4 [Explanation: The provisions below amend the definition ofa "swap" that is subject to
5 regulation under the bill by: 1) deleting the exclusion for foreign exchange swaps and including
6 foreign exchange swaps in the definition ofa "swap"; and 2) limiting eligibility for the exclusion
7 for foreign exchange forwards, andproviding that eligible forwards are subject to the reporting
10 (a) Page 7, lines 15-16 is amended by inserting "foreign exchange swap," after "currency
11 swap,";
12
13 (b) Page 10, line 18 is amended by striking clause (ix) and re-designating clauses (x)
15
16 (c) Page 10, line 19: Section la(35)(B)(ix) (as re-designated in subsection (b)) is amended
17 to read as follows:
CFTC-CREW-0564
1 "(cc) that is not structured to evade the Over-the-
12 prescribe; and
16
17
CFTC-CREW-0565
1 PARAGRAPH 2
5 swaps that are "primarily" based on a single security (or loan) or narrow-based security index.
8 and not a "security-based swap." These amendments also would delete the provisions of Title
10
11 (a) On page 11, lines 3-5, strike ", other than a security-based swap as described in
12 paragraph 38(C)".
13
14 (b) On page 13, line4, strike "is based" and insert "is primarily based".
15
16 (c) On page 14, strike lines 1 through 17, and in line 18 strike "(D)" and insert "(C)".
17
18 (d) On page 25, lines 8-9, strike ", including any authority to regulate with respect to a
20
CFTC-CREW-0566
1 PARAGRAPH 16
6 understand to be the intent of the standard ofconduct for swap dealers and major swap
8 existing provisions in the CEA. Parallel provisions also are provided with respect to security-
10
12
13 a. In line 7, insert "for a swap dealer or major swap participant," after "standard
14 of conduct" .
15
16 b. In lines 9-11, strike "subclause (I) or (II) of section la(13) of this Act, having"
17 and insert "clause (vii)(I) or (II) of section la(13) of this Act, to have".
18
21
22
24
CFTC-CREW-0567
1 a. In line 3, insert "for a security-based swap dealer or major security-based
4 b. In lines 5-7, strike "subclause (I) or (II) of section la(13) of the Commodity
5 Exchange Act (7 U.S.C. la(13)), having" and insert "clause (vii)(I) or (II) of
10 swap participant".
11
12
CFTC-CREW-0568
1 PARAGRAPH 18
5 [Explanation: Set forth below are draft amendments to the Bankruptcy Code, which extend to
6 swap dealers, their counterparties (with respect to non-cleared OTC contracts), and their
7 customers (with respect to cleared OTC contracts), the special protections (i.e., transfer and
10 few analogous provisions, be extended to cover non-cleared security-based swaps. Also set forth
11 below are proposed amendments to the Commodity Exchange Act (the "CEA ''), which
12 amendments define certain entities within the jurisdiction of the CFTC, which entities are
13 therefore properly afforded special protections similar to those that Subchapter IV affords.]
14
15 Page 121, line 20: After Section 734, insert the following:
16
17 SEC. 735. DEFINITIONS.-Section la of the Commodity Exchange Act (7 US.c. la) is further
19 "(51) NON-CLEARED SWAP.-The term "non-cleared swap" means a swap that is not
20 cleared, as set forth in section 20), and for which at least one counterparty is a non-cleared swap
21 dealer.
CFTC-CREW-0569
1 "(53) NON-CLEARED SWAP PARTICIPANT.-The term "non-cleared swap participant"
5 SEC. 736. DEBToRs.-Section 20 of the Commodity Exchange Act (7 US.c. 24) is amended-
6 (a) in subsection (a) in the matter preceding paragraph (1) by inserting "subchapter IV of'
10 "(1) Notwithstanding title 11 of the United States Code, the Commission may provide,
16 "(ii) is to be
20 "(B) if the debtor is a non-cleared swap dealer, the method by which the
21 business of such debtor is to be conducted or liquidated after the date of the filing
CFTC-CREW-0570
1 "(C) any persons to which non-cleared swaps, and property securing such non-
2 cleared swaps, may be transferred under section 795 of title 11; and
3 "(D) the manner in which net equity of a counterparty to the debtor will be
4 calculated.
5 "(2) As used in this section, the term "net equity" shall have the meaning assigned to
8 (a) Section 101(6) of chapter 1 of title 11 of the United States Code is amended by inserting
10 (b) Section 109( d) of chapter 1 of title 11 of the United States Code is amended by striking
11 "or a commodity broker" and inserting ", a commodity broker, or a non-cleared swap dealer as
14 (a) Section 761 of subchapter IV of chapter 7 of title 11 of the United States Code is amended
15 by-
18 "(A) with respect to a futures commission merchant, contract for the purchase
19 or sale of a commodity for future delivery on, or subject to, the rules of a contract
20 market;";
22 (K);
CFTC-CREW-0571
1 "(B) with respect to a swap clearer, a swap that is submitted to a derivatives
4 as follows:
5 "(E) with respect to a clearing organization, a contract for the purchase or sale
6 of a commodity for future delivery on, or subject to the rules of a contract market
8 subject to the rules of, a contract market that is cleared by such clearing
11 "(7) "contract market" means a board of trade designated as a contract market under
12 Section 5 of the Act, including a board of trade designated as a contract market under
14 (3) in paragraph (8) by striking ", 'future delivery', 'board of trade' , 'registered
15 entity', and 'futures commission merchant" and inserting ", 'future delivery', 'board of
19 (F); and
22 "(i) entity for or with whom such swap clearer deals and that holds a
CFTC-CREW-0572
1 received, acquired, or held by or through such swap clearer in the ordinary
2 course of such swap clearer's business as swap clearer from or for the
3 account of such entity, which account pertains to swaps that are submitted
5 "(ii) entity that holds a claim against a swap clearer arising out of-
7 commodity contract;
12 contract.";
16 "(19) "swap clearer" means a swap dealer, futures commission merchant, foreign
22 (b) Section 762 of subchapter IV of chapter 7 of title 11 of the United States Code is
23 amended by-
10
CFTC-CREW-0573
1 (1) striking the title and inserting "Notice to the Commission, right to be heard,
4 "( c) In a case under this chapter, the court shall appoint, as trustee for the liquidation of the
5 business of the debtor, such person as the Commission, in its sole discretion, specifies. Chapter
6 3 and sections 704 and 705 of this title shall apply to the Commission in the same way and to the
7 same extent that they apply to a United States trustee. This subsection shall not apply to a debtor
8 that is a stockbroker or an insured depository institution as such term is defined in section 3(c) of
10 "( d) To the extent that any commodity broker may also be a non-cleared swap counterparty,
11 as such term is defined in section 791 of this title, then such commodity broker may be a debtor
12 only under this subchapter, and may not be a debtor under subchapter VI of this chapter.
13 However, to the extent consistent with this subchapter or as otherwise ordered by the court or the
14 Commission, a trustee in a case under this chapter shall be subject to the same duties as a trustee
18 "subchapters III and IV" and inserting "subchapters III, IV and VI".
20 the United States Code is amended by inserting after subchapter V the following:
21 "SUBCHAPTER VI-SWAPS
11
CFTC-CREW-0574
1 "(1) 'Commission" means Commodity Futures Trading Commission;
2 "(2) 'net equity' means, subject to such rules and regulations as the Commission promulgates
3 under the Commodity Exchange Act, with respect to the aggregate of all accounts held by the
4 debtor for a particular non-cleared swap counterparty in the same capacity, the balance
6 "(A) the transfer or liquidation of all non-cleared swaps to which such non-cleared swap
8 "(B) the offset of all obligations that the non-cleared swap counterparty in such capacity
10 "(3) 'non-cleared swap', 'non-cleared swap dealer', and 'non-cleared swap participant' shall
11 have the meanings assigned to those terms in section 1a of the Commodity Exchange Act.
15 "(5) 'non-cleared margin property' means the margin that has been set aside by a non-cleared
17 "11 USC §792. Notice to the Commission, right to be heard, appointment of trustee
18 "(a) The clerk shall give the notice required by section 342 of this title to the Commission in a
20 "(b) The Commission may, on its own motion, file notice of its appearance in any case under this
21 chapter or chapter 11 involving a non-cleared swap counterparty, and may thereafter raise and
22 appear and be heard on any issue in such a case, and may appeal from any judgment, order or
12
CFTC-CREW-0575
1 decree in such a case that concerns the timing, amount, or recipients of any disposition of non-
3 "(c) In a case under this chapter involving a non-cleared swap dealer, the court shall appoint, as
4 trustee for the liquidation of the business of the debtor, such person as the Commission, in its
5 sole discretion, specifies. Chapter 3 and sections 704 and 705 of this title shall apply to the
6 Commission in the same way and to the same extent that they apply to a United States trustee.
7 This subsection shall not apply to a debtor that is (1) a stockbroker or (2) an insured depository
8 institution, as such term is defined in section 3(c) of the Federal Deposit Insurance Act.
10 "(a) Accounts held by the debtor for a particular non-cleared swap counterparty in separate
12 "(b) The net equity in a non-cleared swap counterparty's account may not be offset against the
15 "(a) Except as otherwise provided in this section, any transfer by the debtor of property that, but
16 for such transfer, would have been non-cleared margin property, may be avoided by the trustee,
17 and such property shall be treated as non-cleared margin property, if and to the extent that the
18 trustee avoids such transfer under section 544, 545, 547, 548, 549, or 724(a) of this title. For the
19 purpose of such sections, the property so transferred shall be deemed to have been property of
20 the debtor, and, if such transfer was made to a non-cleared swap counterparty or for a non-
21 cleared swap counterparty's benefit, such non-cleared swap counterparty shall be deemed, for the
13
CFTC-CREW-0576
1 "(b) Notwithstanding sections 544,545,547,548,549, and 724(a) of this title, the trustee may
2 not avoid a transfer made before [seven] days after the order for relief, if such transfer is
3 approved by the Commission by rule or order, either before or after such transfer, and if such
4 transfer is-
5 "( 1) a transfer of a non-cleared swap and of any non-cleared margin property securing
9 "(a) The trustee shall distribute non-cleared margin property ratably to non-cleared swap
10 counterparties on the basis and to the extent of such nonOcleared swap counterparties' allowed
11 net equity claims, and in priority to all other claims, except claims of a kind specified in section
12 507(a)(2) of this title that are attributable to the administration of non-cleared margin property.
14 "(1) cash; or
16 "(b)( 1) The trustee shall distribute non-cleared margin property in excess of that distributed
17 under subsection (a) of this section in accordance with section 726 of this title.
18 "(2) Except as provided in section 510 of this title, if a non-cleared swap counterparty is
19 not paid the full amount of such non-cleared swap counterparty's allowed net equity
20 claim from non-cleared margin property, the unpaid portion of such claim is a claim
14
CFTC-CREW-0577
1 "(c)(I) The trustee shall endeavor to transfer non-cleared swaps and associated non-cleared
2 margin property to one or more solvent substitute counterparties as soon as practicable, but in
3 any event shall do so within [seven] days of the order for relief.
4 "(2) The trustee shall, as soon as practicable, but in any event within [thirty] days of the
6 "(A) liquidate any nonOcleared swap that has not been transferred;
7 "(B) calculate the net equity claim for each non-cleared swap counterparty; and
9 this section.
10 "(3) The court may increase the period specified in paragraph (2) only upon a
11 demonstration by the trustee that distribution within such period is impracticable, and
13
14
15
CFTC-CREW-0578
1 PARAGRAPH 19
5 [Explanation: The provisions below strengthen the Commodity Exchange Act's ("CEA 's '')
7 markets ''). Specifically, these provisions combine the existing registration criteria and core
8 principles into a comprehensive and unified set ofcore principles for designated contract
9 markets, clarify ambiguities in the existing core principles, and re-state them in more specific
10 terms.]
11
12 Page 96, line 2 through page 98, line 12 is stricken and replaced with the following:
13
14 (a) Section 5(b) of the Commodity Exchange Act (7 U.S.C. 7(b)) is repealed.
15 (b) Section 5(d) of the Commodity Exchange Act (7 U.S.C. 7(d)) is amended to read as
16 follows:
18 "(1) INGENERAL.-To be designated as, and to maintain the designation ofa board of
19 trade as a contract market, the board of trade shall comply with the core principles
20 specified in this subsection and any requirement that the Commission may impose by rule
22 otherwise by rule or regulation, the board of trade shall have reasonable discretion in
16
CFTC-CREW-0579
1 "(2) COMPLIANCE WITH RULES.-
2 "(A) The board of trade shall monitor and enforce compliance with the rules of
3 the contract market, including access requirements, the terms and conditions of
4 any contracts to be traded on the contract market and the contract market's
6 "(B) The board of trade shall have the capacity to detect, investigate, and apply
7 appropriate sanctions to, any person or entity that violates the rules.
8 "(C) The rules shall provide the board of trade with the ability and authority to
9 obtain any necessary information to perform any of the functions described in this
13 list on the contract market only contracts that are not readily susceptible to manipulation.
14 "(4) PREVENTION OF MARKET DISRUPTION.-The board of trade shall have the capacity
22 excessive speculation as described in section 4a(a), the board of trade shall adopt
17
CFTC-CREW-0580
1 for each of its contracts, where necessary and appropriate, position limitations or
3 "(B) For any contract that is subject to a position limitation established by the
4 Commission pursuant to section 4a(a), the board of trade shall set its position
6 "(6) EMERGENCY AUTHORITY.-The board of trade shall adopt rules to provide for the
12 requirements.
14 available to market authorities, market participants, and the public accurate information
15 concermng-
16 "(A) the terms and conditions of the contracts of the contract market; and
18 through the facilities of the contract market, and the rules and specifications
18
CFTC-CREW-0581
1 "(8) DAILY PUBLICATION OF TRADING INFORMATION.-The board of trade shall make
2 public daily information on settlement prices, volume, open interest, and opening and
5 "(A) The board of trade shall provide a competitive, open, and efficient market
6 and mechanism for executing transactions that protects the price discovery
8 "(B) The rules may authorize, for bona fide business purposes-
15 enter into or confirm the execution of a contract for the purchase or sale of
18 clearing organization.
19 "(10) TRADE INFORMATION.-The board of trade shall maintain rules and procedures
20 to provide for the recording and safe storage of all identifying trade information in a
21 manner that enables the contract market to use the information for purposes of assisting
19
CFTC-CREW-0582
1 in the prevention of customer and market abuses and providing evidence of any
4 and enforce rules and procedures for ensuring the financial integrity of transactions
5 entered into on or through the facilities of the contract market (including the clearance
6 and settlement of the transactions with a derivatives clearing organization), and rules to
7 ensure the financial integrity of any futures commission merchants and introducing
10 establish and enforce rules to protect markets and market participants from abusive
12 acting as an agent for a participant, and to promote fair and equitable trading on the
13 contract market.
15 disciplinary procedures that authorize the board of trade to discipline, suspend, or expel
16 members or market participants that violate the rules of the board of trade, or similar
17 methods for performing the same functions, including delegation of the functions to third
18 parties.
20 regarding and provide facilities for alternative dispute resolution as appropriate for
20
CFTC-CREW-0583
1 "(15) GoVERNANCE FITNESS STANDARDs.-The board of trade shall establish and
3 committee, members of the contract market, and any other persons with direct access to
4 the facility (including any parties affiliated with any of the persons described in this
5 paragraph).
6 "(16) CONFLICTS OF INTEREsT.-The board of trade shall establish and enforce rules to
7 minimize conflicts of interest in the decision-making process of the contract market and
13 related to the business of the contract market in a form and manner acceptable to the
17 "(A) adopting any rules or taking any actions that result in any unreasonable
18 restraints of trade; or
20 market.
21
CFTC-CREW-0584
1 "(A) establish and maintain a program of risk analysis and oversight to identify
3 controls and procedures, and the development of automated systems, that are reliable,
5 "(B) establish and maintain emergency procedures, backup facilities, and a plan
6 for disaster recovery that allow for the timely recovery and resumption of operations and
8 "(C) periodically conduct tests to verify that backup resources are sufficient to
9 ensure continued order processing and trade matching, price reporting, market
12 "(A) The board of trade shall have adequate financial, operational, and
15 their value exceeds the total amount that would enable the contract market to
16 cover its operating costs for a period of one year, calculated on a rolling basis.".
17
22
CFTC-CREW-0585
1 PARAGRAPH 20
5 [Explanation: The Administration's proposed OTC legislation based the new provisions for
6 ASEFs on the existing provisions for designated contract markets under the CEA. Thus, as is
7 currently the case for designated contract markets, the Administration proposal includes both a
8 set ofregistration criteria and a separate set ofcore principles for ASEFs. Just as the
9 amendments immediately above would consolidate and streamline the provisions for contract
10 markets, the amendments below would do the same thing with respect to ASEFs.]
11
12 (a) Page 87, line 5 through 95, line 3, is stricken and replaced with the following:
15 alternative swap execution facility, the facility shall comply with the core principles
16 specified in this subsection and any requirement that the Commission may impose by rule
21 (A) monitor and enforce compliance with any of the rules of the facility,
22 including the terms and conditions of the swaps traded on or through the facility and any
23
CFTC-CREW-0586
1 (B) establish and enforce trading and participation rules that will deter
2 abuses and have the capacity to detect, investigate, and enforce those rules, including
3 means to-
5 market; and
9 facility shall permit trading only in swaps that are not readily susceptible to manipulation.
16 and disciplinary practices and procedures, including methods for conducting real-time
19 "(A) establish and enforce rules that will allow the facility to obtain any
24
CFTC-CREW-0587
1 "(6) POSITION LIMITS ORACCOUNTABILITY.-
5 shall adopt for each of its contracts, where necessary and appropriate, position
8 the Commission pursuant to section 4a(a), the swap execution facility shall set its
11 establish and enforce rules and procedures for ensuring the financial integrity of swaps
12 entered on or through its facilities, including the clearance and settlement of the swaps
15 provide for the exercise of emergency authority, in consultation or cooperation with the
19 facility shall make public timely information on price, trading volume, and other trading
22 maintain records of all activities related to the business of the facility, including a
23 complete audit trail, in a form and manner acceptable to the Commission for a period of 5
25
CFTC-CREW-0588
1 years, and report to the Commission all information determined by the Commission to be
2 necessary or appropriate for the Commission to perform its responsibilities under this Act
3 in a form and manner acceptable to the Commission. The Commission shall adopt data
4 collection and reporting requirements for alternative swap execution facilities that are
6 swap repositories.
8 the purposes of this Act, the swap execution facility shall avoid-
9 "(A) adopting any rules or taking any actions that result in any
12 execution facility.
26
CFTC-CREW-0589
1 "(B) The swap execution facility's financial resources shall be considered
2 adequate if their value exceeds the total amount that would enable the facility to
3 cover its operating costs for a period of one year, calculated on a rolling basis.
10 plan for disaster recovery that allow for the timely recovery and resumption of
11 operations and the fulfillment of the swap execution facility's responsibilities and
12 obligation; and
16 audit trail.
21 "(i) shall report directly to the board or to the senior officer of the
22 facility; and
23 "(ii) shall-
27
CFTC-CREW-0590
1 "(I) review compliance with the core principles in section
2 5h(d).
6 anse;
17 non-compliant issues.
19 annually prepare and sign a report on the compliance of the facility with the
20 commodity laws and its policies and procedures, including its code of ethics and
23 the facility that are required to be furnished to the Commission pursuant to this
28
CFTC-CREW-0591
1 section and shall include a certification that, under penalty of laws, the report is
4 (b) On page 95, re-designate subsections paragraphs (f) and (g), as (e) and (f), respectively.
29
CFTC-CREW-0592
1 PARAGRAPH 23
5 [Explanation: Thefollowing amendment would repeal Sections 408 and 409 ofthe Federal
6 Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which address clearing of
7 "over-the-counter derivative instruments" as defined therein, and which were enacted as part of
8 the CFMA. These provisions are no longer necessary in light ofthe regulatory scheme
9 contained in the legislation. Further, retaining them would at best create uncertainty, and could
10 at worst create a loophole, through the interplay between "swaps" and "security-based swaps"
11 as defined in this legislation on the one hand, and "over-the-counter derivative instruments" as
13
14 Page Ill, line 23 through page 112, line 11 are stricken and replaced with the following:
15
16 Sections 408 and 409 of the Federal Deposit Insurance Corporation Improvement Act of
18
19
30
CFTC-CREW-0593
1 PARAGRAPH 25
4 [Explanation: Despite the recent amendments to the CEA enacted as part oflast year's Farm
5 Bill, retail off-exchange foreign currency ("forex '') trading continues to be a fertile area offraud
6 and trading abuse ofretail customers. What is more, the CFTC has started to see these
7 problems migrate to other commodities as well. The legislation continues in place the Farm
8 Bill's fraudfix for "futures look-alike" contracts in foreign currency, and extends that fix to
9 contracts in all other commodities. It also reaffirms that such retail "futures look-alike"
10 contracts must be traded on designated contract markets (except for retail foreign currency
11 trading, which is permitted under the CFMA). The amendments below, in addition to making
12 some technical corrections, would tighten these provisions by narrowing the timing element for
13 the forward exclusion from 28 to 2 days and clarifying the application of these provisions to a
15
16 (a) On page 115, line 19, insert "Sa" before "(to the extent".
17
18 (b) On page 116, line 18, strike "described in" and insert "that is subject to".
19
20 (c) On page 117, line 2, strike "28" and insert "2".
21
22 (d) On page 118, line 3, strike "described in" and insert "that is subject to".
23
24 (e) On page 119, after clause (vi), insert the following:
31
CFTC-CREW-0594
1 "(vii) For the purposes of clause (ii)(III)(aa), the term "actual delivery"
2 shall not include delivery to a third party in a financed transaction where the
32
CFTC-CREW-0595