Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds

SUMMARY: The Commodity Futures Trading Commission ("CFTC" or "Commission") is adopting a final rule to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which contains certain prohibitions and restrictions on the ability of a banking entity and nonbank financial company supervised by the Board of Governors of the Federal Reserve System (the "Board") to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. Section 619 also requires the Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission to also issue regulations implementing section 619 and directs the CFTC and those four agencies to consult and coordinate with each other, as appropriate, in developing and issuing the implementing rules, for the purposes of assuring, to the extent possible, that such rules are comparable and provide for consistent application and implementation. To that end, although the Commission is adopting a final rule that is not a joint rule with the other agencies, the CFTC and the other agencies have worked closely together to develop the same rule text and supplementary information, except for information specific to the CFTC or the other agencies, as applicable. In particular, the CFTC's final rule is numbered as part 75 of the Commission's regulations, the rule text refers to the "Commission" instead of the "[Agency]" and one section of the regulations addresses authority, purpose, scope, and relationship to other authorities with respect to the Commission. Furthermore, it is noted that the supplementary information generally refers to the "Agencies" collectively when referring to deliberations and considerations in developing the final rule by the CFTC together with the other four agencies and references to the "final rule" should be deemed to refer to the final rule of the Commission as herein adopted.

EFFECTIVE DATE: The final rule is effective April 1, 2014.

FOR FURTHER INFORMATION CONTACT: Erik Remmler, Deputy Director, Division of Swap Dealer and Intermediary Oversight ("DSIO"), (202) 418-7630, eremmler@cftc.gov; Paul Schlichting, Assistant General Counsel, Office of the General Counsel ("OGC"), (202) 418-5884, pschlichting@cftc.gov; Mark Fajfar, Assistant General Counsel, OGC, (202) 418-6636, mfajfar@cftc.gov; Michael Barrett, Attorney-Advisor, DSIO, (202) 418-5598, mbarrett@cftc.gov; Stephen Kane, Research Economist, Office of the Chief Economist ("OCE"), (202) 418-5911, skane@cftc.gov; or Stephanie Lau, Research Economist, OCE, (202) 418-5218, slau@cftc.gov; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Notice of Proposed Rulemaking: Summary of General Comments

III. Scope

IV. CFTC-Specific Comments

V. Overview of Final Rule

A. General Approach and Summary of Final Rule

B. Proprietary Trading Restrictions

C. Restrictions on Covered Fund Activities and Investments

D. Metrics Reporting Requirement

E. Compliance Program Requirement

VI. Final Rule

A. Subpart B--Proprietary Trading Restrictions

1. Section 75.3: Prohibition on Proprietary Trading and Related Definitions

a. Definition of "Trading Account"

b. Rebuttable Presumption for the Short-Term Trading Account

c. Definition of "Financial Instrument"

d. Proprietary Trading Exclusions

1. Repurchase and Reverse Repurchase Arrangements and Securities Lending

2. Liquidity management activities

3. Transactions of Derivatives Clearing Organizations and Clearing Agencies

4. Excluded Clearing-Related Activities of Clearinghouse Members

5. Satisfying an Existing Delivery Obligation

6. Satisfying an Obligation in Connection With a Judicial, Administrative, Self-Regulatory Organization, or Arbitration Proceeding

7. Acting Solely as Agent, Broker, or Custodian

8. Purchases or Sales Through a Deferred Compensation or Similar Plan

9. Collecting a Debt Previously Contracted

10. Other Requested Exclusions

2. Section 75.4(a): Underwriting Exemption

a. Introduction

b. Overview

1. Proposed Underwriting Exemption

2. Comments on Proposed Underwriting Exemption

3. Final Underwriting Exemption

c. Detailed Explanation of the Underwriting Exemption

1. Acting as an Underwriter for a Distribution of Securities

a. Proposed Requirements That the Purchase or Sale Be Effected Solely in Connection With a Distribution of Securities for Which the Banking Entity Acts as an Underwriter and That the Covered Financial Position Be a Security

i. Proposed Definition of "Distribution"

ii. Proposed Definition of "Underwriter"

iii. Proposed Requirement That the Covered Financial Position Be a Security

b. Comments on the Proposed Requirements That the Trade Be Effected Solely in Connection With a Distribution for Which the Banking Entity is Acting as an Underwriter and That the Covered Financial Position Be a Security

i. Definition of "Distribution"

ii. Definition of "Underwriter"

iii. "Solely in Connection With" Standard

c. Final Requirement That the Banking Entity Act as an Underwriter for a Distribution of Securities and the Trading Desk's Underwriting Position Be Related to Such Distribution

i. Definition of "Underwriting Position"

ii. Definition of "Trading Desk"

iii. Definition of "Distribution"

iv. Definition of "Underwriter"

v. Activities Conducted "In Connection With" a Distribution

2. Near Term Customer Demand Requirement

a. Proposed Near Term Customer Demand Requirement

b. Comments Regarding the Proposed Near Term Customer Demand Requirement

c. Final Near Term Customer Demand Requirement

3. Compliance Program Requirement

a. Proposed Compliance Program Requirement

b. Comments on the Proposed Compliance Program Requirement

c. Final Compliance Program Requirement

4. Compensation Requirement

a. Proposed Compensation Requirement

b. Comments on the Proposed Compensation Requirement

c. Final Compensation Requirement

<p>5. Registration Requirement

a. Proposed Registration Requirement

b. Comments on Proposed Registration Requirement

c. Final Registration Requirement

6. Source of Revenue Requirement

a. Proposed Source of Revenue Requirement

b. Comments on the Proposed Source of Revenue Requirement

c. Final Rule's Approach to Assessing Source of Revenue

3. Section 75.4(b): Market-Making Exemption

a. Introduction

b. Overview

1. Proposed Market-Making Exemption

2. Comments on the Proposed Market-Making Exemption

a. Comments on the Overall Scope of the Proposed Exemption

b. Comments Regarding the Potential Market Impact of the Proposed Exemption

3. Final Market-Making Exemption

c. Detailed Explanation of the Market-Making Exemption

1. Requirement to Routinely Stand Ready to Purchase and Sell

a. Proposed Requirement to Hold Self Out

b. Comments on the Proposed Requirement to Hold Self Out

i. The Proposed Indicia

ii. Treatment of Block Positioning Activity

iii. Treatment of Anticipatory Market Making

iv. High-Frequency Trading

c. Final Requirement to Routinely Stand Ready to Purchase and Sell

i. Definition of "Trading Desk"

ii. Definitions of "Financial Exposure" and "Market-Maker Inventory"

iii. Routinely Standing Ready to Buy and Sell

2. Near Term Customer Demand Requirement

a. Proposed Near Term Customer Demand Requirement

b. Comments Regarding the Proposed Near Term Customer Demand Requirement

i. The Proposed Guidance for Determining Compliance With the Near Term Customer Demand Requirement

ii. Potential Inventory Restrictions and Differences Across Asset Classes

iii. Predicting Near Term Customer Demand

iv. Potential Definitions of "Client," "Customer," or "Counterparty"

v. Interdealer Trading and Trading for Price Discovery or To Test Market Depth

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "17 CFR Part 75"

RIN Number: "RIN 3038-AD05"

Citation: "79 FR 5808"

Federal Register Page Number: "5808"

"Rules and Regulations"