Orders Regarding the Treatment of Petitions Seeking Grandfather Relief for Exempt Commercial Markets and Exempt Boards of Trade

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice; final orders.

SUMMARY:

The Commission is issuing orders whereby entities currently operating as exempt commercial markets, pursuant to Section 2(h)(3)-(7) of the Commodity Exchange Act, or exempt boards of trade, pursuant to Section 5d of the Commodity Exchange Act, may receive grandfather relief to continue to operate in accordance with those provisions notwithstanding their deletion from the Commodity Exchange Act, effective July 15, 2011, by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Commission's orders set forth various conditions for such grandfather relief, including the filing of a relief petition and a swap execution facility or designated contract market application with the Commission.

DATES:

Effective Date: September 10, 2010. Comments on this notice will be accepted until October 18, 2010.

ADDRESSES:

You may submit comments or petitions for relief, identified with “ECM/EBOT Grandfather Relief” in the subject line, whichever is appropriate, by any of the following methods:

• E-mail for Comments: ecmebotcomments@cftc.gov. E-mail for petitions: ecmebotpetitionscftc.gov.
• Mail: David A. Stawick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
• Hand Delivery/Courier: Same as mail above.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments and petitions will be posted as received to http://www.cftc.gov.

FOR FURTHER INFORMATION CONTACT:

David P. Van Wagner, Chief Counsel, Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5481. E-mail: dvanwagner@cftc.gov; or Beverly E. Loew, Assistant General Counsel, Office of the General Counsel, same address. Telephone: (202) 418-5648. E-mail: bloew@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Title VII of the Dodd-Frank Act amended the Commodity Exchange Act (“CEA”) to establish a comprehensive new regulatory framework for swaps and security-based swaps. Among other changes to the CEA, the Dodd-Frank Act eliminated certain exempt market categories—exempt commercial markets (“ECMs”) and exempt boards of trade (“EBOTs”)—from the CEA; established a new regulated market category—swap execution facilities (“SEFs”); revised certain requirements for an extant regulated market category—designated contract markets (“DCMs”); and authorized the Commission to grant grandfather relief for entities in the eliminated exempt market categories in order to assist those entities to transition their business models to a different market category.

II. Background and Discussion

a. Exempt Commercial Markets and Exempt Boards of Trade

Sections 723 and 734 of the Dodd-Frank Act will strike from the CEA enabling provisions for two categories of exempt markets established by the Commodity Futures Modernization Act of 2000 (“CFMA”). Specifically, Section 723 of the Dodd-Frank Act will strike CEA Section 2(h)(3)-(7) and, thus, eliminate the ECM category. Similarly, Section 734 of the Dodd-Frank Act will strike CEA Section 5d and, thus, eliminate the EBOT category.

The Commission notes that ECMs and EBOTs are both required to operate their execution platforms as trading facilities, as that term is defined by CEA Section 1a(34), and must limit access to a narrow group of market participants—eligible commercial entities in the case of ECMs and eligible contract participants in the case of EBOTs. These requirements are not inconsistent with the execution platform and market participant requirements for DCMs or SEFs as they are set forth in the CEA and the Dodd-Frank Act. Accordingly, while the ECM and EBOT provisions will be eliminated from the CEA effective July 15, 2011, the basic structural requirements for both of those market categories should facilitate the ability of ECMs and EBOTs to transition to either the SEF or DCM market category; provided, of course, that they comply with the enhanced regulatory requirements for those two categories.

Sections 723 and 734 of the Dodd-Frank Act contain similar grandfather provisions for ECMs and EBOTs, respectively, whereby they may petition the Commission to continue to operate as ECMs and EBOTs. With some variation, both sections establish three basic requirements regarding the processing of grandfather petitions.

First, entities seeking grandfather treatment must submit their petitions to the Commission by a set deadline: ECMs must submit their petitions within sixty days of the enactment of the Dodd-Frank Act (i.e., by September 20, 2010) and EBOTs must submit their petitions by the Dodd-Frank Act's effective date (i.e., by July 15, 2011). Second, the Commission must consider all petitions in a “prompt manner.” Third, the Commission may grant grandfather treatment for up to one year. In the case of EBOT petitions, the Dodd-Frank Act makes clear that the one-year period would commence with the Dodd-Frank Act's effective date of July 15, 2011. By contrast, the Dodd-Frank Act does not specify what the reference date should be for the running of any grandfather period for ECMs.

The Commission expects that many entities that currently operate as ECMs or EBOTs will seek to become either SEFs or DCMs when the Commission adopts regulations implementing Dodd-Frank's requirements for those facilities. While the Commission expects to adopt SEF and DCM regulations prior to the July 15, 2011, effective date for deleting the ECM and EBOT provisions from the CEA, the Commission also anticipates that concurrent with the implementation of those new provisions it will have to process a large number of SEF and DCM applications from ECMs, EBOTs and interdealer brokers. In order to ease this congestion of applications, and to facilitate the transition of current ECM and EBOT businesses to the new regulatory regime mandated by the Dodd-Frank Act, the Commission believes that it would be appropriate to provide grandfather relief allowing EBOTs and ECMs to continue to operate as EBOTs and ECMs after the July 15, 2011, effective date of the Dodd-Frank Act.

Accordingly, the Commission is issuing orders that would establish procedures whereby ECMs and EBOTs may petition for and receive grandfather relief from the otherwise applicable provisions of the Dodd-Frank Act, so long as they submit both timely and acceptable grandfather relief requests and either DCM or SEF applications. To be acceptable, the grandfather relief request shall contain a commitment to provide the Commission and its staff with access to the books and records of the ECM or EBOT relating to its business as an ECM or EBOT in accordance with the requirements in Commission Regulation 1.31, 17 CFR 1.31, effective July 15, 2011. Failure to comply with any request for books and records in accordance with the requirements of Commission Regulation 1.31 shall constitute a basis for revocation of the grandfather relief. The grandfather relief will extend for as long as the ECM or EBOT has a legitimate DCM or SEF application pending before the Commission and, accordingly, the relief will expire upon the Commission's approval or disapproval of the application.

b. Eligible Contract Participants Operating Pursuant to Section 2(h)(1)

Section 723 of the Dodd-Frank Act, which eliminated the ECM category from the CEA, also deleted CEA Section 2(h)(1)-(2)—a provision that provides an exemption for certain types of bilateral trading conducted off of regulated markets. Although the Dodd-Frank Act authorizes the Commission to grant grandfather relief to trading activity that relies upon CEA Section 2(h)(1)-(2), the nature of that trading activity is qualitatively different from trading activity on EBOTs and ECMs, both of which must operate as trading facilities, as that term is defined in CEA Section 1a(34). Accordingly, the issue of grandfather treatment for Section 2(h)(1)-(2) bilateral trading will be addressed by the Commission in a separate action.

III. Related Matters

a. Paperwork Reduction Act

The Commission has determined that these proposed orders will not impose any new recordkeeping or information collection requirements, or other collections of information that require approval of the Office of Management and Budget under the Paperwork Reduction Act (“PRA”). Collections of information that may be associated with a SEF or DCM application required as a condition for receiving relief will be addressed within the SEF and DCM-related rulemakings implementing the Dodd-Frank Act.

b. Cost-Benefit Analysis

Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before issuing an order under the Act. By its terms, Section 15(a) does not require the Commission to quantify the costs and benefits of an order or to determine whether the benefits of the order outweigh its costs; rather, it requires that the Commission “consider” the costs and benefits of its actions. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may in its discretion give greater weight to any one of the five enumerated areas and could in its discretion determine that, notwithstanding its costs, a particular order is necessary or appropriate to protect the public interest or to effectuate any of the provisions or accomplish any of the purposes of the Act. The Commission has determined that providing grandfather relief to ECMs and EBOTs, as provided in these orders, will mitigate market disruptions by permitting ECMs and EBOTs to continue to operate while they transition into new market categories once the Dodd-Frank Act becomes effective.

c. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) requires that agencies consider the impact of their rules on small businesses. The Commission previously has determined that neither ECMs nor EBOTs are small entities for purposes of the RFA. Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that these Orders, taken in connection with Sections 2(h)(3)-(7) and 5d of the Act and with the Part 36 rules, will not have a significant impact on a substantial number of small entities.

IV. Orders

a. ECM Grandfather Order

After considering the complete record in this matter, the Commission has determined to issue the following Order pursuant to its authority under Section 723(c) of the Dodd-Frank Act:

It is hereby ordered that any ECM that meets all of the following applicable conditions may continue to operate pursuant to the provisions of CEA Section 2(h)(3)-(7) until July 15, 2012 (one year after the general effective date of the Dodd-Frank Act's amendments to the CEA):

(1) The ECM must have filed with the Commission by September 20, 2010, a grandfather relief petition that:

(a) Is labeled “Exempt Commercial Market Grandfather Relief Petition Filed Pursuant to Section 723(c)(2)(A) of the Dodd-Frank Act,”

(b) Identifies the requesting ECM,

(c) Identifies a contact person at the ECM, including that person's contact information at the ECM, and

(d) Grants the Commission and its representatives access to the books and records of the ECM relating to its business as an ECM in accordance with the requirements of Commission Regulation 1.31, starting July 15, 2011 and throughout the pendency of the grandfather relief.

(2) The ECM must have filed a formal SEF or DCM application with the Commission within sixty days after the effective date of final regulations implementing the provisions of either Section 733 or 735 of the Dodd-Frank Act, whichever is appropriate.

(3) The ECM's SEF or DCM application is currently pending before the Commission.

b. EBOT Grandfather Order

After considering the complete record in this matter, the Commission has determined to issue the following Order pursuant to its authority under Section 734(c)(1) of the Dodd-Frank Act:

It is hereby ordered that any EBOT that meets all of the following applicable conditions may continue to operate pursuant to the provisions of CEA Section 5d up until July 15, 2012 (one year after the general effective date of the Dodd-Frank Act's amendments to the CEA):

(1) The EBOT must have filed with the Commission by July 15, 2011, a grandfather relief petition that:

(a) Is labeled “Exempt Board of Trade Grandfather Relief Petition Filed Pursuant to Section 734(c)(1) of the Dodd-Frank Act,”

(b) Identifies the requesting EBOT,

(c) Identifies a contact person at the EBOT, including that person's contact information at the EBOT, and

(d) Grants the Commission and its representatives access to the books and records of the EBOT relating to its business as an EBOT in accordance with the requirements of Commission Regulation 1.31, starting July 15, 2011 and throughout the pendency of the grandfather relief.

(2) The EBOT must have filed a formal SEF or DCM application with the Commission within sixty days after the effective date of final regulations implementing the provisions of either Section 733 or 735 of the Dodd-Frank Act, whichever is appropriate.

(3) The EBOT's SEF or DCM application is currently pending before the Commission.