Corporate & Financial Weekly Digest : Corporate Finance Lawyers & Attorneys for Legal Developments in Business & Financial Services

Co-authored by Christopher H. Mendoza and Christian B. Hennion.

On February 1, the Commodity Futures Trading Commission and the Securities and Exchange Commission (the Agencies) submitted to Congress a Joint Report of International Swap Regulations (Report). The Report, which Congress directed the Agencies to prepare under section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, describes the regulation of swaps and security-based swaps in the United States, Asia and Europe and identifies areas of regulation that are similar and other areas of regulation that can be harmonized. As required by section 719(c), the Report also identifies major dealers, exchanges, clearinghouses, clearing members, and regulators in each geographic area and lists the major contracts (including trading volumes, clearing volumes, and notional values), the methods for clearing swaps, and the systems used for setting margin in each geographic area.

A copy of the Report can be found here.
 

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

The staff of the Commodity Futures Trading Commission (CFTC) will hold a public roundtable to discuss the “available to trade” provision for swap execution facilities (SEFs) and designated contract markets (DCMs) on January 30, at 9:30 am (Eastern Time). The roundtable is set to discuss: (1) the filing process under Part 40 of the CFTC’s regulations for a DCM or SEF to notify the CFTC that it has determined that a swap is “available to trade”; (2) the factors that a DCM or SEF must consider to make an “available to trade” determination; and (3) the meaning and parameters of “economically equivalent swap.”

A copy of the roundtable agenda is available here. The CFTC press release containing further information regarding the roundtable is available here.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

On January 25, the Commodity Futures Trading Commission released the findings of limited reviews of future commission merchants (FCMs) conducted to assess compliance with requirements to segregate customer funds (including a review of an FCMs obligation to set aside, in secured accounts, funds deposited by customers for trading on foreign boards of trade). As of the review date for each FCM, all of the FCMs that were reviewed were in compliance with the segregation or secured amount requirements.

Further information regarding the scope, methodology, and findings of the limited review are available here.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

At a public meeting held on January 11, the Commodity Futures Trading Commission adopted three final rules and agreed to publish for comment another rule implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission adopted final rules implementing section 724 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which prescribes the manner in which cleared swaps and related collateral must be treated prior to and after bankruptcy. The final rule sets forth a model entitled “Complete Legal Segregation.” The purpose of the rules is to protect swaps customers from so-called “fellow customer” risk, i.e., the risk of loss resulting from the default of one or more customers. Similar to the rules governing funds segregated on behalf of customers trading on US futures exchanges, the rules permit futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) to hold cleared swaps customer collateral in commingled customer omnibus accounts. However, the rules further require FCMs that are members of a DCO to provide the DCO at least once each day with information regarding: (1) the identity of the underlying customers whose positions are held in the omnibus account, (2) the portfolio of positions held by each customer, and (3) the margin associated with those positions. In the event a default by one or more of the clearing member FCM’s cleared swaps customers results in the default of the clearing member to the DCO, the DCO would not have recourse to the collateral posted by non-defaulting cleared swaps customers to meet the FCM’s obligations to the DCO. The rules contemplate that the positions and related margin of non-defaulting customers would either be transferred to another clearing member FCM or liquidated and returned to the Trustee in bankruptcy for distribution in accordance with the commodity broker liquidation provisions of the Bankruptcy Code (Chapter 7, Subchapter IV).

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission adopted final rules implementing business conduct standards rules for swap dealers (SDs) and major swap participants (MSPs) (collectively, SDs/MSPs), regulating their dealings with counterparties and additional requirements when they deal with “Special Entities,” which the final rules define to include: (1) a Federal agency; (2) a State, State agency, city, county, municipality, or other political subdivision of a State, or any instrumentality, department, or a corporation of or established by a State or political subdivision of a State; (3) any employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA); (4) any governmental plan, as defined in Section 3 of ERISA; (5) any endowment, including an endowment that is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986; or (6) any employee benefit plan defined in Section 3 of ERISA, not otherwise defined as a Special Entity, that elects to be a Special Entity by notifying an SD/MSP of its election prior to entering into a swap with the particular SD/MSP.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission adopted final rules establishing a registration process for SDs and MSPs. Registration requirements will not be mandatory until certain swap definitions are finalized and become effective. Persons who believe that they are SDs or MSPs will be able–but not required–to register before that time. As part of the registration requirements, SDs and MSPs are required to become and remain members of a registered futures association. Push-out affiliates will also be subject to the foregoing requirements. A push-out affiliate is a non-insured depository institution affiliate that is an SD or MSP.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission issued an order authorizing the National Futures Association to process and grant applications for registration and withdrawals of registration with respect to SDs and MSPs, to issue notices of provisional registration, to confirm initial compliance with requirements applicable to SDs and MSPs under Section 4s of the CEA, to conduct proceedings to deny, condition, suspend, restrict, or revoke the registration of any SD or MSP, to maintain records regarding SDs and MSPs, and to serve as the official custodian of those records.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

At a public meeting on January 11, the Commodity Futures Trading Commission, by a 3-2 vote (Commissioners O’Malia and Sommers, dissenting), voted to propose regulations to implement the provisions of Section 619 of the Dodd-Frank Act, commonly known as the “Volcker Rule.” Among other things, the Volcker Rule generally prohibits federally insured depository institutions, bank holding companies, and their subsidiaries and affiliates (collectively, banking entities) from engaging in short-term proprietary trading and owning, sponsoring or having certain other relationships with hedge funds or private equity funds, in each case, subject to various exceptions.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

On December 19, 2011, the Commodity Futures Trading Commission issued a final order that extends the CFTC’s prior grant of temporary relief from certain swap-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that would otherwise have taken effect on July 16, 2011 (the Order). Specifically, the Order provides relief with respect to (1) self-effectuating provisions of the Dodd-Frank Act that reference terms requiring further definition, and (2) self-effectuating provisions of the Dodd-Frank Act that repealed existing statutory safe harbors for over-the-counter derivatives transactions. The latest “sunset” date for the Order is July 16, 2012.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

On December 20, 2011, the Commodity Futures Trading Commission approved final rules on swap data recordkeeping and reporting requirements for swap data repositories (SDRs), derivatives clearing organizations (DCOs), designated contract markets (DCMs), swap execution facilities (SEFs), swap dealers (SDs), major swap participants (MSPs), and swap counterparties that are neither swap dealers nor major swap participants (non-SD/MSP counterparties).

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

On December 20, 2011, the Commodity Futures Trading Commission approved final rules governing real-time public reporting of swap transaction data. The final rules cover all interest rate, credit, equity, foreign exchange and “other commodity” swaps, regardless of the method of execution or whether such swaps are cleared.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission will hold a public meeting on January 11 at 9:30 a.m. (Eastern Time) to consider the following matters:

• Final Rule: Registration of Swap Dealers and Major Swap Participants
   
• Final Rule: Protection of Cleared Swaps Customer Contracts and Collateral: Conforming Amendments to the Commodity Broker Bankruptcy Provisions
   
• Final Rule: Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties
   
• Proposed Rule: Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds
   
• Delegation of Authority Order: Performance of Registration Functions by National Futures Association with Respect to Swap Dealers and Major Swap Participants.

Further information regarding the open meeting is available here.
 

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

On January 3, the Commodity Futures Trading Commission issued an order rejecting a motion filed by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) requesting that the CFTC stay the effective date of its final and interim final position limit rules pending resolution of the judicial challenge filed by ISDA and SIFMA on December 2, 2011. The CFTC rejected the motion by a vote of 3 to 2. A copy of the CFTC order is available here.

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Co-authored by Christopher H. Mendoza

The Commodity Futures Trading Commission will hold a public meeting on December 20 at 9:30 a.m. (EST) to consider the following rules:

(1) Final Rule on Real-Time Reporting of Swap Transaction Data;
(2) Final Rule on Swap Data Recordkeeping and Reporting Requirements; and
(3) Final Rule on Effective Date for Swap Regulation

 

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Co-authored by Maureen C. Guilfoile, Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission has adopted amendments to CFTC Rules 1.25 and 30.7 that would narrow the scope of permissible investments for customer funds held by futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) in the customer segregated account maintained under section 4d(a)(2) of the Commodity Exchange Act or the foreign futures and foreign options secured amount account maintained in accordance with CFTC Rule 30.7. Among the key investment categories that will no longer be permitted under the amended rule are (i) foreign sovereign debt obligations, (ii) commercial paper and corporate notes or bonds (other than certain instruments that are fully guaranteed by the U.S. government pursuant to the Temporary Liquidity Guarantee Program (TLGP)), and (iii) inter-affiliate resale and repurchase transactions and certain internal transactions (i.e., “internal repos”).

 

 

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Co-authored by Maureen C. Guilfoile, Christopher H. Mendoza and Christian B. Hennion.

If a swap execution facility (SEF) or designated contract market (DCM) makes a “swap available to trade,” all other SEFs and DCMs listing or offering that swap or an economically equivalent swap must also make those swaps available to trade for purposes of the trade execution requirements of section 2(h)(8) of the CEA. The Commodity Futures Trading Commission has now proposed a rule setting forth the process by which SEFs and DCMs may make a swap “available to trade.”

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Co-authored by Maureen C. Guilfoile, Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission has adopted final rules (which are substantially similar to the proposed rules) that replace the existing system of staff-issued no-action letters with a registration system for foreign boards of trade (FBOTs) seeking to provide their members or other participants located in the U.S. with direct access to the FBOT’s electronic order entry and trade matching system. The standards and procedures for registration (as well as an appendix containing two application forms—one for the FBOT and one for the clearing organization—and describing the information required to be submitted as part of an application) are set out in a new Part 48 of the CFTC’s regulations.

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Co-authored by Maureen C. Guilfoile, Christopher H. Mendoza, and Christian B. Hennion.

Amendments made to the Commodity Exchange Act by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) require that an agreement, contract or transaction in any commodity that is entered into with, or offered to, a non-eligible contract participant or non-eligible commercial entity on a leveraged, margined, or financed basis must be conducted on a regulated exchange and be subject to the Commodity Futures Trading Commission’s anti-fraud authority, unless actual delivery of the commodity is made within 28 days. The CFTC has issued an interpretation of the term “actual delivery” containing guidance on how the CFTC will construe this requirement.

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Co-authored by Maureen C. Guilfoile, Christopher H. Mendoza, and Christian B. Hennion.

The Commodity Futures Trading Commission’s Division of Market Oversight has issued a guidebook containing additional guidance and detailed instructions for submitting large swap trader reports required by new Part 20 of the CFTC’s rules. Clearing organizations and clearing members were required to begin reporting on cleared swaps on November 21, 2011, and are required to begin reporting on uncleared swaps on January 20, 2012. Fully compliant month-end open interest reports must be collected beginning in September 2011 through February 2012 and submitted to the CFTC by March 20, 2012.

The Guidebook for Part 20 Reports is available here.
 

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Co-authored by Maureen C. Guilfoile, Christopher H. Mendoza, and Christian B. Hennion. 

The Commodity Futures Trading Commission’s Technology Advisory Committee will hold a public meeting on December 13, to address: (1) emerging issues in relation to swap execution facilities; (2) high frequency traders and their market impact; and (3) interim recommendations from the subcommittee on data standardization regarding universal product and legal entity identifiers, standardization of machine-readable legal contracts, and data storage and retrieval.

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Co-authored by Christopher H. Mendoza and Christian B. Hennion.

The Commodity Futures Trading Commission is requesting public comment on a petition submitted by ICE Clear Credit LLC (ICC) seeking a CFTC order that would permit ICC and its clearing members that are dually-registered as futures commission merchants and securities broker-dealers to (i) commingle positions in swaps and security-based swaps and related customer money, securities, and property in a cleared swaps customer account and (ii) portfolio margin the swaps and the security-based swaps held in such an account.

The comment period for the ICC petition closes on December 22. The ICC petition may be found here.
 

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On October 24, the Commodity Futures Trading Commission’s Office of General Counsel issued a no-action letter allowing the offer and sale in the United States of the GreTai Securities Market Capitalized Weighted Stock Index (GTEX) futures contract that is traded on the Taiwan Futures Exchange.

A copy of the no-action letter may be found here.
 

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The Commodity Futures Trading Commission (the CFTC) has adopted final rules implementing numerous general provisions and most core principles relating to derivatives clearing organizations (DCOs) at its October 18 open meeting. The final rules were approved by a 3-2 vote (Commissioners Sommers and O’Malia dissenting). The rules, which address15 of the 18 DCO Core Principles, were adopted largely as proposed. The CFTC did not adopt rules implementing the core principles relating to governance fitness standards, conflicts of interest and composition of governing boards. The effective dates for the final rules are staggered. Some rules will be effective 60 days after publication in the Federal Register, and others will be effective 180 days or a year after publication in the Federal Register.

The final rules can be found here.
 

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At its October 18 open meeting, the Commodity Futures Trading Commission (the CFTC) also approved final rules on speculative position limits for futures and swaps. The final rules were approved by a 3-2 vote (Commissioners Sommers and O’Malia dissenting) and reflect certain material changes to the rules proposed in January, including the retention of certain aggregation exemptions that would have been eliminated by the proposed rules. The details of the final position limit rules are the subject of a forthcoming Katten Client Advisory.

The CFTC “Fact Sheets” and “Q&As” on the final position limit rules may be found here.
 

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The Commodity Futures Trading Commission (the CFTC) has proposed to extend its earlier exemptive order that provides temporary relief from certain swap-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that would otherwise have taken effect on July 16 (the Order). Specifically, the Order provided relief with respect to (1) self-effectuating provisions of the Dodd-Frank Act that referenced terms requiring further definition, and (2) self-effectuating provisions of the Dodd-Frank Act that repealed existing statutory safe harbors for over-the-counter derivatives transactions.

The Order originally included an outside “sunset” date of December 31, after which the relief granted by the Order would expire. Under the proposed amendment, the latest “sunset” date for the Order would be extended until July 16, 2012.

The proposed amendment may be found here.
 

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Co-authored by Christopher Mendoza and Christian Hennion

The Commodity Futures Trading Commission has adopted a final rule that creates a new certification procedure for foreign boards of trade (FBOTs) seeking to offer “broad-based” security index futures or options contracts (Index Products) to persons in the U.S. FBOTs are currently required to obtain no-action relief from CFTC staff prior to offering an Index Product to U.S. persons. The new procedure replaces the current no-action letter process and provides for expedited review, allowing an FBOT that is registered as such with the CFTC or that has previously received no-action relief from the CFTC – either for stock index products or allowing the FBOT to offer direct access to its electronic trading systems – to offer and sell an Index Product in the U.S. 45 days after submitting a request to the CFTC with respect to such product, absent notification from the CFTC to the contrary. The final rule also permits an FBOT to offer new Index Products after an expedited 15-day review period in reliance upon prior CFTC relief issued to that FBOT where the new Index Product is based on the same index that was the subject of such prior relief and is “substantially identical” to the Index Product covered by such prior relief. Finally, previously granted no-action relief will be grandfathered under the new regime, provided that the applicable FBOT submits a written statement representing that the covered Index Products remain fully compliant with the requirements of such relief.

The final rule, available here, will take effect on October 26.
 

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Co-authored by Christopher Mendoza and Christian Hennion

The CFTC is requesting public comment on an application by Eurex Clearing AG for registration as a derivatives clearing organization. The CFTC staff intends to complete its review of the application on or before March 31, 2012. Comments should be submitted on or before October 31.

The CFTC press release may be found here.
The documents submitted by Eurex Clearing are available here.
 

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The Division of Market Oversight (DMO) of the U.S. Commodity Futures Trading Commission has issued a letter providing temporary relief from daily large trader reporting requirements for physical commodity swaps. The reporting requirements, which apply to both cleared and uncleared swaps, were to take effect on September 20.

The DMO letter grants relief to derivatives clearing organizations and clearing members until November 21 for cleared swaps and January 20, 2012 for uncleared swaps. Reliance on this relief is voluntary, and is conditioned upon the provision of month-end open interest data by no later than February 20, 2012. Open interest attributable to uncleared swaps must also be reported separately by the counterparty to such swaps.

The DMO letter may be found here.
 

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Co-authored by Christopher Mendoza and Christian Hennion

The Technical Committee of the International Organization of Securities Commissions (IOSCO) published a report, prepared by the IOSCO Task Force on Commodity Futures Markets, on principles for the regulation and supervision of commodity derivatives markets (the Principles). The report addresses the G20’s November 2010 request for further work on regulation and supervision of physical commodity derivatives markets.

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Co-authored by Christopher Mendoza and Christian Hennion

On August 31, the Commodity Futures Trading Commission’s Office of General Counsel issued a no-action letter allowing the offer and sale in the U.S. of the BEL 20 Index futures contract that is traded on Euronext Brussels.

A copy of the no-action letter may be found here.
 

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Co-authored by Christopher Mendoza and Christian Hennion

On September 2, the Commodity Futures Trading Commission issued an order granting CME Clearing Europe Limited registration as a derivatives clearing organization pursuant to Section 5b of the Commodity Exchange Act. Under the terms of the order, CME Clearing Europe Limited is permitted to clear swaps and forward contracts on energy, agricultural, freight and metals products executed either bilaterally or on or through a swap execution facility.

A copy of the Order of Registration may be found here.
 

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Co-authored by: Christopher H. Mendoza and Christian B. Hennion

Gary Barnett has been appointed to serve as the Director of the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight, a newly created division that is part of the CFTC’s restructuring to fulfill its expanded responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Mr. Barnett is currently head of the U.S. Derivatives and Structured Finance Practice Group at Linklaters LLP in New York, NY.

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Co-authored by: Christopher H. Mendoza and Christian B. Hennion

The Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the International Organization of Securities Commissions (IOSCO) have published a consultative report on the gathering, storing, and dissemination of over-the-counter (OTC) derivatives data by trade repositories (TRs). The consultative report was prepared in response to the October 2010 report of the Financial Stability Board, “Implementing OTC Derivatives Market Reforms,” which requested the CPSS and IOSCO to consult with other regulators to develop (i) minimum data reporting requirements and standardized formats and (ii) the methodology and mechanism for data aggregation.

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The Commodity Futures Trading Commission has approved proposed amendments to National Futures Association compliance rules, bylaws and other requirements applicable to the retail forex activities of NFA members.

Among the amendments, NFA is eliminating certain existing exclusions from compliance with NFA’s forex requirements, with the result that all NFA members engaging in retail forex transactions will be subject to the applicable NFA forex requirements (subject to a limited exemption for futures commission merchants (FCMs) whose forex activities are limited to hedging currency risk for their futures customers). Currently, NFA’s retail forex requirements do not apply to FCMs and introducing brokers that are also registered with the Securities and Exchange Commission as broker-dealers.

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The Commodity Futures Trading Commission and Securities and Exchange Commission have published a request for comment in connection with a joint study and report to Congress on international swap and clearinghouse regulation. The study and report, required under section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, must identify major swap contracts, dealers, exchanges, clearinghouses and regulators in the United States, Asia and Europe; describe the methods for clearing swaps and systems used for setting margin; and indicate similar areas of regulation for harmonization. Comments must be received within 60 days of the publication of the request for comment in the Federal Register.

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The Commodity Futures Trading Commission’s Technology Advisory Subcommittee on Data Standardization will hold its first public meeting on August 5. The Subcommittee will review public and private solutions for creating well-accepted standards for describing, communicating and storing complex financial products data. Two additional Subcommittee meetings are tentatively scheduled for September 30 and November 4.

Information regarding the meeting can be found here and the agenda is available here.
 

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At a July 19 meeting, the Commodity Futures Trading Commission approved three final rulemakings and two rule proposals under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), as described below.

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The staffs of the Commodity Futures Trading Commission and the Securities and Exchange Commission will jointly conduct a public roundtable discussion to address international issues in connection with the implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The roundtable will take place on August 1 at the CFTC Headquarters in Washington, D.C.

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Co-authored by Christopher H. Mendoza

The CME Group has announced amendments to CME, CBOT and NYMEX Rule 957, which specifies the information that must be included in a clearing member's confirmations to its customers, to require that confirmation statements "show facts relevant to the economic terms of the transaction." The changes to Rule 957 are effective immediately, and are intended to broaden the scope of the rule to include types of information that may be necessary to confirm over-the-counter swaps transactions.

The CME Group advisory notice announcing the rule change may be found here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has issued an Order, essentially in the form proposed, providing temporary relief from certain swap-related provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would otherwise take effect on July 16. The Federal Register release accompanying the Order groups the provisions of Title VII as to which the CFTC has regulatory responsibility into four broad categories:

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Co-authored by Kevin M. Foley and Vanessa L. Colman

At a July 7 meeting, the Commodity Futures Trading Commission approved five final rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act: (1) large trader reporting for physical commodity swaps; (2) anti-manipulation and anti-fraud requirements; (3) the definition of an "agricultural commodity;" (4) protection of consumer information under the Fair Credit Reporting Act; and (5) the scope of consumer privacy protections under the Gramm-Leach-Bliley Act.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

In compliance with Executive Order 13563, "Improving Regulation and Regulatory Review,'' the Commodity Futures Trading Commission has developed a Plan to review its existing regulations to evaluate their continued effectiveness in achieving the objectives for which they were adopted. Under the Plan, after the CFTC has substantially finished promulgating rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC intends to conduct reviews of those regulations not examined in connection with the Dodd-Frank Act, to determine whether any such regulations should be modified or repealed in order to make the CFTC's regulatory program more effective and less burdensome. The CFTC has requested comments on the Plan by interested parties. Comments must be received by August 29.

The Federal Register release of the CFTC's request for information regarding the Plan can be found here.

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Co-authored by Kevin M. Foley and Christopher H. Mendoza

The Commodity Futures Trading Commission has proposed to issue an order (the Proposed Order) providing temporary relief from certain swap-related provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would otherwise take effect on July 16, 2011. The CFTC proposal, which describes the scope of the proposed exemptive relief but does not include the actual text of the Proposed Order, groups the provisions of Title VII as to which the CFTC has regulatory responsibility into four broad categories:

1. provisions that, by their terms, do not take effect without the adoption of implementing rules;
2. self-effectuating provisions that include references to terms that require further definition;
3. self-effectuating provisions that do not reference terms requiring further definition and that repeal current provisions of the Commodity Exchange Act (CEA); and
4. other self-effectuating provisions.
    

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission will hold a public meeting on June 14 at its headquarters in Washington, D.C., to consider the effective date of various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 754 of the Dodd-Frank Act provides that "[u]nless otherwise provided in this title, the provisions of this subtitle shall take effect on the later of 360 days after the date of the enactment of this subtitle [i.e., July 16, 2011] or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provision of this subtitle."

Further information about the meeting is available here.

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Co-authored by Kevin M. Foley and Christopher H. Mendoza

The Commodity Futures Trading Commission has adopted amendments to CFTC Rules 4.12 and 4.13 to provide relief from certain disclosure, reporting and recordkeeping requirements for commodity pool operators (CPOs), as well as relief from registration requirements for certain independent directors and trustees, of pools with units of participation that are publicly offered and traded on a national securities exchange (Commodity ETFs). The final rules are substantially similar to the rules that were proposed by the CFTC in September 2010.

The CFTC also has issued an order authorizing the National Futures Association to process claims of exemption under the newly adopted rules.

The rules will take effect on June 17.

The CFTC rules can be found here.
The CFTC order can be found here.

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On May 11, the White House announced that Mark Wetjen has been nominated to be Commissioner of the Commodity Futures Trading Commission. Mr. Wetjen is currently Counsel and Senior Policy Advisor to Nevada Senator and Senate Majority Leader Harry Reid.

The press release announcing Mr. Wetjen's nomination is available here.

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Co-authored by Kevin M. Foley and Christian B. Hennion

The Commodity Futures Trading Commission has determined to extend the public comment period for over 30 of its proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act until June 3. The rule proposals covered by the extension were proposed between October 2010 and March 2011 and relate to various aspects of the regulatory framework for swaps under the Dodd-Frank Act. For many of these proposed rulemakings, the public comment period has already closed, and is therefore being reopened until June 3. Comments previously received by the CFTC on such rule proposals after the close of the original comment period will be treated as if received during the reopened comment period and need not be resubmitted.

In its release announcing the extension of the public comment period, the CFTC also requests comment on the order in which it should consider the final rule proposals.

The CFTC release, including a full list of the affected rule proposals, is available here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission has published its fourteenth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. These proposals include capital requirements for swap dealers (SDs) and major swap participants (MSPs), interpretive guidance regarding various proposed definitions and the regulation of mixed swaps, proposed rules concerning the bankruptcy protection of cleared swaps customer contracts and collateral, and amendments to adapt certain CFTC regulations to Dodd-Frank Act requirements.

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Co-authored by Kevin M. Foley, Christian B. Hennion and Vanessa L. Colman

The Office of the Inspector General (OIG) for the Commodity Futures Trading Commission has issued a report summarizing its investigation into the CFTC's cost-benefit analyses for four rulemakings promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The OIG investigation, which was conducted at the request of Reps. Frank Lucas (R-OK) and K. Michael Conway (R-TX), reviewed how the CFTC formulated its cost-benefit analyses for its rulemakings regarding (1) definitions of "swap dealer," "major swap participant" and other key terms from Title VII of the Dodd-Frank Act; (2) confirmation, portfolio reconciliation and compression requirements for swap dealers and major swap participants; (3) core principles for designated contract markets; and (4) duties of swap dealers and major swap participants.

In its report, OIG concludes that, to a varying extent for the various rulemakings examined, the CFTC's Office of General Counsel (OGC) appeared to have a more dominant role in formulating the cost-benefit analysis than did the CFTC's Office of the Chief Economist (OCE), at times overriding the latter's input into the process. OIG further stated that the OGC's methodology for formulating cost-benefit analyses utilized a historic and "somewhat stripped down" analytical approach, and recommended that a "more robust" approach, with greater OCE input, be implemented.

A copy of the OIG report is available here.

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Co-authored by Kevin M. Foley, Christian B. Hennion and Vanessa L. Colman

The Commodity Futures Trading Commission announced that it will hold an open meeting on the fourteenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on April 27. At the meeting, the CFTC will consider, among other things, proposed rulemakings regarding capital requirements for swap dealers and major swap participants, bankruptcy protections for cleared swaps and associated collateral, product definitions under Title VII of the Dodd-Frank Act and other conforming amendments to CFTC regulations.

Information about the meeting is available here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission has published its thirteenth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposals relate to the establishment of initial and variation margin requirements for uncleared swaps and to recordkeeping and reporting requirements for existing swaps.

Margin Requirements for Uncleared Swaps

The CFTC has proposed rules to implement Section 731 of the Dodd-Frank Act, which requires the CFTC to adopt rules imposing initial and variation margin requirements on all swaps that are not cleared by a derivatives clearing organization (DCO). The margin requirements would apply to uncleared swaps entered into after the effective date of the rules.

The proposed rules would apply to swap dealers (SDs) and major swap participants (MSPs) that are not subject to oversight by a regulator other than the CFTC. Margin requirements would vary by counterparty, depending on whether the counterparty is a "financial entity," as defined under Section 2(h)(7)(C) of the Commodity Exchange Act. The proposed rules would require initial and variation margin to be paid on all uncleared swaps that are entered into between an SD or MSP with an SD or MSP. Initial margin posted for swaps between SDs and MSPs would have to be deposited with a third-party custodian and could not be rehypothecated.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission and the Securities and Exchange Commission will jointly conduct a public roundtable discussion to address the schedule for implementing final rules for swaps and security-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including whether to phase in the implementation of the new requirements. The roundtable will take place on May 2 and 3 at the CFTC headquarters in Washington, D.C. Further information about the public roundtable, including how to submit advance comments to the CFTC and SEC, is available here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission and the Federal Trade Commission (FTC) have signed a Memorandum of Understanding (MOU) to facilitate the sharing of non-public information between the agencies in connection with investigations into possible market manipulation. In its press release announcing the MOU, the CFTC focused on information sharing related to investigations into fraud-based manipulation of the oil and gasoline markets. The MOU states that "[u]nless applicable law requires otherwise, the [CFTC and the FTC] shall take all actions reasonably necessary to preserve, protect and maintain all privileges and claims of confidentiality related to all nonpublic information provided pursuant to this MOU."

The MOU is available here. The CFTC press release about the MOU can be found here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The National Futures Association (NFA) has amended the Self-Examination Questionnaire required to be reviewed annually by NFA members in order to identify and correct any supervisory deficiencies. Specifically, NFA has added a section to the Questionnaire for Forex Dealer Members (FDMs), updated other sections of the Questionnaire to assist non-FDM members in reviewing their forex operations, and made general updates to the Questionnaire.

In connection with the amendments to the Questionnaire, NFA has amended the related Interpretive Notice 9020 to require FDMs to complete the Questionnaire and to require non-FDM members who engage in forex transactions to use the Questionnaire to review their forex operations.

The amended Questionnaire can be found here.
NFA's letter to the Commodity Futures Trading Commission regarding the amendments to Interpretive Notice 9020 can be found here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission announced that it will hold an open meeting on the thirteenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on April 12. At the meeting, the CFTC will consider, among other things, proposed rulemakings regarding the imposition of margin requirements for uncleared swaps on swap dealers and major swap participants.

Information about the meeting is available here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Options Clearing Corporation (OCC) has submitted a petition to the Commodity Futures Trading Commission to permit OCC to operate an internal non-proprietary cross-margining program available to market professionals who trade futures products and securities products that are cleared by OCC in its capacity as a derivatives clearing organization and a securities clearing agency, respectively.

The CFTC requires that cross-margined futures and securities positions that are cleared solely by OCC be cleared by the same clearing member. OCC is requesting a modification to permit internal non-proprietary cross-margining accounts to be maintained at OCC jointly by a pair of affiliated clearing members, each of which is dually registered as a futures commission merchant and a securities broker-dealer.

The CFTC is requesting comments on this proposed change. The comment period will close on April 22.

OCC's request can be found here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Dodd-Frank Wall Street Reform and Consumer Protection Act added a new Section 4c(a)(5) to the Commodity Exchange Act (CEA) regarding disruptive trading practices, which prohibits any trading, practice or conduct on or subject to the rules of a "registered entity" that (a) violates bids or offers; (b) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or (c) is, is of the character of, or is commonly known to the trade as, "spoofing" (bidding or offering with the intent to cancel the bid or offer before execution).

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange, and the Commodity Exchange have together released a special executive report (SER) announcing the amendment of Rule 432 (General Offenses), section L.3, for each of the exchanges. The amendment will require that books or records requested from a market participant by exchange staff be provided in the format and medium specified in the request.

Under the amendment, all books and records provided to the Market Regulation Department must by default be provided in electronic format, unless the request specifies another format. Generally, it is anticipated that documents will be requested in PDF format and audio recordings will be requested to be on a compact disc or via email in an MP3 or WAV file, though exchange staff may still request original source documents (e.g., handwritten order tickets). Each document request will specify the medium and format in which the produced information should be contained.

If a market participant is unable to comply with the exchange-requested format or medium, the participant may petition the exchange to accept an alternate format or medium. Such a petition should (1) be made at least two business days before the request due date, (2) be in writing (including via email), (3) provide the basis for the request, and (4) provide a proposed production date. All requests will be subject to approval by the Market Regulation Department.

The amendment to Rule 432 will become effective on March 28.

The SER regarding the amendments to Rule 432 can be found here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission's Division of Market Oversight has issued an advisory notice to remind futures commission merchants (FCMs), clearing members and foreign brokers of their obligation to maintain up-to-date information regarding special account information on Form 102 submitted to the CFTC. Failure to properly and timely update information contained in a Form 102 constitutes an actionable violation under the Commodity Exchange Act and CFTC Regulations.

CFTC Regulation 17.01 generally requires FCMs, clearing members and foreign brokers to report all special accounts carried on the books of the FCM, clearing member or foreign broker on Form 102 upon the establishment of the account. CFTC Regulation 17.01(g) requires that each Form 102 be updated any time there is a change in any information contained therein, including any changes to the name, address, business telephone number, registration status, legal organization or principal business of the account holder, or the account number or account name.

The advisory notice can be found here.
 

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission has published its twelfth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a proposed interpretive order to give effect to the Dodd-Frank Act provisions relating to "disruptive" trading practices. The proposals relate to technical amendments to regulations governing commodity pool operator (CPO) and commodity trading advisor (CTA) registration; requirements for processing, clearing and transferring customer positions; and the intermediary registration requirements as they relate to swap dealers, major swap participants (MSPs) and swap execution facilities (SEFs).

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Co-authored by Kevin M. Foley and Christian B. Hennion

The Division of Clearing and Intermediary Oversight (DCIO) of the Commodity Futures Trading Commission has issued its annual guidance letter to commodity pool operators (CPOs) and their accountants, summarizing annual CPO reporting obligations. The DCIO letter includes information regarding regulatory changes within the last year affecting CPOs, including the adoption by the CFTC of final regulations governing retail forex transactions and associated registration requirements, as well as the adoption by the National Futures Association (NFA) of Compliance Rule 2-46, which requires CPOs to be "fully registered" and Rule 4.7 exempt pools to file specified information with NFA on a quarterly basis. The letter also includes detailed guidance regarding the preparation and filing of CPO annual reports, including applicable deadlines and filing procedures.

The DCIO letter is available here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission issued an order on January 31 granting New York Portfolio Clearing, LLC (NYPC) registration as a derivatives clearing organization. NYPC plans to clear U.S. dollar-denominated interest rate futures contracts traded on NYSE Liffe U.S.

NYPC's approval order can be found here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Joint Commodity Futures Trading Commission–Securities Exchange Commission Advisory Committee on Emerging Regulatory Issues will hold a public meeting on February 18, from 9:30 a.m. to 12:00 p.m. Eastern time at the CFTC's headquarters in Washington, D.C. The Committee will discuss matters relating to its recommendations regarding the "Flash Crash" market events of May 6, 2010, and other matters relating to the ongoing work of the committee.

Interested parties may submit written statements to either the CFTC or the SEC, and all submissions will be reviewed jointly by the two agencies.

The Federal Register Notice regarding the meeting, including information regarding the submission of written statements, can be found here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

At an open meeting on January 26, the Commodity Futures Trading Commission proposed rules that would repeal exemptions from registration and effect substantial changes to the reporting requirements applicable to commodity pool operators (CPOs) and commodity trading advisors (CTAs) under the CFTC's Part 4 rules. Among the significant changes that would be effected by the proposed rules are the following:

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission announced that it will hold open meetings on the twelfth and thirteenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on February 11 and February 24, respectively. Details regarding the February 11 meeting are available here, and information about the February 24 meeting is available here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The staff of the Commodity Futures Trading Commission announced that it will hold a public roundtable discussion on January 28 to address issues related to swap data recordkeeping and reporting requirements, including unique counterparty, product and swap identification and a master agreement library and portfolio data warehouse. The press release announcing the roundtable, including location and dial-in information and how to submit comments, is available here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The National Futures Association (NFA) has issued a Notice to Members providing guidance regarding the calculation of retail forex customer accounts maintained by retail foreign exchange dealers (RFEDs) and futures commission merchants (FCMs).

Pursuant to Commodity Futures Trading Commission Regulation 5.5, RFEDs, FCMs and introducing brokers (IBs) that participate in over-the-counter retail forex transactions must, upon opening an account for a customer, provide the customer with (a) certain written disclosures, and (b) with respect to the four most recent calendar quarters during which the RFED or FCM maintained retail forex accounts, the total number of non-discretionary "open" retail forex customer accounts maintained by the RFED or FCM, the percentage of such accounts that were profitable during the quarter and the percentage of such accounts that were not profitable during the quarter.

The NFA Notice clarifies that the term "open" account includes only those accounts that entered into trades during a particular quarter and/or maintained an open position at any time during the quarter, regardless of whether a cash balance was maintained, interest was paid and/or any fees were incurred during the quarter.

The NFA Notice can be found here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission has published its ninth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The ninth series of CFTC rule proposals relates to the swap trading relationship documentation requirements for swap dealers (SDs) and major swap participants (MSPs) and the imposition of position limits on certain derivatives (which will be discussed in a forthcoming client advisory).

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The National Futures Association (NFA) has amended NFA Financial Requirements (FR) Sections 11(b), 14(c) and 14(d), effective February 1. Under FR Section 11, a Forex Dealer Member is prohibited from including assets held at an “unregulated person” in its determination of current assets for purposes of calculating its adjusted net capital. The amendments will revise the list of persons that are “unregulated” by (1) deleting “a financial institution regulated by a U.S. banking regulator” and “an insurance company regulated by any U.S. state”; (2) adding “a bank or trust company regulated by a U.S. banking regulator”; and (3) adding foreign banks and trust companies “regulated in a money center country” that maintain regulatory capital of more than $1 billion. NFA may still, on a case-by-case basis, approve the use of certain foreign equivalent entities that are appropriately regulated and capitalized.

FR Section 14 defines foreign institutions that are qualified to hold assets covering liabilities to retail Forex customers. Amendments to this section include (1) removal of foreign equivalent broker-dealers and foreign equivalent futures commission merchants as “qualifying institutions”; and (2) deletion of banks or trust companies regulated in the money center country whose, or whose holding company’s, “commercial paper or long-term debt instrument... is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization” from the list of “qualifying institutions.”

NFA’s submission letter to the Commodity Futures Trading Commission, dated December 6, 2010, can be found here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The ABA Securities Association, the Clearing House Association, the Financial Services Roundtable, the Futures Industry Association, the International Swaps and Derivatives Association, and the Securities Industry and Financial Markets Association (the Industry Groups) have submitted a comment letter with the Commodity Futures Trading Commission in response to a comment letter submitted by the U.S. Department of Justice (DOJ) urging the implementation of more-stringent rules relating to ownership and conflicts of interest for designated contract markets (DCMs), derivatives clearing organizations (DCOs) and swap execution facilities (SEFs).

The Industry Groups’ comment letter urges the CFTC to refrain from imposing limitations on the aggregate voting power that may be held by major dealers and financial institutions in DCMs, DCOs and SEFs. The Industry Groups argue that, contrary to the DOJ’s assertion, imposing aggregate voting limitations would decrease rather than promote competition within the markets for derivatives trading and clearing because the ability to offer ownership interests is vital to the ability of newly formed exchanges and clearinghouses to attract the liquidity necessary to successfully compete against incumbents. Furthermore, the Industry Groups argue that aggregate voting limitations are not necessary to prevent abuse and anti-competitive governance arrangements in the industry given the other tools available to the CFTC to monitor and regulate DCMs, DCOs and SEFs. Finally, the Industry Groups also urge the CFTC to avoid imposing burdensome composition requirements with respect to integral board committees of DCMs, DCOs and SEFs, including in particular DCO risk management committees, arguing that doing so will also impede the ability of newly formed exchanges and clearinghouses to attract the participation required to successfully compete against incumbents.

The original DOJ comment letter can be found here.
The Industry Groups’ comment letter can be found here.

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Co-authored by Vanessa L. Colman

The Commodity Futures Trading Commission has published its eighth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The eighth series of CFTC rules and rule proposals relate to confirmation, portfolio reconciliation and portfolio compression requirements for swap dealers (SDs) and major swap participants (MSPs), registration obligations of derivatives clearing organizations (DCOs) and core principles and other requirements applicable to swap execution facilities (SEFs).

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission announced that it will hold open meetings on the ninth and tenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on January 13 and January 20, respectively.

Details regarding the January 13 meeting are available here, and information about the January 20 meeting is available here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission has issued a notice of proposed rulemaking to further implement the Conflict of Interest Core Principles for derivatives clearing organizations (DCOs), designated contract markets (DCMs) and swap execution facilities (SEFs) by addressing, among other things, reporting requirements, obligations of transparency in decision-making and limitations on the use or disclosure of non-public information.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The U.S. Department of Justice (DOJ), in a comment letter submitted to the Commodity Futures Trading Commission, has urged the implementation of more-stringent rules relating to ownership and conflicts of interest for designated contract markets (DCMs), derivatives clearing organizations (DCOs) and swap execution facilities (SEFs). The DOJ comment letter was submitted in response to an October 2010 rule proposal by the CFTC, which would impose specific structural governance requirements and limitations on the ownership of DCMs, DCOs and SEFs.

In its letter, the DOJ expressed concern that the ownership limitations proposed for DCMs and SEFs, which limit the voting power that may be exercised by any single member thereof, do not also include aggregate voting limitations to restrict the aggregate voting power that may be held by major dealers and financial institutions. Absent such limitations, the DOJ is concerned that such entities may be able to use their control over these trading platforms to limit competition. The DOJ also recommends enhancing the CFTC’s proposed governance requirements by increasing the participation of independent directors on DCM, DCO and SEF boards and/or board committees.

The DOJ comment letter is available here. The CFTC’s rule proposal is available here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission has issued a final order exempting the trading and clearing of certain options (Exempted Options) from the Commodity Exchange Act and regulations thereunder to the extent needed to allow such options to be traded on national securities exchanges and cleared though the Options Clearing Corporation. Exempted Options include options on (1) the CBOE Gold ETF Volatility Index (which measures the implied volatility of options on shares of the SDPR Gold Trust, an exchange traded fund (ETF) that intends to reflect the performance of the price of gold bullion), and (2) any other index that measures the volatility of the price of shares of gold ETFs.

The Federal Register release of the order can be found here.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The National Futures Association (NFA) has published a Notice to Members which provides guidance to registered commodity pool operators (CPOs) and commodity trading advisors (CTAs) regarding their disclosure of conflicts of interest arising from the collection of incentive fees. The NFA guidance is based upon guidance that NFA received from the Commodity Futures Trading Commission’s Division of Clearing and Intermediary Oversight (DCIO), which oversees NFA in its review of CPO and CTA Disclosure Documents.

In its letter, DCIO noted that typical incentive fee arrangements, in which a CPO or CTA receives a fee or other compensation based upon its trading performance, could be viewed as creating a conflict of interest between the CPO or CTA and its pool investors or clients by encouraging the CPO or CTA to take excessive risks and/or maximize short-term performance in order to earn outsized incentive fees. Accordingly, the DCIO letter prescribes that every CPO and CTA that charges an incentive fee of this type must include discussion in its Disclosure Document that such fees may encourage the CPO/CTA to take excessive risk and may place the interests of the CPO/CTA in conflict with those of its clients or investors. In its Notice to Members, NFA urges its CPO and CTA members to review their Disclosure Documents and include any additional disclosures prior to submitting any subsequent filings of the document. Although NFA’s Notice to Members does not expressly discuss the status of registered CPOs and CTAs that rely upon the relief provided under CFTC Rule 4.7, or of CPOs and CTAs that are exempt from registration with NFA, because such CPOs and CTAs are not required to prepare and file Disclosure Documents with NFA, they are not directly affected by the NFA’s Notice to Members.

The NFA Notice to Members is available here.

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Co-authored by Kevin M. Foley and Vanessa L. Friedman

The Commodity Futures Trading Commission has published its seventh series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The latest round of CFTC rules and rule proposals relates to an “end user” exception from otherwise-mandatory swap clearing requirements; governance requirements for derivatives clearing organizations (DCOs), designated contract markets (DCMs) and swap execution facilities (SEFs); the reporting of swaps entered into after the enactment of Dodd-Frank but before the effectiveness of the CFTC’s swap recordkeeping rules; and business conduct standards for swap dealers (SDs) and major swap participants (MSPs).

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission held a public meeting on December 1 to propose its sixth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC has published notification of (and, in most cases, requested public comment on) the following five rule proposals.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission has requested public comments on an application for registration as a derivatives clearing organization (DCO) filed by CME Clearing Europe Limited (CMECE) on November 26.

CMECE, which will be principally located in London and which is an indirect subsidiary of CME Group Inc., is requesting approval from the CFTC to clear over-the-counter derivatives, such as swaps, forwards and options, on energy products.

The public documents included in CMECE’s DCO application can be found here.
Public comments regarding CMECE’s application can be directed to the CFTC here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission has requested comments on the following five rule proposals to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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Co-authored by Vanessa L. Friedman

A number of the proposals approved by the Commodity Futures Trading Commission at its meeting on November 10 and reported in the November 19 edition of Corporate and Financial Weekly Digest were published for comment in the Federal Register.

The release requesting comment on the CFTC’s notice of proposed rulemaking regarding registration of foreign boards of trade is available here. The CFTC’s proposed rule requiring each futures commission merchant, swap dealer (SD), and major swap participant (MSP) to designate a chief compliance officer and file an annual report regarding its compliance activities is available here. Both of these releases were published November 19; the comment period for each ends January 18. Additionally, the release requesting comment on the CFTC’s proposed rules that would establish and govern the duties of SDs and MSPs is available here. The CFTC’s notice of proposed rulemaking regarding conflicts of interest requirements applicable to SDs and MSPs is available here. Finally, the CFTC’s proposed rules governing registration of SDs and MSPs is available here. All three of these releases were published November 23, and the comment period for each ends January 24.

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Co-authored by Vanessa L. Friedman

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commodity Futures Trading Commission is charged with leading an interagency working group in (1) conducting a study regarding the oversight of existing and prospective carbon markets, and (2) making recommendations to Congress for the oversight of carbon markets to ensure their efficiency, transparency and security. The CFTC has requested public comment on the study, specifically with regard to the study’s regulatory objectives and the ultimate oversight of the carbon markets.

The comment period closes December 17. The CFTC’s notice and request for comment is available here.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

The Commodity Futures Trading Commission has requested comments on six rule proposals to implement additional provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

• Registration of Foreign Boards of Trade: Section 738 of the Dodd-Frank Act provides the CFTC with authority to implement a registration system for a foreign board of trade (FBOT) that provides direct access to its trading system to market participants located in the United States. The CFTC’s proposed rules would create a registration process for FBOTs to replace the existing system of staff-issued no-action relief (from which the proposed rules are substantially derived), and would make it unlawful for any FBOT to permit direct access to U.S. participants without first registering with the CFTC. An FBOT that seeks to provide direct access to participants in the United States must submit a registration application to the CFTC that includes information regarding the FBOT’s membership criteria, trading system, contracts to be made available to U.S. participants, settlement and clearing systems, home regulatory regime, and rules and rule enforcement. FBOTs currently operating pursuant to no-action relief would be required to apply for registration pursuant to a “limited” registration application process. The factors to be considered by the CFTC in determining whether to grant an FBOT application are substantially similar to those currently applicable to the no-action review process, including evaluation of whether the FBOT’s home regulatory authority oversees the FBOT in a manner that is comparable to CFTC oversight of designated contract markets (DCMs).

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

National Futures Association (NFA) has launched a new online system to assist futures commission merchants (FCMs) and introducing brokers (IBs) in developing anti-money laundering (AML) programs. The system is designed to help users identify the minimum required components of an AML program and to provide additional guidance and information on the various components of the program, including example provisions. FCMs and IBs are not required to use the system in designing their AML program, and use of the system does not provide users with a “safe harbor” from applicable AML requirements under NFA rules or federal law. NFA further cautions that the system is only intended to provide an outline for an AML program, which may need to be further tailored to the specific risks of a firm’s business.

The NFA notice to members announcing the launch of the new system, as well as instructions for accessing the system, is available here.

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Co-authored by Kenneth M. Rosenzweig and Joshua A. Penner

The Futures Industry Association’s Principal Traders Group has released a report setting out a number of recommended risk controls for trading firms that have direct access to exchange matching engines.

The report expands on a previous set of recommendations published in April 2010 and includes recommendations for risk controls applicable to trading operations and electronic trading systems. The recommendations cover such issues as access and oversight, pre-trade risk management, trading interruptions, post-execution and back office functions, physical security, electronic security and business continuity.

The FIA report can be found here.

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Co-authored by Kenneth M. Rosenzweig

The Commodity Futures Trading Commission announced that it will hold a public meeting to propose rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding: (1) registration of foreign boards of trade; (2) registration of swap dealers and major swap participants; (3) implementation of the new whistleblower provisions of the Commodity Exchange Act; (4) conflict of interest policies and procedures for futures commission merchants (FCMs), introducing brokers, swap dealers and major swap participants; and (5) FCM, swap dealer and major swap participant compliance policies.

The meeting will take place at 1:00 p.m. Eastern on November 10.

The CFTC’s press release, which includes information on viewing a webcast of the meeting, can be found here.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

The Commodity Futures Trading Commission has issued five rule proposals and an advance notice of proposed rulemaking, five of which relate to rulemakings required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The sixth is not mandated by the Dodd-Frank Act, and relates to permitted investments of customer funds and funds held in foreign futures accounts.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

The U.S. Treasury Department has requested public comment on whether foreign exchange swaps and forwards should be exempted from the definition of a “swap” under the Commodity Exchange Act (CEA). Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Secretary of the Treasury is permitted to make a determination that foreign exchange swaps, foreign exchange forwards, or both, should be excluded from the CEA’s “swap” definition, based on consideration of various enumerated factors.

In its request for comment, the Treasury has solicited comment on several specific questions, including the primary risks of, and risk management techniques in use in, the foreign exchange swaps and forward markets, and how mandatory clearing and exchange trading might affect market liquidity in the U.S. dollar, as well as U.S. dealers and end-users. The comment period expires on November 29.

A copy of the Treasury’s request for comments is available here.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

In response to certain amendments made by the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to swaps in “agricultural commodities,” the Commodity Futures Trading Commission has proposed to define “agricultural commodities” for the first time.

The CFTC’s proposed definition would include all of the “enumerated commodities” listed in Section 1a of the Commodity Exchange Act (CEA), as well as:

• commodities derived from living organisms that are “generally fungible” and used primarily for human food, shelter, animal feed or natural fiber;
• tobacco, products of horticulture, and such other commodities used or consumed by animals or humans and designated by the CFTC as agricultural commodities; and
• commodity-based contracts (e.g., basis swaps and qualifying index contracts) based wholly or principally on a single underlying agricultural commodity.

The CFTC has requested comments on a number of aspects of the definition, including its exclusion of biofuels, and its potential impact on swaps currently transacted pursuant to CEA Sections 2(g) and 2(h). The comment period expires on November 26.

A copy of the CFTC release is available here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has announced that it will be holding a public meeting on Tuesday, October 26 at 9:30 a.m. Eastern to consider the issuance of several proposed rulemakings. Proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act that will be discussed at the meeting include:

• prohibition of market manipulation and disruptive trade practices;
• provisions common to registered entities;
• removing any reference to or reliance on credit ratings in CFTC regulations and proposing alternatives; and
• process of review of swaps for mandatory clearing.

In addition, the CFTC will consider one proposed rulemaking not arising out of the Dodd-Frank Act involving CFTC Rule 1.25, the investment of customer funds and funds held in an account for foreign futures and foreign options transactions.

The meeting will be webcast on the Internet, and the audio feed of the meeting will be available on a listen-only conference call.

The webcast of the meeting can be accessed at www.cftc.gov. The listen-only conference call can be dialed in to at 1-866-844-9416, with a pass code of 28228.

The Federal Register releases concerning the proposed rulemakings to be discussed can be accessed here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has introduced an online form through which comments to Federal Register releases and industry filings may be submitted. The online form for submitting comments can be accessed here.

Comments submitted will become part of the public record and will be published on the CFTC’s website without prior review and without the removal of any personally identifying or other sensitive information. Therefore, commenters should not submit information that they wish to remain confidential or not be disclosed to the public.

The CFTC press release regarding the new online comment form can be found here.

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Co-authored by Vanessa Friedman

The Commodity Futures Trading Commission has announced that it will hold a meeting next week to address proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding: (i) the definition of “agricultural commodity”; (ii) position reports for physical commodity swaps and options on physical commodity swaps; (iii) increasing privacy protections for consumer financial information under the Gramm-Leach-Bliley Act; and (iv) rules concerning business affiliate marketing and discarding consumer information under the Fair Credit Reporting Act.

The meeting will take place at 9:30 a.m. on October 19. Please click here to see the CFTC’s press release for information on attending the meeting in person or online, or listening in via conference call.

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Co-authored by Vanessa Friedman

Two of the proposals approved by the Commodity Futures Trading Commission at its meeting on October 1 and reported in the October 8, 2010 edition of Corporate and Financial Weekly Digest were published for comment in the Federal Register on October 14.

The release requesting comment on the CFTC’s interim final rule requiring the reporting of certain information concerning unexpired swaps entered into prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act is available here. The comment period ends November 15.

The release requesting comment on the CFTC’s proposed rules regarding financial resources requirements for derivatives clearing organizations is available here. The comment period ends December 13.

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Co-authored by Vanessa Friedman

The National Futures Association (NFA), after consultation with the Commodity Futures Trading Commission, published additional guidance on the CFTC’s final forex regulations, which are effective October 18. NFA clarified the following:

1. Futures commission merchants (FCMs), retail foreign exchange dealers (RFEDs) and introducing brokers (IBs) are not required under CFTC Regulation 5.5 to provide existing customers with the most recent quarterly customer account information (unless requested by the customer) or required disclosure documents (or to obtain a disclosure document acknowledgment from such customers). Such requests only apply to customers that open accounts on or after October 18.
2. Only the following types of entities may be used to hold assets equal to the total amount owed to U.S. customers for Forex transactions: (a) in the U.S., a domestic regulated bank or trust company, an SEC registered broker-dealer (that is also a Financial Industry Regulatory Authority member) or a CFTC registered FCM (that is also an NFA member), and (b) in a “money center country” (as defined in CFTC Regulation 1.49), a bank or trust company with regulatory capital greater than $1 billion, a foreign equivalent of a broker-dealer or FCM with regulatory capital greater than $100 million or an FCM registered with CFTC and a member of NFA.
3. Any registered FCM, RFED, IB, commodity pool operator or commodity trading advisor must be approved by NFA as a forex firm prior to engaging in retail forex transactions. Any such firm must have at least one principal registered as an associated person (AP) and approved as a forex AP. Two exams are required for any individual who solicits or supervises the solicitation of retail Forex business: the National Commodity Futures Examination (Series 3) and the Retail Off Exchange Forex Examination (Series 34) (though APs, sole proprietors or floor brokers who were registered as such on May 22, 2008 are exempt from taking the Series 34 exam, absent any 2 year or greater gap in their registration since that date).
4. Entities defined in the Commodity Exchange Act §§ 2(c)(2)(B)(ii)(II)(aa), (bb), (ee) and (ff) may solicit retail Forex orders, manage retail Forex accounts or operate a retail Forex pool without registering with the CFTC in the relevant capacity.

The NFA Notice is available here.

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Co-authored by Christian B. Hennion

In connection with its ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commodity Futures Trading Commission last Friday voted to propose several rules for publication in the Federal Register. The CFTC proposals include rules relating to the financial resources requirements for derivatives clearing organizations (DCOs) and the mitigation of conflicts of interest by DCOs, designated contract markets (DCMs), and swap execution facilities (SEFs).

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Co-authored by Christian B. Hennion

The National Futures Association (NFA) has announced that recent amendments to NFA Bylaw 1301(b), which sets forth the schedule of dues and assessments for futures commission merchants (FCMs), will take effect on November 1. The amendments, which were submitted to the Commodity Futures Trading Commission on August 30, create an exemption from the NFA assessments charged to FCMs with respect to trades entered on or subject to the rules of a foreign board of trade by their customers. Specifically, the new exemption exempts from the NFA assessment fee the proprietary trading activity of any person who has membership privileges on an NFA member contract market which had an annual transaction volume during the prior calendar year of more than 1 million. The parents, affiliates and subsidiaries of a such a person are counted separately for this purpose.

The NFA Notice to Members announcing the effective date of the amendments, which includes a link to the amendments, is available here.

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Co-authored by Christian B. Hennion

The National Futures Association (NFA) has submitted proposed amendments to its Interpretive Notice entitled “NFA Compliance Rule 2-9: Enhanced Supervisory Requirements” to the Commodity Futures Trading Commission. The Interpretive Notice sets out enhanced supervisory requirements that apply to certain NFA member firms due to the prior association of their associated persons or principals with disciplined firms. Among other things, the amendments provide limited relief to certain firms that are currently subject to enhanced supervisory requirements due to a principal’s prior affiliations; amend the enhanced capital requirements applicable to futures commission merchants, commodity pool operators and commodity trading advisors who are subject to enhanced supervisory requirements; require the inclusion of certain information in the written supervisory procedures of such firms; and require quarterly (rather than monthly, as is currently the case) reporting by such firms of their compliance with the enhanced supervisory requirements.

The NFA proposal was submitted to the CFTC on October 6 and, unless the CFTC notifies NFA that it has determined to review the proposal, will take effect 10 days after receipt by the CFTC.

The proposed amendments can be found here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has published an Advanced Notice of Proposed Rulemaking seeking public comment regarding the appropriate regulatory treatment of agricultural swaps.

The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that “swaps” (which are defined to include options) in an “agricultural commodity” (as defined by the CFTC) are prohibited unless entered into pursuant to a rule, regulation or order of the CFTC adopted pursuant to section 4(c) of the Commodity Exchange Act (CEA), the CFTC’s general exemptive authority.

The CFTC notes that, under the current regulatory framework, Part 35 of its Regulations permits bilateral over-the-counter agricultural swaps between eligible counterparties subject to certain requirements, while Part 32 of the Regulations separately permits certain counterparties to enter into “agricultural trade options,” also subject to certain requirements.

Because Part 35 of the CFTC Regulations was promulgated under the CFTC’s exemptive authority under Section 4(c) of the CEA, the swaps exemption under Part 35 continues to be effective pursuant to Section 723(c)(3) of the Dodd-Frank Act. However, Part 32 of the CFTC Regulations, which was promulgated under the CFTC’s plenary authority regarding commodity options under Section 4c(b) of the CEA, has been superseded by Dodd-Frank, and the CFTC must therefore promulgate new regulations concerning options on agricultural commodities.

The CFTC is seeking comment on the appropriate conditions, restrictions or protections to be included in any CFTC regulation or order governing the trading of agricultural swaps and agricultural options, as well as information regarding the current market in agricultural swaps and options and the impact of clearing requirements on the current market.

The Federal Register release concerning the proposed rulemaking, including the method for submitting comments, can be found here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission announced that it will hold a public meeting on October 1 regarding the first series of rule proposals pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The meeting will be held at 9:30 a.m. EDT in the CFTC Hearing Room at 1155 21st Street NW, Washington, D.C. The CFTC will consider proposed rules relating to: (1) financial resource standards for systemically important central counterparties, and (2) governance and conflicts of interest standards for designated clearing organizations, designated contract markets and swap execution facilities. The CFTC will also consider an interim final rule regarding the timing of reporting pre-enactment unexpired swaps to a swap repository or the CFTC.

The CFTC press release about the meeting is available here, and the Federal Register release is available here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission has published a request for comment (the Notice) with respect to a National Futures Association (NFA) petition for rulemaking asking the CFTC to amend Rule 4.5 to restore certain limitations on the activities of registered investment companies (RICs) that claim an exclusion from registration as a commodity pool operator under that rule. The amendments requested by NFA would reinstate the requirements that any RIC claiming an exclusion from registration under Rule 4.5: (1) will not market the RIC as a means of obtaining exposure to commodity futures or options, and (2) will limit its commodity futures and options positions (other than positions held for bona fide hedging purposes) to no more than 5% of the liquidation value of the portfolio. The comment period for the Notice expires on October 18.

The Federal Register release of the Notice is available here, and the June NFA petition is available here.

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Co-authored by Vanessa L. Friedman

CME Group, Inc. has sent a letter to the Commodity Futures Trading Commission reaffirming its position that it is not required to accept for clearing ELX Futures “exchange of futures for futures” (EFF) transactions.

Last year, the Chicago Board of Trade (CBOT) issued a Market Regulation Advisory Notice stating that CBOT rules do not allow the execution of EFF transactions. CFTC staff subsequently took the position that neither the Commodity Exchange Act (CEA) nor CFTC regulations prohibit such transactions, and the CFTC sent a letter to CME in August restating this position. In addition, the CFTC Division of Market Oversight (DMO) sent a second letter requesting from CBOT a written response and the production of records addressing whether the CBOT Advisory Notice complies with Core Principle 18 of Section 5(d) of the CEA (antitrust considerations).

In its September 13 reply, CME defended CBOT’s ban on EFF transactions and reiterated its position that such transactions are wash sales and/or fictitious trades. CME also responded to the DMO’s letter addressing its inquiries regarding antitrust considerations and detailing CBOT’s legal and economic rationale for prohibiting EFF transactions.

Copies of both letters, with attachments, are posted on the CFTC’s website, available here.

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Co-authored by Vanessa L. Friedman

CME Group, Inc. issued an Advisory Notice regarding CME Clearing’s new Cleared over-the-counter (OTC) Customer Sequestered regulatory class, which is set to replace the use of 30.7 Secured status for customer positions in certain swaps and forwards on October 4.

The Advisory Notice, which includes links to further information regarding the new regulatory class, is available here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has extended the period for public comment on its recent proposal to adopt a new account “Ownership and Control Report” (OCR), pursuant to which the CFTC would collect detailed account information from reporting entities on a weekly basis (including identifying and contact information with respect to both beneficial owners and account controllers, whether the account is traded pursuant to an automated system, the executing and clearing brokers, and an indication of whether the account is a firm omnibus account). The comment period on the CFTC proposal now closes on October 7.

Notice of the extension is available here, and the original CFTC proposal is available here.

The CFTC will also host a public roundtable on the OCR at 1:00 p.m. E.D.T. on September 16. Information regarding the roundtable, including dial-in information, is available here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has adopted final rules regarding over-the-counter foreign currency (forex) transactions with retail customers. The new rules are substantially similar to the rules proposed by the CFTC in January, and reflect the first body of final rules adopted by the CFTC in connection with its implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The rules institute a variety of requirements in connection with retail forex transactions, including registration, disclosure, recordkeeping, financial reporting, minimum capital and other standards and requirements.

Subject to certain exceptions for “otherwise regulated” entities, the new rules will generally require entities offering forex contracts to retail customers to register with the CFTC as either futures commission merchants (FCMs) or registered foreign exchange dealers (RFEDs), depending upon the nature of the business conducted by those entities. Persons who solicit orders, exercise discretionary trading authority and/or operate pools with respect to retail forex generally will be required to register as introducing brokers, commodity trading advisors, commodity pool operators or as associated persons of such entities, as appropriate.

The new rules also implement a minimum net capital requirement for RFEDs and FCMs offering retail forex transactions equal to $20 million plus 5% of the amount (if any) by which such registrant’s liabilities to its retail forex customers exceeds $10 million. Significantly, the rules do not include the “10-to-1” leverage limitation for retail forex transactions that was included in the original proposal. Instead, the rules establish initial minimum security deposit requirements for retail forex contracts equal to 2% of the notional value for major currencies and 5% of the notional value for non-major currencies, and delegate authority to the National Futures Association to set higher security deposit requirements and to make changes in the designation of particular currencies as “major” currencies.

The CFTC press release announcing the new rules, which includes links to the final rules and a CFTC Q&A regarding the new rules, is available here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has proposed amendments to its Part 4 Rules to provide exemptions from certain requirements set forth in those rules with respect to the operation of “commodity ETFs,” or pools for which the units of participation are sold in a registered public offering and listed for trading on a national securities exchange. The proposed amendments to CFTC Rule 4.12 would codify exemptive relief previously granted by CFTC staff to registered commodity pool operators (CPOs) operating commodity ETFs. The proposed amendments would permit CPOs to claim an exemption from certain disclosure, reporting and recordkeeping requirements otherwise applicable to CPOs, based on their substituted compliance with applicable securities law requirements. The CFTC has also proposed the adoption of a new Rule 4.13(a)(5), which provides an exemption from CPO registration for certain independent directors and trustees of commodity ETFs who serve on the commodity ETF’s independent audit committee solely for purposes of compliance with federal securities laws.

The comment period for the CFTC’s proposed rules will expire 45 days after their publication in the Federal Register. The CFTC press release, including a link to the Federal Register release, is available here.

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Co-authored by Christian B. Hennion

The National Futures Association (NFA) has set an October 7 effective date for recent amendments to its Interpretive Notice entitled “NFA Compliance Rule 2-30(b): Risk Disclosure Statement for Security Futures Contracts.” Pursuant to NFA Compliance Rule 2-30(b), NFA members that are notice registered as broker-dealers and their associated persons are required to provide their customers with a risk disclosure statement regarding the trading of security futures products (SFPs) at or before the time that a customer’s account is approved to trade SFPs. NFA members and associates with existing customers approved for SFP trading must distribute the amended paragraph of the risk disclosure statement to such customers no later than the time a confirmation of an SFP transaction is delivered to such customer.

The NFA Notice to Members regarding the amendments is available here.

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Co-authored by Christian B. Hennion

Commodity Futures Trading Commission Chairman Gary Gensler has announced that the CFTC will publish a list of all meetings held by either the Chairman or CFTC staff with outside organizations regarding the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The list will be published on the CFTC’s website, and can be accessed here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has signed a Statement of Intent (SOI) Concerning Cooperation, Consultation and the Exchange of Information with the Ministry of Economy, Trade and Industry of Japan (METI) and the Ministry of Agriculture, Forestry and Fisheries of Japan (MAFF).

The SOI establishes a framework for information sharing and facilitates cooperation in cross-border investigations of potential violations of commodity futures laws. The SOI is supported by a diplomatic Note Verbale exchanged by the governments of the United States and Japan. The Note confirms that information obtained under the SOI can be used by each country’s criminal authorities.

METI has oversight over trading in precious metals, base metals, rubber and energy related products, and MAFF has jurisdiction over agricultural commodity trading.

The CFTC press release concerning the SOI can be found here.
The text of the SOI can be found here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has published a Federal Register notice seeking public input on the CFTC’s proposed rulemaking areas to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

On July 21, the CFTC released the list of 30 areas of rulemaking for over-the-counter derivatives to implement the Act. The CFTC has made separate electronic mailboxes available for comments with respect to 29 of the 30 individual areas, as well as a general comment mailbox (the addresses for which mailboxes can be found in the Federal Register notice). The CFTC has indicated that the views of interested parties may be considered in the pre-proposal process but will not be treated as official comments on specific proposed rules.

The CFTC will accept submissions on each rulemaking topic until such time as it publishes a proposed rule for that topic in the Federal Register. Thereafter, it will accept official comments on such proposed rules until the close of the proposed rule’s official comment period. All submissions provided to the CFTC will be published on the CFTC’s website. The submissions will not be subject to pre-publication review, and personally identifying information will not be removed.

The CFTC press release regarding the Federal Register release can be found here.
The Federal Register release can be found here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission and the Securities and Exchange Commission have issued a joint advance notice of proposed rulemaking (the Joint Notice) seeking public comment regarding the agencies’ mandate to regulate swaps and security-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Joint Notice requests public comments on the CFTC’s and SEC’s joint regulation of “mixed swaps” and the adoption of regulations further defining the following terms: (1) “swap”; (2) “security-based swap”; (3) “swap dealer”; (4) “security-based swap dealer”; (5) “major swap participant”; (6) “major security-based swap participant”; (7) “eligible contract participant”; and (8) “security-based swap agreement”. The comment period for the Joint Notice expires on September 20.

A copy of the Federal Register release of the Joint Notice is available here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission has withdrawn its January proposal to establish federal speculative position limits for futures and option contracts on certain energy products. In its withdrawal notice, the CFTC cited the significant revisions to the Commodity Exchange Act (CEA) introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC plans to issue a notice of rulemaking and propose position limits for exempt and agricultural commodity derivatives, including energy derivatives, in compliance with the CEA as amended by the Dodd-Frank Act (which requires the CFTC to establish limits for exempt and agricultural commodity derivatives within 180 days and 270 days, respectively, of the date of enactment of the Dodd-Frank Act).

The notice of the CFTC withdrawal is available here.

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Co-authored by Vanessa L. Friedman

In connection with the long-running dispute between CME Group, Inc. and ELX Futures regarding so-called “exchange of futures for futures” (EFF) transactions on ELX, the Commodity Futures Trading Commission sent a letter to CME reaffirming the position previously taken by CFTC staff that neither the Commodity Exchange Act (CEA) nor CFTC regulations prohibit such transactions. EFF transactions are designed to permit market participants effectively to move a Treasury futures position from the Chicago Board of Trade (CBOT) to ELX for clearing. The CFTC letter was written in response to CBOT’s October 19, 2009, Market Regulation Advisory Notice stating that CBOT rules do not permit the execution of EFF transactions.

The CFTC also directed its staff to undertake an analysis of whether the CBOT Advisory Notice complies with Core Principle 18 of Section 5(d) of the CEA (antitrust considerations). In connection with this directive, the CFTC Division of Market Oversight sent a second letter requesting from CBOT a written response and the production of records addressing certain related matters.

The CFTC press release regarding its letters to CME, including links to both letters, is available here.

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Co-authored by Vanessa Friedman and Kevin Foley

The Commodity Futures Trading Commission has reissued its proposal to amend CFTC Regulations 1.20, 1.26 and 30.7, relating to the acknowledgment letters that futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) are required to obtain from depositories that hold customer segregated and/or secured amount funds.

In response to comments on its previous proposal, the CFTC’s amended proposal includes a required form of acknowledgment letter. FCMs and DCOs would be required to update the acknowledgment letters within 60 days of any change in the name of the FCM or DCO, of the bank, trust company, FCM or DCO that has received the funds, or of any change in the account number. Finally, the CFTC has proposed to create an electronic filing system for the required acknowledgement letters.

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The Commodity Futures Trading Commission has announced that it will amend its Regulation 190.04(d)(2) regarding the operation of a commodity broker in bankruptcy. Currently, a bankruptcy trustee is prohibited, immediately upon the commencement of the commodity broker’s bankruptcy case, from processing any new trades on behalf of customers of the commodity broker, with limited exceptions. Under the amended Regulation, bankruptcy trustees will be permitted, under appropriate circumstances as determined by the CFTC, to operate the business of the commodity broker in the ordinary course, including entering into new commodity contracts on behalf of customers.

The amendment will become effective 30 days from the date it is published in the Federal Register.

The CFTC press release can be found here.

The final rule can be found here.
 

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Co-authored by Joshua Penner

The National Futures Association (NFA) has set an effective date of January 3, 2011 for changes to its Compliance Rule 2-30 and the associated Interpretive Notice, which set out "know-your-customer" and customer risk disclosure requirements for NFA member firms.

The amended rules expand Compliance Rule 2-30 to cover all customers who are not eligible contract participants (rather than covering only natural persons, as is currently the case); require futures commission merchants (FCMs) to periodically request updated account information from their active customers; require the NFA member that currently solicits and communicates with a customer (whether the clearing FCM, a separate introducing FCM, an introducing broker or commodity trading advisor) to determine, based on any updated account information received by the clearing FCM, whether additional risk disclosure to the customer is necessary; and prohibit NFA members and their associated persons from making individualized recommendations to customers who have been (or should have been) advised that futures trading is too risky for them.

The NFA notice can be found here.

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Co-authored by Joshua Penner

The National Futures Association (NFA) has amended Sections 11(b) and (c) of the NFA Financial Requirements. These rules currently provide that a Forex Dealer Member (FDM) may include assets as current for purposes of determining adjusted net capital and as cover for currency positions, only if the assets are held at the following regulated entities not affiliated with the FDM: (1) a financial institution regulated by a U.S. banking regulator; (2) a broker-dealer registered with the Securities and Exchange Commission; (3) a futures commission merchant or a retail forex dealer registered with the Commodity Futures Trading Commission; (4) a state-regulated insurance company; or (5) a regulated foreign equivalent of such entities.

The amended rules remove regulated foreign entities from the list of regulated entities. However, the NFA will continue to have authority to approve the use of certain regulated foreign equivalents that are appropriately regulated and capitalized.

The amendments will become effective October 1.

The NFA notice concerning the amendments can be found here.

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Co-authored by Joshua Penner

The Commodity Futures Trading Commission will begin publishing a new report, entitled Traders in Financial Futures (TFF). The TFF report expands upon the disaggregation of data in the CFTC’s weekly Commitments of Traders (COT) Reports implemented by the CFTC last year.

The TFF report uses the same data that appears in the COT reports, but separates large traders in the financial futures markets into the following four categories: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds; and Other Reportables. Like the COT reports, the TFF report provides a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The report will be published in futures-only and futures-and-options-combined formats and will be published concurrently with the legacy COT. The TFF report is not a disaggregation of the COT data for the financial markets. The traders classified into one of the four categories in the TFF report may be drawn from either the “commercial” or “noncommercial” categories of traders in the legacy COT reports. The CFTC anticipates releasing four years of historical data for the new report.

The CFTC press release announcing the TFF reports can be found here.

Explanatory notes from the CFTC on the TFF reports can be found here.

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Co-authored by Joshua Penner

The Commodity Futures Trading Commission has determined that certain contracts traded on IntercontinentalExchange Inc. perform significant price discovery functions and, therefore, must be traded in compliance with the statutory provisions, including core principles, applicable to "significant price discovery contracts" (SPDCs).

A list of the relevant final orders declaring certain contracts to be SPDCs can be found here.

The CFTC press release can be found here.

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Co-authored by Joshua Penner

The Commodity Futures Trading Commission has released a list of 30 separate rulemakings that it must undertake to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act and is soliciting public input prior to publishing proposed rules for comment. The CFTC is generally required to promulgate these rules in 360 days from the date of enactment (July 21), although certain of the rules must be promulgated within 90, 180 or 270 days.

The CFTC has established a separate e-mail address for each of the rulemakings to which comments may be submitted. The email address for a particular subject can be accessed by clicking on the link below, and then clicking on the subject in question. The user will be directed to a page containing an email address to which comments should be addressed.

The list of rule-writing subjects and access to the email addresses to which comments should be directed can be found here.

The CFTC press release can be found here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has proposed to issue new regulations under which the CFTC would collect account ownership and control information on a weekly basis from reporting entities from designated contract markets (DCMs), exempt commercial markets (ECMs) that list significant price discovery contracts, and foreign boards of trade that provide direct access to U.S. market participants. The CFTC Notice follows an Advanced Notice of Proposed Rulemaking on the same topic that was published for comment in July 2009, and incorporates certain changes made in response to comments received on the Advance Notice. Under the proposed rules, various account ownership and control information, including identifying and contact information with respect to both beneficial owners and account controllers, whether the account is traded pursuant to an automated system, the executing and clearing brokers, and an indication of whether the account is a firm omnibus account, will be collected by the CFTC via an account Ownership and Control Report.

The comment period for the Notice of Proposed Rulemaking will end 60 days after the publication of the Notice in the Federal Register. A copy of the Notice is available here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has published proposed rules that would establish standards for the recovery and resumption of operations by certain designated contract markets (DCMs) and derivatives clearing organizations (DCOs). The proposed standards would apply to DCMs that are determined by the CFTC to be “critical financial markets,” as well as to the DCOs for those markets, and would require any such DCM or DCO to establish and maintain business continuity and disaster recovery plans and resources (including appropriate geographic dispersal of personnel and infrastructure) sufficient to satisfy an objective of resuming trading and clearing operations on a same-day basis.

The comment period for the Notice of Proposed Rulemaking will end 30 days after the publication of the Notice in the Federal Register. A copy of the Notice is available here.

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Co-authored by Christian B. Hennion

National Futures Association (NFA) has submitted a petition for rulemaking to the Commodity Futures Trading Commission that would reinstate certain limitations on the marketing and trading activities of investment vehicles operated pursuant to CFTC Rule 4.5 (Rule 4.5 Entities), which the CFTC had removed from the rule in 2003. Rule 4.5 excludes from the definition of a “commodity pool operator” certain otherwise regulated persons and entities, including registered investment companies. NFA’s proposal would require that a Rule 4.5 Entity (1) not be marketed as a method for obtaining exposure to commodity futures or options, and (2) limit its commodity futures and options positions (other than positions held for bona fide hedging purposes) to no more than 5% of the liquidation value of the portfolio. In its petition, NFA cites its concerns regarding the recent establishment of several registered investment companies that are marketed to retail investors and engage in significant futures trading, but which are not subject to the registration and disclosure requirements set out in the CFTC’s Part 4 Rules due to the exclusion set out in Rule 4.5.

The NFA petition is available here.

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Co-authored by Joshua A. Penner

In a letter to the Chicago Mercantile Exchange dated June 3, the Commodity Futures Trading Commission has provided guidance on the potential impact of newly adopted Securities and Exchange Commission Rule 22e-3 on the investment of customer segregated funds, by futures commission merchants (FCMs) and derivatives clearing organizations (DCOs), in money-market mutual funds (MMMFs) under CFTC Rule 1.25. SEC Rule 22e-3 authorizes MMMFs to suspend redemptions if necessary to facilitate an orderly liquidation of the fund.

Rule 1.25 generally permits customer segregated funds to be invested in an MMMF, subject to the requirement that any such MMMF be “legally obligated to redeem an interest and to make payment in satisfaction thereof by the business day following a redemption request.” Among the exceptions to this next-day redemption requirement is the existence of “emergency conditions,” as “set forth in Section 22(e) of the Investment Company Act of 1940.” Section 22(e) allows the SEC to “by rule or regulation determine the conditions under which (i) trading shall be deemed to be restricted and (ii) an emergency shall be deemed to exist.…”

The CFTC has determined that SEC Rule 22e-3 qualifies as a “rule or regulation” under Section 22(e) describing when an emergency condition will be deemed to exist. Consequently, FCMs and DCOs may continue to invest customer funds in an MMMF that otherwise qualifies as a permitted investment under Rule 1.25, notwithstanding the right of the MMMF to suspend redemptions to facilitate an orderly liquidation of the fund.

The CFTC Staff Letter providing the interpretation can be found here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission, acting pursuant to CFTC Regulation 30.10, has granted an exemption from certain of the CFTC’s foreign futures and options regulations to firms designated by Bursa Malaysia Derivatives Berhad (Bursa Derivatives) who offer and sell foreign futures and options on futures contracts to customers located in the United States.

In granting the exemption, the CFTC determined that the regulatory framework established by Malaysian law and the rules of Bursa Derivatives is comparable to that imposed by the Commodity Exchange Act and CFTC regulations. The exemption is limited to brokerage activities undertaken on behalf of customers located in the United States with respect to transactions on or subject to the rules of Bursa Derivatives for products that customers located in the United States may trade, and is conditioned on an eligible firm making and maintaining certain representations to the National Futures Association relating to compliance with applicable provisions of Malaysian law and the rules of Bursa Derivatives.

The Federal Register notice of the order can be found here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission and the Securities and Exchange Commission will hold a joint advisory meeting to discuss emerging regulatory issues. The meeting is open to the public and will be held at 1 p.m. (EDT) on Tuesday, June 22, in the Auditorium, Room L-002, at the SEC’s Washington, D.C., offices at 100 F Street, NE. Representatives from various exchanges and firms will testify on the market events of May 6.

Notice of the meeting can be found here.

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Co-authored by Joshua A. Penner

The Chicago Mercantile Exchange (CME) has announced new rules that, subject to the CME Clearing House Risk Committee and other approvals, would require customer “cleared over-the-counter (OTC) derivatives” to be held in a separate account. The CME rules implement recent amendments to the Commodity Futures Trading Commission’s Bankruptcy Rules, Part 190, creating a new, separate customer account class for “cleared OTC derivatives.” When the new rules become effective, existing customer positions in cleared OTC derivatives, currently held in CFTC Rule 30.7 secured amount accounts, will be required to be transferred to separate cleared OTC derivative customer accounts. Clearing futures commission merchants (FCMs) will be required to maintain funds for all amounts owed to cleared OTC customers in cleared OTC customer accounts and to prepare daily statements for cleared OTC customers. Clearing FCMs will be required to compute their cleared OTC customer requirement, the funds held in cleared OTC customer accounts and any excess (or deficiency) of funds in cleared OTC customer accounts. The rules will also require clearing FCMs to call for and collect performance bond collateral for positions in cleared OTC derivatives. FCMs will also be required to open new bank and safekeeping accounts for cleared OTC customer assets.

The CME plans to provide clearing firms with testing opportunities for the new cleared OTC derivatives account class in late July. The rules are expected to become effective on September 13.

The CME Advisory Notice can be found here.
 

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has declined to approve a proposed rule amendment by the Options Clearing Corporation (OCC) that would have classified certain foreign currency exchange contracts with a nominal exercise price such as $0.01 as securities options. OCC contended in the submission that, other than the low strike price, the products were essentially the same as the cash-settled, foreign currency options currently cleared by OCC and, therefore, these products should be subject to the exclusive jurisdiction of the Securities and Exchange Commission, be traded on national securities exchanges and treated and cleared as securities options.

The CFTC rejected this analysis, however, and noted that, because the nominal strike price resulted in the products being deep in the money from inception, the option premium would be economically indistinguishable from the value of a futures contract on the underlying asset. The CFTC concluded that products are not bona fide options and therefore are subject to the Commodity Exchange Act and must be traded exclusively on a designated contract market or a derivatives transaction execution facility.

The denial notice from the CFTC can be found here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has requested public comment on a petition for exemptive relief filed by Hard Eight Futures, LLC, a registered commodity trading advisor, pursuant to Section 4(c) of the Commodity Exchange Act (CEA). The requested relief would permit persons qualifying as “eligible contract participants” (ECPs), as defined in Section 1a(12) of the CEA, to trade foreign-listed security index futures contracts on broad-based indices without a prior grant of no-action relief to the listing exchange. Currently, such contracts may only be offered and sold to U.S. persons (including ECPs) after the listing exchange has received no-action relief.

The relief requested in the petition would be limited to indices of which the underlying securities are principally traded on, by or through a non-U.S. market, and would be further conditioned upon the existence of a Memorandum of Understanding between the CFTC and the regulator of the listing exchange. If the petition were granted in its current form, ECPs seeking to rely upon this relief would be required to file a notice containing certain specified information regarding such ECP and the relevant contract to be traded with the CFTC, and the exemption would then take effect 10 business days thereafter (absent CFTC objection).

In its request for comment, the CFTC has raised several questions regarding the petition, including whether additional conditions should be imposed upon the requested relief. Comments must be submitted by July 19.

The CFTC’s request for comment is available here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has issued an exemption, pursuant to Section 4(c) of the Commodity Exchange Act (CEA), which would permit options and futures on ETFs Physical Swiss Gold Shares and ETFs Physical Swiss Silver Shares to be traded and cleared, in the case of options contracts, as options on securities, and in the case of futures contracts, as security futures contracts. The exemption is consistent with prior CFTC action on similar exchange-traded fund products, which have gold and silver, both regulated commodities, as their primary underlying assets, and thus implicate potentially overlapping areas of authority between the CFTC and the Securities and Exchange Commission. In conjunction with the exemption, the CFTC also approved a requested change to the rules of the Options Clearing Corporation (OCC) to permit the OCC to clear these products.

The CFTC press release regarding the exemption and rule change is available here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has published for comment proposed rules requiring a designated contract market (DCM) offering co-location or proximity hosting services to ensure that all market participants have equal access to such services. Under the proposed rules, access to co-location services must be “equitable, open and fair,” and may not be offered on a discriminatory basis to select market participants or select categories of market participants. To this end, the proposed rules would also require that fees charged for co-location services be imposed in a uniform, non-discriminatory manner. “Fees shall not be used as an artificial barrier to access by any market participants.” The proposed rules further provide that a DCM that offers co-location services must disclose monthly to the public on its website the longest, shortest and average latencies for each connectivity option provided by the designated contract market. This latter information would permit a market participant to assess whether incurring the benefit of co-location services is worth the cost.

Comments on the proposed rules must be submitted by July 12.

The CFTC proposal may be accessed here.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission and Securities and Exchange Commission have announced that the first meeting of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues will be held on Monday, May 24.

The Joint Committee will discuss the preliminary findings of the staffs of the CFTC and SEC related to the unusual market events of May 6.

The meeting will be streamed live on the Internet at www.sec.gov.
The CFTC press release regarding the meeting can be found here.

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