ANALYSIS OF PROPOSED OVER-THE-COUNTER DERIVATIVES MARKETS ACT OF
2009 (August 17, 2009) The Administrations Over-the-Counter
Derivatives Markets Act of 2009 (Proposed OTC Act) effectively
addresses the complex regulatory reform issues with respect to OTC
derivatives. These reforms are critical to lower risk, promote
transparency and protect market integrity. Reform must
comprehensively regulate both swap dealers and the markets in which
swaps trade. The Proposed OTC Act would implement the following
important steps: ! Eliminate exclusions and exemptions from
regulation for OTC derivatives and extend the regulatory regimes of
the Commodity Exchange Act (CEA) and the federal securities laws to
fully cover OTC swaps in all commodities; Require the registration
and regulation of swap dealers and major swap participants,
including capital, margin and reporting and recordkeeping
requirements as well as business conduct, documentation and back
office standards; Require that standardized swaps be cleared by
clearinghouses that are registered with, and regulated by, the CFTC
or the SEC; Require that standardized swaps be traded either on
regulated exchanges or, if trading is limited to commercial and
sophisticated traders, on alternative swap execution facilities
(ASEFs), which are regulated, transparent electronic trade
execution systems; Require that information on standardized swaps
traded on exchanges or ASEFs be made public in a timely manner,
including price, trading volume and other trade information; Apply
the CFTCs and SECs enforcement authority to OTC derivatives and
those who trade them; Establish a comprehensive reporting and
recordkeeping regime for swaps, including swap repositories and a
large trader reporting system for the collection of data regarding
swaps; Require public disclosure of aggregate data on swap trading
volumes and positions; Give the CFTC and SEC authority to set
aggregate position limits across markets; Impose
conflict-of-interest requirements on trading firms to keep research
and analysis appropriately separated from the trading function;
Enhance Core Principles for all derivatives clearing organizations
to be in alignment with international standards; and
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Place, consistent with existing law pursuant to the Shad-Johnson
Accord, swaps on broad-based security indexes within the CFTCs
jurisdiction, and swaps on single securities and narrow-based
security indexes (security-based swaps) within the SECs
jurisdiction.
The Proposed OTC Act also includes other important provisions
that apply uniquely to the CEA: ! ! ! Strengthens the CFTCs
rulemaking, oversight and enforcement authorities with respect to
registered futures exchanges and clearinghouses; Enhances the CFTCs
authority, including a registration requirement, for certain
foreign boards of trade that provide access to persons located in
the United States; and Extends the Zelener fraud fix, which
Congress enacted in last years Farm Bill with respect to CFTC
enforcement authority over off-exchange retail foreign currency
transactions, to similar contracts in other commodities.
Based on a preliminary review of the Proposed OTC Act, the
following are areas where further improvements and refinements of
the draft statutory text are appropriate: 1. FX Swaps and
Forwards
The Proposed OTC Act would exclude foreign exchange swaps and
foreign exchange forwards from the definition of a swap regulated
by the CFTC. The concern is that these broad exclusions could
enable swap dealers and participants to structure swap transactions
to come within these foreign exchange exclusions and thereby avoid
regulation. In particular, currency and interest rate swaps could
be broken down into their component parts and then restructured to
resemble a series of foreign exchange forwards or a foreign
exchange swap to come within the scope of these foreign exchange
exclusions and thereby avoid regulation. For example, these foreign
exchange exclusions might be used to exclude each individual leg of
a currency swap, and/or the final currency exchange at maturity
(which is often a significant portion of the economic value of a
currency swap), from the new regulatory regime for swaps. In short,
these exceptions could swallow up the regulation that the Proposed
OTC Act otherwise provides for currency and interest rate swaps.
There is also a risk that these exclusions may have the unintended
consequence of undermining the CFTCs enforcement authority over
retail foreign currency fraud enacted by Congress as part of last
years Farm Bill. Furthermore, although the Proposed OTC Act
includes anti-evasion provisions authorizing the CFTC and SEC to
prescribe rules defining a swap and securitybased swap to include
transactions that have been structured to evade regulation, those
provisions are not specifically tied to the exclusions for foreign
exchange swaps and forwards. As an alternative to these exclusions:
1) the foreign exchange swap exclusion should be stricken so that
all swaps are covered by the Proposed OTC Act; and 2) an
appropriately tailored exclusion for foreign exchange forwards
should be adopted. This narrower exclusion for foreign
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exchange forwards should: 1) not apply to transactions involving
retail customers; 2) be explicitly tied to the anti-evasion
rulemaking authority provided to the CFTC and SEC; and 3) require
compliance with the transparency and business conduct provisions of
the Proposed OTC Act. Attachment A provides proposed statutory text
along these lines. 2. Mandatory Clearing and Exchange Trading of
Standardized Swaps
The Proposed OTC Act provides for mandatory clearing and
exchange trading of standardized swaps. It creates an exception,
however, from the mandatory clearing and trading requirements when
one of the counterparties is not a swap dealer or major swap
participant (and does not meet the eligibility requirements of any
clearinghouse that clears the swaps). This excludes a significant
class of end users from the clearing and mandatory trading
requirement. This major exception may undermine the policy
objective of lowering risk through bringing all standardized OTC
derivatives into centralized clearing. It may also undermine the
policy objective of increasing transparency and market efficiency
through bringing standardized OTC derivatives onto exchanges or
ASEFs. The concern that end-users cannot directly access a
clearinghouse, because they do not meet the eligibility
requirements for clearing membership, can be addressed by the
end-users accessing clearing through an entity that is a clearing
member. That is, end users could establish a client relationship
with a clearing member who would then clear the transaction in a
client account on behalf of the end-user. Furthermore, end users
should be permitted by regulators to use non-cash collateral to
satisfy their margin obligations in appropriate circumstances. This
would allow for a mandatory clearing requirement for standardized
swaps, just as there is a mandatory clearing requirement for all
futures and options on futures. 3. Bankruptcy and Set-Aside
Provisions
The Proposed OTC Act includes important protections with respect
to insolvency risk involving OTC swaps. It would be prudent to
include several additional measures to protect customers and
counterparties in the event of a bankruptcy of a swap dealer.
Specifically, the legislation should impose a mandatory set-aside
requirement with respect to collateral received by swap dealers.
This set-aside requirement would be equivalent to the CEAs
segregation requirement for futures, which has effectively
protected customer funds from loss ever since the CFTC was created
in 1974. As important, the legislation should amend the Bankruptcy
Code to afford, in the event of a swap dealer bankruptcy, swap
counterparties and customers of swap dealers similar protections as
those currently available to futures customers of commodity
brokers. These protections include the transfer of customer funds
to other solvent commodity brokers in the event of a bankruptcy
without violating the automatic stay or being subject to the
bankruptcy trustees avoidance powers, and the special customer
priority in bankruptcy (ahead of all unsecured claims other than
certain administrative expenses of the debtors estate) with respect
to customer property, including segregated funds. Such protections,
if enacted into the Bankruptcy Code with respect
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to swap dealers, along with mandatory set-aside of funds, will
serve to protect counterparties and customers in the event of swap
dealer insolvencies. This will reduce the impact of such
insolvencies on the financial system, and further mitigate the
insolvency risk associated with OTC swaps. Attachment B provides
proposed statutory text along these lines. 4. Multilateral Clearing
Organizations
The Proposed OTC Act sets forth a comprehensive regulatory
regime for clearing swaps. Any entity that clears swaps must
register with the CFTC as a DCO (even if it is registered with the
SEC as a clearing agency), and conversely, any entity that clears
security-based swaps must register with the SEC (even if the entity
is registered with the CFTC as a DCO). A concern arises, though,
because the Proposed OTC Act also retains the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) that permit banks and certain foreign clearinghouses
(collectively called multilateral clearing organizations) to clear
over-the-counter-derivative instruments as defined in FDICIA. The
current FDICIA provisions are inconsistent with the comprehensive
scheme established by the proposed OTC Act. Retaining them could
create a situation where banks and foreign clearinghouse could
clear swaps outside this new regulatory structure and be subject to
potentially lesser standards. These FDICIA clearing provisions
should be repealed. The requirement that swap clearinghouses
register with the CFTC or SEC applies to banks and foreign
clearinghouses, and thus, with respect to swaps, there is no longer
a need for these FDICIA provisions. Further, the universe of
instruments within the definition of an over-the-counter derivative
instrument in FDICIA is larger than the universe of instruments
that would fall within the combined definitions of swap and
security-based swap in the Proposed OTC Act. Swap participants that
want to avoid the comprehensive clearing framework in this
legislation could claim that their transactions are not swaps or
security-based swaps, but rather over-the-counter derivative
instruments as defined in FDICIA. This risk would be avoided by
repealing Sections 408 and 409 of FDICIA. 5. Mixed Swaps
The Proposed OTC Act appears to provide for dual CFTC-SEC
regulation of mixed swaps. That is, if a swap derives its value in
part from a security or narrow-based security index (and is
therefore subject to SEC regulation), and it derives part of its
value from something else such as currency, interest rates,
broad-based security indexes or commodities (and is therefore
subject to CFTC regulation), that swap will be dually regulated by
both agencies. This would be the case whether 90% of the value is
derived from a security and 10% is derived from something else, or
vice versa. Dual regulation of mixed swaps would be a departure
from the approach taken in the rest of the Proposed OTC Act.
Elsewhere, the Proposed OTC Act provides for the CFTC and SEC to
separately administer parallel regulatory regimes with respect to
swaps and security-based
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swaps, respectively, pursuant to uniform rules adopted through
joint rulemakings. Dual regulation, by contrast, suggests that both
agencies will be regulating the same activities, which may yield
duplication and inefficiency. Accordingly, the mixed swap
provisions of the Proposed OTC Act should be stricken. Instead,
these instruments should be subject either to SEC regulation if
their value is based primarily on a security or narrow-based
security index, or to CFTC regulation if their value is based
primarily on something else. Since the Proposed OTC Act requires
the CFTC and SEC to use rulemaking to further define the terms swap
and security-based swap anyway, this rulemaking would be the
appropriate forum for defining the term primarily in this context
so as to provide legal certainty, without burdensome dual
regulation, for mixed swap products. 6. Designated Contract Market
Core Principles
The Proposed OTC Act includes: 1) amendments to clarify current
CEA Core Principle 9 for designated contract markets (DCMs)
regarding execution of transactions; and 2) two new Core
Principles, regarding minimum financial resources and system
safeguards, respectively, which mirror two new Core Principles
being proposed for DCOs as well. Additional measures could be taken
to bolster and streamline the existing Core Principles for DCMs. In
particular, CEA Section 5 includes both Designation Criteria that a
DCM must meet in order to be designated by the CFTC, as well as
separate Core Principles that a DCM must maintain to continue to
operate in that capacity. These Designation Criteria and Core
Principles largely overlap and are redundant of each other.
Further, to the extent there are unique requirements in the
Designation Criteria, some contend that they apply only in the
context of designation applications and not necessarily on an
ongoing basis as do the Core Principles. To address this situation,
the CEAs current Designation Criteria and Core Principles for DCMs
should be replaced with an updated and unified set of Core
Principles. Attachment C provides proposed statutory text along
these lines. (If Congress decides to enact a unified set of DCM
Core Principles, it may want to consider adopting a unified set of
Core Principles for ASEFs, as well. We are available to provide
technical drafting assistance in this regard upon request.) 7.
Retail Off-Exchange Commodity Transactions (Non-Forex)
In last years Farm Bill, Congress enacted a provision commonly
referred to as the Zelener fraud fix. This provision overturned a
ruling by the 7th Circuit Court of Appeals in the Zelener case that
permitted fraudsters to evade the CFTCs anti-fraud authority by
peddling off-exchange foreign currency (forex) contracts to retail
customers that were written to look like spot currency
transactions, but that in reality operated like futures contracts.
Since Congress closed the Zelener loophole, the CFTC has
aggressively pursued enforcement actions to combat this type of
retail forex fraud. As a result, the CFTCs Division of Enforcement
has seen these fraudsters start to migrate to commodities other
than forex, offering the same Zelener-type contract in commodities
that are not covered by the Farm Bills Zelener fraud fix for
forex.
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The Proposed OTC Act addresses this growing problem by including
a broad Zelener fraud fix that extends the CFTCs retail fraud
authority for forex under the Farm Bill to other commodities as
well. This would be a substantial tool in the CFTCs arsenal to
protect retail commodity customers from fraud and abuse. Several
additional measures would provide the public with additional
protections from fraud. Specifically: 1) the timeframe for actual
delivery of a commodity, which would take the transaction outside
the scope of the broad Zelener fraud fix, should be reduced; and 2)
in order to avoid leaving a potential loophole to evade the broad
Zelener fraud fix, the provision should clarify that the term
actual delivery does not include delivery to a third party in a
financed transaction where the commodity is held as collateral.
Attachment D provides proposed statutory text along these lines. 8.
Further Input
Technical comments regarding the statutory text of the Proposed
OTC Act will be provided under separate cover. Provisions
warranting particular focus are the jurisdictional savings clause
in Section 712(b) (page 14), and enforcement authority over swaps
in which a material term is based on the price, yield, value or
volatility of any security or index of securities (page 72).
Another issue of importance is the relationship between the market
regulators and any systemic regulator set up through the other
titles of the Administrations legislative proposals. In particular,
Title VIII regarding Payment, Clearing and Settlement Supervision
raises a significant concern that the regulation of systemically
important clearinghouses and clearing firms could hinder the CFTC
and SEC in their administration of the comprehensive regulatory
scheme for swaps provided for in the Proposed OTC Act. Comments
regarding Title VIII will be provided under separate cover.
Finally, also under consideration are additional proposed
amendments to the CEA. This would include further protecting
consumers in retail off-exchange foreign currency trading in light
of the CFTCs experience in this area. These proposals would be
intended to bolster and enhance the CFTCs existing enforcement and
oversight authorities with respect to the markets. Attachment A:
Proposed amendments to foreign exchange swap and forward exclusions
in the Proposed OTC Act Attachment B: Proposed set-aside and
bankruptcy provisions Attachment C: Proposed new and updated Core
Principles for DCMs Attachment D: Proposed amendments to retail
off-exchange commodity transaction provisions in the Proposed OTC
Act
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ATTACHMENT A FX Swap and Forward Exclusions from Swap Definition
[EXPLANATION The provisions below amend the definition of a swap
that is subject to regulation under the Treasurys Over-the-Counter
Derivatives Markets Act of 2009 by: 1) deleting the exclusion for
foreign exchange swaps and including foreign exchange swaps in the
definition of a swap; and 2) limiting eligibility for the exclusion
for foreign exchange forwards, and providing that eligible foreign
exchange forwards are subject to the reporting and business conduct
standards of the bill.]
(a) Section 1a(35)(A)(iii) (as added by section 711 of the draft
legislation) is amended by inserting foreign exchange swap, after
currency swap,; (b) Section 1a(35)(B) (as added by section 711 of
the draft legislation) is amended by striking clause (ix) and
redesignating clauses (x) through (xii) as clauses (ix) through
(xi), respectively; and (c) Section 1a(35)(B)(ix) (as redesignated
in subsection (b)) is amended to read as follows: (ix) a foreign
exchange forward that meets the requirements of subclause (I), but
only to the extent described in subclause (II) (I) a foreign
exchange forward (aa) in which all parties to the agreement are
eligible contract participants; (bb) that results in actual
delivery of currency; and (cc) that is not structured to evade the
Over-theCounter Derivatives Markets Act of 2009 in violation of
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any rules promulgated by the Commission pursuant to section
711(b)(2) of that Act; (II) shall not be considered a swap except
that (aa) all parties to the agreement (unless the agreement was
cleared) shall report such an agreement either to a swap repository
described in section 21 or, if there is no repository that would
accept the agreement, to the Commission pursuant to section 4r
within such time period as the Commission may by rule or regulation
prescribe; and (bb) any party to the agreement that is a swap
dealer or a major swap participant shall conform to the business
conduct standards contained in section 4s(h)..
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ATTACHMENT B Swap Dealer Set-Aside Requirements [EXPLANATION The
provisions below amend the new Section 4s of the Commodity Exchange
Act in order to detail the set-aside requirements that are proposed
to be imposed on swap dealers. This language could also be used for
set-aside requirements on counterparties to swaps that are
customized and not cleared.]
Section 4s(e) (as added by section 717 of the draft legislation)
is amended by adding after paragraph (4) the following: (5)
SET-ASIDE REQUIREMENTS.No person shall initially be registered as a
swap dealer, and no person shall continue to be registered as a
swap dealer, unless such person, at all times (A) sets aside, in
accordance with such rules, regulations, or orders as the
Commission may promulgate, the following amounts or property for
each swap to which such person is a party and that is not cleared
(i) an amount equal to the minimum margin requirement for such swap
that the Commission may prescribe, by rule, regulation, or order
with respect to such person, pursuant to subparagraph (A); plus
(ii) any additional amount that such person and the counterparty
agree shall be set aside from such persons own funds or property in
order to margin, guarantee, or secure such swap; plus (iii) any
amount that such person receives from its counterparty in order to
margin, guarantee, or secure such swap; plus
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(iv) the greater of (I) any accrued but unpaid losses such
person has incurred in connection with such swap, less any accrued
but unpaid gains such person has earned in connection with such
swap, or (II) zero; less (v) any amount that such person posts with
its counterparty in order to margin, guarantee, or secure such
swap. (B) treats, deals with, and limits its investments of any
amount that such person is required to set aside, pursuant to
clause (i), in accordance with any rule, regulation, or order that
the Commission may promulgate..
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Amendments to the Bankruptcy Code and Corresponding Amendments
to the Commodity Exchange Act Relating to Bankruptcy Issues
[EXPLANATION: Set forth below are draft amendments to the
Bankruptcy Code, which extend to swap dealers, their counterparties
(with respect to customized and uncleared OTC contracts), and their
customers (with respect to standardized and cleared OTC contracts),
the special protections (i.e., transfer and preferential
distribution) that Subchapter IV of Chapter 7 of the Bankruptcy
Code (Subchapter IV) provides to customers of commodity brokers.
Proposed Subchapter VI could, by adding a few analogous provisions,
be extended to cover non-cleared security-based swaps. Also set
forth below are proposed amendments to the Commodity Exchange Act
(the CEA), which amendments define certain entities within the
jurisdiction of the CFTC, which entities are therefore properly
afforded special protections similar to those that Subchapter IV
affords.]
The draft legislation is amended by adding after section 734 the
following:
SEC. 735. DEFINITIONS.Section 1a of the Commodity Exchange Act
(7 U.S.C. 1a) is further amended by adding after paragraph (50) the
following: (51) NON-CLEARED SWAP.The term non-cleared swap means a
swap that is not cleared, as set forth in section 2(j), and for
which at least one counterparty is a non-cleared swap dealer. (52)
NON-CLEARED SWAP DEALER.The term non-cleared swap dealer means an
entity registered pursuant to 4s, which is party to a non-cleared
swap.
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(53) NON-CLEARED SWAP PARTICIPANT.The term non-cleared swap
participant means an entity that (A) is a counterparty to a
non-cleared swap with a non-cleared swap dealer; and (B) is not
itself a non-cleared swap dealer.. SEC. 736. DEBTORS.Section 20 of
the Commodity Exchange Act (7 U.S.C. 24) is amended (a) in
subsection (a) in the matter preceding paragraph (1) by inserting
subchapter IV of after under; and (b) by inserting after subsection
(b) the following: (c) NON-CLEARED SWAP PROVISIONS. (1)
Notwithstanding title 11 of the United States Code, the Commission
may provide, with respect to a non-cleared swap dealer or a
non-cleared swap participant that is a debtor under subchapter VI
of chapter 7 of title 11, by rule or regulation (A) that certain
cash, securities, or other property are to be included in or
excluded from the property that (i) secures non-cleared swaps; and
(ii) is to be (I) distributed to the counterparty of the debtor; or
(II) transferred, along with the non-cleared swaps that such
property secures, to another person, under section 795 of title 11;
(B) if the debtor is a non-cleared swap dealer, the method by which
the business of such debtor is to be conducted or liquidated after
the date of the filing of the petition under subchapter VI of
chapter 7 of title 11;
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(C) any persons to which non-cleared swaps, and property
securing such non-cleared swaps, may be transferred under section
795 of title 11; and (D) the manner in which net equity of a
counterparty to the debtor will be calculated. (2) As used in this
section, the term net equity shall have the meaning assigned to
such term under subchapter VI of chapter 7 of title 11. SEC. 737.
CHAPTER 1 OF THE BANKRUPTCY CODE. (a) Section 101(6) of chapter 1
of title 11 of the United States Code is amended by inserting swap
clearer, after means. (b) Section 109(d) of chapter 1 of title 11
of the United States Code is amended by striking or a commodity
broker and inserting , a commodity broker, or a non-cleared swap
dealer as defined in section 1a of the Commodity Exchange Act (7
U.S.C. 1a). SEC. 738. SUBCHAPTER IV OF CHAPTER 7 OF THE BANKRUPTCY
CODE. (a) Section 761 of subchapter IV of chapter 7 of title 11 of
the United States Code is amended by (1) in paragraph (4) by (A)
amending subparagraph (A) to read as follows: (A) with respect to a
futures commission merchant, contract for the purchase or sale of a
commodity for future delivery on, or subject to, the rules of a
contract market;; (B) redesignating subparagraphs (B) through (J)
as subparagraphs (C) through (K); (C) inserting after subparagraph
(A) the following:
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(B) with respect to a swap clearer, a swap that is submitted to
a derivatives clearing organization for clearing;; and (D) amending
subparagraph (E) (as redesignated by subparagraph (B)) to read as
follows: (E) with respect to a clearing organization, a contract
for the purchase or sale of a commodity for future delivery on, or
subject to the rules of a contract market that is cleared by such
clearing organization, or a commodity option traded on, or subject
to the rules of, a contract market that is cleared by such clearing
organization, or a swap that is cleared by such clearing
organization.; (2) amending paragraph (7) to read as follows: (7)
contract market means a board of trade designated as a contract
market under Section 5 of the Act, including a board of trade
designated as a contract market under Section 5f of the Act;; (3)
in paragraph (8) by striking , future delivery, board of trade,
registered entity, and futures commission merchant and inserting ,
future delivery, board of trade and swap; (4) in paragraph (9) by
(A) redesignating subparagraphs (B) through (E) as subparagraphs
(C) through (F); and (B) inserting after subparagraph (A) the
following: (B) with respect to a swap clearer (i) entity for or
with whom such swap clearer deals and that holds a claim against
such swap clearer on account of a commodity contract made,
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received, acquired, or held by or through such swap clearer in
the ordinary course of such swap clearers business as swap clearer
from or for the account of such entity, which account pertains to
swaps that are submitted to a derivatives clearing organization for
clearing; or (ii) entity that holds a claim against a swap clearer
arising out of (I) the making, liquidation, or change in the value
of a commodity contract; (II) a deposit or payment of cash, a
security, or other property with such swap dealer for the purpose
of making or margining such a commodity contract; or (III) the
liquidation or other termination of such a commodity contract.; (5)
adding at the end the following: (18) futures commission merchant
means an entity registered or required to be registered pursuant to
4d of the Act; (19) swap clearer means a swap dealer, futures
commission merchant, foreign futures commission merchant, leverage
transaction merchant, or commodity options dealer that, directly or
indirectly, submits a swap to a derivatives clearing organization
for clearing; and (20) swap dealer means an entity registered or
required to be registered pursuant to 4s of the Act.. (b) Section
762 of subchapter IV of chapter 7 of title 11 of the United States
Code is amended by
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(1) striking the title and inserting Notice to the Commission,
right to be heard, appointment of trustee, and responsibilities of
trustee; (2) inserting after subsection (b) the following: (c) In a
case under this chapter, the court shall appoint, as trustee for
the liquidation of the business of the debtor, such person as the
Commission, in its sole discretion, specifies. Chapter 3 and
sections 704 and 705 of this title shall apply to the Commission in
the same way and to the same extent that they apply to a United
States trustee. This subsection shall not apply to a debtor that is
a stockbroker or an insured depository institution, as such term is
defined in 3(c) of the Federal Deposit Insurance Act. (d) To the
extent that any commodity broker may also be a non-cleared swap
counterparty, as such term is defined in section 791 of this title,
then such commodity broker may be a debtor only under this
subchapter, and may not be a debtor under subchapter VI of this
chapter. However, to the extent consistent with this subchapter or
as otherwise ordered by the court or the Commission, a trustee in a
case under this chapter shall be subject to the same duties as a
trustee in a case under subchapter VI of this chapter.. SEC. 739.
SUBCHAPTER V OF CHAPTER 7 OF THE BANKRUPTCY CODE. Section 783(a) of
subchapter V of chapter 7 of title 11 of the United States Code is
amended by striking subchapters III and IV and inserting
subchapters III, IV and VI. SEC. 740. SUBCHAPTER VI OF CHAPTER 7 OF
THE BANKRUPTCY CODE.Chapter 7 of title 11 of the United States Code
is amended by inserting after subchapter V the following:
SUBCHAPTER VISWAPS 11 USC 791. Definitions
In this subchapter
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(1) Commission means Commodity Futures Trading Commission; (2)
net equity means, subject to such rules and regulations as the
Commission promulgates under the Commodity Exchange Act, with
respect to the aggregate of all accounts held by the debtor for a
particular non-cleared swap counterparty in the same capacity, the
balance remaining in such accounts immediately after (A) the
transfer or liquidation of all non-cleared swaps to which such
non-cleared swap counterparty in such capacity is party; and (B)
the offset of all obligations that the non-cleared swap
counterparty in such capacity owes to the debtor; (3) non-cleared
swap, non-cleared swap dealer, and non-cleared swap participant
shall have the meanings assigned to those terms in 1a of the
Commodity Exchange Act. (4) non-cleared swap counterparty means (A)
a non-cleared swap dealer; or (B) a non-cleared swap participant;
(5) non-cleared margin property means the margin that has been set
aside by a non-cleared swap counterparty in accordance with 4s of
the Commodity Exchange Act. 11 USC 792. Notice to the Commission,
right to be heard, appointment of trustee
(a) The clerk shall give the notice required by section 342 of
this title to the Commission in a case under this chapter or
chapter 11 involving a non-cleared swap counterparty. (b) The
Commission may, on its own motion, file notice of its appearance in
any case under this chapter or chapter 11 involving a non-cleared
swap counterparty, and may thereafter raise and appear and be heard
on any issue in such a case, and may appeal from any judgment,
order or
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decree in such a case that concerns the timing, amount, or
recipients of any disposition of noncleared margin property. (c) In
a case under this chapter involving a non-cleared swap dealer, the
court shall appoint, as trustee for the liquidation of the business
of the debtor, such person as the Commission, in its sole
discretion, specifies. Chapter 3 and sections 704 and 705 of this
title shall apply to the Commission in the same way and to the same
extent that they apply to a United States trustee. This subsection
shall not apply to a debtor that is (1) a stockbroker or (2) an
insured depository institution, as such term is defined in 3(c) of
the Federal Deposit Insurance Act. 11 USC 793. Treatment of Margin
Accounts
(a) Accounts held by the debtor for a particular non-cleared
swap counterparty in separate capacities shall be treated as
accounts of separate non-cleared swap counterparties. (b) The net
equity in a non-cleared swap counterpartys account may not be
offset against the net equity in the account of any other
non-cleared swap counterparty. 11 USC 794. Voidable Transfers
(a) Except as otherwise provided in this section, any transfer
by the debtor of property that, but for such transfer, would have
been non-cleared margin property, may be avoided by the trustee,
and such property shall be treated as non-cleared margin property,
if and to the extent that the trustee avoids such transfer under
section 544, 545, 547, 548, 549, or 724 (a) of this title. For the
purpose of such sections, the property so transferred shall be
deemed to have been property of the debtor, and, if such transfer
was made to a non-cleared swap counterparty or for a noncleared
swap counterpartys benefit, such non-cleared swap counterparty
shall be deemed, for the purposes of this section, to have been a
creditor.
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(b) Notwithstanding sections 544, 545, 547, 548, 549, and 724
(a) of this title, the trustee may not avoid a transfer made before
[seven] days after the order for relief, if such transfer is
approved by the Commission by rule or order, either before or after
such transfer, and if such transfer is (1) a transfer of a
non-cleared swap and of any non-cleared margin property securing
such non-cleared swap; or (2) the liquidation of a non-cleared
swap. 11 USC 795. Treatment of Non-Cleared Margin Property
(a) The trustee shall distribute non-cleared margin property
ratably to non-cleared swap counterparties on the basis and to the
extent of such non-cleared swap counterparties allowed net equity
claims, and in priority to all other claims, except claims of a
kind specified in section 507 (a)(2) of this title that are
attributable to the administration of non-cleared margin property.
Such distribution shall be in the form of (1) cash; or (2) the
return or transfer of securities. (b)(1) The trustee shall
distribute non-cleared margin property in excess of that
distributed under subsection (a) of this section in accordance with
section 726 of this title. (2) Except as provided in section 510 of
this title, if a non-cleared swap counterparty is not paid the full
amount of such non-cleared swap counterpartys allowed net equity
claim from non-cleared margin property, the unpaid portion of such
claim is a claim entitled to distribution under section 726 of this
title.
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(c)(1) The trustee shall endeavor to transfer non-cleared swaps
and associated non-cleared margin property to one or more solvent
substitute counterparties as soon as practicable, but in any event
shall do so within [seven] days of the order for relief. (2) The
trustee shall, as soon as practicable, but in any event within
[thirty] days of the order for relief (A) liquidate any non-cleared
swap that has not been transferred; (B) calculate the net equity
claim for each non-cleared swap counterparty; and (C) distribute
non-cleared margin property in accordance with subsection (a) of
this section. (3) The court may increase the period specified in
paragraph (2) only upon a demonstration by the trustee that
distribution within such period is impracticable, and then only to
the extent necessary to make such distribution practicable..
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ATTACHMENT C Designated Contract Markets [EXPLANATION The
provisions below strengthen the Commodity Exchange Acts (CEAs)
principles-based regulatory regime for registered futures exchanges
(designated contract markets). Specifically, these provisions
clarify ambiguities in the CEAs existing core principles for
designated contract markets, and re-state them in more specific
terms.]
Section 721 of the proposed legislation is amended to read as
follows:
SEC. 721. CORE PRINCIPLES FOR CONTRACT MARKETS. (a) Section 5(b)
of the Commodity Exchange Act (7 U.S.C. 7(b)) is repealed. (b)
Section 5(d) of the Commodity Exchange Act (7 U.S.C. 7(d)) is
amended to read as follows: (d) CORE PRINCIPLES FOR CONTRACT
MARKETS. (1) IN GENERAL.To be designated as, and to maintain the
designation of a board of trade as a contract market, the board of
trade shall comply with the core principles specified in this
subsection and any requirement that the Commission may impose by
rule or regulation pursuant to section 8a(5). Except where the
Commission determines otherwise by rule or regulation, the board of
trade shall have reasonable discretion in establishing the manner
in which it complies with the core principles. (2) COMPLIANCE WITH
RULES.
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(A) The board of trade shall monitor and enforce compliance with
the rules of the contract market, including access requirements,
the terms and conditions of any contracts to be traded on the
contract market and the contract markets abusive trade practice
prohibitions. (B) The board of trade shall have the capacity to
detect, investigate, and apply appropriate sanctions to, any person
or entity that violates the rules. (C) The rules shall provide the
board of trade with the ability and authority to obtain any
necessary information to perform any of the functions described in
this subsection, including the capacity to carry out such
international informationsharing agreements as the Commission may
require. (3) CONTRACTS NOT READILY SUBJECT TO MANIPULATION.The
board of trade shall list on the contract market only contracts
that are not readily susceptible to manipulation. (4) PREVENTION OF
MARKET DISRUPTION.The board of trade shall have the capacity and
responsibility to prevent manipulation, price distortion, and
disruptions of the delivery or cash-settlement process through
market surveillance, compliance, and enforcement practices and
procedures, including methods for conducting real-time monitoring
of trading and comprehensive and accurate trade reconstructions.
(5) POSITION LIMITATIONS OR ACCOUNTABILITY. (A) To reduce the
potential threat of market manipulation or congestion, especially
during trading in the delivery month, and to eliminate or prevent
excessive speculation as described in section 4a(a), the board of
trade shall adopt
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for each of its contracts, where necessary and appropriate,
position limitations or position accountability for speculators.
(B) For any contract that is subject to a position limitation
established by the Commission pursuant to section 4a(a), the board
of trade shall set its position limitation at a level no higher
than the Commission-established limitation. (6) EMERGENCY
AUTHORITY.The board of trade shall adopt rules to provide for the
exercise of emergency authority, in consultation or cooperation
with the Commission, where necessary and appropriate, including the
authority to (A) liquidate or transfer open positions in any
contract; (B) suspend or curtail trading in any contract; and (C)
require market participants in any contract to meet special margin
requirements. (7) AVAILABILITY OF GENERAL INFORMATION.The board of
trade shall make available to market authorities, market
participants, and the public accurate information concerning (A)
the terms and conditions of the contracts of the contract market;
and (B) the rules, regulations and mechanisms for executing
transactions on or through the facilities of the contract market,
and the rules and specifications describing the operation of the
board of trades electronic matching platform or other trade
execution facility.
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(8) DAILY PUBLICATION OF TRADING INFORMATION.The board of trade
shall make public daily information on settlement prices, volume,
open interest, and opening and closing ranges for actively traded
contracts on the contract market. (9) EXECUTION OF TRANSACTIONS.
(A) The board of trade shall provide a competitive, open, and
efficient market and mechanism for executing transactions that
protects the price discovery process of trading in the board of
trades centralized market. (B) The rules may authorize, for bona
fide business purposes (i) transfer trades or office trades; (ii)
an exchange of (I) futures in connection with a cash commodity
transaction; (II) futures for cash commodities; or (III) futures
for swaps; or (iii) a futures commission merchant, acting as
principal or agent, to enter into or confirm the execution of a
contract for the purchase or sale of a commodity for future
delivery if the contract is reported, recorded, or cleared in
accordance with the rules of the contract market or a derivatives
clearing organization. (10) TRADE INFORMATION.The board of trade
shall maintain rules and procedures to provide for the recording
and safe storage of all identifying trade information in a manner
that enables the contract market to use the information for
purposes of assisting
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in the prevention of customer and market abuses and providing
evidence of any violations of the rules of the contract market.
(11) FINANCIAL INTEGRITY OF TRANSACTIONS.The board of trade shall
establish and enforce rules and procedures for ensuring the
financial integrity of transactions entered into on or through the
facilities of the contract market (including the clearance and
settlement of the transactions with a derivatives clearing
organization), and rules to ensure the financial integrity of any
futures commission merchants and introducing brokers and the
protection of customer funds. (12) PROTECTION OF MARKETS AND MARKET
PARTICIPANTS.The board of trade shall establish and enforce rules
to protect markets and market participants from abusive practices
committed by any party, including abusive practices committed by a
party acting as an agent for a participant, and to promote fair and
equitable trading on the contract market. (13) DISCIPLINARY
PROCEDURES.The board of trade shall establish and enforce
disciplinary procedures that authorize the board of trade to
discipline, suspend, or expel members or market participants that
violate the rules of the board of trade, or similar methods for
performing the same functions, including delegation of the
functions to third parties. (14) DISPUTE RESOLUTION.The board of
trade shall establish and enforce rules regarding and provide
facilities for alternative dispute resolution as appropriate for
market participants and any market intermediaries.
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(15) GOVERNANCE FITNESS STANDARDS.The board of trade shall
establish and enforce appropriate fitness standards for directors,
members of any disciplinary committee, members of the contract
market, and any other persons with direct access to the facility
(including any parties affiliated with any of the persons described
in this paragraph). (16) CONFLICTS OF INTEREST.The board of trade
shall establish and enforce rules to minimize conflicts of interest
in the decision-making process of the contract market and establish
a process for resolving such conflicts of interest. (17)
COMPOSITION OF GOVERNING BOARDS OF CONTRACT MARKETS.The governance
arrangements of the board of trade shall be designed to promote the
objectives of market participants. (18) RECORDKEEPING.The board of
trade shall maintain records of all activities related to the
business of the contract market in a form and manner acceptable to
the Commission for a period of 5 years. (19) ANTITRUST
CONSIDERATIONS.Unless appropriate to achieve the purposes of this
chapter, the board of trade shall avoid (A) adopting any rules or
taking any actions that result in any unreasonable restraints of
trade; or (B) imposing any material anticompetitive burden on
trading on the contract market. (20) SYSTEM SAFEGUARDS.The board of
trade shall
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(A) establish and maintain a program of risk analysis and
oversight to identify and minimize sources of operational risk,
through the development of appropriate controls and procedures, and
the development of automated systems, that are reliable, secure,
and have adequate scalable capacity; (B) establish and maintain
emergency procedures, backup facilities, and a plan for disaster
recovery that allow for the timely recovery and resumption of
operations and the fulfillment of the board of trades
responsibilities and obligations; and (C) periodically conduct
tests to verify that backup resources are sufficient to ensure
continued order processing and trade matching, price reporting,
market surveillance, and maintenance of a comprehensive and
accurate audit trail. (21) FINANCIAL RESOURCES. (A) The board of
trade shall have adequate financial, operational, and managerial
resources to discharge its responsibilities. (B) The board of
trades financial resources shall be considered adequate if their
value exceeds the total amount that would enable the contract
market to cover its operating costs for a period of one year,
calculated on a rolling basis..
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ATTACHMENT D Retail Off-Exchange Commodity Transactions
[EXPLANATION Despite the recent amendments to the CEA enacted as
part of last years Farm Bill, retail off-exchange foreign currency
(forex) trading continues to be a fertile area of fraud and trading
abuse of retail customers. What is more, the CFTC has started to
see these problems migrate to other commodities as well. The
provisions below would continue in place the Farm Bills fraud fix
for Zelener-type futures look-alike contracts in foreign currency,
and extend that fix to contracts in all other commodities. They
also would reaffirm that such retail futures look-alike contracts
must be traded on designated contract markets (except for retail
foreign currency trading, which is permitted under the CFMA).]
The amendments to the Treasury document are shown below in track
changes.
SEC. 730. RETAIL COMMODITY TRANSACTIONS. Section 2(c) of the
Commodity Exchange Act (7 U.S.C. 2(c)) is amended (1) in paragraph
(1), by striking 5a (to the extent provided in section 5a(g), 5b,
5d, or 12(e)(2)(B)) and inserting 5b, or 12(e)(2)(B)); (2) in
paragraph (2), by inserting after subparagraph (C) the following:
(D) RETAIL COMMODITY TRANSACTIONS. (i) This subparagraph shall
apply to any agreement, contract, or transaction in any commodity
that is (I) entered into with, or offered to (even if not entered
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with), a person that is not an eligible contract participant or
eligible commercial entity; and (II) entered into, or offered (even
if not entered into), on a leveraged or margined basis, or financed
by the offeror, the counterparty, or a person acting in concert
with the offeror or counterparty on a similar basis. (ii) Clause
(i) shall not apply to (I) an agreement, contract, or transaction
described in that is subject to paragraph (1) or subparagraphs (A),
(B), or (C), including any agreement, contract, or transaction
specifically excluded from subparagraph (A), (B), or (C); (II) any
security; (III) a contract of sale that (aa) results in actual
delivery within 28 days or such other period as the Commission may
determine by rule or regulation based upon the typical commercial
practice in cash or spot markets for the commodity involved; or
(bb) creates an enforceable obligation to deliver between a seller
and a buyer that have the ability to deliver and accept delivery,
respectively, in connection with their line of business;. (IV) an
agreement, contract, or transaction that is listed on
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a national securities exchange registered under section 6(a) of
the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or (V) an
identified banking product, as defined in section 402(b) of the
Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)).
(iii) Sections 4(a), 4(b) and 4b shall apply to any agreement,
contract or transaction described inthat is subject to clause (i),
that is not excluded from clause (i) by clause (ii), as if the
agreement, contract, or transaction were a contract of sale of a
commodity for future delivery. (iv) This subparagraph shall not be
construed to limit any jurisdiction that the Commission may
otherwise have under any other provision of this Act over an
agreement, contract, or transaction that is a contract of sale of a
commodity for future delivery.; (v) This subparagraph shall not be
construed to limit any jurisdiction that the Commission or the
Securities and Exchange Commission may otherwise have under any
other provisions of this Act with respect to security futures
products and persons effecting transactions in security futures
products.; (vi) For the purposes of this subparagraph, an
agricultural producer, packer, or handler shall be considered an
eligible commercial entity for any agreement, contract, or
transaction for a commodity in connection with its line of
business.. (vii) For the purposes of clause (ii)(III)(aa), the term
actual
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delivery shall not include delivery to a third party in a
financed transaction where the commodity is held as
collateral..
