Comparability Determination for Canada: Certain Entity-Level Requirements

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of Comparability Determination for Certain Requirements under the Laws of Canada.

SUMMARY:

The following is the analysis and determination of the Commodity Futures Trading Commission (“Commission”) regarding certain parts of a joint request by the Canadian Bankers Association (“CBA”), five individual Canadian banks provisionally-registered with the Commodity Futures Trading Commission (“Commission”) as swap dealers (“SDs”), and the Office of the Superintendent of Financial Institutions (“OSFI”) that the Commission determine that certain laws and regulations applicable in Canada provide a sufficient basis for an affirmative finding of comparability with respect to the following regulatory obligations applicable to 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, gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202-418-5949, ffisanich@cftc.gov, and Andy Chapin, Associate Director, 202-418-5465, achapin@cftc.gov, 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”). 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”). 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.

On May 13, 2013, the CBA, five individual Canadian banks provisionally registered with the Commission as SDs, and OSFI (collectively hereinafter, the “applicant”) submitted a request that the Commission determine that laws and regulations applicable in Canada provide a sufficient basis for an affirmative finding of comparability with respect to certain Entity-Level Requirements, including the Internal Business Conduct Requirements. The applicants provided Commission staff with a supplemental submission from the Ontario Securities Commission (“OSC”) dated June 7, 2013. The following is the Commission's analysis and determination regarding the Internal Business Conduct Requirements, as detailed below.

II. Background

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“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. 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. 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).

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.

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. 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 and the Commission's regulations, and is a condition to registration.

III. Regulation of SDs and MSPs in Canada

On May 13, 2013, the applicant submitted a request that the Commission assess the comparability of Canadian laws and regulations with the requirements of the CEA and the Commission's regulations promulgated thereunder. OSC provided a supplement to the submission on June 7, 2013. On November 8, 2013, OSFI further supplemented the application with corrections and additional materials.

All of the currently registered Canadian SDs are banks regulated under the Canadian Bank Act (the “Bank Act”), relevant regulations thereunder, and guidelines, advisories, and interpretations provided by OSFI. As the governing prudential regulator in Canada, OSFI supervises all Canadian banks on a consolidated basis, including those provisionally registered with the Commission as SDs (the “Canadian Bank SDs”). To implement its “Supervisory Framework,” OSFI has published guidelines, advisories, and interpretations which OSFI expects each bank to follow. Each of the five Canadian Bank SDs also has been designated as Domestic Systemically Important Banks (“DSIBs”) due to the potential impact that failure could have on the domestic economy based on their size, interconnectedness, substitutability, and complexity. As DSIBs, these banks are expected to have advanced practices in terms of the design and operation of oversight functions and controls, and are subject to continued supervisory intensity, enhanced disclosure requirements, and a capital surcharge.

Canada's provincial securities administrators, coordinated by the Derivatives Committee of the Canadian Securities Administrators (“CSA”), are responsible for regulating the capital markets. Harmonized policy recommendations are made at the CSA level, while regulations are made at the provincial level. Currently, the CSA has issued a Consultation Paper 91-407 on “Derivatives Registration” (comment period closed June 17, 2013).

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. 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.

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.

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). 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 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. 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.

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 of SDs and MSPs in the relevant jurisdictions. 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.

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

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 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.”

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, provide for notification upon the occurrence of specified events, memorialize understandings related to on-site visits, 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 applicant 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 (§ 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 CEO 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and comparable to and as comprehensive as section 4s(k) of the CEA and Commission regulation 3.3.

OSFI's Legislative Compliance Management Guideline E-13 (“LCM Guideline”) requires Canadian banks to establish an enterprise-wide framework of regulatory risk management controls to ensure that regulatory compliance risks are managed effectively. The required LCM framework must meet the requirements of the LCM Guideline, which sets out OSFI's expectations. The Canadian Bank SDs are required to demonstrate that they satisfy those expectations in particular circumstances. Pursuant to the LCM Guideline:

• The compliance oversight function should be designated to a member of senior management as the bank's CCO;
• Such CCO should have sufficient stature, authority, resources, and access to achieve compliance with applicable law;
• Such CCO should have appropriate skills and knowledge to effectively fulfill the requirements of the function;
• The CCO should approve the content and frequency of reports and that such reports should be sufficient to enable the CCO, senior management, and the bank's board to discharge their compliance responsibilities;
• OSFI expects that each bank's LCM framework will include identification, assessment, communication, and maintenance of applicable regulatory requirements, compliance procedures, monitoring procedures, and reporting procedures;
• OSFI expects the CCO to be responsible for the LCM framework and to report issues directly to the board, including any material compliance issues and their remediation; and
• Normal course reports to the board should be made no less than annually, and contain discussion of material weaknesses, non-compliance issues, and remedial action plans.

In addition, the OSFI Corporate Governance Guideline of Federally Regulated Financial Institutions (“OSFI Corporate Governance Guideline”) states that the bank's board of directors should be responsible for the selection, performance, management, compensation, and evaluation of a CCO. Pursuant to the OSFI Supervisory Framework, OSFI monitors banks' management of compliance risk and reports on banks' compliance with the Bank Act annually to the Canadian Minister of Finance.

Commission Determination: The Commission finds that the OSFI standards specified above are generally identical in intent to § 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 the OSFI standards, specified above, are comparable to and as comprehensive as § 3.3, with the exception of § 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 the OSFI standards are comparable to and as comprehensive as § 3.3(f), any SD or MSP to which both § 3.3 and the OSFI standards specified above are applicable would generally be deemed to be in compliance with § 3.3(f) if that SD or MSP complies with the OSFI standards specified above, subject to certifying and furnishing the Commission with the annual report required under the OSFI standards specified above in accordance with § 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 (§§ 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. The Commission adopted regulations 23.600, 23.601, 23.602, 23.603, 23.605, and 23.606 to implement the statute. 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”). Collectively, these requirements help to establish a robust and comprehensive internal risk management program for SDs and MSPs with respect to their swaps activities, 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.

1. Risk Management Program for SDs and MSPs (§ 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and are comparable to and as comprehensive as section 4s(j)(2) of the CEA and Commission regulation § 23.600.

The OSFI Corporate Governance Guideline requires that each bank establish a risk appetite framework (“RAF”) that:

• Guides the amount of risk the bank is willing to accept in pursuit of its strategic and business objectives.
• Sets basic goals, benchmarks, parameters, and limits, and should consider all applicable types of risks.
• Contains all elements required by an annex to the Corporate Governance Guideline, including a risk appetite statement, specific risk tolerance limits, and processes for implementation of the RAF.

Further, the OSFI Corporate Governance Guideline states that DSIBs should establish a dedicated risk committee to oversee risk management on an enterprise-wide basis, and that the oversight of the risk management activities of the bank are to be independent from operational management, adequately resourced, and have appropriate status and visibility.

The OSFI Derivatives Best Practice Guideline states that each bank should ensure that each derivative product traded is subject to a product authorization signed off by senior management, and sets forth OSFI's expectations with respect to having documented policies and procedures for risk management, creating risk tolerance limits, and measuring, reporting, managing, and controlling the risks associated with the derivatives business, including market, currency, interest rate, equity price, commodity price, credit, settlement, liquidity, operational, and legal risks.

Finally, OSFI represents that its oversight pursuant to the Supervisory Framework will assess the extent to which the risk management function integrates policies, practices, and limits with day-to-day business activities and with the bank's strategic, capital, and liquidity management policies. Under the Supervisory Framework, OSFI also will assess whether the risk management function effectively monitors risk positions against approved limits and ensures that material breaches are addressed on a timely basis. OSFI represents that it will look at various indicators, including the extent to which the bank proactively updates its policies, practices, and limits in response to changes in the industry and in the institution's strategy, business activities and risk tolerances.

Commission Determination: The Commission finds that the OSFI standards specified above are generally identical in intent to § 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 OSFI standards specified above would 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 the OSFI standards, as specified above, are comparable to and as comprehensive as § 23.600, with the exception of § 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 the OSFI standards are comparable to and as comprehensive as § 23.600(c)(2), any SD or MSP to which both § 23.600 and the OSFI standards specified above are applicable would generally be deemed to be in compliance with § 23.600(c)(2) if that SD or MSP complies with the OSFI 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 § 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 (§ 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 DCM, or a SEF. 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, § 23.601 is intended to ensure that established position limits are not breached by the SD or MSP.

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

OSFI states that the monitoring of position limits is an aspect of the risk management and compliance framework for each bank. Specifically:

• OSFI's LCM Guideline requires Canadian banks to establish an enterprise-wide framework of regulatory risk management controls to ensure that regulatory compliance risks are managed effectively. The required LCM framework sets out OSFI's expectations and banks are required to demonstrate that they satisfy those expectations in particular circumstances; and
• OSFI expects that each bank's LCM framework will include identification, assessment, communication, and maintenance of applicable regulatory requirements, compliance procedures, monitoring procedures, and reporting procedures.

• The applicants represent to the Commission that the OSFI requirement to monitor the effectiveness of procedures to ensure compliance with regulatory obligations includes applicable regulatory obligations of an SD or MSP under the CEA, Commission regulations, and position limits set by the Commission, a DCM, or a SEF. OSFI expects banks to comply with all applicable regulatory requirements, which includes legislation, regulations, and regulatory directives applicable to the activities of the bank or its subsidiaries worldwide.

Commission Determination: The Commission finds that the OSFI standards specified above are generally identical in intent to § 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 OSFI 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, including monitoring for compliance with position limits set pursuant to applicable law (including the CEA and Commission regulations) 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 the OSFI standards, as specified above, are comparable to and as comprehensive as § 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 (§ 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 § 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and comparable to and as comprehensive as section 4s(h)(1)(B) of the CEA and Commission regulation 23.602.

• Section 157 of the Bank Act imposes a duty on the board of directors of a bank to manage or supervise the management of the business and affairs of the bank.
• OSFI's Supervisory Framework states that the board and senior management are designated as ultimately accountable for the safety and soundness of the bank.
• OSFI's Corporate Governance Guideline states that banks should appoint a senior officer, identified as the Chief Risk Officer (“CRO”), who has responsibility for the oversight of all relevant risks across the firm. The CRO must be identified in the bank's license application along with a description of the resources and authority allocated to discharge his duties. Like the CCO, the CRO should have sufficient stature and authority within the organization, be independent from operational management, have unfettered access and, for functional purposes, a direct reporting line to the board of directors or risk committee.

In addition, the applicant states that diligent supervision is an aspect of the risk management and compliance framework for each bank, which includes requirements for controls and monitoring. Specifically:

• OSFI's LCM Guideline requires Canadian banks to establish an enterprise-wide framework of regulatory risk management controls to ensure that regulatory compliance risks are managed effectively. The required LCM framework sets out OSFI's expectations and banks are required to demonstrate that they satisfy those expectations in particular circumstances; and
• OSFI expects that each bank's LCM framework will include identification, assessment, communication, and maintenance of applicable regulatory requirements, compliance procedures, monitoring procedures, and reporting procedures.
• The applicants represent to the Commission that the OSFI requirement to monitor the effectiveness of procedures to ensure compliance with regulatory obligations includes applicable regulatory obligations of an SD or MSP under the CEA and Commission regulations. OSFI expects banks to comply with all applicable regulatory requirements, which includes legislation, regulations, and regulatory directives applicable to the activities of the bank or its subsidiaries worldwide.

Commission Determination: The Commission finds that the provisions of the Bank Act and the OSFI standards specified above are generally identical in intent to § 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 provisions of the Bank Act and the OSFI standards specified above, Canadian 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 the Bank Act and the OSFI standards, as specified above, are comparable to and as comprehensive as § 23.602.

4. Business Continuity and Disaster Recovery (§ 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and comparable to and as comprehensive as Commission regulation 23.603.

The applicant has represented that business continuity and disaster recovery are aspects of the risk management framework for each bank. Specifically:

• OSFI's Derivatives Best Practice Guideline requires banks to regularly assess contingency plans to deal with operations and systems risks.
• OSFI's Outsourcing of Business Activities, Functions and Processes Guideline requires banks that outsource functions to ensure that adequate continuity and disaster recovery are in place.
• OSFI's Supervisory Framework subjects each bank to a “Business Continuity & Disaster Recovery Preparedness Cross Sector Review” that is divided into three broad sections: Structure, Operational Management, and Controls & Oversight. Pursuant to such review, OSFI ensures: the existence of a plan for both business continuity and disaster recovery; that such plans have essential components related to identification of documents, data, staff, supervisory personnel, back-up locations, third party disruptions, etc.; that plans are distributed to all employees; that appropriate emergency contacts are identified; that plans are reviewed at least annually; that plans are subject to comprehensive testing and audit; and that records related to developing and maintaining the plans are maintained in accordance with banking supervisory guidelines and are accessible to OSFI.

Commission Determination: The Commission finds that the OSFI standards specified above are generally identical in intent to § 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 OSFI 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 the OSFI standards, as specified above, are comparable to and as comprehensive as § 23.603.

5. Conflicts of Interest (§ 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 § 23.605(d)(1) outlined above.

The Commission observes that § 23.605(d) works in tandem with Commission regulation 1.71, which requires 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 § 1.71(d)(1), which are the same as the prohibitions set forth in § 23.605(d)(1) outlined above.

Finally, § 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 swap execution facility 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, the § 23.605(d) (working in tandem with § 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, § 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and comparable to and as comprehensive as Commission regulation 23.605(c).

The Bank Act subsection 157(2)(c), as well as the Competition Act, requires that directors of a bank establish procedures to resolve conflicts of interest, including techniques for the identification and remediation of potential conflict situations, tied selling, exclusive dealing, and refusal to deal, and for restricting the use of confidential information.

The Bank Act subsection 157(2)(b) requires the directors of a bank to have a review committee to ensure compliance with the self-dealing provisions of the Bank Act, while 157(2)(d) requires that banks designate a committee of the board of directors to monitor the conflict of interest procedures.

The Bank Act subsection 459.1(1) prohibits a bank from imposing undue pressure on, or coercing a person to obtain a product or service from a particular person, including the bank and any of its affiliates, as a condition for obtaining another product or service from the bank.

The Bank Act subsection 459.1(4.1) requires a bank to disclose coercive tied selling arrangements.

OSFI's Supervisory Framework requires monitoring of conflicts of interest through a bank's risk management program.

The applicants have represented to the Commission that OSFI, in the process of its oversight and enforcement of the foregoing Canadian standards, would require any SD or MSP subject to such standards to resolve or mitigate conflicts of interests in the provision of clearing services by a clearing member of a DCO that is an affiliate of the SD or MSP, or the decision of a counterparty to execute a derivative on a SEF or DCM, or clear a derivative through a DCO, through appropriate information firewalls and disclosures.

Commission Determination: The Commission finds that the Bank Act standards specified above with respect to conflicts of interest that may arise in producing or distributing research are generally identical in intent to § 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 Bank Act 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 § 23.605(e) (Undue influence on counterparties), the Commission finds that the general disclosure requirements of the Bank Act 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 applicants, the Commission hereby determines that the requirements found in the Bank Act standards specified above in relation to conflicts of interest are comparable to and as comprehensive as § 23.605.

6. Availability of Information for Disclosure and Inspection (§ 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 § 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 § 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and comparable to and as comprehensive as Commission regulation 23.606.

OSFI relies on general reporting obligations of Canadian banks and OSFI's monitoring function under the OSFI Supervisory Framework with respect to availability of information for disclosure and inspection. Specifically, banks are expected to have appropriate policies and procedures in place to ensure that all regulatory filings are received by OSFI within specified timeframes and are error free. Banks are subject to penalties for late or erroneous filings pursuant to OSFI's Late and Erroneous Filing Penalty Framework.

With respect to data capture and retention, as part of the bank licensing process, OSFI must approve a bank's operational risk management policies, including policies related to information technology, information management and security, and records retention.

As part of the OSFI Supervisory Framework, OSFI generally requires banks to establish and maintain an enterprise-wide LCM framework. OSFI expects the LCM framework to include “Adequate Documentation” as one of its key controls. As set forth in the OSFI Derivatives Best Practice Guideline, each bank should have mechanisms in place to assure the confirmation, maintenance and safeguarding of derivatives contract documentation. In particular, it states:

[t]he design of information systems will vary according to the risks demanded by the scope and complexity of an institution's involvement in derivatives. The degree of accuracy and timeliness of information processing should be sufficient to meet an institution's risk exposure monitoring needs. Appropriate information processing and reporting capabilities should be put in place and fully operational.

Commission Determination: The Commission finds that the OSFI standards specified above are generally identical in intent to § 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 OSFI standards with respect to the availability of information for inspection and disclosure, as specified above, are comparable to, and as comprehensive as, § 23.606, with the exception of § 23.606(a)(2) concerning the requirement that an SD or MSP make information required by § 23.606(a)(1) available promptly upon request to Commission staff and the staff of an applicable U.S. prudential regulator. The applicant has not submitted any provision of law or regulations applicable in Canada 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 the OSFI standards are comparable to and as comprehensive as § 23.606(a)(2), any SD or MSP to which both § 23.606 and the OSFI standards specified above are applicable would generally be deemed to be in compliance with § 23.606(a)(2) if that SD or MSP complies with the OSFI 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 § 23.606(a)(2).

7. Clearing Member Risk Management (§ 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and comparable to and as comprehensive as Commission regulation 23.609.

OSFI stated that, to the extent that any bank is a clearing member, risk management specifically for clearing members is an aspect of the risk management framework.

OSFI Derivatives Best Practice Guideline states that banks should have knowledgeable individuals or units responsible for risk monitoring and control functions, including the responsibility for actively monitoring transactions and positions for adherence to internal policy limits. Moreover, stress tests should be performed regularly and should account for abnormally large market swings and periods of prolonged inactivity, while considering the effect of price changes on the “mid-market value” of the portfolio.

More generally, the OSFI Corporate Governance Guideline requires that each bank establish a risk appetite framework (“RAF”) that:

• Guides the amount of risk the bank is willing to accept in pursuit of its strategic and business objectives.
• Sets basic goals, benchmarks, parameters, and limits, and should consider all applicable types of risks.
• Contains all elements required by an annex to the Corporate Governance Guideline, including a risk appetite statement, specific risk tolerance limits, and processes for implementation of the RAF.

Further, the OSFI Corporate Governance Guideline states that DSIBs should establish a dedicated risk committee to oversee risk management on an enterprise-wide basis, and that the oversight of the risk management activities of the bank are to be independent from operational management, adequately resourced, and have appropriate status and visibility.

The OSFI Derivatives Best Practice Guideline states that each bank should ensure that each derivative product traded is subject to a product authorization signed off by senior management, and sets forth OSFI's expectations with respect to having documented policies and procedures for risk management, creating risk tolerance limits, and measuring, reporting, managing, and controlling the risks associated with the derivatives business, including market, currency, interest rate, equity price, commodity price, credit, settlement, liquidity, operational, and legal risks.

OSFI represents that its oversight pursuant to the Supervisory Framework will assess the extent to which the risk management function integrates policies, practices, and limits with day-to-day business activities and with the bank's strategic, capital, and liquidity management policies. Under the Supervisory Framework, OSFI also will assess whether the risk management function effectively monitors risk positions against approved limits and ensures that material breaches are addressed on a timely basis. OSFI represents that it will look at various indicators, including the extent to which the bank proactively updates its policies, practices, and limits in response to changes in the industry and in the institution's strategy, business activities and risk tolerances.

Specifically, OSFI has represented to the Commission that, in the process of its oversight and enforcement of the foregoing Canadian law and regulations, any SD or MSP subject to such standards that is a clearing member of a DCO would be required to comply with clearing member risk management requirements comparable to Commission regulation 23.609.

Commission Determination: The Commission finds that the OSFI standards specified above are generally identical in intent to § 23.609 because such standards seek to ensure the financial integrity of the markets and the clearing system, to avoid systemic risk, and to protect customer funds.

The Commission notes that the OSFI standards specified above are not as specific as § 23.609 with respect to ensuring that SDs and MSPs that are clearing members of a DCO establish detailed procedures and limits for clearing member risk management purposes. Nevertheless, the Commission finds that the general requirements under the OSFI standards specified above, implemented in the context of clearing member risk management and pursuant to the representations of OSFI, meet the Commission's regulatory objective specified above.

Based on the foregoing and the representations above, the Commission hereby determines that the clearing member risk management requirements of the Canadian law and regulations specified above are comparable to and as comprehensive as § 23.609.

C. Swap Data Recordkeeping (§§ 23.201 and 23.203)

Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the CEA, and Commission regulation 23.201 generally require SDs and MSPs to retain records of each transaction, each position held, general business records (including records related to complaints and sales and marketing materials), records related to governance, financial records, records of data reported to SDRs, and records of real-time reporting data along with a record of the date and time the SD or MSP made such reports. Transaction records must be kept in a form and manner identifiable and searchable by transaction and counterparty.

Commission regulation 23.203, requires SDs and MSPs to maintain records of a swap transaction until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, and for a period of five years after such date. Records must be “readily accessible” for the first 2 years of the 5 year retention period (consistent with § 1.31).

The Commission notes that the comparability determination below with respect to §§ 23.201 and 23.203 encompasses both swap data recordkeeping generally and swap data recordkeeping relating to complaints and marketing and sales materials in accordance with § 23.201(b)(3) and (4).

Regulatory Objective: Through the Commission's regulations requiring SDs and MSPs to keep comprehensive records of their swap transactions and related data, the Commission seeks to ensure the effectiveness of the internal controls of SDs and MSPs, and transparency in the swaps market for regulators and market participants.

The Commission's regulations require SDs and MSPs to keep swap data in a level of detail sufficient to enable regulatory authorities to understand an SD's or MSP's swaps business and to assess its swaps exposure.

By requiring comprehensive records of swap data, the Commission seeks to ensure that SDs and MSPs employ effective risk management, and strictly comply with Commission regulations. Further, such records facilitate effective regulatory oversight.

The Commission observes that it would be impossible to meet the regulatory objective of §§ 23.201 and 23.203 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 § 23.203 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 Canadian Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in Canada are in full force and effect in Canada, and comparable to and as comprehensive as sections 4s(f)(1)(B) and 4s(g)(1) of the CEA and §§ 23.201 and 23.203.

OSFI's Supervisory Framework requires banks to establish and maintain an enterprise-wide LCM framework of regulatory risk management controls, and these controls include oversight functions that are independent of the activities they oversee. OSFI expects the LCM framework to include “Adequate Documentation” as one of its key controls.

As set forth in the OSFI Derivatives Best Practice Guideline, each bank should have mechanisms in place to assure the confirmation, maintenance, and safeguarding of derivatives contract documentation. In particular, it states:

[t]he design of information systems will vary according to the risks demanded by the scope and complexity of an institution's involvement in derivatives. The degree of accuracy and timeliness of information processing should be sufficient to meet an institution's risk exposure monitoring needs. Appropriate information processing and reporting capabilities should be put in place and fully operational.

Finally, Sections 238, 239 and 597 of the Bank Act generally require banks carrying on business in Canada to maintain records in Canada and to ensure that OSFI can access in Canada any records necessary to enable OSFI to fulfill its supervisory mandate.

Commission Determination: The Commission finds that the Bank Act and OSFI standards specified above are generally identical in intent to §§ 23.201 and 23.203 because such standards seek to ensure the effectiveness of the internal controls of SDs and MSPs, and transparency in the swaps market for regulators and market participants.

In addition, the Commission finds that the Bank Act and OSFI standards specified above require SDs and MSPs to keep swap data in a level of detail sufficient to enable regulatory authorities to understand an SD's or MSP's swaps business and to assess its swaps exposure.

Finally, the Commission finds that the Bank Act and OSFI standards specified above, by requiring comprehensive records of swap data, seek to ensure that SDs and MSPs employ effective risk management, seek to ensure that SDs and MSPs strictly comply with applicable regulatory requirements (including the CEA and Commission regulations), and that such records facilitate effective regulatory oversight.

Based on the foregoing and the representations of the applicant, the Commission hereby determines that the requirements of the Bank Act and the OSFI standards with respect to swap data recordkeeping, as specified above, are comparable to, and as comprehensive as, §§ 23.201 and 23.203, with the exception of § 23.203(b)(2) concerning the requirement that an SD or MSPs make records required by § 23.201 open to inspection by any representative of the Commission, the United States Department of Justice, or any applicable U.S. prudential regulator. The applicant has not submitted any provision of law or regulations applicable in Canada upon which the Commission could make a finding that SDs and MSPs would be required to make records required by § 23.201 open to inspection by any representative of the Commission, the United States Department of Justice, or any applicable U.S. prudential regulator.

Notwithstanding that the Commission has not determined that the requirements of the Bank Act and the OSFI standards are comparable to and as comprehensive as § 23.203(b)(2), any SD or MSP to which both § 23.203 and the Bank Act and OSFI standards specified above are applicable would generally be deemed to be in compliance with § 23.203(b)(2) if that SD or MSP complies with the Bank Act and OSFI standards specified above, subject to compliance with the requirement that it make records required by § 23.201 open to inspection by any representative of the Commission, the United States Department of Justice, or any applicable U.S. prudential regulator in accordance with § 23.203(b)(2).

Appendices to Comparability Determination for Canada: Certain Entity-Level Requirements

Appendix 1—Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Chilton and Wetjen voted in the affirmative. Commissioner O'Malia voted in the negative.

Appendix 2—Joint Statement of Chairman Gary Gensler and Commissioners Bart Chilton and Mark Wetjen

We support the Commission's approval of broad comparability determinations that will be used for substituted compliance purposes. For each of the six jurisdictions that has registered swap dealers, we carefully reviewed each regulatory provision of the foreign jurisdictions submitted to us and compared the provision's intended outcome to the Commission's own regulatory objectives. The resulting comparability determinations for entity-level requirements permit non-U.S. swap dealers to comply with regulations in their home jurisdiction as a substitute for compliance with the relevant Commission regulations.

These determinations reflect the Commission's commitment to coordinating our efforts to bring transparency to the swaps market and reduce its risks to the public. The comparability findings for the entity-level requirements are a testament to the comparability of these regulatory systems as we work together in building a strong international regulatory framework.

In addition, we are pleased that the Commission was able to find comparability with respect to swap-specific transaction-level requirements in the European Union and Japan.

The Commission attained this benchmark by working cooperatively with authorities in Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland to reach mutual agreement. The Commission looks forward to continuing to collaborate with both foreign authorities and market participants to build on this progress in the months and years ahead.

Appendix 3—Statement of Dissent by Commissioner Scott D. O'Malia

I respectfully dissent from the Commodity Futures Trading Commission's (“Commission”) approval of the Notices of Comparability Determinations for Certain Requirements under the laws of Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland (collectively, “Notices”). While I support the narrow comparability determinations that the Commission has made, moving forward, the Commission must collaborate with foreign regulators to harmonize our respective regimes consistent with the G-20 reforms.

However, I cannot support the Notices because they: (1) Are based on the legally unsound cross-border guidance (“Guidance”); (2) are the result of a flawed substituted compliance process; and (3) fail to provide a clear path moving forward. If the Commission's objective for substituted compliance is to develop a narrow rule-by-rule approach that leaves unanswered major regulatory gaps between our regulatory framework and foreign jurisdictions, then I believe that the Commission has successfully achieved its goal today.

Determinations Based on Legally Unsound Guidance

As I previously stated in my dissent, the Guidance fails to articulate a valid statutory foundation for its overbroad scope and inconsistently applies the statute to different activities. Section 2(i) of the Commodity Exchange Act (“CEA”) states that the Commission does not have jurisdiction over foreign activities unless “those activities have a direct and significant connection with activities in, or effect on, commerce of the United States . . .” However, the Commission never properly articulated how and when this limiting standard on the Commission's extraterritorial reach is met, which would trigger the application of Title VII of the Dodd-Frank Act and any Commission regulations promulgated thereunder to swap activities that are outside of the United States. Given this statutorily unsound interpretation of the Commission's extraterritorial authority, the Commission often applies CEA section 2(i) inconsistently and arbitrarily to foreign activities.

Accordingly, because the Commission is relying on the legally deficient Guidance to make its substituted compliance determinations, and for the reasons discussed below, I cannot support the Notices. The Commission should have collaborated with foreign regulators to agree on and implement a workable regime of substituted compliance, and then should have made determinations pursuant to that regime.

Flawed Substituted Compliance Process

Substituted compliance should not be a case of picking a set of foreign rules identical to our rules, determining them to be “comparable,” but then making no determination regarding rules that require extensive gap analysis to assess to what extent each jurisdiction is, or is not, comparable based on overall outcomes of the regulatory regimes. While I support the narrow comparability determinations that the Commission has made, I am concerned that in a rush to provide some relief, the Commission has made substituted compliance determinations that only afford narrow relief and fail to address major regulatory gaps between our domestic regulatory framework and foreign jurisdictions. I will address a few examples below.

First, earlier this year, the OTC Derivatives Regulators Group (“ODRG”) agreed to a number of substantive understandings to improve the cross-border implementation of over-the-counter derivatives reforms. The ODRG specifically agreed that a flexible, outcomes-based approach, based on a broad category-by-category basis, should form the basis of comparability determinations.

However, instead of following this approach, the Commission has made its comparability determinations on a rule-by-rule basis. For example, in Japan's Comparability Determination for Transaction-Level Requirements, the Commission has made a positive comparability determination for some of the detailed requirements under the swap trading relationship documentation provisions, but not for other requirements. This detailed approach clearly contravenes the ODRG's understanding.

Second, in several areas, the Commission has declined to consider a request for a comparability determination, and has also failed to provide an analysis regarding the extent to which the other jurisdiction is, or is not, comparable. For example, the Commission has declined to address or provide any clarity regarding the European Union's regulatory data reporting determination, even though the European Union's reporting regime is set to begin on February 12, 2014. Although the Commission has provided some limited relief with respect to regulatory data reporting, the lack of clarity creates unnecessary uncertainty, especially when the European Union's reporting regime is set to begin in less than two months.

Similarly, Japan receives no consideration for its mandatory clearing requirement, even though the Commission considers Japan's legal framework to be comparable to the U.S. framework. While the Commission has declined to provide even a partial comparability determination, at least in this instance the Commission has provided a reason: The differences in the scope of entities and products subject to the clearing requirement. Such treatment creates uncertainty and is contrary to increased global harmonization efforts.

Third, in the Commission's rush to meet the artificial deadline of December 21, 2013, as established in the Exemptive Order Regarding Compliance with Certain Swap Regulations (“Exemptive Order”), the Commission failed to complete an important piece of the cross-border regime, namely, supervisory memoranda of understanding (“MOUs”) between the Commission and fellow regulators.

I have previously stated that these MOUs, if done right, can be a key part of the global harmonization effort because they provide mutually agreed-upon solutions for differences in regulatory regimes. Accordingly, I stated that the Commission should be able to review MOUs alongside the respective comparability determinations and vote on them at the same time. Without these MOUs, our fellow regulators are left wondering whether and how any differences, such as direct access to books and records, will be resolved.

Finally, as I have consistently maintained, the substituted compliance process should allow other regulatory bodies to engage with the full Commission. While I am pleased that the Notices are being voted on by the Commission, the full Commission only gained access to the comment letters from foreign regulators on the Commission's comparability determination draft proposals a few days ago. This is hardly a transparent process.

Unclear Path Forward

Looking forward to next steps, the Commission must provide answers to several outstanding questions regarding these comparability determinations. In doing so, the Commission must collaborate with foreign regulators to increase global harmonization.

First, there is uncertainty surrounding the timing and outcome of the MOUs. Critical questions regarding information sharing, cooperation, supervision, and enforcement will remain unanswered until the Commission and our fellow regulators execute these MOUs.

Second, the Commission has issued time-limited no-action relief for the swap data repository reporting requirements. These comparability determinations will be done as separate notices. However, the timing and process for these determinations remain uncertain.

Third, the Commission has failed to provide clarity on the process for addressing the comparability determinations that it declined to undertake at this time. The Notices only state that the Commission may address these requests in a separate notice at a later date given further developments in the law and regulations of other jurisdictions. To promote certainty in the financial markets, the Commission must provide a clear path forward for market participants and foreign regulators.

The following steps would be a better approach: (1) The Commission should extend the Exemptive Order to allow foreign regulators to further implement their regulatory regimes and coordinate with them to implement a harmonized substituted compliance process; (2) the Commission should implement a flexible, outcomes-based approach to the substituted compliance process and apply it similarly to all jurisdictions; and (3) the Commission should work closely with our fellow regulators to expeditiously implement MOUs that resolve regulatory differences and address regulatory oversight issues.

Conclusion

While I support the narrow comparability determinations that the Commission has made, it was my hope that the Commission would work with foreign regulators to implement a substituted compliance process that would increase the global harmonization effort. I am disappointed that the Commission has failed to implement such a process.

I do believe that in the longer term, the swaps regulations of the major jurisdictions will converge. At this time, however, the Commission's comparability determinations have done little to alleviate the burden of regulatory uncertainty and duplicative compliance with both U.S. and foreign regulations.

The G-20 process delineated and put in place the swaps market reforms in G-20 member nations. It is then no surprise that the Commission must learn to coordinate with foreign regulators to minimize confusion and disruption in bringing much needed clarity to the swaps market. For all these shortcomings, I respectfully dissent from the Commission's approval of the Notices.