Certain Entity-Level Requirements Notice Posted in Federal Register

Targeted News Service

WASHINGTON, Dec. 27 -- The Commodity Futures Trading Commission published the following notice in the Federal Register:

Comparability Determination for the European Union: Certain Entity-Level Requirements

A Notice by the Commodity Futures Trading Commission on 12/27/2013

Action

Notice Of Comparability Determination For Certain Requirements Under The European Market Infrastructure Regulation.

Summary

The following is the analysis and determination of the Commodity Futures Trading Commission ("Commission") regarding certain parts of a joint request by the European Commission ("EC") and the European Securities and Markets Authority ("ESMA") that the Commission determine that laws and regulations applicable in the European Union ("EU") provide a sufficient basis for an affirmative finding of comparability with respect to the following regulatory obligations applicable to swap dealers ("SDs") and major swap participants ("MSPs") registered with the Commission: (i) Chief compliance officer; (ii) risk management; and (iii) swap data recordkeeping; (collectively, the "Internal Business Conduct Requirements").

DATES:

Effective Date: This determination will become effective immediately upon publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Gary Barnett, Director, 202-418-5977, [email protected], Frank Fisanich, Chief Counsel, 202-418-5949, [email protected], and Ellie Jester, Special Counsel, 202-418-5874, [email protected], Division of Swap Dealer and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

On July 26, 2013, the Commission published in the Federal Register its "Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations" (the "Guidance").1 In the Guidance, the Commission set forth its interpretation of the manner in which it believes that section 2(i) of the Commodity Exchange Act ("CEA") applies Title VII's swap provisions to activities outside the U.S. and informed the public of some of the policies that it expects to follow, generally speaking, in applying Title VII and certain Commission regulations in contexts covered by section 2(i). Among other matters, the Guidance generally described the policy and procedural framework under which the Commission would consider a substituted compliance program with respect to Commission regulations applicable to entities located outside the U.S. Specifically, the Commission addressed a recognition program where compliance with a comparable regulatory requirement of a foreign jurisdiction would serve as a reasonable substitute for compliance with the attendant requirements of the CEA and the Commission's regulations promulgated thereunder.

In addition to the Guidance, on July 22, 2013, the Commission issued the Exemptive Order Regarding Compliance with Certain Swap Regulations (the "Exemptive Order").2 Among other things, the Exemptive Order provided time for the Commission to consider substituted compliance with respect to six jurisdictions where non-U.S. SDs are currently organized. In this regard, the Exemptive Order generally provided non-U.S. SDs and MSPs in the six jurisdictions with conditional relief from certain requirements of Commission regulations (those referred to as "Entity-Level Requirements" in the Guidance) until the earlier of December 21, 2013, or 30 days following the issuance of a substituted compliance determination.3

On May 7, 2013, the EC and ESMA (collectively, the "applicant") submitted a request that the Commission determine that laws and regulations applicable in the EU provide a sufficient basis for an affirmative finding of comparability with respect to certain Entity-Level Requirements, including the Internal Business Conduct Requirements.4 The applicant provided Commission staff with an updated submission on August 6, 2013. On November 11, 2013, the application was further supplemented with corrections and additional materials. The following is the Commission's analysis and determination regarding the Internal Business Conduct Requirements, as detailed below.5

II. Background

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act6 ("Dodd-Frank Act" or "Dodd-Frank"), which, in Title VII, established a new regulatory framework for swaps.

Section 722(d) of the Dodd-Frank Act amended the CEA by adding section 2(i), which provides that the swap provisions of the CEA (including any CEA rules or regulations) apply to cross-border activities when certain conditions are met, namely, when such activities have a "direct and significant connection with activities in, or effect on, commerce of the United States" or when they contravene Commission rules or regulations as are necessary or appropriate to prevent evasion of the swap provisions of the CEA enacted under Title VII of the Dodd-Frank Act.7 In the three years since its enactment, the Commission has finalized 68 rules and orders to implement Title VII of the Dodd-Frank Act. The finalized rules include those promulgated under section 4s of the CEA, which address registration of SDs and MSPs and other substantive requirements applicable to SDs and MSPs. With few exceptions, the delayed compliance dates for the Commission's regulations implementing such section 4s requirements applicable to SDs and MSPs have passed and new SDs and MSPs are now required to be in full compliance with such regulations upon registration with the Commission.8 Notably, the requirements under Title VII of the Dodd-Frank Act related to SDs and MSPs by their terms apply to all registered SDs and MSPs, irrespective of where they are located, albeit subject to the limitations of CEA section 2(i).

To provide guidance as to the Commission's views regarding the scope of the cross-border application of Title VII of the Dodd-Frank Act, the Commission set forth in the Guidance its interpretation of the manner in which it believes that Title VII's swap provisions apply to activities outside the U.S. pursuant to section 2(i) of the CEA. Among other matters, the Guidance generally described the policy and procedural framework under which the Commission would consider a substituted compliance program with respect to Commission regulations applicable to entities located outside the U.S. Specifically, the Commission addressed a recognition program where compliance with a comparable regulatory requirement of a foreign jurisdiction would serve as a reasonable substitute for compliance with the attendant requirements of the CEA and the Commission's regulations. With respect to the standards forming the basis for any determination of comparability ("comparability determination" or "comparability finding"), the Commission stated:

In evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the applicable requirement(s) under the CEA and Commission regulations, the Commission will take into consideration all relevant factors, including but not limited to, the comprehensiveness of those requirement(s), the scope and objectives of the relevant regulatory requirement(s), the comprehensiveness of the foreign regulator's supervisory compliance program, as well as the home jurisdiction's authority to support and enforce its oversight of the registrant. In this context, comparable does not necessarily mean identical. Rather, the Commission would evaluate whether the home jurisdiction's regulatory requirement is comparable to and as comprehensive as the corresponding U.S. regulatory requirement(s).9

Upon a comparability finding, consistent with CEA section 2(i) and comity principles, the Commission's policy generally is that eligible entities may comply with a substituted compliance regime, subject to any conditions the Commission places on its finding, and subject to the Commission's retention of its examination authority and its enforcement authority.10

In this regard, the Commission notes that a comparability determination cannot be premised on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction, but rather on whether information relevant to the Commission's oversight of an SD or MSP would be directly available to the Commission and any U.S. prudential regulator of the SD or MSP.11 The Commission's direct access to the books and records required to be maintained by an SD or MSP registered with the Commission is a core requirement of the CEA [12] and the Commission's regulations, [13] and is a condition to registration. [14]

III. Regulation of SDs and MSPs in the EU

On May 7, 2013, the EC and ESMA submitted a request that the Commission assess the comparability of laws and regulations applicable in the EU with the CEA and the Commission's regulations promulgated thereunder. The applicant provided Commission staff with an updated submission on August 6, 2013. On November 11, 2013, the application was further supplemented with corrections and additional materials.

As represented to the Commission by the applicant, swap activities in the EU member states is governed primarily by the European Market Infrastructure Regulation ("EMIR"). [15]

EMIR and the Regulatory Technical Standards ("RTS") are regulations with immediate, binding, and direct effect in all EU member states (i.e., no transposition into domestic law required). EMIR entered into force on August 16, 2012.

In addition, as represented to the Commission by the applicant, swap activities in the EU are also governed by a number of regulatory requirements other than EMIR.

Markets in Financial Instruments Directive ("MiFID)": [16] MiFID is a directive and in accordance with the Treaty on the Functioning of the European Union, all Member States of the EU are legally bound to implement the provisions of MiFID by November 1, 2007, by transposing them into their national laws. MiFID applies in particular to investment firms, which comprise any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. Investment services and activities means any of the services and activities listed in Section A of Annex I of MiFID relating to any of the instruments listed in Section C of Annex I of MiFID. Section C of Annex 1 refers explicitly to swaps as well as "other derivative financial instruments".

Capital Requirements Directive ("CRD"): [17] CRD is also a directive and in accordance with the Treaty on the Functioning of the European Union, all Member States of the EU are legally bound to implement the provisions of CRD by December 31, 2006, by transposing them into their national laws. [18]

Due to the requirement that each EU Member State transpose MiFID and CRD into its national law, the comparability determinations in this notice are based on the representations of the applicant to the Commission that (i) each Member State of the EU where an SD or MSP would seek to rely on substituted compliance on the basis of the comparability of the MiFID or CRD standards has completed the process of transposing MiFID and CRD into its national law; [19] (ii) such national laws have transposed MiFID and CRD without change in any aspect that is material for a comparability determination contained herein; and (iii) such transposed law is in full force and effect as of the time that any SD or MSP seeks to rely on a relevant comparability determination contained herein. The Commission notes that to the extent that any of the foregoing representations are incorrect, an affected comparability determination will not be valid.

In addition to MiFID and CRD, the applicant noted that there are a number of proposed laws and regulations that, when implemented, would affect the regulation of SDs and MSPs in the EU. [20]

IV. Comparable and Comprehensiveness Standard

The Commission's comparability analysis will be based on a comparison of specific foreign requirements against the specific related CEA provisions and Commission regulations as categorized and described in the Guidance. As explained in the Guidance, within the framework of CEA section 2(i) and principles of international comity, the Commission may make a comparability determination on a requirement-by-requirement basis, rather than on the basis of the foreign regime as a whole. [21] In making its comparability determinations, the Commission may include conditions that take into account timing and other issues related to coordinating the implementation of reform efforts across jurisdictions. [22]

In evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the corollary requirement(s) under the CEA and Commission regulations, the Commission will take into consideration all relevant factors, including, but not limited to:

- The comprehensiveness of those requirement(s),

- The scope and objectives of the relevant regulatory requirement(s),

- The comprehensiveness of the foreign regulator's supervisory compliance program, and

- The home jurisdiction's authority to support and enforce its oversight of the registrant. [23]

In making a comparability determination, the Commission takes an "outcome-based" approach. An "outcome-based" approach means that when evaluating whether a foreign jurisdiction's regulatory requirements are comparable to, and as comprehensive as, the corollary areas of the CEA and Commission regulations, the Commission ultimately focuses on regulatory outcomes (i.e., the home jurisdiction's requirements do not have to be identical). [24] This approach recognizes that foreign regulatory systems differ and their approaches vary and may differ from how the Commission chose to address an issue, but that the foreign jurisdiction's regulatory requirements nonetheless achieve the regulatory outcome sought to be achieved by a certain provision of the CEA or Commission regulation.

In doing its comparability analysis the Commission may determine that no comparability determination can be made [25] and that the non-U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to its foreign branches, or non-registrant, to the extent applicable under the Guidance, may be required to comply with the CEA and Commission regulations.

The starting point in the Commission's analysis is a consideration of the regulatory objectives of the foreign jurisdiction's regulation of swaps and swap market participants. As stated in the Guidance, jurisdictions may not have swap specific regulations in some areas, and instead have regulatory or supervisory regimes that achieve comparable and comprehensive regulation to the Dodd-Frank Act requirements, but on a more general, entity-wide, or prudential, basis. [26] In addition, portions of a foreign regulatory regime may have similar regulatory objectives, but the means by which these objectives are achieved with respect to swaps market activities may not be clearly defined, or may not expressly include specific regulatory elements that the Commission concludes are critical to achieving the regulatory objectives or outcomes required under the CEA and the Commission's regulations. In these circumstances, the Commission will work with the regulators and registrants in these jurisdictions to consider alternative approaches that may result in a determination that substituted compliance applies. [27]

Finally, the Commission will generally rely on an applicant's description of the laws and regulations of the foreign jurisdiction in making its comparability determination. The Commission considers an application to be a representation by the applicant that the laws and regulations submitted are in full force and effect, that the description of such laws and regulations is accurate and complete, and that, unless otherwise noted, the scope of such laws and regulations encompasses the swaps activities [28] of SDs and MSPs [29] in the relevant jurisdictions. [30] Further, as stated in the Guidance, the Commission expects that an applicant would notify the Commission of any material changes to information submitted in support of a comparability determination (including, but not limited to, changes in the relevant supervisory or regulatory regime) as, depending on the nature of the change, the Commission's comparability determination may no longer be valid. [31]

The Guidance provided a detailed discussion of the Commission's policy regarding the availability of substituted compliance [32] for the Internal Business Conduct Requirements. [33]

V. Supervisory Arrangement

In the Guidance, the Commission stated that, in connection with a determination that substituted compliance is appropriate, it would expect to enter into an appropriate memorandum of understanding ("MOU") or similar arrangement [34] with the relevant foreign regulator(s). Although existing arrangements would indicate a foreign regulator's ability to cooperate and share information, "going forward, the Commission and relevant foreign supervisor(s) would need to establish supervisory MOUs or other arrangements that provide for information sharing and cooperation in the context of supervising [SDs] and MSPs." [35]

The Commission is in the process of developing its registration and supervision regime for provisionally-registered SDs and MSPs. This new initiative includes setting forth supervisory arrangements with authorities that have joint jurisdiction over SDs and MSPs that are registered with the Commission and subject to U.S. law. Given the developing nature of the Commission's regime and the fact that the Commission has not negotiated prior supervisory arrangements with certain authorities, the negotiation of supervisory arrangements presents a unique opportunity to develop close working relationships between and among authorities, as well as highlight any potential issues related to cooperation and information sharing.

Accordingly, the Commission is negotiating such a supervisory arrangement with each applicable foreign regulator of an SD or MSP. The Commission expects that the arrangement will establish expectations for ongoing cooperation, address direct access to information, [36] provide for notification upon the occurrence of specified events, memorialize understandings related to on-site visits, [37] and include protections related to the use and confidentiality of non-public information shared pursuant to the arrangement.

These arrangements will establish a roadmap for how authorities will consult, cooperate, and share information. As with any such arrangement, however, nothing in these arrangements will supersede domestic laws or resolve potential conflicts of law, such as the application of domestic secrecy or blocking laws to regulated entities.

VI. Comparability Determination and Analysis

The following section describes the requirements imposed by specific sections of the CEA and the Commission's regulations for the Internal Business Conduct Requirements that are the subject of this comparability determination, and the Commission's regulatory objectives with respect to such requirements. Immediately following a description of the requirement(s) and regulatory objective(s) of the specific Internal Business Conduct Requirements that the requestor submitted for a comparability determination, the Commission provides a description of the foreign jurisdiction's comparable laws, regulations, or rules and whether such laws, regulations, or rules meet the applicable regulatory objective.

The Commission's determinations in this regard and the discussion in this section are intended to inform the public of the Commission's views regarding whether the foreign jurisdiction's laws, regulations, or rules may be comparable and comprehensive as those requirements in the Dodd-Frank Act (and Commission regulations promulgated thereunder) and therefore, may form the basis of substituted compliance. In turn, the public (in the foreign jurisdiction, in the United States, and elsewhere) retains its ability to present facts and circumstances that would inform the determinations set forth in this notice.

As was stated in the Guidance, the Commission recognizes the complex and dynamic nature of the global swap market and the need to take an adaptable approach to cross-border issues, particularly as it continues to work closely with foreign regulators to address potential conflicts with respect to each country's respective regulatory regime. In this regard, the Commission may review, modify, or expand the determinations herein in light of comments received and future developments.

A. Chief Compliance Officer (section 3.3).

Commission Requirement: Implementing section 4s(k) of the CEA, Commission regulation 3.3 generally sets forth the following requirements for SDs and MSPs:

- An SD or MSP must designate an individual as Chief Compliance Officer ("CCO");

- The CCO must have the responsibility and authority to develop the regulatory compliance policies and procedures of the SD or MSP;

- The CCO must report to the board of directors or the senior officer of the SD or MSP;

- Only the board of directors or a senior officer may remove the CCO;

- The CCO and the board of directors must meet at least once per year;

- The CCO must have the background and skills appropriate for the responsibilities of the position;

- The CCO must not be subject to disqualification from registration under sections 8a(2) or (3) of the CEA;

- Each SD and MSP must include a designation of a CCO in its registration application;

- The CCO must administer the regulatory compliance policies of the SD or MSP;

- The CCO must take reasonable steps to ensure compliance with the CEA and Commission regulations, and resolve conflicts of interest;

- The CCO must establish procedures for detecting and remediating non-compliance issues;

- The CCO must annually prepare and sign an "annual compliance report" containing: (i) A description of policies and procedures reasonably designed to ensure compliance; (ii) an assessment of the effectiveness of such policies and procedures; (iii) a description of material non-compliance issues and the action taken; (iv) recommendations of improvements in compliance policies; and (v) a certification by the CCO or chief executive officer that, to the best of such officer's knowledge and belief, the annual report is accurate and complete under penalty of law; and

- The annual compliance report must be furnished to the CFTC within 90 days after the end of the fiscal year of the SD or MSP, simultaneously with its annual financial condition report.

Regulatory Objective: The Commission believes that compliance by SDs and MSPs with the CEA and the Commission's rules greatly contributes to the protection of customers, orderly and fair markets, and the stability and integrity of the market intermediaries registered with the Commission. The Commission expects SDs and MSPs to strictly comply with the CEA and the Commission's rules and to devote sufficient resources to ensuring such compliance. Thus, through its CCO rule, the Commission seeks to ensure firms have designated a qualified individual as CCO that reports directly to the board of directors or the senior officer of the firm and that has the independence, responsibility, and authority to develop and administer compliance policies and procedures reasonably designed to ensure compliance with the CEA and Commission regulations, resolve conflicts of interest, remediate noncompliance issues, and report annually to the Commission and the board or senior officer on compliance of the firm.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as section 4s(k) of the CEA and Commission regulation 3.3.

MiFID Articles 13(2), 13(3) and 18 set forth the general obligation for investment firms (which would include SDs) to establish adequate policies and procedures to ensure compliance with requirements and to identify and properly manage conflicts of interests.

MiFID implementing measure (Commission Directive "MiFID L2D") Articles 5, 6, 9, 21 to 23 clarify, along with ESMA guidelines, the application of some aspects of the MiFID articles, to ensure common, uniform, and consistent application of MiFID and the MiFID L2D across the EU. The main principles are the following:

- Investment firms must appoint a person as compliance officer ("CO") responsible for the compliance function ("CF");

- The CO must have sufficiently broad knowledge/experience and high level of expertise to assume responsibility for the CF and ensure it is effective;

- Written reports must be sent to senior management (which includes boards of directors) on a regular basis (at least annually as well as on an ad-hoc basis when significant compliance matters are discovered);

- The CO must only be appointed and replaced by senior management or supervisory function;

- The CO, but also compliance staff, must have specific knowledge, skills and expertise relevant to the tasks and to the business of the firm;

- Supervisors must ensure compliance with above requirements in the authorization process of investment firms and during on-going supervision;

- CF, under the responsibility of the CO, must monitor and assess the adequacy and effectiveness of measures and procedures to ensure compliance with regulatory obligations and to address any deficiencies, including the obligation to identify and manage conflicts of interests and maintain effective conflicts of interest policies;

- Written report to address, at least annually: The description of implementation and effectiveness of the overall control environment; the summary of major findings of the review of policies and procedures; the summary of inspections and reviews carried out; the risk identified; and the advice on any necessary remedial action;

- The CF must be involved in all material non-routine correspondence with supervisors;

- The CF must be involved in all significant modifications of the organization of the investment firm;

- The CF must be independent;

- Senior management retains ultimate responsibility to ensure firms' compliance with obligations; and

- Investment firms must arrange for all records necessary to enable supervisors to monitor compliance with requirements.

Commission Determination: The Commission finds that the MiFID standards specified above are generally identical in intent to section 3.3 by seeking to ensure firms have designated a qualified individual as the compliance officer that reports directly to a sufficiently senior function of the firm and that has the independence, responsibility, and authority to develop and administer compliance policies and procedures reasonably designed to ensure compliance with the CEA and Commission regulations, resolve conflicts of interest, remediate noncompliance issues, and report annually on compliance of the firm.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the CCO requirements of MiFID are comparable to and as comprehensive as section 3.3, with the exception of section 3.3(f) concerning certifying and furnishing an annual compliance report to the Commission.

Notwithstanding that the Commission has not determined that the requirements of MiFID are comparable to and as comprehensive as section 3.3(f), any SD or MSP to which both section 3.3 and the MiFID standards specified above are applicable would generally be deemed to be in compliance with section 3.3(f) if that SD or MSP complies with the MiFID standards specified above, subject to certifying and furnishing the Commission with the annual report required under the MiFID standards specified above in accordance with section 3.3(f). The Commission notes that it generally expects registrants to submit required reports to the Commission in the English language.

B. Risk Management Duties (sections 23.600-23.609)

Section 4s(j) of the CEA requires each SD and MSP to establish internal policies and procedures designed to, among other things, address risk management, monitor compliance with position limits, prevent conflicts of interest, and promote diligent supervision, as well as maintain business continuity and disaster recovery programs. [38] The Commission adopted regulations 23.600, 23.601, 23.602, 23.603, 23.605, and 23.606 to implement the statute. [39] The Commission also adopted regulation 23.609, which requires certain risk management procedures for SDs or MSPs that are clearing members of a derivatives clearing organization ("DCO"). [40] Collectively, these requirements help to establish a robust and comprehensive internal risk management program for SDs and MSPs with respect to their swaps activities, [41] which is critical to effective systemic risk management for the overall swaps market. In making its comparability determination with regard to these risk management duties, the Commission will consider each regulation individually. [42]

1. Risk Management Program for SDs and MSPs (section 23.600)

Commission Requirement: Implementing section 4s(j)(2) of the CEA, Commission regulation 23.600 generally requires that:

- Each SD or MSP must establish and enforce a risk management program consisting of a system of written risk management policies and procedures designed to monitor and manage the risks associated with the swap activities of the firm, including without limitation, market, credit, liquidity, foreign currency, legal, operational, and settlement risks, and furnish a copy of such policies and procedures to the CFTC upon application for registration and upon request;

- The SD or MSP must establish a risk management unit independent from the business trading unit;

- The risk management policies and procedures of the SD or MSP must be approved by the firm's governing body;

- Risk tolerance limits and exceptions therefrom must be reviewed and approved quarterly by senior management and annually by the governing body;

- The risk management program must have a system for detecting breaches of risk tolerance limits and alerting supervisors and senior management, as appropriate;

- The risk management program must account for risks posed by affiliates and be integrated at the consolidated entity level;

- The risk management unit must provide senior management and the governing body with quarterly risk exposure reports and upon detection of any material change in the risk exposure of the SD or MSP;

- Risk exposure reports must be furnished to the CFTC within five business days following provision to senior management;

- The risk management program must have a new product policy for assessing the risks of new products prior to engaging in such transactions;

- The risk management program must have policies and procedures providing for trading limits, monitoring of trading, processing of trades, and separation of personnel in the trading unit from personnel in the risk management unit; and

- The risk management program must be reviewed and tested at least annually and upon any material change in the business of the SD or MSP.

Regulatory Objective: Through the required system of risk management, the Commission seeks to ensure that firms are adequately managing the risks of their swaps activities to prevent failure of the SD or MSP, which could result in losses to counterparties doing business with the SD or MSP, and systemic risk more generally. To this end, the Commission believes the risk management program of an SD or MSP must contain at least the following critical elements:

- Identification of risk categories;

- Establishment of risk tolerance limits for each category of risk and approval of such limits by senior management and the governing body;

- An independent risk management unit to administer a risk management program; and

- Periodic oversight of risk exposures by senior management and the governing body.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as section 4s(j)(2) of the CEA and Commission regulation 23.600.

- Under MiFID Article 13(5) & MiFID L2D Article 5, investment firms must have effective procedures for risk assessment, effective control, and safeguard arrangements for information processing systems, sound administrative and accounting procedures, and internal control mechanisms.

- Under MiFID L2D Article 6, investment firms (including SDs) must, subject to a proportionality principle dependent on the size and nature of a firm's business, establish and maintain an independent risk management function that is responsible for the implementation of risk management policies and procedures and that provides reports and advice to senior management regarding risk management.

- MiFID L2D Article 9: Senior management (which includes boards of directors) must take responsibility for firms' compliance with regulatory obligations including risk management.

- MiFID L2D Article 9: Senior management must receive on a frequent basis, and at least annually, written reports on risk management issues, including any appropriate action taken in the event of deficiencies;

- MiFID L2D Article 7: Investment firms must identify the risks relating to the firms' activities, processes and systems, and set the level of risk tolerated by the firm in appropriate instances; must adopt effective arrangements, processes, and mechanisms to manage the risks relating to the firm's activities, processes and systems, in light of the established level of risk tolerance; must monitor the adequacy and effectiveness of its risk management policies and procedures, the level of compliance with arrangements, processes and mechanisms for risk management; and must monitor the adequacy and effectiveness of measures taken to address any deficiencies. The risk management strategy should address credit and counterparty risk; residual risk; market risk; interest rate risk; operational risk; liquidity risk; securitization risk; concentration risk; and risk of excessive leverage.

- Directive 2002/87/EC Article 9: In the case of financial conglomerates, risk management processes must include approval and periodical review of the strategies and policies by governing bodies with respect to all the risks assumed; adequate capital adequacy policies to anticipate impacts on risk profiles and capital requirements; risk monitoring and controls at the level of the conglomerates.

- ESMA Guidelines on compliance function requirements (ESMA/2012/388) specify that the assessment of compliance risk should involve the compliance function, including in the case of new business lines or new financial products. Identified risks should be reviewed on a regular basis as well as ad-hoc when necessary to ensure that any emerging risks are taken into consideration. A monitoring program covering all areas of the investment firm's activities should ensure that compliance risk is comprehensively monitored. Specific measures ensure the effectiveness, the permanence and the independence of the compliance function.

- MiFID L2D Articles 21 to 23: Requirements on conflicts of interests include the obligation to adopt measures to ensure the appropriate level of independence to any person working in the firm. This includes measures preventing or controlling the exchange of information, separating the supervision of relevant persons, preventing or limiting the possibility for a person to exercise inappropriate influence over others. Furthermore, firms must ensure that performance of multiple functions does not prevent persons from acting soundly, honestly, and professionally.

- MiFID Article 50: Supervisors can access documents for the discharge of their supervisory duties.

- CRD Annex V: Credit institutions and investment firms must have in place risk management procedures that cover credit, operational, counterparty, market, concentration, securitization, liquidity and interest rate risk.

- CRD Article 22: Credit institution's conformity with regulation is the responsibility of the institution's management body and is subject to ongoing supervisory review. [43]

Commission Determination: The Commission finds that the MiFID, ESMA, and CRD standards specified above are generally identical in intent to section 23.600 by requiring a system of risk management that seeks to ensure that firms are adequately managing the risks of their swaps activities to prevent failure of the SD or MSP, which could result in losses to counterparties doing business with the SD or MSP, and systemic risk more generally. Specifically, the Commission finds that the MiFID, ESMA, and CRD standards specified above comprehensively require SDs and MSPs to establish risk management programs containing the following critical elements:

- Identification of risk categories;

- Establishment of risk tolerance limits for each category of risk and approval of such limits by senior management and the governing body;

- An independent risk management unit to administer a risk management program; and

- Periodic oversight of risk exposures by senior management and the governing body.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the risk management program requirements of MiFID, ESMA, and CRD, as specified above, are comparable to and as comprehensive as section 23.600, with the exception of section 23.600(c)(2) concerning the requirement that each SD and MSP produce a quarterly risk exposure report and provide such report to its senior management, governing body, and the Commission.

Notwithstanding that the Commission has not determined that the requirements of MiFID, ESMA, and CRD are comparable to and as comprehensive as section 23.600(c)(2), any SD or MSP to which both section 23.600 and the MiFID, ESMA, and CRD standards specified above are applicable would generally be deemed to be in compliance with section 23.600(c)(2) if that SD or MSP complies with the MiFID, ESMA, and CRD standards specified above, subject to compliance with the requirement that it produce quarterly risk exposure reports and provide such reports to its senior management, governing body, and the Commission in accordance with section 23.600(c)(2). The Commission notes that it generally expects reports furnished to the Commission by registrants to be in the English language.

2. Monitoring of Position Limits (section 23.601)

Commission Requirement: Implementing section 4s(j)(1) of the CEA, Commission regulation 23.601 requires each SD or MSP to establish and enforce written policies and procedures that are reasonably designed to monitor for, and prevent violations of, applicable position limits established by the Commission, a designated contract market ("DCM"), or a swap execution facility ("SEF"). [44] The policies and procedures must include an early warning system and provide for escalation of violations to senior management (including the firm's governing body).

Regulatory Objective: Generally, position limits are implemented to ensure market integrity, fairness, orderliness, and accurate pricing in the commodity markets. Commission regulation 23.601 thus seeks to ensure that SDs and MSPs have established the necessary policies and procedures to monitor the trading of the firm to prevent violations of applicable position limits established by the Commission, a DCM, or a SEF. As part of its Risk Management Program, section 23.601 is intended to ensure that established position limits are not breached by the SD or MSP.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as section 4s(j)(1) of the CEA and Commission regulation 23.601.

The applicant requests that the Commission look to the general risk management function requirements outlined in subsection VI(B)(1) (Risk Management Program) above and the general compliance function requirements outlined in subsection VI(A) (Chief Compliance Officer) above for comparable EU law and regulations that would require an SD or MSP to monitor for and comply with applicable position limits. For example:

- MiFID L2D: A firm's compliance function, under the responsibility of the compliance officer, must monitor and assess the adequacy and effectiveness of measures and procedures to ensure compliance with regulatory obligations and to address any deficiencies, including obligations to identify and manage conflicts of interests and maintain effective conflicts of interest policies; and

- MiFID L2D Article 9: Senior management (which includes boards of directors) must take responsibility for firms' compliance with regulatory obligations including risk management.

The applicant states that the foregoing MiFID standards to monitor the effectiveness of procedures to ensure compliance with regulatory obligations includes regulatory obligations of an SD or MSP, that is subject to such MiFID standards, to comply with applicable standards under the CEA, Commission regulations, and position limits set by the Commission, a DCM, or a SEF.

Commission Determination: The Commission finds that the MiFID standards specified above are generally identical in intent to section 23.601 by requiring SDs and MSPs to establish necessary policies and procedures to monitor the trading of the firm to prevent violations of applicable position limits established by applicable laws and regulations, including those of the Commission, a DCM, or a SEF. Specifically, the Commission finds that the MiFID standards specified above, while not specific to the issue of position limit compliance, nevertheless comprehensively require SDs and MSPs to monitor for regulatory compliance generally, which includes monitoring for compliance with position limits set pursuant to applicable law and the responsibility of senior management (including the board of directors) for such compliance.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the compliance monitoring requirements of MiFID, as specified above, are comparable to and as comprehensive as section 23.601. For the avoidance of doubt, the Commission notes that this determination may not be relied on to relieve an SD or MSP from its obligation to strictly comply with any applicable position limit established by the Commission, a DCM, or a SEF.

3. Diligent Supervision (section 23.602)

Commission Requirement: Commission regulation 23.602 implements section 4s(h)(1)(B) of the CEA and requires each SD and MSP to establish a system to diligently supervise all activities relating to its business performed by its partners, members, officers, employees, and agents. The system must be reasonably designed to achieve compliance with the CEA and CFTC regulations. Commission regulation 23.602 requires that the supervisory system must specifically designate qualified persons with authority to carry out the supervisory responsibilities of the SD or MSP for all activities relating to its business as an SD or MSP.

Regulatory Objective: The Commission's diligent supervision rule seeks to ensure that SDs and MSPs strictly comply with the CEA and the Commission's rules. To this end, through section 23.602, the Commission seeks to ensure that each SD and MSP not only establishes the necessary policies and procedures that would lead to compliance with the CEA and Commission regulations, but also establishes an effective system of internal oversight and enforcement of such policies and procedures to ensure that such policies and procedures are diligently followed.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as section 4s(h)(1)(B) of the CEA and Commission regulation 23.602.

Under MiFID Article 13, MiFID L2D Articles 5, 6, 11, and 12, and ESMA/2012/388, firms must establish policies and procedures sufficient to ensure compliance of the firm, as well as its managers, employees and agents, with all of their compliance obligations as well as rules on personal transactions by these persons. The applicant represents to the Commission that the compliance obligations of firms that are subject to MiFID would cover those of an SD or MSP under the CEA and the Commission's regulations.

Under MiFID Article 9, directors are subject to fit and proper criteria. Under MiFID Article 13, firms must establish and maintain decision-making processes and an organizational structure specifying reporting lines and allocate functions and responsibilities; personnel must have skills, knowledge and expertise necessary for the discharge of their responsibilities; and internal control mechanisms must be maintained to secure compliance as well as internal reporting and communication of information at all relevant levels of the firm.

Commission Determination: The Commission finds that the MiFID standards specified above are generally identical in intent to section 23.602 because such standards seek to ensure that SDs and MSPs strictly comply with applicable law, which would include the CEA and the Commission's regulations. Through the MiFID standards specified above, EU laws and regulations seek to ensure that each SD and MSP not only establishes the necessary policies and procedures that would lead to compliance with applicable law, which would include the CEA and Commission regulations, but also establishes an effective system of internal oversight and enforcement of such policies and procedures to ensure that such policies and procedures are diligently followed.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the internal supervision requirements of MiFID, as specified above, are comparable to and as comprehensive as section 23.602.

4. Business Continuity and Disaster Recovery (section 23.603)

Commission Requirement: To ensure the proper functioning of the swaps markets and the prevention of systemic risk more generally, Commission regulation 23.603 requires each SD and MSP, as part of its risk management program, to establish a business continuity and disaster recovery plan that includes procedures for, and the maintenance of, back-up facilities, systems, infrastructure, personnel, and other resources to achieve the timely recovery of data and documentation and to resume operations generally within the next business day after the disruption.

Regulatory Objective: Commission regulation 23.603 is intended to ensure that any market disruption affecting SDs and MSPs, whether caused by natural disaster or otherwise, is minimized in length and severity. To that end, this requirement seeks to ensure that entities adequately plan for disruptions and devote sufficient resources capable of carrying out an appropriate plan within one business day, if necessary.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as Commission regulation 23.603.

- Under MiFID L2D Article 5(3), firms must establish, implement, and maintain an adequate business continuity policy aimed at insuring the preservation of essential data and functions, the maintenance of services, and the timely recovery of such data and functions and timely resumption of services.

- Under MiFID Article 13(4), firms must take reasonable steps to ensure continuity and regularity in the performance of investment services and activities, including employing appropriate systems, resources, and procedures to accomplish this requirement.

Commission Determination: The Commission finds that the MiFID standards specified above are generally identical in intent to section 23.603 because such standards seek to ensure that any market disruption affecting SDs and MSPs, whether caused by natural disaster or otherwise, is minimized in length and severity. To that end, the Commission finds that the MiFID standards specified above seek to ensure that entities adequately plan for disruptions and devote sufficient resources capable of carrying out an appropriate plan in a timely manner.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the business continuity and disaster recovery requirements of MiFID, as specified above, are comparable to and as comprehensive as section 23.603. 5. Conflicts of Interest (section 23.605)

Commission Requirement: Section 4s(j)(5) of the CEA and Commission regulation 23.605(c) generally require each SD or MSP to establish structural and institutional safeguards to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity or swap are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in pricing, trading, or clearing activities might potentially bias their judgment or supervision.

In addition, section 4s(j)(5) of the CEA and Commission regulation 23.605(d)(1) generally prohibits an SD or MSP from directly or indirectly interfering with or attempting to influence the decision of any clearing unit of any affiliated clearing member of a DCO to provide clearing services and activities to a particular customer, including:

- Whether to offer clearing services to a particular customer;

- Whether to accept a particular customer for clearing derivatives;

- Whether to submit a customer's transaction to a particular DCO;

- Whether to set or adjust risk tolerance levels for a particular customer; or

- Whether to set a customer's fees based on criteria other than those generally available and applicable to other customers.

Commission regulation 23.605(d)(2) generally requires each SD or MSP to create and maintain an appropriate informational partition between business trading units of the SD or MSP and clearing units of any affiliated clearing member of a DCO to reasonably ensure compliance with the Act and the prohibitions set forth in section 23.605(d)(1) outlined above.

The Commission observes that section 23.605(d) works in tandem with Commission regulation 1.71, which requires futures commission merchants ("FCMs") that are clearing members of a DCO and affiliated with an SD or MSP to create and maintain an appropriate informational partition between business trading units of the SD or MSP and clearing units of the FCM to reasonably ensure compliance with the Act and the prohibitions set forth in section 1.71(d)(1), which are the same as the prohibitions set forth in section 23.605(d)(1) outlined above.

Finally, section 23.605(e) requires that each SD or MSP have policies and procedures that mandate the disclosure to counterparties of material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a SEF or DCM or to clear a derivative through a DCO.

Regulatory Objective: Commission regulation 23.605(c) seeks to ensure that research provided to the general public by an SD or MSP is unbiased and free from the influence of the interests of an SD or MSP arising from the SD's or MSP's trading business.

In addition, section 23.605(d) (working in tandem with section 1.71) seeks to ensure open access to the clearing of swaps by requiring that access to and the provision of clearing services provided by an affiliate of an SD or MSP are not influenced by the interests of an SD's or MSP's trading business.

Finally, section 23.605(e) seeks to ensure equal access to trading venues and clearinghouses, as well as orderly and fair markets, by requiring that each SD and MSP disclose to counterparties any material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a SEF or DCM, or to clear a derivative through a DCO.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as Commission regulation 23.605(c).

- MiFID Articles 13(3) and 18 require that SDs maintain and operate effective organizational and administrative arrangements with a view to preventing conflicts of interest from adversely affecting the interests of its clients.

- Under MiFID L2D Articles 21 to 23, SDs are obligated to adopt measures to ensure the appropriate level of independence of any person working in the firm. This includes measures preventing or controlling the exchange of information, separating the supervision of relevant persons, and preventing or limiting the possibility for a person to exercise inappropriate influence over others. Furthermore, firms must ensure that performance of multiple functions does not prevent persons from acting soundly, honestly, and professionally.

- Under MiFID L2D Articles 24 to 25, SDs must maintain and operate effective organizational and administrative arrangements and take all reasonable steps designed to prevent conflicts of interest from adversely affecting the interests of its clients.

- Under MiFID Articles 18 and MiFID L2D Article 22, SDs must develop a written conflicts of interest policy appropriate to the size and organization of the firm that identifies circumstances that might give rise to conflicts entailing a material risk of damage to the interests of one or more clients and specify procedures to be followed to manage such conflicts. The general conflicts policy has to be disclosed to clients. Disclosure is also needed when organizational arrangements to manage conflicts are not sufficient to ensure, with reasonable confidence, that the risk of damage to client interests will be prevented.

- Under MiFID L2D Article 25, an SD that prepares or disseminates research recommendations must take reasonable care to ensure that research recommendations are fairly presented and must disclose its interests or indicate conflicts of interest concerning relevant investments.

- Under MiFID L2D Article 25, in addition to the conflicts of interest requirements set out above, steps must be taken to ensure that restrictions are in place to avoid conflicts with respect to research personnel (e.g., financial analysts), including restrictions on personal account dealing and inducements.

- Under MiFID L2D Article 24, research recommendations must also include a disclosure of interests or indicate conflicts of interests concerning the relevant investments.

The applicant states that the foregoing MiFID standards would require any SD or MSP that is subject to such MiFID standards to resolve or mitigate conflicts of interests in the provision of clearing services by a clearing member that is linked to that SD or MSP, or conflicts of interests in the execution of a derivative by a client on a particular execution venue, including an eligible SEF or DCM, or conflicts of interests in the clearing of a derivative through a CCP, including an eligible DCO, through measures including appropriate information firewalls and disclosures.

Commission Determination: The Commission finds that the MiFID standards specified above with respect to conflicts of interest that may arise in producing or distributing research are generally identical in intent to section 23.605(c) because such standards seek to ensure that research provided to the general public by an SD is unbiased and free from the influence of the interests of an SD arising from the SD's trading business.

With respect to conflicts of interest that may arise in the provision of clearing services by an affiliate of an SD or MSP, the Commission further finds that although the general conflicts of interest prevention requirements under the MiFID standards specified above do not require with specificity that access to and the provision of clearing services provided by an affiliate of an SD or MSP not be improperly influenced by the interests of an SD's or MSP's trading business, such general requirements would require prevention and remediation of such improper influence when recognized or discovered. Thus such standards would ensure open access to clearing.

Finally, although not as specific as the requirements of section 23.605(e) (Undue influence on counterparties), the Commission finds that the general disclosure requirements of the MiFID standards specified above would ensure equal access to trading venues and clearinghouses by requiring that each SD and MSP disclose to counterparties any material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a SEF or DCM, or to clear a derivative through a DCO.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the requirements found in the MiFID standards specified above in relation to conflicts of interest are comparable to and as comprehensive as section 23.605.

6. Availability of Information for Disclosure and Inspection (section 23.606)

Commission Requirement: Commission regulation 23.606 implements sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to disclose to the Commission, and an SD's or MSP's U.S. prudential regulator (if any) comprehensive information about its swap activities, and to establish and maintain reliable internal data capture, processing, storage, and other operational systems sufficient to capture, process, record, store, and produce all information necessary to satisfy its duties under the CEA and Commission regulations. Such systems must be designed to provide such information to the Commission and an SD's or MSP's U.S. prudential regulator within the time frames set forth in the CEA and Commission regulations and upon request.

Regulatory Objective: Commission regulation 23.606 seeks to ensure that each SD and MSP captures and maintains comprehensive information about their swap activities, and is able to retrieve and disclose such information to the Commission and its U.S. prudential regulator, if any, as necessary for compliance with the CEA and the Commission's regulations and for purposes of Commission oversight, as well as oversight by the SD's or MSP's U.S. prudential regulator, if any.

The Commission observes that it would be impossible to meet the regulatory objective of section 23.606 unless the required information is available to the Commission and any U.S. prudential regulator under the foreign legal regime. Thus, a comparability determination with respect to the information access provisions of section 23.606 would be premised on whether the relevant information would be available to the Commission and any U.S. prudential regulator of the SD or MSP, not on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as Commission regulation 23.606.

Under MiFID Article 13(6) & 25(2) & 50, investment firms are required to maintain adequate and orderly records of their business and internal organization. Firms must maintain at the disposal of the regulator, for at least five years, the relevant data relating to their transactions in financial instruments. Among other things, supervisors have the authority to access any document in any form whatsoever and to receive a copy of it, to demand information from any person, and to carry out on-site inspections.

Commission Determination: The Commission finds that the MiFID standards specified above are generally identical in intent to section 23.606 because such standards seek to ensure that each SD and MSP captures and stores comprehensive information about their swap activities, and are able to retrieve and disclose such information as necessary for compliance with applicable law and for purposes of regulatory oversight.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the requirements of MiFID with respect to the availability of information for inspection and disclosure, as specified above, are comparable to, and as comprehensive as, section 23.606, with the exception of section 23.606(a)(2) concerning the requirement that an SD or MSP make information required by section 23.606(a)(1) available promptly upon request to Commission staff and the staff of an applicable prudential regulator. The applicant has not submitted any provision of law or regulations applicable in the EU upon which the Commission could make a finding that SDs and MSPs would be required to retrieve and disclose comprehensive information about their swap activities to the Commission or any U.S. prudential regulator as necessary for compliance with the CEA and Commission regulations, and for purposes of Commission oversight and the oversight of any U.S. prudential regulator.

Notwithstanding that the Commission has not determined that the requirements of MiFID are comparable to and as comprehensive as section 23.606(a)(2), any SD or MSP to which both section 23.606 and the MiFID standards specified above are applicable would generally be deemed to be in compliance with section 23.606(a)(2) if that SD or MSP complies with the MiFID standards specified above, subject to compliance with the requirement that it produce information to Commission staff and the staff of an applicable U.S. prudential regulator in accordance with section 23.606(a)(2).

7. Clearing Member Risk Management (section 23.609)

Commission Requirement: Commission regulation 23.609 generally requires each SD or MSP that is a clearing member of a DCO to:

- Establish risk-based limits based on position size, order size, margin requirements, or similar factors;

- Screen orders for compliance with the risk-based limits;

- Monitor for adherence to the risk-based limits intra-day and overnight;

- Conduct stress tests under extreme but plausible conditions of all positions at least once per week;

- Evaluate its ability to meet initial margin requirements at least once per week;

- Evaluate its ability to meet variation margin requirements in cash at least once per week;

- Evaluate its ability to liquidate positions it clears in an orderly manner, and estimate the cost of liquidation; and

- Test all lines of credit at least once per year.

Regulatory Objective: Through Commission regulation 23.609, the Commission seeks to ensure the financial integrity of the markets and the clearing system, to avoid systemic risk, and to protect customer funds. Effective risk management by SDs and MSPs that are clearing members is essential to achieving these objectives. A failure of risk management can cause a clearing member to become insolvent and default to a DCO. Such default can disrupt the markets and the clearing system and harm customers.

Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as Commission regulation 23.609.

- Under MiFID Article 13(5) & MiFID L2D Article 5, investment firms must have effective procedures for risk assessment, effective control, and safeguard arrangements for information processing systems, sound administrative and accounting procedures, and internal control mechanisms.

- Under MiFID L2D Article 6, investment firms must, subject to a proportionality principle dependent on the size and nature of a firm's business, establish and maintain an independent risk management function that is responsible for the implementation of risk management policies and procedures and that provides reports and advice to senior management regarding risk management.

- MiFID L2D Article 9: Senior management (which includes boards of directors) must take responsibility for firms' compliance with regulatory obligations including risk management.

- MiFID L2D Artic

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