FIA Regarding Proposed Rules Relating to Definitions Contained in Title VII of Dodd-Frank Wall...

8/8/2019 FIA Regarding Proposed Rules Relating to Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and C

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10-012COMMENT

CL-00061

From:Sent:To:Subject:Attach:

Legal Mond ay, September 20, 2010 4:16 [email protected]; dfadefinitions SEC File #$7-16-10 CFT C DefinitionsCFTC SEC Definitions 092010.pdf

Attached please find the Futures Industry Associations comment letter regarding Proposed Rules Relating toDefinitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act (File No. $7-16-10).Please feel free to contact the FIA with any questions or comments.

[email protected] ThompsonLaw & Compliance Division CoordinatorFutures Industry Association2001 Pennsylvania Avenue, NWSuite 600Washington, DC 20006-1823(202) 466-5460


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Futures industry A ssociation200I l)emas,;I .vana Ave, N WSuite 600~Vas}~in~lo~ DC 2000,6-.1833

202.466,5460) ,~. ) ( . .>

September 20, 2010

Mr. D avid A. Stawick, SecretaryCommodity Futures Trading CommissionThree Lafayette Centre1155 21st Street, NWW ashington, DC 2 0581.Ms. Elizabeth M. Murphy, SecretaryS ecurities and Exchange Com m ission100 F Street, NEW ashington, DC 2 0549-0609.

Propo sed Rules Relating to D efinitions Contained inTitle V II of D odd-Fran.k W all Street Reform andConsum er Protection Act (File No. ST-I 6 -10)D ear Ms. Murphy and Mr. Stawick:

The Futures Industry Association (the "FIA ")i subm its these com m ents i~response to Release No. 3 4-6 271 7 (the "Release"), in which the S ecurities and ExchangeC omm ission (the "SEC ") and the C om m odity Futures Trading C omm ission (the "C FTC ")solicited com m ents on certain definitions contained in Title V II of the Do dd-Frank W att S treetReform and C onsumer Protection Act ("Dodd-Frank). FIA welcom es the opp ortunity toprov ide our comm ents ol~ the definitions addressed i,~ the R elease, and in particular, with. regardto issues concerning futures comm ission merchants (TC Ms") and their affiliates.

FIA is a principal spokesman for the commodity ihtures and options industry. FIAs regular membership iscomp rised of app roximately 30 of the largest l~utures comm ission m erchants ("IPCM s~) in the United States,the majority of which are either registered with the Securities and Exchange Commission as broker-dealersor are affiliates of broker-dealers. Among its associate members are represematives from virtually all othersegm ents of the futures industry, both national and international. Reflectit;g the scop e and diversity of it.smembership, FIA estimates that its members effect more than. eighty percent of all customer transactionsexecuted on U nited States designated contract markets.


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FIA C om m ent Letter Proposed Rules Relating to D efinitions Contained in Title V II of D odd-Frank Wall S treet Reform and C onsumer Protection Act (File No. S 7-16 ~1 0)September 20, 2010

FC Ms S hould. not be Required to Register as Swap D ealersFtA strongly believes that FC M s should not b e required to register as.swap

dealers solely by virtue of providing sw ap clearing services to custom ers or acting as brokerswith respect to swap transactions between customers.2 Pursuant to D odd-Frank, a ~swap dealer"is a m arket participant that ~actively hotds itself out as a dealer in swap s", "m akes .a m arket inswap s", ~regularly enters into swaps with counterparties as an ordin.ary course of b usiness for itsown account" or "engages in any activity causing the person to b e com m only known in the tradeas a dealer or market m aker in swap s." W hile FCM s will perform services related to theexecution of swap s, they will not, solely b y virtue of these activities and acting as clearingbrokers, engag e in any of the activities enumerated in the swap dealer definition. Sp ecifically, an..FC M that acts as a clearing b roker but neither holds itself out as a dealer nor m akes a m arket inswap s, and does not enter into swap transactions as principal, sho uld not be con sidered a dealer.As is the case w ith respect to futures transactio~s, an FC M , in its role as a clearing b roker, islimited to acting as an agent on bel~alf of its customers.S imilarly, FC Ms m ight from tim e to time act as brokers in matching twocustomers or counterparties seeking to execute a swap , which will then b e subm itted for cIeari~g .In such instances, the FC M has no rote in the transaction other than m atching the parties~ It doesnot act as a princip al witl~ resp ect to either party, nor does it have any obligation under theresulting transaction un less and until it is cleared. This role is outside of the statutory definitionof a swap dealer and tb~ e CF TC s regulations should m ake it clear that registration as a swapdealer is not required. The definition of swap deaIer, therefore, should make it clear that onlythose m arket participan ts that are actively engag ed in the activities enum erated i.n the sw apdealer defir~itio~ should b e required to be registered as swap dealers pursuant to any regulationsprom ulgated by the CFT C under D odd-Frank.In addition, FIA does not believe that ar~ FC M should, be deem ed to be a swapdealer if the FCM is required to assum e custom er positions as a result of a def~ault or otherextraordinary circum stances. Th e assum ption of a defaulted customers p ositions is related toand simp ly a function of the FC M s role as an agent and clearing b roker and should not betreated as principal activity. Accordingly, FIA requests the C FTC to clarify that an. FCM will notbe deem ed a swap dealer in such circumstances including for purp oses of capitat treatment as aresult of assmning such p ositions.

W e also believe that the defi~i{iot~, of the term major swap participant (~MS P") should not be construed toinclude FCM s~ and w e urge the CFTC to clarify that FCM s will not be required to register as MSPs, solelyby virtue of providing clearing services and brokerage services in conr~ection with swaps.I~ addition, to ensure consistent reguIation bet~v een comp arable m arket participants, we urge the SEC todefine the term s security-based swap dealer and major security-based swap participant to exclude registeredbroker-dealers to the extent that their swaps activities are lim ited to the provision of b rokerage and clearingservices.


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FIA C om m ent Letter Proposed Rules Relating to D efin.itions Contained in Title V II of D odd-Frank W all Street Reform and Consum er Protection Act (File N o. $7-16 -10)September 20, 2010

Sim ilarly, FCM s m ay, from tim e to time, b e required to take on customerpo sitions in order for the clearing system s to function. For exam ple, som e clearing organizationsm ay utilize det~ault m anagem ent processes in connection ~vith cleared swaps, p ursuant to whichnon-defaulting clearing m em bers m ay accept certain positions of a defaulted clearing m emb er.An F C M accepting such p ositions should not be construed as a sw ap deaIer as a result of thisactivity in default situations. W e believ e that clarity on. this issue in advance of any custom erdefault or any other extraordinary circum stm~ ces will prov ide legal certainty to marketpartici.pants and w ill help to reduce the risk of m arket disruptions.

FC Ms S hould not be Required to Register as Commodity Trading AdvisorsFIA is concerned that an overly broad interpretation of the definition ofcom m odity trading advisor ("CT A") m ight encom pass FC Ms that provide advice on swaptransactions in a m anner that is solely incidental to their FCM business. W e do not b elieve that

this is the intended result or that it would serve any regulatory purp ose. W e note that thedefinition ofa CT A in S ection la of the C om m odity Exchange A ct ("CEA ") explicitly excludesFC Ms w hose advice is solely incidental to their business. Accordingly, we encourage the CFT Cto clarify in its rulem aking that this exem ption app lies equally to advice rendered by an FC M inconnection with its brokering and clearing of swap s.S wap D ealers Should not be Required to Register as FC MsiFor m any of the reasons set forth in the p receding paragraph s, those entities actingin the capacity of a swap dealer should not fall within the definition of an FC M . W e urge theC FTC , in its rulem aking under Dodd-F rank, to clarify the newly expanded definition of an FCMunder S ection 721 in order to prov ide clear guidance to market participants as to the preciseactivities that will result in a m arket participant being enco m passed w ithin the definition of anFC M. W e are concerned that the expanded definition of an FCM m ight be construed toobroadly, thereby cap turing a range of m arket participants that historically have not been, and arenot app ropriate to be, treated as FCM s, such as executing dealers or swap d ealers acting only indealer capacities. Accordingly, we urge the C FTC to exercise its authority to ensure tl~at anyrulemaking regarding the definition of FCMs strikes the appropriate balance between capturingm arket participants that are actively engaged in the activities of an F C M , such as the p rovision ofbrokerage and clearing services and the handling of m argin, while excluding those m arketparticipants that should not be considered FCM s under D odd-Frank, particularly where suchparticipants are required to register in other capacities.


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FIA C om m ent Letter Proposed Rules Relating to D efinitions Contained in Title V II of D odd-Frank W all Street Reform and C onsm ner Protection Act (File No. $7-16 -10)Septemb er 20, 2010

For example, swap dealers affiliated with FCMs should not be required to registeras FC Ms simp ly because they refer their swap counterparties to FC Ms for the provision ofcl.earin.g services. FC M s prov ide a wide range of services to custom ers, including executing andclearing transactions, accepting funds and securities deposited by custom ers as margin andissuing confirm ations and statemen ts. An affiliated entity that refers a counterparty for clearingservices is not engaged in FC M activities merely by such referral. Under these circum stances,the affiliated entity is not "accepting" an order for a swap , and is not prov iding clearing services.These factors, com bined w ith the swap dealers own registration status, m ake it duplicative andunnecessary for it also to be registered as an FC M.

This additional registration will p rovide no additional ben efits or protections tothe counterparties, the m arket or the CF TC , and will force swap dealers to comp ly with aregulatory scheme not approp riate for their businesses. W e urge the C FTC to clarify in thedefir~ition of an FC M th.at such dual registration b y swap dealers will not be required unless aswap dealer itself engages in the prov ision of clearing services, the handlil~g of m argin forcleared swaps or other activities characteristic of an FC M.S imilarly, because the revised definition of an F C M inciudes any entity that"accepts" swap orders, we are also concerned that this could be read to include executingdealers, which m ay also be affiliated with FC M s, that are m erely executing swap transactionswith counterparties to b e subm itted for clearing through an FC M. C leared swaps are typicallyexecuted directly between an executing dealer and its counterparty, each acting as p rincipal, withthe intention of the resulti~g counterp arty position being subm itted to the counterpartys FC Mfor cleari~g. This is an activity that is distinct from an FC M s %ccep tance" of orders forexecution of futures transactions. In such instances, we do not believe that swap dealers thatexecute transactions as p rincipal with connterparties should be construed as "accepting" swap

orders for the purp ose of the definition of"FCM ." W e urge the C FTC to ensure that anyregulations prom ulgated under Dodd-Frank m ake it clear that the definition of an F CM does notinclude swap dealers that enter into swap transactions, even if those transactions are then clearedby affiliated (or unaffiliated) FCMs.The Associated Person Registration Requirement should be Clarified

W e note that Dodd-Frank creates a newly defined term in the CE A for associatedpersons ("AP") of a swap dealer or MS P, which is defined to m ean an individual engaged in thesolicitation or acceptance of swap s on behalf of a swap dealer or MS P. H owev er, in contrast tothe provisions of the C EA requiring the registration of APs of FC Ms, ir~troducing brokers, CT Asand com m odity pooI operators, Cong ress chose not to amend the C EA to require registrationwith respect to APs of a sw ap dealer or an MS P, or with respect to em ployees of FC Ms thatprovide services in connection with swap s. FtA b elieves that these individuals should l~ ot berequired to be registered as APs_and requests that the CF TC ctarify that such registration wit.1 notbe req uired. In addition to the absence of a statutory registration requirem ent, we note that,where an FC M p rovides brokerage and clearing services with respect to swaps, its emp loyeesinvolved in that business would not be encom passed w ithin the definition of an AP, b ecause theFC M has not been considered to b e soliciting or accepting orders. Accordingly, the CF TC


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FIA C om m ent Letter Proposed Rules Relating to D efinitions Contained in Title V II of D odd-Frank W all Street Reform and Consum er Protection Act (File No. $7-1 6 -I0)Septemb er 20, 2010

should clarify in future rulem akings that there is no registration requirement for A Ps of F C Ms, aswell as APs of swap deal.ers or MSP s.The L egal iDistinctions between Forwards, Futures and Sw aps should b e C larifiedThe definition of a "swap " under Section 721 of D odd-Frank expressly excludesany sale of a nonfinancial comm odity or security for deferred shipm ent or delivery, so long asthe transaction is intended to b e ph ysically settled." W e recomm end that the CFT C clarify,through rulem aking or interpretation, that the intent standard in this prov ision will be interpretedand app lied in the sam e m anner as the forward contract exclusion" that has been included in theC EA since 1974 . tn particular, the CFT C and the courts have traditionally construed the forwardcontract exclusion to ap ply to transactions that (1) are entered into between p arties with thecapacity to make or take delivery of the underlying commodity; (2) require settlement byph ysical delivery and do no t prov ide either p arty with the contractual right to settle in any otherm anner; and (3) are generally settled by p hysical delivery absent an event of default or forcem ajeure, or a subseq uent agreem ent of the parties consistent with. relevant market practice. Thisapp roach is well understood by m arket participants and has allow ed such p articipants to enterinto transactions with legal, certainty as to the status of the transactions as forward contracts,without focusing exclusively on subjective intent. The use of the term "intend," without furtherclarification or interpretation, relies exclusively on the subjective intentions of the parties, whichcannot definitively b e ascertained and could change during the term of a transaction for entirelylegitim ate business purp oses.

To provide legal certainty to all market participants, we urge the CFTC tointerpret this intent requirement in a manner consistent with the CFTCs long-standing policy asset forth in its Exem ption jbr Certain Con tracts [nvo lying Energy Produ cts,58 F .R. 21286 (Apr .20, 1993) (the "Energy C ontracts" Exem ption"). The Energy Con tracts" Exemption describestransactions eligible for exemption under the forward contract exclusion as those that "imposebinding obligations on the parties to make and receive delivery of the underlying commodity orcommodities, with no right of either party to effect cash settlement of their obligations withoutthe consent of the other party (except pursuant to a bona fide termination right), provided,however, that the parties may enter into a subsequent bookout, book transfer, or other suchcontract which provides for settlement of the obligation in a manner other than by physicaldelivery of the commodity specified in the contract." We believe that forward contracts thatsatisfy these criteria, regardIess of the underlying commodity, should be excluded from thedefinition of the term "swap," for purposes of the CEA and we urge the CFTC to clarify that theterm "intend" in the exclusion, from the swap definition will be construed in this manner.

W e also b elieve that such an interpretation is consistent with the legislative intentof Congress, as noted in a letter from S enate Banking Com m ittee Chairman D odd and SenateAgriculture Com m ittee Chairman Lincoln to House Financial Services Chairm an Frank andHouse A griculture C om m ittee Chairman Peterson on June 3 0, 20 10. In that letter, S enatorsD odd and L incoln stated that the definition of the forward contract exclusion "is intended to beconsistent with the forward contract exclusion that is currently in the C orn.m odify Exchang e Actand the C FTC s established p olicy and orders on this subject, including situations wh ere


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FIA C om m ent Letter Proposed R~ fles Relating to Definitions Contained in Title VII of D odd-Frank W all Street Reform and C onsumer Protection Act (File N o. $7-16 -10)Septemb er 20, 2010

com m ercial p arties agree to book-out their physica! delivery obligations under a forw ardcontract." W e therefore recom m end that the CF TC clarify that the forward contract provision ofD odd-Frank will be interpreted and app lied in the sam e rnann.er as the pre-D odd-Frank forwardcontract exclusion.

W e appreciate the opp orturtity to comm ent on the Release, and would be pleasedto discuss any questions eitl~er regulator m ay hav e with respect to this letter. Arty questionsabo~t this letter may be directed to Barbara Wierzynski, Executive Vice President and GeneralCounsel.

Futures Indu y " "CO : Honorable Gary GensIer, Chairman, C FTCHonorable M ichael Dunn, C omm issioner, C FTCHonorable Jilt E. Som m ers, Com m issiorter, CFT CHonorable Bart Chilton, Com m issioner, C FTCHonorable Scott OMaIia, C om m issioner, CFTCTerry Arbit, Deputy General Com~se!, Office of the General CounselJulian Ham m ar, Assistant General C ounsel, Office of the General CounselMark Fajfar, Assistant General Counsel, Office of the Gerteral Counsel

D avid Aron, Counsel, Office of the General C ounselHonorable Mary Schapiro, Chairman, SE CHonorable Kathleen C asey, C om m issioner, S ECHonorable Elisse W alter, Com m issioner, SECHonorable Luis Aguilar, C om m issioner, SECHonorable Troy Paredes, Com m issioner, SECMatthew D aigler, Senior Sp ecial C ounsel, Division of Tradirtg and Markets, SECC ristie March, Attorney Adviser, Division of Trading and Markets, SE CMichael Reedich, Special Counsel, Office of Chief Counsel,D ivision of C orporate Finance

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