clarification that regulation 1.31(b) would continue to permit firms to retain paper records on micrographic or electronic storage media in lieu of maintaining paper records in their original format. NFA commented that the proposed revisions fail to provide a reason for requiring that electronic records be kept in their native file format.

FIA and NFA believe that existing regulation 1.31 complies with Federal Rule of Civil Procedure 34. Therefore, they asserted, there is no reason for the Commission to require that records be kept in their original form for paper records and native file format for electronic records. FIA and NFA further asserted that there is no reason for the Commission to depart from a rule that was designed, in 1999, to harmonize with the SEC's recordkeeping rules. Similarly, ACSA commented that requiring paper records to be maintained in their original form for five years and be readily accessible for the first two would conflict with SEC rules. FIA commented that firms currently rely on regulation 1.31(b) to transfer electronic records from their original format to new forms of electronic media. CME similarly commented that electronic files often must be migrated, upgraded or converted in order to meet ever-evolving technology standards. Therefore, CME argued that, because some swaps could exist for 30 to 50 years, the technology used to generate or store electronic records related to such swap transactions may become outdated or obsolete in a much shorter period of time. Therefore, CME recommended that the Commission eliminate the requirement to retain swap records in their native file format for the life of the swap.

CME argued that the Commission should re-propose other rules referencing regulation 1.31 (

e.g.,

DCO Core Principles, DCM Core Principles, SEF Core Principles, and SD and MSP Recordkeeping) because the proposed revisions to the form a record must take under regulation 1.31 substantially change the requirements proposed by those rulemakings. In contrast to other comments, the Working Group, in response to the proposed regulation 23.203(b) requiring SDs and MSPs to maintain records in accordance with existing regulation 1.31, asserted that, to be made workable for purposes of complying with the Commission's proposed requirements under regulation 23.203(b), regulation 1.31 should be revised to reflect current technologies and industry practices relating to digitized data storage.

See

Letter of Working Group of Commercial Energy Firms, dated February 7, 2011, in response to Notice of Proposed Rulemaking for Reporting, Recordkeeping, and Daily Trading Requirements for Swap Dealers and Major Swap Participants (75 FR 76666, Dec. 9, 2010). The Commission addressed the Working Group's comment in the final rule for SD and MSP recordkeeping requirements stating, “[t]he Commission believes that The Working Group's concerns about § 1.31 have been addressed by a subsequent rule proposal to amend § 1.31 to reflect current technologies and industry practices related to digitized data storage. If these amendments are finalized, the Commission believes that § 1.31 will be compatible with electronic records in a trading system and other records that do not originate from a written document.”

See

Having considered these comments, the Commission is adopting the revisions to regulation 1.31 regarding the form in which records must be kept as proposed. In 1999, as commenters highlighted, the Commission adopted amendments to the recordkeeping obligations established in regulation 1.31 by, among other things, allowing most categories of records to be stored on either micrographic or electronic storage media for the full five-year maintenance period.

The Commission reasserts one of its intentions in undertaking the 1999 update, which was to “provide recordkeepers with opportunities to reduce costs and improve both the efficiency and security of their recordkeeping systems.” Thus, the Commission clarifies that recordkeepers will be in compliance with the new requirement to keep paper records in their original form if they continue to store paper records “on either `micrographic media' * * * or `electronic storage media' for the required time period,” as provided under regulation 1.31(b). However, one of the Commission's other stated goals in amending regulation 1.31 in 1999 was to further the Commission's need for access to complete and accurate records when necessary in a format that the Commission can process,

i.e.,

a usable format.

Thus, the Commission is now making clear that paper records are not usable by the Commission as a substitute for the underlying financial data used to create that paper. Therefore, it is necessary that electronic records be maintained in their native file format and not reduced to paper.

See

64 FR 28735 (May 27, 1999).

In 1999, the Commission stated that, “[t]he requirement that recordkeepers provide documents to the Commission in one of the many identified formats arises out of practical limitations on the Commission's ability to process data stored in the full range of available formats and coding structures on the full range of storage media available to recordkeepers.” 64 FR 28735, 28740 (May 27, 1999).

Accordingly, for records that include data stored in a database, the “native file format” is the format in which the data is maintained in that database, not a format reduced to paper or imaged format, which is essentially the equivalent of paper. This is true regardless of the imaged format, such as portable document format (“PDF”), whether machine-readable through optical character recognition (“OCR”) or any other process. Thus, the underlying financial data from which an FCM creates PDF versions of customer account statements must be kept in its “native file format” because, if and when the Commission requests those financial records, it will not be sufficient for the recordkeeper to produce the paper and/or PDF statements. Where the data is used to generate a paper document (including, but not limited to a PDF), such as a customer account statement, the paper document must be maintained in its original form, while the data must be maintained in its native file format.

Specifically regarding records of swap transactions, the Commission has decided to keep the requirement that these records be maintained in their native file format for the life of the swap plus five years. In response to CME's specific concerns about the need to migrate, update or convert electronic files over the potentially long life of a swap to meet evolving technology standards, the Commission confirms that maintaining data in native file format (

i.e.,

the format in which it was originally created or maintained) does not prohibit a recordkeeper from migrating that data from an obsolete or legacy system or database to a new system or database, where it will then be maintained in the native file format of the new system or database. If due to the proprietary nature of the system, it is impossible or impracticable to provide the Commission with the data in its native file format because, for

example, the native file format would not be accessible by the Commission, as it may not otherwise have that proprietary system, or the system does not readily export the requested data in native file format, then a recordkeeper may provide the data in a commonly accessible, non-proprietary format.

In the proposed changes to regulation 1.31, the Commission proposed to amend regulation 1.31(b)(3)(i) by replacing “approved machine-readable media as defined in regulation 15.00(l)” with “compatible data processing media as defined in regulation 15.00(d).” The proposed change was intended to update this paragraph of regulation 1.31 to reflect that regulation 15.00(l) no longer exists and, when it existed, was a definition of “compatible data processing media” and not “machine-readable media.”

Having received no comments on this proposed ministerial change, the Commission has determined to adopt the changes to regulation 1.31(b)(3)(i) as proposed.

Under current § 15.00(d), “Compatible data processing media” means “data processing media approved by the Commission or its designee.” This term has existed under § 15.00 since as early as 1986. See 17 CFR 15.01 (1986). At that time, the definition included a list of what the Commission considered to be compatible data processing media, but deleted those references to specific media in 1997 in response to comments suggesting that a regulatory definition was impractical given the fast pace of evolving technology.

See

64 FR 28735, 28739 (May 27, 1999) (citing 62 FR 24026, 24028 (May 2, 1997)).

In response to CME's request for clarification of the scope of “native file format,” the Commission confirms that the definition of “native file format” excludes raw, unprocessed data generated or transmitted by an electronic trading or clearing system.

4. Regulation 1.33: Monthly and Confirmation Statements

Regulation 1.33 requires FCMs to maintain certain records and to regularly furnish monthly and confirmation statements to customers regarding commodity futures and option transactions they have entered into on behalf of customers. The DFA amended the definition of FCM in section 1a of the CEA to authorize an FCM to solicit or accept orders for swaps in addition to commodity futures and option transactions.

Therefore, the Commission proposed adding requirements for monthly and confirmation statements applicable to swaps. The Commission did not receive comments concerning these amendments and is adopting these provisions mostly as proposed.

DFA section 721(a)(13). Today's rulemaking similarly incorporates those changes into the corresponding definition of “futures commission merchant” in regulation 1.3.

The Commission has decided to replace a reference to “open positions” in the existing paragraph (a) introductory text with “open contracts.” This amendment makes the regulation 1.33(a) introductory text consistent with the Commission's revised definition of “open contracts” in regulation 1.3(t).

In finalizing paragraphs (a)(3) and (b)(2), the Commission is replacing proposed references to “swaps” with “Cleared Swaps,” as regulation 22.1 defines that term. Since the publication of the Proposal, the Commission has finalized part 22 concerning the segregation of “Cleared Swaps Customer Collateral.”

Because an FCM will only clear those swaps that are “Cleared Swaps,” regulation 1.33 should only refer to “Cleared Swaps.” For the same reason, the Commission is using the terms “Cleared Swaps Customer” and “Cleared Swaps Customer Collateral,” as now defined in regulation 1.3. These corrections are being made in conjunction with technical corrections described below, in section II.A.14 (Technical corrections to parts 1 and 22).

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012).

See infra

pt. II.A.14 (discussing technical changes to parts 1 and 22).

Finally, in paragraph (a)(3) of regulation 1.33, the Commission is replacing the phrase “caused to be executed by” with “carried by.” The reason is that an FCM might not provide a trade execution function for every swap that it clears.

5. Regulation 1.35: Records of Cash Commodity, Futures and Option Transactions

The Commission proposed to amend regulation 1.35(a) so that FCMs, RFEDs, IBs, and members of a DCM or SEF would be required to record all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading, and prices, that lead to the execution of transactions in a commodity interest or cash commodity, however communicated. The proposed amendments to regulation 1.35(a) also included a requirement that each transaction record be maintained in a separate electronic file identifiably by transaction and counterparty. As noted above, the Commission will consider these proposed amendments to regulation 1.35(a) in a separate release.

As part of the ministerial amendments contained in this release, the Commission is renumbering portions of regulation 1.35 so that paragraphs currently numbered 1.35(a-1) and 1.35(a-2) will be renumbered 1.35(b) and 1.35(c), respectively. As a result, paragraphs currently numbered 1.35(b), (c), (d) and (e) have been renumbered as 1.35(d), (e), (f) and (g), respectively.

Because amended regulation 1.35 extends recordkeeping obligations to swaps, the Commission has created special language for swaps, where appropriate. In regulation 1.35(d)(2) (formerly (b)(2)) (records of futures, commodity options, and retail forex exchange transactions for each account), the Commission has added paragraph (iv), as proposed. The Commission did not receive comments about this amendment and is adopting it as proposed. Amended regulation 1.35(d)(2)(iv) requires FCMs, IBs, and any clearing members clearing swaps executed on a DCM or SEF to maintain records describing the date, price, quantity, market, commodity, and, if cleared, DCO of each swap.

a. Bunched Orders

The Commission recognizes that investment managers currently execute bunched swap orders on behalf of clients and allocate the trades to individual clients post-execution. The Commission believes that the bunched order procedures currently applicable to futures can be adapted for use in swap trading. Therefore, the Commission proposed amending regulation 1.35(a-1)(5) (redesignated as (b)(5) pursuant to this rulemaking), addressing post-execution allocation of bunched orders.

The Commission received one comment letter concerning this topic. The Swaps and Derivatives Market Association (“SDMA”) strongly supported the proposed amendment on the grounds that it would promote operational and execution efficiency in both the cleared and uncleared swaps markets. Specifically, SDMA noted that industry precedent supports the proposed post-execution time limits (for cleared swaps, no later than a time sufficiently before the end of the calendar day the order is executed to ensure that clearing records identify the ultimate customer for each trade; for uncleared swaps, no later than the end of the day the swap was executed). SDMA also noted that regulation 1.35(a-1)(5)'s bunched order provisions for futures provide an appropriate model for swaps and that FCMs generally have sufficient risk control capability (technologically speaking) to allocate swap orders post-execution.

In the Proposal, the Commission requested comment as to whether it would be appropriate to add FCMs and IBs to the list of eligible account managers. Proposing Release, 76 FR at 33073.

In its final rulemaking concerning Customer Clearing Documentation, Time of Acceptance for Clearing, and Clearing Member Risk Management, the Commission adopted the Proposal's

amendments to regulation 1.35(a-1)(5) concerning the post-execution time limits referred to above.

Customer Clearing Documentation, Time of Acceptance for Clearing, and Clearing Member Risk Management, 77 FR 21278, 21306 (Apr. 9, 2012).

In this rulemaking, the Commission is adding FCMs and IBs to the list of eligible account managers in regulation 1.35(a-1)(5) (redesignated as (b)(5)), as proposed, in order to have a single standard for all intermediaries that might have discretion over customer accounts. Unlike other account managers, however, under regulations 155.3 and 155.4, FCMs and IBs are prohibited from including proprietary trades in a bunched order with customer trades. Accordingly, as proposed, the Commission has added a cross-reference in regulation 1.35(a-1)(5) (re-designated herein as (b)(5)) to those regulations. The Commission did not receive comments to this segment of the Proposal.

The Commission is further amending regulation 1.35(a-1) (redesignated herein as (b)) in order to provide that specific customer account identifiers need not be included in confirmations or acknowledgments provided pursuant to regulation 23.501(a), if the requirements of regulation 1.35(a-1)(5) (redesignated herein as (b)(5)) are met. This will enable account managers to bunch orders for trades executed bilaterally with SDs or MSPs. This will require that, similar to the current procedure for futures, the allocation be completed by the end of the day of execution and provided to the counterparty. The Commission is making this revision as proposed; it did not receive comments to this revision.

Also as proposed, the Commission is deleting appendix C to part 1, which predated regulation 1.35(a-1)(5) (re-designated herein as (b)(5)) and also addresses bunched orders. Appendix C consists of a Commission Interpretation regarding certain account identification requirements pertaining to the practice of combining orders for different accounts into a single order book, referred to as bunched orders. The procedures for bunched orders are set forth in regulation 1.35(a-1)(5) (re-designated herein as (b)(5)). Accordingly, the procedures under appendix C to part 1 are duplicative and no longer necessary. The Commission received no comments concerning its proposal to delete appendix C to part 1 and is hereby deleting that appendix.

b. Other Changes to Regulation 1.35

The Commission has deleted paragraphs (f)-(l) of regulation 1.35, as proposed. To implement the CFMA, regulation 38.2 required DCMs to comply with an enumerated list of Commission regulations, and exempted them from all remaining Commission regulations that were no longer applicable post-CFMA.

The DCM Core Principles final rulemaking substantially revised part 38, but did not revoke regulation 38.2.

Instead, it updated the list of Commission regulations that are applicable to DCMs. Unlike its predecessor, regulation 38.2, as revised by the DCM Core Principles final rulemaking, only enumerates the Commission regulations from which DCMs are exempt.

See

71 FR 1964 (Jan. 12, 2006).

Core Principles and Other Requirements for Designated Contract Markets, 77 FR 36612 (June 19, 2012).

As part of the ministerial amendments contained in this rulemaking, the Commission has eliminated from the Commission's regulations any provisions that have been inapplicable to DCMs since the passage of the CFMA, and that remain inapplicable after the passage of the DFA. Paragraphs (f)-(l) of regulation 1.35 are among those provisions. Pursuant to the deletion paragraph (j) of regulation 1.35, the Commission has copied most of that provision into new subsection (d)(7)(i) (formerly (b)(7)(i)). The Commission made these changes as proposed; it did not receive any comments on these provisions.

Also as part of the ministerial amendments contained in this rulemaking, the Commission proposed to eliminate regulations 1.35(a-1)(3)(ii) and 1.35(a-2)(3). However, regulation 38.2, as revised by the DCM Core Principles final rule, no longer exempts DCMs from these provisions. Accordingly, these provisions will not be eliminated in this rulemaking, and they are redesignated as regulations 1.35(b)(3)(ii) and 1.35(c)(3), respectively.

Regulation 1.35, as revised by this rulemaking, no longer agrees with regulation 38.2. As this rulemaking eliminates the provisions of regulation 1.35 that remain inapplicable to DCMs, the Commission is revising regulation 38.2 to remove references to those provisions of regulation 1.35 with which DCMs are not required to comply. The Commission considers this revision to regulation 38.2 technical in nature as it merely cleans up the discrepancy created by the revisions to regulation 1.35.

Finally, the Commission has made a technical correction to regulation 1.35(b)(3)(v) (redesignated herein as (d)(3)(v)) so that the final sentence references “commodity futures, retail forex, commodity option, or swap books and records” instead of “commodity retail forex or commodity option books and records.” The Commission has made this change as proposed; it did not receive any comments on this provision.

6. Regulation 1.37: Customer's or Option Customer's Name, Address, and Occupation Recorded; Record of Guarantor or Controller of Account

Dodd-Frank Act section 723(a)(3) added a new section 2(h)(8) to the CEA to require, among other things, that swaps subject to the clearing requirement of CEA section 2(h)(1) be executed either on a DCM or on a SEF. The DFA established SEFs as a new category of regulated markets for the purpose of trading and executing swaps. Because SEFs are now regulated markets under the CEA, many of the Commission's existing regulatory provisions that currently are applicable to DCMs also will become applicable to SEFs.

Accordingly, the Commission, as proposed, has amended paragraphs (c) and (d) of regulation 1.37, pertaining to recording foreign traders' and guarantors' names, addresses, and business information. Currently, these provisions apply to DCMs and futures and options contracts executed on those facilities. This revision amends the provisions to also include SEFs and swap transactions. Additionally, the Commission is amending the title and remaining text of regulation 1.37 to reflect the removal of the term “option customer.”

The Commission received no comments on these provisions.

See supra,

section II.A.b. for a discussion of the deletion of the defined term “option customer” (1.3(jj)).

7. Regulation 1.39: Simultaneous Buying and Selling Orders of Different Principals; Execution of, for and Between Principals

Like regulation 1.37, the Commission is amending regulation 1.39 to apply it to SEFs and swaps. Regulation 1.39, which has applied to members of contract markets, governs the simultaneous execution of buy and sell orders of different principals for the same commodity for future delivery by a member and permits the execution of such orders between such principals on a contract market. The Commission is amending this provision to include members of SEFs, and to include swap transactions. The Commission is also amending paragraph (c) to eliminate the reference to “cross trades,” as they are

no longer defined under section 4c(a) of the Act, as amended by the DFA. The Commission received no comments and is making these revisions as proposed, with a slight modification to further clarify that the rule applies to SEFs in the same manner that it applies to DCMs.

8. Regulation 1.40: Crop, Market Information Letters, Reports; Copies Required

Regulation 1.40 requires FCMs, RFEDs, IBs and members of contract markets to furnish to the Commission certain information they publish or circulate concerning crop or market information affecting prices of commodities. The Commission is amending regulation 1.40 to apply it to trading on a SEF, to the extent that persons have trading privileges on the SEF. Persons without trading privileges on a SEF will not be subject to regulation 1.40. The amendments also update the forms of communication covered by the regulation by replacing the word “telegram” with “telecommunication.” The Commission is making these revisions as proposed; the Commission received no comments on these provisions.

9. Regulation 1.59: Activities of Self-Regulatory Employees, Governing Board Members, Committee Members and Consultants

The Commission proposed to amend regulation 1.59 to include SEFs and swaps. The Commission also proposed to amend regulation 1.59(b) to correct certain cross-references to the Act and Commission regulations. Regulation 1.59(c) has been revised to apply only to registered futures associations, as the prohibitions contained therein applicable to the other SROs already are addressed in proposed regulation 40.9.

The Commission is making these revisions as proposed; the Commission received no comments.

Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010).

10. Regulation 1.63: Service on Self-Regulatory Organization Governing Boards or Committees by Persons With Disciplinary Histories

The Commission proposed to amend regulation 1.63 to correct certain cross-references to the Act and its regulations. The Commission also proposed to amend paragraph (d) to incorporate the posting of notices required under that paragraph on each SRO's Web site. The Commission received no comments regarding the proposed amendments to regulation 1.63 and is adopting the amendments without modification.

11. Regulation 1.67: Notification of Final Disciplinary Action Involving Financial Harm to a Customer

Regulation 1.67 requires contract markets, upon taking any final disciplinary action involving a member causing financial harm to a non-member, to provide notice to the FCM that cleared the transaction. FCMs and other registrants on SEFs should also be notified of any disciplinary action involving transactions on a SEF they executed for ECPs. Accordingly, the Commission proposed to amend regulation 1.67 to include SEFs, registrants and ECPs on such facilities. The Commission received no comments regarding proposed regulation 1.67 and is adopting the rule without modification.

12. Regulation 1.68: Customer Election Not To Have Funds, Carried by a Futures Commission Merchant for Trading on a Registered Derivatives Transaction Execution Facility, Separately Accounted for and Segregated

The Commission is hereby removing and reserving regulation 1.68. Regulation 1.68 had permitted a customer of an FCM to allow the FCM to not separately account for and segregate such customer's funds if, among other things, such funds are being carried by the FCM to trade on or through the facilities of a DTEF. No DTEF has ever registered with the Commission. Furthermore, section 734 of the Dodd-Frank Act repealed the DTEF provisions in the CEA, effective July 15, 2011. Therefore, because the statutory provisions underpinning regulation 1.68 have been repealed, the Commission is removing it from the Commission's regulations.

The Commission is also hereby deleting all other references to DTEFs, except those already removed by other Commission rulemakings, throughout its regulations.

See infra

Part II.G.

13. Regulations 1.44, 1.53, and 1.62—Deletion of Regulations Inapplicable to Designated Contract Markets

The CFMA adopted core principles for DCMs.

On August 10, 2001, the Commission published final rules implementing provisions of the CFMA, in which it concluded that the CFMA's framework effectively constituted a broad exemption from many of the existing regulations applicable to DCMs.

Accordingly, the final rules included regulation 38.2, which required DCMs to comply with an enumerated list of Commission regulations, and exempted them from all remaining Commission regulations no longer applicable post-CFMA. As part of the ministerial amendments contained in the Proposal, the Commission proposed to eliminate from the Commission's regulations any provisions that have been inapplicable to DCMs since the CFMA was enacted and that remain inapplicable after enactment of the DFA. Accordingly, the Commission proposed to eliminate the following regulations: regulation 1.44 (Records and reports of warehouses, depositories, and other similar entities; visitation of premises), regulation 1.53 (Enforcement of contract market bylaws, rules, regulations, and resolutions), and regulation 1.62 (Contract market requirement for floor broker and floor trader registration). The Commission received no comments regarding the proposed deletion of these provisions and is hereby deleting such provisions as proposed.

Public Law 106-554, 114 Stat. 2763 (2000).

A New Regulatory Framework for Trading Facilities, Intermediaries and Clearing Organizations, 66 FR 42256 (Aug. 10, 2001).

14. Technical Changes to Part 1 and Part 22 in Order To Accommodate Recently Finalized Part 22

On February 7, 2012, the Commission finalized regulations in part 22 regarding the Protection of Cleared Swaps Customer Contracts and Collateral (“Cleared Swaps Customer Final Rule”).

The Cleared Swaps Customer Final Rule took effect on April 9, 2012, although the compliance date for the rule is November 8, 2012. The Cleared Swaps Customer Final Rule established a segregation regime applicable to FCMs and DCOs for “Cleared Swaps Customer Collateral,” as regulation 22.1 defines that term.

The rulemaking process involved extensive public comment, including through both an advanced notice of proposed rulemaking and a notice of proposed rulemaking.

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012) (“Cleared Swaps Customer Final Rule”).

Part 22 capitalizes definitions, but part 1 does not. Hence, in this rulemaking, terms defined in regulation 22.1 are capitalized, and terms defined in regulation 1.3 are not.

The Cleared Swaps Customer Final Rule carefully established the basic architecture for protecting Cleared Swaps Customer Collateral. Both the Cleared Swaps Customer Final Rule and

the related proposed rule

described how and to what extent the part 22 regulations for cleared swaps parallel and deviate from the part 1 regulations applicable to FCMs and DCOs relating to Customers' Money, Securities, and Property for exchange-traded contracts (referred to herein as the “Part 1 Segregation Regulations”). In today's final rulemaking, the Commission is making technical corrections to certain of the Part 1 Segregation Regulations to make unambiguous that certain parallel Part 1 Segregation Regulations do not apply to Cleared Swaps Customer Collateral. These Part 1 Segregation Regulations only apply to the segregation of customer funds used to margin, guarantee, or secure contracts for future delivery on or subject to the rules of a contract market, and all money accruing to such customers as a result of such contracts (referred to herein as “futures contracts”), as well as to customer funds used to margin commodity option transactions on or subject to the rules of a contract market or DCO (referred to herein as “options on futures contracts”).

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 76 FR 33818 (June 9, 2011).

See generally Cleared Swaps Customer Final Rule, 77 FR at 6363 (“Sections 22.2 through 22.10 implement the basic architecture of a system of segregation for swaps customer funds roughly comparable to the system used for customer funds for futures contracts under CEA sections 4d(a)(2) and 4d(b) and Commission regulations 1.20 through 1.30 and 1.49.”).

For the reasons stated above, the Commission is hereby making the following technical corrections:

In regulation 1.3, the Commission has added a definition of “futures customer funds” to reference only those funds used to margin futures contracts or commodity option transactions on or subject to the rules of a contract market, or DCO, as the case may be. This definition matches the existing definition of customer funds (regulation 1.3(gg)). The Commission is also adding a definition of “Cleared Swaps Customer Collateral,” which cross-references regulation 22.1's definition of this term. Regulation 1.3(gg)(“customer funds”) applies to both “futures customer funds” and “Cleared Swaps Customer Collateral.” The Proposal's definition in regulation 1.3(gg) had already applied to customer funds used to margin both futures and swaps.

Relatedly, the Commission is adding a definition of “futures customer” to regulation 1.3 and a definition of “Cleared Swaps Customer,” which cross-references regulation 22.1's definition of that term. As discussed above in section II.A.1.b. of this preamble, the definition of “customer” in regulation 1.3(k) will be finalized as proposed, to reference “any person who uses a futures commission merchant, introducing broker, commodity trading advisor, or commodity pool operator as an agent in connection with trading in any commodity interest.”

The definition of “customer” refers to both a “futures customer” and a “Cleared Swaps Customer” because, as described in section II.A.1.f. of this preamble, this rulemaking is adopting a revised definition of “commodity interest” (regulation 1.3(yy)), largely as proposed, to reference futures, swaps, and contracts subject to Commission sections 2(c)(2), 4c or 19 of the Act.

As finalized, the definition of customer in regulation 1.3(k) preserves existing treatment of proprietary accounts.

The Proposal included an amendment to the definition of “futures account” in regulation 1.3(vv) to reference a related futures segregation provision of section 4 of the Act, as amended by the Dodd-Frank Act,

i.e.,

section 4d(a). The Proposal neglected to reference subsection (b) of section 4d, so today's final definition of “futures account” references sections 4d(a) and 4d(b) of the Act. The Commission did not receive comments about its proposed revisions to this definition. As a technical correction, the Commission is adding a definition of “Cleared Swaps Customer Account,” which references regulation 22.1's definition of that term. Relatedly, the Commission is adding a definition of “customer account” in regulation 1.3 to connote both a “futures account” and a “Cleared Swaps Customer Account,” as regulation 1.3 defines each of those terms.

The Commission is making a technical correction to paragraph (c)(5)(xiii)(C) of regulation 1.17 (“Minimum financial requirements for futures commission merchants and introducing brokers”) to restrict a provision pertaining to a foreign broker granted relief pursuant to regulation 30.10 to “the foreign futures or foreign options secured amount, as § 1.3(rr) of this part defines such term.” This provision has always referenced the foreign futures or foreign options secured amount. Thus, because “customer funds” includes both “futures customer funds” and “Cleared Swaps Customer Collateral,” the Commission is making a technical correction to replace the term “customer funds” in paragraph (c)(5)(xiii)(C) of regulation 1.17 with the term “foreign futures or foreign options secured amount.”

The Commission is making technical corrections to regulation 1.20 (“Customer funds to be segregated and separately accounted for”) by: changing the title to “Futures customer funds to be segregated and separately account for”; replacing references to “customer funds” and “customers” to “futures customer funds” and “futures customers”; and linking the regulation to those provisions of section 4d of the Act, as amended by the Dodd-Frank Act, pertaining to the segregation of futures customer funds (

i.e.,

sections 4d(a) and (b)).

The Commission is making technical corrections to regulation 1.21 (“Care of money and equities accruing to customers”) by changing the title to “Care of money and equities accruing to futures customer” and replacing references to “customer” with references to “futures customer.” The Cleared Swaps Customer Final Rule did not create a parallel regulation in part 22 on the grounds that such parallels were not necessary because: (1) Regulation 22.1 broadly includes “accruals” in the definition of Cleared Swaps Customer Collateral, and (2) regulation 22.2(e) permits an FCM to commingle the Cleared Swaps Customer Collateral of multiple Cleared Swaps Customers. Thus, although revised regulation 1.21 is limited to futures customers and there is no parallel regulation in part 22, part 22 captures the substance of regulation 1.21 with respect to Cleared Swaps Customers and Cleared Swaps Customer Collateral.

The Commission is making technical corrections to regulation 1.22 (“Use of customer funds restricted”) by changing the title to “Use of futures customer funds restricted” and replacing references to “customer funds” and “customer” with references to “futures customer funds” and “futures customer.” The Cleared Swaps Customer Final Rule incorporated these requirements into part 22 with respect to Cleared Swaps Customer Collateral and Cleared Swaps Customers.

The Commission is making technical corrections to regulation 1.23 (“Interest of futures commission merchant in funds; additions and withdrawals”) by changing the title to “Interest of futures commission merchant in segregated futures customer funds; additions and withdrawals;” replacing references to “customer funds” and “customer” with references to “futures customer funds” and “futures customer;” and linking the regulation to sections 4d(a) and (b) of the Act.

The Cleared Swaps Customer Final Rule created analogous requirements in part 22 with

respect to Cleared Swaps Customer Collateral and Cleared Swaps Customers. See 17 CFR 22.2(e)(3).

The Commission is making technical corrections to regulation 1.24 (“Segregated funds; exclusions therefrom”) by replacing a reference to “customers” with “futures customers.”

The Cleared Swaps Customer Final Rule created analogous provisions in part 22 with respect to Cleared Swaps Customers. See 17 CFR 22.2(d)(3).

The Commission is making technical corrections to regulation 1.26 (“Deposit of instruments purchased with customer funds”) by: changing the title to “Deposit of instruments purchased with futures customer funds”; replacing references to “customer funds” and “customer” with references to “futures customer funds” and “futures customer;” and linking the regulation to sections 4d(a) and (b) of the Act.

The Cleared Swaps Customer Final Rule created analogous requirements in regulation 22.5 17 CFR 22.5.

The Commission is making technical corrections to regulation 1.32 (“Segregated account; daily computation and record”) by replacing references to “customer funds,” “customer,” and “customer account” with references to “futures customer funds,” “futures customer,” and “futures customer account.”

The Cleared Swaps Customer Final Rule mirrored some of regulation 1.32's requirements in part 22 with respect to Cleared Swaps Customer Collateral and Cleared Swaps Customers. See 17 CFR 22.2(g).

The Commission is making a technical correction to regulations 1.21, 1.23, 1.24, 1.26, 1.29, 140.735-2a, and 140.735-3 by replacing the term “clearing organization” or “clearinghouse” with “derivatives clearing organization.” Since Congress' enactment of the CFMA in 2000,

which added “derivatives clearing organization” as a new defined term to section 1a of the Act, the intent of these regulations has been to refer to “derivatives clearing organizations.”

Public Law 106-55, 114 Stat. 2763 (Effective December 21, 2000).

The Commission is making technical changes to subsection (1)(iii) of regulation 1.33 (“Monthly and Confirmation statements”) to specifically reference “futures customer funds” and the “foreign futures and foreign options secured amount.” This subsection presently refers to these classes of customer funds; the intention of this technical amendment is to clarify that meaning.

Proposed amended regulation 1.33(a)(3) described what “swap positions” information an FCM must provide in monthly statements to its customers. The Commission did not receive comments on this proposal and is publishing it as proposed, except for the following. In line with the aforementioned technical corrections, today's final version of regulation 1.33 replaces “swap position” with “Cleared Swaps Customer.” Today's final rulemaking also makes a technical correction to regulation 1.33 by combining subsections (a)(1)(iv), (a)(2)(v), and proposed (a)(3)(iv) into a new paragraph (a)(4).

Unlike the aforementioned Part 1 Segregation Regulations, Regulation 1.25 (“Investment of customer funds”), on the other hand, now properly applies to both futures customer funds and Cleared Swaps Customer Collateral. Thus, its title will continue to refer to “customer funds,” which, as defined by revised regulation 1.3(gg), includes both futures customer funds and Cleared Swaps Customer Collateral. However, the Commission is making technical corrections to regulation 1.25 as part of today's final rulemaking by adding references to regulation 22.5 (“Futures commission merchants and derivatives clearing organizations: Written acknowledgment”) alongside current references to regulation 1.26 (“Deposit of instruments purchased with customer funds”) (to be amended herein as “Deposit of instruments purchased with futures customer funds”). The Commission explains this reference to regulation 22.5 in a new provision at the end of paragraph (d)(13) of regulation 1.25.

The foregoing technical corrections to the Part 1 Segregation Regulations are designed to ensure that, when taken together with the Cleared Swaps Customer Final Rule, they do not create redundant, and potentially conflicting, duties for FCMs and DCOs. For similar reasons, the Commission is making certain equivalent technical corrections to part 22. As mentioned above, none of these technical changes alter the meaning of any regulation of part 22. First, the Commission is deleting the definition of “Customer” from regulation 22.1 (“Definitions”). Because of the aforementioned addition of the definition of “futures customer” in regulation 1.3, regulation 22.1's definition of “Customer” is no longer needed or correct. Consequently, in regulation 22.2 (“Futures Commission Merchants: Treatment of Cleared Swaps and Associated Cleared Swaps Customer Collateral”), the Commission is replacing references to “Customers” with references to “futures customers” or “foreign futures or foreign options customers,” as regulation 30.1(c) defines that term. For the same reason, in regulation 22.3(b)(2)(iii) (“Derivatives clearing organizations: Treatment of Cleared Swaps Customer Collateral”); paragraphs (a) and (b) of regulation 22.5 (“Futures commission merchants and derivatives clearing organizations: Written acknowledgement”); and paragraph (a) of regulation 22.9 (“Denomination of Cleared Swaps Customer Collateral and location of depositories”), the Commission is replacing references to funds belonging to “Customers” with references to “futures customer funds.”

In addition, since, as described above, regulation 1.25 (“Investment of customer funds”) applies to both futures customer funds and Cleared Swaps Customer Collateral, the Commission is making a technical correction to paragraph (e)(1) of regulation 22.2 and paragraph (d) of regulation 22.3 by omitting, “which section shall apply to such money, securities, or other property as if they comprised customer funds or customer money subject to segregation pursuant to section 4d(a) of the Act and the regulations thereunder.”

Similarly, the Commission is making a technical correction to regulation 22.9 (“Denomination of Cleared Swaps Customer Collateral and location of depositories”) by omitting a reference to Cleared Swaps Customer Collateral. Regulation 22.9 cross-references regulation 1.49 (“Denomination of customer funds and location of depositories”). Because the new revised definition of “customer funds” in regulation 1.3 references both futures customer funds and Cleared Swaps Customer Collateral, regulation 1.49 references to both classes of funds. Therefore, regulation 22.9 can reference regulation 1.49 without making a specific reference to Cleared Swaps Customer Collateral, which the Commission has always intended.

Moreover, as a result of the corrections to the definition described above, the Commission is making (1) a technical correction to regulation 22.10 (“Application of other regulatory provisions”) to avoid confusion as to the applicability of regulations 1.27, 1.28, 1.29, and 1.30 to Cleared Swaps, Cleared Swaps Customers, and Cleared Swaps Customer Collateral, and (2) technical corrections to regulations 22.13(a)(2) and 22.15 to incorporate the new “Futures Customer” and “Foreign Futures or Foreign Options Customer” terms.

The Commission is also making technical corrections to regulation 22.11, regulation 22.13(a)(1), the title of regulation 22.14, regulation 22.14(a)(2), regulation 22.14(c)(2), regulation 22.15, and the title of regulation of 22.16 by replacing references to “Customer” with

the correct term “Cleared Swaps Customer.” Since its publication, regulation 22.11 has always intended to reference only Cleared Swaps Customers.

In addition, the Commission is making technical corrections to regulation 22.12 (“Information to be maintained regarding Cleared Swaps Customer Collateral”) by replacing the term “Cleared Swaps Customer Funds,” with the correct term, “Cleared Swaps Customer Collateral.”

The Commission notes that its regulations refer to “customer funds” in the following regulations: 3.10, 3.21, 5.5, 39.15, 39.16, and 170.5, as well as in Appendices to part 190. “Customer funds” also appears in the following regulations recently amended by the Commission's final rulemaking concerning Core Principles and Other Requirements for Designated Contract Markets:

1.52, 38.603, 38.604, and Appendix B to part 38. The Commission believes that these provisions properly refer to “customer funds” as revised regulation 1.3(gg) now defines that term,

i.e.,

to connote both “futures customer funds” and “Cleared Swaps Customer Collateral.”

77 FR 3661 (June 19, 2012) (Effective date: August 20, 2012).

B. Part 7

The Commission proposed to rename part 7 of the Commission's regulations “Registered Entity Rules Altered or Supplemented by the Commission,” thus reflecting the language in section 8a(7) of the Act, as amended by the Dodd-Frank Act, which provides the basis for part 7. The Commission also proposed to make a similar change in regulation 7.1, replacing contract market rules with registered entity rules. Finally, the Commission proposed to remove and reserve subparts B (Chicago Mercantile Exchange Rules) and C (Board of Trade of the City of Chicago Rules) and their associated sections. The Commission received no comments regarding the proposed amendments to part 7 and is adopting these amendments as proposed.

C. Part 8

The Commission proposed to remove part 8 of its regulations. Regulation 38.2 enumerates the provisions with which DCMs are not required to comply. The part 8 regulations are among those provisions.

In the DCM Core Principles final rules, the Commission adopted regulations in “Subpart N—Disciplinary Procedures” of part 38 to amend the disciplinary procedure requirements applicable to DCMs.

Several of the regulations adopted in subpart N of part 38 are similar to the text of the disciplinary procedures found in part 8 of the Commission's regulations.

The Commission proposed to remove part 8 from its regulations to avoid any confusion that could result from those regulations containing two sets of exchange disciplinary procedures. The Commission received no comments regarding the proposed deletion of part 8 and is therefore deleting those regulations as proposed.

17 CFR 38.2.

77 FR at 36649. The DCM Core Principles final rules take effect on August 20, 2012. Section 735 of the Dodd-Frank Act eliminates all DCM designation criteria, including Designation Criterion 6 (Disciplinary Procedures). Section 735 of the Dodd-Frank Act creates a new Core Principle 13 (Disciplinary Procedures) that is devoted exclusively to exchange disciplinary proceedings, and captures disciplinary concepts inherent in both Designation Criterion 6 and in current DCM Core Principle 2.

Paragraph (b)(4) of the acceptable practices for former Core Principle 2 referenced part 8 of the Commission's regulations as an example that DCMs could follow to comply with Core Principle 2. 17 CFR pt. 38, app. B, Acceptable Practices for Core Principle 2 at (b)(4). In its experience, the Commission has found that many DCMs' disciplinary programs do in fact model their disciplinary structures and processes on part 8.

D. Parts 15, 18, 21, and 36

The Commission also proposed to incorporate changes into parts 15, 18, 21, and 36 of its regulations to account for (1) the DFA's elimination of two categories of exempt markets, exempt commercial markets (“ECMs”) and electronic boards of trade (“EBOTs”); and (2) the DFA's grandfather relief provisions for such entities.

Section 723 of the DFA repealed CEA section 2(h), thus eliminating the ECM category. Section 734 of the DFA repealed CEA section 5d, thus eliminating the EBOT category. Section 734 also repealed CEA section 5a, thus eliminating the DTEF category of regulated markets effective July 15, 2011, as discussed above.

Both sections 723 and 734 of the Dodd-Frank Act contain grandfather provisions allowing ECMs and EBOTs to petition the Commission to continue to operate as ECMs and EBOTs. Pursuant to the grandfather provisions, in September 2010, the Commission issued orders regarding the treatment of such grandfather petitions (the “Grandfather Relief Orders”).

Under the Grandfather Relief Orders, the Commission may, subject to certain conditions, provide relief to ECMs and EBOTs for up to one year from the general effective date of the DFA's amendments to the CEA. On July 13, 2012, the Commission amended for the second time a Commission order dated July 14, 2011, by, among other things, allowing ECMs and EBOTs, as well as markets that rely on pre-DFA CEA section 2(d)(2), to rely only on the amended order (“Second Amended July 14 Order”) after July 16, 2012.

75 FR 56513 (Sept. 16, 2010).

77 FR 41260 (July 13, 2012).

Pursuant to the DFA and the Grandfather Relief Orders, the Commission proposed to remove from parts 15, 18, 21 and 36

references to CEA sections 2(h) and 5d and to replace those references, where appropriate, with references to the Grandfather Relief Orders as the authority under which ECMs and EBOTs can continue to operate. The Commission also proposed to remove from parts 15, 18, 21, and 36 of its regulations references to CEA sections 2(d), 2(g), and 5a, as well as references to DTEFs. The Commission received no comments regarding the amendments to parts 15, 18, 21, and 36. The Commission is revising regulation 36.1 in order to account for the expiration of the Grandfather Relief Orders on July 16, 2012, as well as reliance by ECMs and EBOTs on the Second Amended July 14 Order. Otherwise, the Commission is adopting the amendments to parts 15, 18, 21, and 36 as proposed.

Part 36 provisions apply to ECMs and EBOTs. The Commission is not deleting part 36 in its entirety because part 36 provisions will continue to apply to ECMs and EBOTs that continue to operate under the Grandfather Relief Orders.

E. Parts 41, 140, and 145

The Commission also proposed to incorporate changes into its regulations to account for other new categories of registered entities and to include new products now subject to Commission jurisdiction. Section 733 of the Dodd-Frank Act added new section 5h to the CEA and created SEFs. Section 728 of the Dodd-Frank Act added new section 21 to the CEA and created SDRs. SEFs will allow for the trading of swap transactions between ECPs, as that term is defined in CEA section 1a(18).

In addition to the amendments contained in proposed part 37, the Commission proposed additional amendments throughout the regulations to include SEFs and SDRs where necessary. The Commission also proposed to delete from part 41 references to DTEFs as that term was deleted from CEA section 5b by the Dodd-Frank Act, effective July 15, 2011.

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The Commission received

no comments to its deletion of the term DTEF from part 41 and is adopting this change as proposed. In addition, as part of today's final rulemaking, the Commission is making a technical change to part 41 so that references to the definition of “narrow-based security index” is cited as section 1a(35) of the Act instead of section 1a(25) of the Act.

For a detailed discussion of the proposed rules as they directly relate to SEFs,

see

76 FR 1214 (Jan. 7, 2011).

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Section 5b of the CEA provided for the registration of DTEFs. Although secondary references to DTEFs remain in the CEA, none of the

those would enable an entity to commence operations as a DTEF. The proposed deletions are in regulations 41.2, 41.12, 41.13, 41.21-41.25, 41.27, 41.43 and 41.49.

The proposed changes throughout parts 140 (Organization, Functions and Procedures of the Commission) and 145 (Commission Records and Information) reflect the need to incorporate SEFs and SDRs into the Commission's regulations dealing with the rights and obligations of other registered entities. The Commission proposed amending regulation 140.72 to provide the Commission with the authority to disclose confidential information to SEFs and SDRs. This provision allows the Commission, or specifically identified Commission personnel, to disclose information necessary to effectuate the purposes of the CEA, including such matters as transactions or market operations. The Commission proposed amending regulation 140.96 to authorize the Commission to publish in the

Federal Register

information pertaining to the applications for registration of DCMs, SEFs and SDRs, as well as new rules and rule amendments which present novel or complex issues that require additional time to analyze, an inadequate explanation by the submitting registered entity, or a potential inconsistency with the Act, or regulations under the Act. The Proposal included an amendment to regulation 140.99 to include SEFs and SDRs to the categories of registered entities that may petition the Commission for exemptive relief and no-action and interpretative letters.

The Commission proposed amending regulation 140.735-2 by adding swap and retail forex transactions, as regulation 5.1(m) defines the latter term, to those agreements, contracts or transactions Commission staff may not trade. The Commission proposed amending regulation 140.735-3 to add SEFs and SDRs to the list of entities from which Commission members and employees may not accept employment or compensation.

The Commission received no comments about these proposed amendments to part 140 and is adopting them as proposed, except for two technical corrections to regulation 140.735-2. The Proposal added “swap transaction” to the text of paragraph (c) but inadvertently omitted updating a cross-reference to paragraph (b) that references “swaps.” Today's final rulemaking updates that cross-reference accordingly. Similarly, the Proposal added “swap transaction” to one sentence of paragraph (c)'s footnote three but, inadvertently, did not add “swap transaction” to another sentence of that paragraph. Thus, today's rulemaking makes a technical correction by adding “swap transaction” to that other sentence.

The Commission proposed amending regulation 145.9 to expand the definition of “submitter” by adding SEFs and SDRs to the list of registered entities to which a person's confidential information has been submitted, and which, in turn, submit that information to the Commission. This amendment allows individuals who have submitted information to a SEF or SDR to request confidential treatment under regulation 145.9. The Commission received no comments about this proposed amendment and is adopting it as proposed.

Appendix A to Part 145 discusses those portions of Commission records made available to the public. Section (b) discusses information made available in the public reading area of the Commission's Office of the Secretariat. The Proposal amended subsection (b)(13) by adding “application form” to the list of publicly available portions of applications for becoming a registered entity. One month following the publication of the Proposal,

i.e.

in July 2011, the Commission published final amendments to Regulation 40.8(a) (“Availability of public information”).

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Regulation 40.8(a) is consistent with proposed (b)(13) of Appendix A except for the fact that Regulation 40.8(a) references a “first page of the application cover sheet” instead of an “application form.” Thus, as part of today's final rulemaking, the Commission is making a technical correction by deleting the proposed language, “application form,” and replacing it with “first page of the application cover sheet” so that it is consistent with regulation 40.8(a.)

102

101

Provisions Common to Registered Entities, 76 FR 44776, 44797 (July 27, 2011).

102

In November 2011, the Commission published a final version of Regulation 39.3 (“Procedures for [DCO] registration”). To be consistent with Regulation 40.8(a), subsection (a)(5) of Regulation 39.3 (“Public information”) references the “first page of the Form DCO cover sheet.”

See

Derivatives Clearing Organization General Provisions and Core Principles Regarding Rulemaking, 76 FR 69334, 69431(Nov. 8, 2011). Form DCO is the application for registration to become a DCO. Thus, today's technical correction to subsection (b)(13) of Appendix A is consistent with both Regulation 40.8(a) and Regulation 39.3(a)(5).

F. Parts 155 and 166

1. Regulation 155.2: Trading Standards for Floor Brokers

The Commission is removing the references to regulation 1.41 within regulation 155.2 because the Commission removed and reserved regulation 1.41 in 2001

103

pursuant to the CFMA. The Commission is also removing the related reference to former section 5a(a)(12)(A) of the Act. The Commission did not receive any comments on these changes in the Proposal and is finalizing them as proposed.

103

66 FR 42256.

2. Regulation 155.3: Trading Standards for Futures Commission Merchants and Regulation 155.4: Trading Standards for Introducing Brokers

The Commission is removing references to “option customer” in these two regulations pursuant to this final rulemaking's deletion of that term from regulation 1.3, described above. The Commission did not receive comments about this change following publication of the Proposal and is amending regulations 155.3 and 155.4 as proposed.

3. Regulation 166.2: Authorization To Trade

The Commission is revising this regulation by incorporating the revised definition of “commodity interest” (regulation 1.3(yy)), discussed above. The Commission believes that paragraph (a) of regulation 166.2 should refer to futures, options, or swaps and that paragraph (b) should refer only to futures or options. The Commission did not receive comments about these changes and is adopting them as proposed.

4. Regulation 166.5: Dispute Settlement Procedures

The Commission is revising this regulation by deleting a reference to “option customer” because, as described above, today's rulemaking deletes that term from regulation 1.3. The Commission is also making a conforming, technical change to regulation 166.5, described in section G.2., below.

G. Other General Changes to CFTC Regulations

1. Removal of References to DTEFs

The Commission is removing references to DTEFs and regulations pertaining to DTEFs in parts 1, 5, 15, 36,

41, 140, and 155 because section 734 of the DFA abolished DTEFs, effective July 15, 2011.

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This rulemaking is not deleting those DTEF references that other rulemakings have deleted or will delete from the Commission's regulations (

e.g.,

some references in part 3 and all references in part 40).

2. Other Conforming Changes

The Commission is also making changes to various parts of its regulations to update cross-references to CEA provisions, now renumbered after the passage of the DFA. An example of one such change is amended regulation 166.5, in which the Commission has updated the reference to the statutory definition of the term “eligible contract participant,” to reflect the Dodd-Frank Act's renumbering of CEA section 1a. Additionally, where typographical errors or other minor inconsistencies were discovered while reviewing CFTC regulations, this rulemaking includes instructions and amended regulations to correct them.

III. Administrative Compliance

A. Paperwork Reduction Act

Sections 1.31, 1.33, 1.35, 1.37, and 1.39 of the Commission's regulations are being amended to provide that records of swap transactions be kept in a similar manner to records of futures transactions. These amended provisions impose new information recordkeeping requirements that constitute the collection of information within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).

105

Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it has been approved by the Office of Management and Budget (“OMB”) and displays a currently valid control number.

106

This rulemaking contains new collections of information for which the Commission must seek a valid control number. The Commission therefore has requested that OMB assign a control number for this collection of information. The Commission has also submitted the proposed rulemaking, this final rule release, and supporting documentation to OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for these new collections of information is “Adaptation of Regulations to Incorporate Swaps,” OMB Control Number 3038-0090. Responses to these information collections will be mandatory.

105

44 U.S.C. 3501

et seq.

106

Id.

With respect to all of the Commission's collections, the Commission will protect proprietary information according to the Freedom of Information Act and 17 CFR part 145, “Commission Records and Information.” In addition, section 8(a)(1) of the Act strictly prohibits the Commission, unless specifically authorized by the Act, from making public “data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.” The Commission also is required to protect certain information contained in a government system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.

1. Information To Be Provided by Reporting Entities/Persons

a. Amendments to Regulation 1.31 (Books and Records; Keeping and Inspection)

Regulation 1.31 describes the manner in which “all books and records required to be kept by the Act” must be maintained. Most of the requirements of regulation 1.31 are applicable to FCMs, IBs, RFEDs, CTAs, CPOs, and members of DCMs and SEFs in conjunction with other part 1 regulations, and the PRA burdens either have been or will be covered by the OMB control numbers associated with the other part 1 regulations. Examples of these other part 1 regulations are regulation 1.33, which requires certain registrants to produce monthly confirmation statements, and regulation 1.35, which requires the maintenance of records of cash commodity, futures, and option transactions (as finalized, Records of commodity interest and cash commodity transactions). Regulation 1.31 is applicable to SDs and MSPs by way of the part 23 regulations.

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Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules, 77 FR 20128 (Apr. 3, 2012).

i. Obligation To Develop and Maintain Recordkeeping Policies and Controls

Regulation 1.31 additionally contains discrete stand-alone collections for which a control number must be sought. Subsection (b)(3)(ii) requires persons keeping records using electronic storage media to “develop and maintain written operational procedures and controls (an `audit system') designed to provide accountability over [the entry of records into the electronic storage media].” This provision is already applicable to FCMs, RFEDs, IBs, CTAs, CPOs, and members of DCMs, and would be applicable to SDs and MSPs pursuant to the part 23 regulations. As members of SEFs will be newly subject to the part 1 regulations, the Commission must estimate the burden of subsection (b)(3)(ii) on these entities and seek OMB approval for this new application of the subsection.

The Commission anticipates that members of SEFs may incur certain one-time start-up costs in connection with establishing the audit system. This will include drafting and adopting procedures and controls and may include updates to existing recordkeeping systems. The Commission estimates the burden hours associated with these one-time start-up costs to be 100 hours per SEF member.

As there are not any SEFs operating at the present, in light of the fact that the Commission has not yet finalized regulations concerning SEF Core Principles, it is not possible for the Commission to estimate with precision how many SEF members there will be or how many of those SEF members will be FCMs, SDs, or MSPs that are being covered by already pending existing information collections. Nonetheless, the Commission has estimated that 35 SEFs will register with it after the Dodd-Frank Act becomes effective, and now is estimating that there may be on average 100 members of a SEF that will not fall under one of the other collections. Accordingly, the aggregate new burden of subsection (b)(3)(ii) is estimated to be 100 one-time burden hours to approximately 3,500 SEF members.

The Commission expects that compliance and operations managers will be employed in the establishment of the written procedures and controls under subsection (b)(3)(ii). According to recent Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 11-3031, “Financial Managers,” that is employed by the “Securities and Commodity Contracts Intermediation and Brokerage” industry is $80.90.

108

Because members of SEFs may be large entities that may engage employees with wages above the mean, the Commission has conservatively chosen to use a mean hourly wage of $100 per hour. Accordingly, the burden associated with developing written procedures and controls will total approximately $10,000 for each applicable member of a SEF on a one-time basis.

108

Occupational Employment Statistics, Occupation Employment and Wages: 11-3031 Financial Managers,

http://www.bls.gov/oes/current/oes113031.htm

(May 2011).

ii. Representation to the Commission Prior to Initial Use of System

Members of SEFs will also have to comply with regulation 1.31(c), which requires persons employing an

electronic storage system to provide a representation to the Commission prior to the initial use of the system.

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The Commission estimates the burden of drafting this representation in accordance with regulation 1.31(c) and submitting it to the Commission to be one hour.

109

As with subsection (b)(3)(ii), regulation 1.31(c) is already applicable or will be made applicable by other actions to FCMs, IBs, DCM members, as well as SDs or MSPs pursuant to the part 23 regulations.

According to recent Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 11-3031, “Financial Managers,” (which includes operations managers) that is employed by the “Securities and Commodity Contracts Intermediation and Brokerage” industry is $80.90.

110

Because members of SEFs may be large entities that may engage employees with wages above the mean, the Commission has conservatively chosen to use a mean hourly wage of $100 per hour. Accordingly, the burden associated with drafting and submitting the representation prior to using an electronic storage system will be $100 ($100 x 1 hour) per affected member of a SEF.

110

Occupational Employment Statistics, Occupation Employment and Wages: 11-3031 Financial Managers,

http://www.bls.gov/oes/current/oes113031.htm

(May 2011).

iii. Comments Received

The Commission did not receive any comments concerning the cost for SEF members to comply with the recordkeeping requirements contained in regulation 1.31.

b. Amendments to Regulation 1.33 (Monthly and Confirmation Statements)

The Commission is amending regulation 1.33 by requiring FCMs to include in their monthly and confirmation statements sent to customers certain specified information related to a customer's Cleared Swap positions. The information required to be summarized in respect of swap transactions will be analogous to information currently required to be kept in respect of futures and commodity option transactions. The Commission estimates the burden of complying with regulation 1.33 in respect of swap transactions to be 1 hour for each Cleared Swap confirmation and 1 hour for each monthly statement.

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Accordingly the burden associated with complying with regulation 1.33 in respect of each Cleared Swap confirmation will be $80.90 ($80.90 × 1 hour), and the burden will be $80.90 ($80.90 × 1 hour) for each monthly statement regarding Cleared Swaps.

111

Occupational Employment Statistics, Occupation Employment and Wages: 11-3031 Financial Managers,

http://www.bls.gov/oes/current/oes113031.htm

(May 2011).

i. Comments Received

The Commission did not receive any comments concerning the cost for FCMs to comply with the recordkeeping requirements contained in regulation 1.33 with respect to their swap transactions.

c. Amendments to Regulation 1.35 (Records of Commodity Interest and Cash Commodity Transactions)

i. Obligation To Develop and Maintain Recordkeeping Policies and Controls

The amendments will require members of SEFs to comply with the regulation 1.35 recordkeeping requirements that are currently followed by FCMs, IBs, RFEDs, and members of DCMs. The Commission anticipates that members of SEFs will spend approximately eight hours per trading day (or 2,016 hours per year based on 252 trading days) compiling and maintaining transaction records.

112

Because members of SEFs may be large entities that may engage employees with wages above the mean, the Commission has conservatively chosen to use a mean hourly wage of $100 per hour. Thus, each SEF member will have a burden of $201,600 per year (2,016 hours × $100/hour).

112

Occupational Employment Statistics, Occupation Employment and Wages: 11-3031 Financial Managers,

http://www.bls.gov/oes/current/oes113031.htm

(May 2011).

The amendments to regulation 1.35 will also require FCMs, RFEDs, IBs, and members of DCMs to comply with the regulation 1.35 recordkeeping requirements for any swap transactions into which they enter. Because the proposed recordkeeping requirements for swaps would be equivalent to the recordkeeping requirements they must currently follow in respect of futures and commodity option transactions, the additional burden for any swap transaction would be the same for any additional futures and commodity option transaction for which they keep records pursuant to regulation 1.35 in its current form. The Commission estimates that the recordkeeping burden associated with each swap transaction would be 0.5 hours, for a total burden of $50 per transaction.

ii. Comments Received

The Commission did not receive any comments concerning the excepted cost of complying with the aforementioned revisions to regulation 1.35.

d. Amendments to Regulation 1.37 (Customer's Name, Address, and Occupation Recorded; Record of Guarantor or Controller of Account)

i. Obligation To Develop and Maintain Recordkeeping Policies and Controls

The Commission is amending regulation 1.37(a) by requiring each FCM, IB, and member of a DCM to keep the same kind of record (showing the customer's name, address, occupation or business, and name of any other person guaranteeing the account or exercising any trading control over it) for any swap transactions it “carries or introduces” for another person. The Commission estimates that it will take each of these entities an average of 0.4 hours to gather the information and file it or key it into the entity's customer recordkeeping programs.

The Commission also is amending regulation 1.37(b) by requiring each FCM carrying an omnibus account for another FCM, a foreign broker, a member of a DCM or any other person to maintain a daily record for such account of the total open long contracts and the total open short contracts in each swap. FCMs presently have an equivalent obligation with respect to futures and commodity option transactions. These daily records typically are maintained in electronic form. Therefore, once a position is entered into the entity's systems, the daily record will be automatically available. The Commission estimates that entering the position into the system, commencing with the placement of an order and ending with execution will take each of these entities an average of 0.4 hours.

The Commission additionally is amending regulation 1.37(c) by requiring SEFs to comply with a provision that DCMs must currently follow: Keep a record showing the true name, address, and principal occupation or business of any foreign trader executing transactions on the

facility or exchange. According to regulation 1.37(d), this provision does not apply in respect of futures/options/swaps that foreign traders execute through FCMs or IBs.

The Commission estimates that it would take a SEF a total of 0.4 hours to prepare each record in accordance with regulation 1.37(c). According to the Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 43-9021, “Data Entry Keyer,” is $13.95.

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Because SEFs may be large entities employing persons at wages higher than the average, the Commission conservatively estimates the mean hourly wage to be $19.03 per hour. Thus, the burden associated with preparing a record with regulation 1.37(c) would be $7.61 ($19.03/hour × 0.4 hours).

113

Occupational Employment Statistics, National Industry-Specific Occupational Employment and Wage Estimates, NAICS 523100—Securities and Commodity Contracts Intermediation and Brokerage,

http://www.bls.gov/oes/current/oes439021.htm

(May 2011).

ii. Comments Received

The Commission did not receive any comments concerning the extension of regulation 1.37 to swap transactions executed by FCMs, IBs, and other DCM members.

e. Amendments to Regulation 1.39 (Simultaneous Buying and Selling Orders of Different Principals; Execution of, for and Between Principals)

i. Obligation To Develop and Maintain Recordkeeping Policies and Controls

The Commission is amending regulation 1.39, which currently applies to DCMs, by enabling members of SEFs to execute simultaneous buying and selling orders of different principals pursuant to rules of the SEF if certain conditions are met. Among those conditions, a SEF would have to record these transactions in a manner that “shows all transaction details required to be captured by the Act, Commission rule, or regulation.” The Commission anticipates that the data to be captured would already exist in the SEF's trading system. The Commission estimates that it will take the SEF an average of 0.1 hours to capture this data, and storage costs of less than $1 per record.

According to the recent Bureau of Labor Statistics, the mean hourly wage of computer programmers under occupation code 15-1131 and computer software developers under program codes 15-1132 are between $36.54 and $44.27.

114

Because SEFs may be large entities that may engage employees with wages above the mean, the Commission has conservatively chosen to use a mean hourly programming wage of $50 per hour for each of the categories of persons who will have to establish the system for maintaining oral records. Accordingly, the start-up burden associated with the data capture requirements would be an average of $5.

114

Occupational Employment Statistics, Occupational Employment and Wages: 15-1131, Computer Programmers,

http://www.bls.gov/oes/current/oes151131.htm

(May 2011); Occupational Employment Statistics, Occupational Employment and Wages: 15-1132, Computer Software Developers,

http://www.bls.gov/oes/current/oes151132.htm

(May 2011).

ii. Comments Received

The Commission did not receive any comments concerning the extension of regulation 1.39 to transactions executed on a SEF.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) requires that agencies consider whether the rules they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis respecting the impact.

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The rules adopted by the Commission are for the most part technical amendments to conform the affected parts to provisions of the Dodd-Frank Act and, as such, are non-substantive and will not have a significant economic impact on a substantial number of any types of entities, whether or not they are small entities. In order to conform the Commission's existing records regulations to its new recordkeeping requirements for SDs and MSPs (Regulation 23.202 (“Daily Trading Records”)),

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the Commission also is amending its regulation 1.35 records requirements (as finalized, Records of commodity interest and cash commodity transactions) to require FCMs, IBs, RFEDs, and members of DCMs to observe recordkeeping requirements for swaps that they currently observe with respect to their futures and commodity option transactions.

115

5 U.S.C. 601

et seq.

116

See

Additionally, the Commission is applying certain of those books and records regulations to members of SEFs, mirroring obligations that apply to members of DCMs.

Accordingly, the Commission is hereby determining that most of the entities affected by this rulemaking will not be significantly economically impacted by the conforming and technical rules being adopted. As discussed below, the Commission is also determining that most of the entities that will be subject to compliance with this rulemaking are not small entities for the purposes of the RFA. Therefore, pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of the Commission, certifies by category of market participant below that the final rules will not have a significant economic effect on a substantial number of small entities.

1. FCMs, RFEDs, DCMs, ECPs, SEFs and Large Traders

The Commission has previously determined that registered FCMs, RFEDs, DCMs, ECPs, SEFs and large traders are not small entities for purposes of the RFA.

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The Commission has been informed, in the context of other rulemakings, that there are some entities that are both ECPs as defined in the CEA and also are small entities as defined by the Small Business Administration (“SBA”). In particular, the SBA has defined as small entities those entities that are engaged in the generation, transmission, and/or distribution of electric energy for sale and whose total electric output for the preceding year did not exceed four million megawatt hours. As noted previously, however, this rulemaking involves primarily technical conforming amendments that alone do not impose significant economic impacts on any group of entities, and that overlap with substantive rulemakings in which the Commission has assessed or will assess the economic impact on small entities to the extent required under the RFA. Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the final rules will not have a significant economic impact on a substantial number of small entities with respect to these entities.

117

See

Policy Statement and Establishment of Definitions of “Small Entities” for Purposes of the Regulatory Flexibility Act, 47 FR 18618, 18619, Apr. 30, 1982 (DCMs, FCMs, and large traders) (“RFA Small Entities Definitions”); Opting Out of Segregation, 66 FR 20740, 20743, Apr. 25, 2001 (ECPs); Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75 FR 55410, 55416, Sept. 19, 2010 (RFEDs) (“Retail Forex Final Rules”); and Position Limits for Futures and Swaps; Final Rule and Interim Final Rule, 76 FR 71626, 71680, Nov. 18, 2011 (SEFs).

2. IBs

As discussed above, most of the provisions of this rulemaking are technical and conforming in nature, and overlap with substantive rulemakings in which the Commission has condu

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