ANALYSIS OF PROPOSED

OVER-THE-COUNTER DERIVATIVES MARKETS ACT OF 2009

(August 17, 2009)

The Administration’s Over-the-Counter Derivatives Markets Act of 2009 (“Proposed OTC Act”)
effectively addresses the complex regulatory reform issues with respect to OTC derivatives.
These reforms are critical to lower risk, promote transparency and protect market integrity.
Reform must comprehensively regulate both swap dealers and the markets in which swaps trade.

The Proposed OTC Act would implement the following important steps:

! Eliminate exclusions and exemptions from regulation for OTC derivatives and extend the
regulatory regimes of the Commodity Exchange Act (“CEA”) and the federal securities
laws to fully cover OTC swaps in all commodities;

! Require the registration and regulation of swap dealers and major swap participants,
including capital, margin and reporting and recordkeeping requirements as well as
business conduct, documentation and back office standards;

! Require that standardized swaps be cleared by clearinghouses that are registered with,
and regulated by, the CFTC or the SEC;

! Require that standardized swaps be traded either on regulated exchanges or, if trading is
limited to commercial and sophisticated traders, on alternative swap execution facilities
(“ASEFs”), which are regulated, transparent electronic trade execution systems;

! Require that information on standardized swaps traded on exchanges or ASEFs be made

public in a timely manner, including price, trading volume and other trade information;

! Apply the CFTC’s and SEC’s enforcement authority to OTC derivatives and those who
trade them;

! Establish a comprehensive reporting and recordkeeping regime for swaps, including swap
repositories and a large trader reporting system for the collection of data regarding swaps;

! Require public disclosure of aggregate data on swap trading volumes and positions;

! Give the CFTC and SEC authority to set aggregate position limits across markets;

! Impose conflict-of-interest requirements on trading firms to keep research and analysis

appropriately separated from the trading function;

! Enhance Core Principles for all derivatives clearing organizations to be in alignment with
international standards; and
 ! Place, consistent with existing law pursuant to the “Shad-Johnson Accord,” swaps on
broad-based security indexes within the CFTC’s jurisdiction, and swaps on single
securities and narrow-based security indexes (“security-based swaps”) within the SEC’s
jurisdiction.

The Proposed OTC Act also includes other important provisions that apply uniquely to the CEA:

! Strengthens the CFTC’s rulemaking, oversight and enforcement authorities with respect
to registered futures exchanges and clearinghouses;

! Enhances the CFTC’s authority, including a registration requirement, for certain foreign
boards of trade that provide access to persons located in the United States; and

! Extends the “Zelener fraud fix,” which Congress enacted in last year’s Farm Bill with
respect to CFTC enforcement authority over off-exchange retail foreign currency
transactions, to similar contracts in other commodities.

Based on a preliminary review of the Proposed OTC Act, the following are areas where further
improvements and refinements of the draft statutory text are appropriate:

1. FX Swaps and Forwards

The Proposed OTC Act would exclude foreign exchange swaps and foreign exchange forwards
from the definition of a “swap” regulated by the CFTC. The concern is that these broad
exclusions could enable swap dealers and participants to structure swap transactions to come
within these foreign exchange exclusions and thereby avoid regulation.

In particular, currency and interest rate swaps could be broken down into their component parts
and then restructured to resemble a series of foreign exchange forwards or a foreign exchange
swap to come within the scope of these foreign exchange exclusions and thereby avoid
regulation. For example, these foreign exchange exclusions might be used to exclude each
individual leg of a currency swap, and/or the final currency exchange at maturity (which is often
a significant portion of the economic value of a currency swap), from the new regulatory regime
for swaps. In short, these exceptions could swallow up the regulation that the Proposed OTC Act
otherwise provides for currency and interest rate swaps.

There is also a risk that these exclusions may have the unintended consequence of undermining
the CFTC’s enforcement authority over retail foreign currency fraud enacted by Congress as part
of last year’s Farm Bill. Furthermore, although the Proposed OTC Act includes “anti-evasion”
provisions authorizing the CFTC and SEC to prescribe rules defining a “swap” and “security-
based swap” to include transactions that have been structured to evade regulation, those
provisions are not specifically tied to the exclusions for foreign exchange swaps and forwards.

As an alternative to these exclusions: 1) the foreign exchange swap exclusion should be stricken
so that all swaps are covered by the Proposed OTC Act; and 2) an appropriately tailored
exclusion for foreign exchange forwards should be adopted. This narrower exclusion for foreign

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exchange forwards should: 1) not apply to transactions involving retail customers; 2) be
explicitly tied to the anti-evasion rulemaking authority provided to the CFTC and SEC; and
3) require compliance with the transparency and business conduct provisions of the Proposed
OTC Act. Attachment A provides proposed statutory text along these lines.

2. Mandatory Clearing and Exchange Trading of Standardized Swaps

The Proposed OTC Act provides for mandatory clearing and exchange trading of standardized
swaps. It creates an exception, however, from the mandatory clearing and trading requirements
when one of the counterparties is not a swap dealer or major swap participant (and does not meet
the eligibility requirements of any clearinghouse that clears the swaps). This excludes a
significant class of end users from the clearing and mandatory trading requirement. This major
exception may undermine the policy objective of lowering risk through bringing all standardized
OTC derivatives into centralized clearing. It may also undermine the policy objective of
increasing transparency and market efficiency through bringing standardized OTC derivatives
onto exchanges or ASEFs.

The concern that end-users cannot directly access a clearinghouse, because they do not meet the
eligibility requirements for clearing membership, can be addressed by the end-users accessing
clearing through an entity that is a clearing member. That is, end users could establish a client
relationship with a clearing member who would then clear the transaction in a client account on
behalf of the end-user. Furthermore, end users should be permitted by regulators to use non-cash
collateral to satisfy their margin obligations in appropriate circumstances. This would allow for
a mandatory clearing requirement for standardized swaps, just as there is a mandatory clearing
requirement for all futures and options on futures.

3. Bankruptcy and Set-Aside Provisions

The Proposed OTC Act includes important protections with respect to insolvency risk involving
OTC swaps.

It would be prudent to include several additional measures to protect customers and

counterparties in the event of a bankruptcy of a swap dealer. Specifically, the legislation should
impose a mandatory set-aside requirement with respect to collateral received by swap dealers.
This set-aside requirement would be equivalent to the CEA’s segregation requirement for
futures, which has effectively protected customer funds from loss ever since the CFTC was
created in 1974.

As important, the legislation should amend the Bankruptcy Code to afford, in the event of a swap
dealer bankruptcy, swap counterparties and customers of swap dealers similar protections as
those currently available to futures customers of commodity brokers. These protections include
the transfer of customer funds to other solvent commodity brokers in the event of a bankruptcy
without violating the automatic stay or being subject to the bankruptcy trustee’s avoidance
powers, and the special customer priority in bankruptcy (ahead of all unsecured claims other than
certain administrative expenses of the debtor’s estate) with respect to customer property,
including segregated funds. Such protections, if enacted into the Bankruptcy Code with respect

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to swap dealers, along with mandatory set-aside of funds, will serve to protect counterparties and
customers in the event of swap dealer insolvencies. This will reduce the impact of such
insolvencies on the financial system, and further mitigate the insolvency risk associated with
OTC swaps. Attachment B provides proposed statutory text along these lines.

4. Multilateral Clearing Organizations

The Proposed OTC Act sets forth a comprehensive regulatory regime for clearing swaps. Any
entity that clears swaps must register with the CFTC as a DCO (even if it is registered with the
SEC as a clearing agency), and conversely, any entity that clears security-based swaps must
register with the SEC (even if the entity is registered with the CFTC as a DCO).

A concern arises, though, because the Proposed OTC Act also retains the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) that permit banks
and certain foreign clearinghouses (collectively called multilateral clearing organizations) to
clear “over-the-counter-derivative instruments” as defined in FDICIA. The current FDICIA
provisions are inconsistent with the comprehensive scheme established by the proposed OTC
Act. Retaining them could create a situation where banks and foreign clearinghouse could clear
swaps outside this new regulatory structure and be subject to potentially lesser standards.

These FDICIA clearing provisions should be repealed. The requirement that swap
clearinghouses register with the CFTC or SEC applies to banks and foreign clearinghouses, and
thus, with respect to swaps, there is no longer a need for these FDICIA provisions.

Further, the universe of instruments within the definition of an “over-the-counter derivative

instrument” in FDICIA is larger than the universe of instruments that would fall within the
combined definitions of “swap” and “security-based swap” in the Proposed OTC Act. Swap
participants that want to avoid the comprehensive clearing framework in this legislation could
claim that their transactions are not swaps or security-based swaps, but rather “over-the-counter
derivative instruments” as defined in FDICIA. This risk would be avoided by repealing Sections
408 and 409 of FDICIA.

5. Mixed Swaps

The Proposed OTC Act appears to provide for dual CFTC-SEC regulation of “mixed swaps.”
That is, if a swap derives its value in part from a security or narrow-based security index (and is
therefore subject to SEC regulation), and it derives part of its value from something else such as
currency, interest rates, broad-based security indexes or commodities (and is therefore subject to
CFTC regulation), that swap will be dually regulated by both agencies. This would be the case
whether 90% of the value is derived from a security and 10% is derived from something else, or
vice versa.

Dual regulation of “mixed swaps” would be a departure from the approach taken in the rest of
the Proposed OTC Act. Elsewhere, the Proposed OTC Act provides for the CFTC and SEC to
separately administer parallel regulatory regimes with respect to swaps and security-based

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swaps, respectively, pursuant to uniform rules adopted through joint rulemakings. Dual
regulation, by contrast, suggests that both agencies will be regulating the same activities, which
may yield duplication and inefficiency.

Accordingly, the “mixed swap” provisions of the Proposed OTC Act should be stricken. Instead,
these instruments should be subject either to SEC regulation if their value is based “primarily”
on a security or narrow-based security index, or to CFTC regulation if their value is based
“primarily” on something else. Since the Proposed OTC Act requires the CFTC and SEC to use
rulemaking to further define the terms “swap” and “security-based swap” anyway, this
rulemaking would be the appropriate forum for defining the term “primarily” in this context so
as to provide legal certainty, without burdensome dual regulation, for “mixed swap” products.

6. Designated Contract Market Core Principles

The Proposed OTC Act includes: 1) amendments to clarify current CEA Core Principle 9 for
designated contract markets (“DCMs”) regarding execution of transactions; and 2) two new Core
Principles, regarding minimum financial resources and system safeguards, respectively, which
mirror two new Core Principles being proposed for DCOs as well.

Additional measures could be taken to bolster and streamline the existing Core Principles for
DCMs. In particular, CEA Section 5 includes both Designation Criteria that a DCM must meet
in order to be designated by the CFTC, as well as separate Core Principles that a DCM must
maintain to continue to operate in that capacity. These Designation Criteria and Core Principles
largely overlap and are redundant of each other. Further, to the extent there are unique
requirements in the Designation Criteria, some contend that they apply only in the context of
designation applications and not necessarily on an ongoing basis as do the Core Principles.

To address this situation, the CEA’s current Designation Criteria and Core Principles for DCMs
should be replaced with an updated and unified set of Core Principles. Attachment C provides
proposed statutory text along these lines. (If Congress decides to enact a unified set of DCM
Core Principles, it may want to consider adopting a unified set of Core Principles for ASEFs, as
well. We are available to provide technical drafting assistance in this regard upon request.)

7. Retail Off-Exchange Commodity Transactions (Non-Forex)

In last year’s Farm Bill, Congress enacted a provision commonly referred to as the “Zelener
fraud fix.” This provision overturned a ruling by the 7th Circuit Court of Appeals in the Zelener
case that permitted fraudsters to evade the CFTC’s anti-fraud authority by peddling off-exchange
foreign currency (“forex”) contracts to retail customers that were written to look like spot
currency transactions, but that in reality operated like futures contracts. Since Congress closed
the Zelener loophole, the CFTC has aggressively pursued enforcement actions to combat this
type of retail forex fraud. As a result, the CFTC’s Division of Enforcement has seen these
fraudsters start to migrate to commodities other than forex, offering the same Zelener-type
contract in commodities that are not covered by the Farm Bill’s Zelener fraud fix for forex.

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The Proposed OTC Act addresses this growing problem by including a “broad Zelener fraud fix”
that extends the CFTC’s retail fraud authority for forex under the Farm Bill to other commodities
as well. This would be a substantial tool in the CFTC’s arsenal to protect retail commodity
customers from fraud and abuse.

Several additional measures would provide the public with additional protections from fraud.
Specifically: 1) the timeframe for actual delivery of a commodity, which would take the
transaction outside the scope of the broad Zelener fraud fix, should be reduced; and 2) in order to
avoid leaving a potential loophole to evade the broad Zelener fraud fix, the provision should
clarify that the term “actual delivery” does not include delivery to a third party in a financed
transaction where the commodity is held as collateral. Attachment D provides proposed
statutory text along these lines.

8. Further Input

Technical comments regarding the statutory text of the Proposed OTC Act will be provided
under separate cover. Provisions warranting particular focus are the jurisdictional “savings
clause” in Section 712(b) (page 14), and enforcement authority over swaps in which a material
term is based on the price, yield, value or volatility of any security or index of securities (page
72).

Another issue of importance is the relationship between the market regulators and any systemic
regulator set up through the other titles of the Administration’s legislative proposals. In
particular, Title VIII regarding Payment, Clearing and Settlement Supervision raises a significant
concern that the regulation of systemically important clearinghouses and clearing firms could
hinder the CFTC and SEC in their administration of the comprehensive regulatory scheme for
swaps provided for in the Proposed OTC Act. Comments regarding Title VIII will be provided
under separate cover.

Finally, also under consideration are additional proposed amendments to the CEA. This would
include further protecting consumers in retail off-exchange foreign currency trading in light of
the CFTC’s experience in this area. These proposals would be intended to bolster and enhance
the CFTC’s existing enforcement and oversight authorities with respect to the markets.

Attachment A: Proposed amendments to foreign exchange swap and forward exclusions

in the Proposed OTC Act
Attachment B: Proposed set-aside and bankruptcy provisions
Attachment C: Proposed new and updated Core Principles for DCMs
Attachment D: Proposed amendments to retail off-exchange commodity transaction provisions
in the Proposed OTC Act

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 1 ATTACHMENT A

2 FX Swap and Forward Exclusions from “Swap” Definition

3 [EXPLANATION – The provisions below amend the definition of a “swap” that is subject

4 to regulation under the Treasury’s Over-the-Counter Derivatives Markets Act of 2009 by:

5 1) deleting the exclusion for foreign exchange swaps and including foreign exchange swaps

6 in the definition of a “swap”; and 2) limiting eligibility for the exclusion for foreign

7 exchange forwards, and providing that eligible foreign exchange forwards are subject to

8 the reporting and business conduct standards of the bill.]

10 (a) Section 1a(35)(A)(iii) (as added by section 711 of the draft legislation) is amended by

11 inserting “foreign exchange swap,” after “currency swap,”;

12 (b) Section 1a(35)(B) (as added by section 711 of the draft legislation) is amended by

13 striking clause (ix) and redesignating clauses (x) through (xii) as clauses (ix) through (xi),

14 respectively; and

15 (c) Section 1a(35)(B)(ix) (as redesignated in subsection (b)) is amended to read as follows:

16 “(ix) a foreign exchange forward that meets the requirements of

17 subclause (I), but only to the extent described in subclause (II)—

18 “(I) a foreign exchange forward—

19 “(aa) in which all parties to the agreement are

20 eligible contract participants;

21 “(bb) that results in actual delivery of currency; and

22 “(cc) that is not structured to evade the Over-the-

23 Counter Derivatives Markets Act of 2009 in violation of

 1 any rules promulgated by the Commission pursuant to

2 section 711(b)(2) of that Act;

3 “(II) shall not be considered a “swap” except that—

4 “(aa) all parties to the agreement (unless the

5 agreement was cleared) shall report such an agreement

6 either to a swap repository described in section 21 or, if

7 there is no repository that would accept the agreement, to

8 the Commission pursuant to section 4r within such time

9 period as the Commission may by rule or regulation

10 prescribe; and

11 “(bb) any party to the agreement that is a swap

12 dealer or a major swap participant shall conform to the

13 business conduct standards contained in section 4s(h).”.

1 ATTACHMENT B

2 Swap Dealer Set-Aside Requirements

3 [EXPLANATION –The provisions below amend the new Section 4s of the Commodity

4 Exchange Act in order to detail the set-aside requirements that are proposed to be imposed

5 on swap dealers. This language could also be used for set-aside requirements on

6 counterparties to swaps that are customized and not cleared.]

8 Section 4s(e) (as added by section 717 of the draft legislation) is amended by adding after

9 paragraph (4) the following:

10 “(5) SET-ASIDE REQUIREMENTS.—No person shall initially be registered as a swap

11 dealer, and no person shall continue to be registered as a swap dealer, unless such person,

12 at all times—

13 “(A) sets aside, in accordance with such rules, regulations, or orders as the

14 Commission may promulgate, the following amounts or property for each swap to

15 which such person is a party and that is not cleared—

16 “(i) an amount equal to the minimum margin requirement for such

17 swap that the Commission may prescribe, by rule, regulation, or order

18 with respect to such person, pursuant to subparagraph (A); plus

19 “(ii) any additional amount that such person and the counterparty agree

20 shall be set aside from such person’s own funds or property in order to

21 margin, guarantee, or secure such swap; plus

22 “(iii) any amount that such person receives from its counterparty in

23 order to margin, guarantee, or secure such swap; plus

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 1 “(iv) the greater of—

2 “(I) any accrued but unpaid losses such person has incurred in

3 connection with such swap, less any accrued but unpaid gains such

4 person has earned in connection with such swap, or

5 “(II) zero; less

6 “(v) any amount that such person posts with its counterparty in order

7 to margin, guarantee, or secure such swap.

8 “(B) treats, deals with, and limits its investments of any amount that such

9 person is required to set aside, pursuant to clause (i), in accordance with any rule,

10 regulation, or order that the Commission may promulgate.”.

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1 Amendments to the Bankruptcy Code and Corresponding Amendments to the

2 Commodity Exchange Act Relating to Bankruptcy Issues

3 [EXPLANATION: Set forth below are draft amendments to the Bankruptcy Code, which

4 extend to swap dealers, their counterparties (with respect to customized and uncleared

5 OTC contracts), and their customers (with respect to standardized and cleared OTC

6 contracts), the special protections (i.e., transfer and preferential distribution) that

7 Subchapter IV of Chapter 7 of the Bankruptcy Code (“Subchapter IV”) provides to

8 customers of commodity brokers. Proposed Subchapter VI could, by adding a few

9 analogous provisions, be extended to cover non-cleared security-based swaps. Also set

10 forth below are proposed amendments to the Commodity Exchange Act (the “CEA”),

11 which amendments define certain entities within the jurisdiction of the CFTC, which

12 entities are therefore properly afforded special protections similar to those that Subchapter

13 IV affords.]

14

15 The draft legislation is amended by adding after section 734 the following:

16

17 SEC. 735. DEFINITIONS.—Section 1a of the Commodity Exchange Act (7 U.S.C. 1a) is further

18 amended by adding after paragraph (50) the following:

19 “(51) NON-CLEARED SWAP.—The term “non-cleared swap” means a swap that is not cleared,

20 as set forth in section 2(j), and for which at least one counterparty is a non-cleared swap dealer.

21 “(52) NON-CLEARED SWAP DEALER.—The term “non-cleared swap dealer” means an entity

22 registered pursuant to §4s, which is party to a non-cleared swap.

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 1 “(53) NON-CLEARED SWAP PARTICIPANT.—The term “non-cleared swap participant” means

2 an entity that—

3 “(A) is a counterparty to a non-cleared swap with a non-cleared swap dealer; and

4 “(B) is not itself a non-cleared swap dealer.”.

5 SEC. 736. DEBTORS.—Section 20 of the Commodity Exchange Act (7 U.S.C. 24) is amended—

6 (a) in subsection (a) in the matter preceding paragraph (1) by inserting “subchapter IV of”

7 after “under”; and

8 (b) by inserting after subsection (b) the following:

9 “(c) NON-CLEARED SWAP PROVISIONS.—

10 “(1) Notwithstanding title 11 of the United States Code, the Commission may provide,

11 with respect to a non-cleared swap dealer or a non-cleared swap participant that is a

12 debtor under subchapter VI of chapter 7 of title 11, by rule or regulation—

13 “(A) that certain cash, securities, or other property are to be included in or

14 excluded from the property that—

15 “(i) secures non-cleared swaps; and

16 “(ii) is to be

17 “(I) distributed to the counterparty of the debtor; or

18 “(II) transferred, along with the non-cleared swaps that such

19 property secures, to another person, under section 795 of title 11;

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

22 of the petition under subchapter VI of chapter 7 of title 11;

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 1 “(C) any persons to which non-cleared swaps, and property securing such

2 non-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

6 such term under subchapter VI of chapter 7 of title 11.

7 SEC. 737. CHAPTER 1 OF THE BANKRUPTCY CODE.—

8 (a) Section 101(6) of chapter 1 of title 11 of the United States Code is amended by inserting

9 “swap clearer,” after “means”.

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

12 defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)”.

13 SEC. 738. SUBCHAPTER IV OF CHAPTER 7 OF THE BANKRUPTCY CODE.—

14 (a) Section 761 of subchapter IV of chapter 7 of title 11 of the United States Code is amended

15 by—

16 (1) in paragraph (4) by—

17 (A) amending subparagraph (A) to read as follows:

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;”;

21 (B) redesignating subparagraphs (B) through (J) as subparagraphs (C) through

22 (K);

23 (C) inserting after subparagraph (A) the following:

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 1 “(B) with respect to a swap clearer, a swap that is submitted to a derivatives

2 clearing organization for clearing;”; and

3 (D) amending subparagraph (E) (as redesignated by subparagraph (B)) to read

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

7 that is cleared by such clearing organization, or a commodity option traded on, or

8 subject to the rules of, a contract market that is cleared by such clearing

9 organization, or a swap that is cleared by such clearing organization.”;

10 (2) amending paragraph (7) to read as follows:

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

13 Section 5f of the Act;”;

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

16 trade’ and ‘swap’”;

17 (4) in paragraph (9) by—

18 (A) redesignating subparagraphs (B) through (E) as subparagraphs (C) through

19 (F); and

20 (B) inserting after subparagraph (A) the following:

21 “(B) with respect to a swap clearer—

22 “(i) entity for or with whom such swap clearer deals and that holds a

23 claim against such swap clearer on account of a commodity contract made,

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 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

4 to a derivatives clearing organization for clearing; or

5 “(ii) entity that holds a claim against a swap clearer arising out of—

6 “(I) the making, liquidation, or change in the value of a

7 commodity contract;

8 “(II) a deposit or payment of cash, a security, or other property

9 with such swap dealer for the purpose of making or margining

10 such a commodity contract; or

11 “(III) the liquidation or other termination of such a commodity

12 contract.”;

13 (5) adding at the end the following:

14 “(18) “futures commission merchant” means an entity registered or required to be

15 registered pursuant to §4d of the Act;

16 “(19) “swap clearer” means a swap dealer, futures commission merchant, foreign

17 futures commission merchant, leverage transaction merchant, or commodity options

18 dealer that, directly or indirectly, submits a swap to a derivatives clearing organization

19 for clearing; and

20 “(20) “swap dealer” means an entity registered or required to be registered pursuant to

21 §4s of the Act.”.

22 (b) Section 762 of subchapter IV of chapter 7 of title 11 of the United States Code is

23 amended by—

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 1 (1) striking the title and inserting “Notice to the Commission, right to be heard,

2 appointment of trustee, and responsibilities of trustee”;

3 (2) inserting after subsection (b) the following:

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 §3(c) of the

9 Federal Deposit Insurance Act.

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

15 in a case under subchapter VI of this chapter.”.

16 SEC. 739. SUBCHAPTER V OF CHAPTER 7 OF THE BANKRUPTCY CODE. Section 783(a) of

17 subchapter V of chapter 7 of title 11 of the United States Code is amended by striking

18 “subchapters III and IV” and inserting “subchapters III, IV and VI”.

19 SEC. 740. SUBCHAPTER VI OF CHAPTER 7 OF THE BANKRUPTCY CODE.—Chapter 7 of title 11 of

20 the United States Code is amended by inserting after subchapter V the following:

21 “SUBCHAPTER VI—SWAPS

22 “11 USC § 791. Definitions

23 “In this subchapter—

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 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

5 remaining in such accounts immediately after—

6 “(A) the transfer or liquidation of all non-cleared swaps to which such non-cleared swap

7 counterparty in such capacity is party; and

8 “(B) the offset of all obligations that the non-cleared swap counterparty in such capacity

9 owes to the debtor;

10 “(3) ‘non-cleared swap’, ‘non-cleared swap dealer’, and ‘non-cleared swap participant’ shall

11 have the meanings assigned to those terms in §1a of the Commodity Exchange Act.

12 “(4) ‘non-cleared swap counterparty’ means—

13 “(A) a non-cleared swap dealer; or

14 “(B) a non-cleared swap participant;

15 “(5) ‘non-cleared margin property’ means the margin that has been set aside by a non-cleared

16 swap counterparty in accordance with §4s of the Commodity Exchange Act.

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

19 case under this chapter or chapter 11 involving a non-cleared swap counterparty.

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

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 1 decree in such a case that concerns the timing, amount, or recipients of any disposition of non-

2 cleared margin property.

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 §3(c) of the Federal Deposit Insurance Act.

9 “11 USC § 793. Treatment of Margin Accounts

10 “(a) Accounts held by the debtor for a particular non-cleared swap counterparty in separate

11 capacities shall be treated as accounts of separate non-cleared swap counterparties.

12 “(b) The net equity in a non-cleared swap counterparty’s account may not be offset against the

13 net equity in the account of any other non-cleared swap counterparty.

14 “11 USC § 794. Voidable Transfers

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

22 purposes of this section, to have been a creditor.

10
 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

6 such non-cleared swap; or

7 “(2) the liquidation of a non-cleared swap.

8 “11 USC § 795. Treatment of Non-Cleared Margin Property

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 non-cleared 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.

13 Such distribution shall be in the form of—

14 “(1) cash; or

15 “(2) the return or transfer of securities.

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

21 entitled to distribution under section 726 of this title.

11
 1 “(c)(1) 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

5 order for relief—

6 “(A) liquidate any non-cleared swap that has not been transferred;

7 “(B) calculate the net equity claim for each non-cleared swap counterparty; and

8 “(C) distribute non-cleared margin property in accordance with subsection (a) of

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

12 then only to the extent necessary to make such distribution practicable.”.

12
 1 ATTACHMENT C

2 Designated Contract Markets

3 [EXPLANATION – The provisions below strengthen the Commodity Exchange Act’s

4 (“CEA’s”) “principles-based” regulatory regime for registered futures exchanges

5 (“designated contract markets”). Specifically, these provisions clarify ambiguities in the

6 CEA’s existing core principles for designated contract markets, and re-state them in more

7 specific terms.]

9 Section 721 of the proposed legislation is amended to read as follows:

10

11 SEC. 721. CORE PRINCIPLES FOR CONTRACT MARKETS.—

12 (a) Section 5(b) of the Commodity Exchange Act (7 U.S.C. 7(b)) is repealed.

13 (b) Section 5(d) of the Commodity Exchange Act (7 U.S.C. 7(d)) is amended to read as

14 follows:

15 “(d) CORE PRINCIPLES FOR CONTRACT MARKETS.—

16 “(1) IN GENERAL.—To be designated as, and to maintain the designation of a board of

17 trade as a contract market, the board of trade shall comply with the core principles

18 specified in this subsection and any requirement that the Commission may impose by rule

19 or regulation pursuant to section 8a(5). Except where the Commission determines

20 otherwise by rule or regulation, the board of trade shall have reasonable discretion in

21 establishing the manner in which it complies with the core principles.

22 “(2) COMPLIANCE WITH RULES.—

1
 1 “(A) The board of trade shall monitor and enforce compliance with the rules of

2 the contract market, including access requirements, the terms and conditions of

3 any contracts to be traded on the contract market and the contract market’s

4 abusive trade practice prohibitions.

5 “(B) The board of trade shall have the capacity to detect, investigate, and apply

6 appropriate sanctions to, any person or entity that violates the rules.

7 “(C) The rules shall provide the board of trade with the ability and authority to

8 obtain any necessary information to perform any of the functions described in this

9 subsection, including the capacity to carry out such international information-

10 sharing agreements as the Commission may require.

11 “(3) CONTRACTS NOT READILY SUBJECT TO MANIPULATION.—The board of trade shall

12 list on the contract market only contracts that are not readily susceptible to manipulation.

13 “(4) PREVENTION OF MARKET DISRUPTION.—The board of trade shall have the capacity

14 and responsibility to prevent manipulation, price distortion, and disruptions of the

15 delivery or cash-settlement process through market surveillance, compliance, and

16 enforcement practices and procedures, including methods for conducting real-time

17 monitoring of trading and comprehensive and accurate trade reconstructions.

18 “(5) POSITION LIMITATIONS OR ACCOUNTABILITY.—

19 “(A) To reduce the potential threat of market manipulation or congestion,

20 especially during trading in the delivery month, and to eliminate or prevent

21 excessive speculation as described in section 4a(a), the board of trade shall adopt

2
 1 for each of its contracts, where necessary and appropriate, position limitations or

2 position accountability for speculators.

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

5 limitation at a level no higher than the Commission-established limitation.

6 “(6) EMERGENCY AUTHORITY.—The board of trade shall adopt rules to provide for the

7 exercise of emergency authority, in consultation or cooperation with the Commission,

8 where necessary and appropriate, including the authority to—

9 “(A) liquidate or transfer open positions in any contract;

10 “(B) suspend or curtail trading in any contract; and

11 “(C) require market participants in any contract to meet special margin

12 requirements.

13 “(7) AVAILABILITY OF GENERAL INFORMATION.—The board of trade shall make

14 available to market authorities, market participants, and the public accurate information

15 concerning—

16 “(A) the terms and conditions of the contracts of the contract market; and

17 “(B) the rules, regulations and mechanisms for executing transactions on or

18 through the facilities of the contract market, and the rules and specifications

19 describing the operation of the board of trade’s electronic matching platform or

20 other trade execution facility.

3
 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

3 closing ranges for actively traded contracts on the contract market.

4 “(9) EXECUTION OF TRANSACTIONS.—

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

7 process of trading in the board of trade’s centralized market.

8 “(B) The rules may authorize, for bona fide business purposes—

9 “(i) transfer trades or office trades;

10 “(ii) an exchange of—

11 “(I) futures in connection with a cash commodity transaction;

12 “(II) futures for cash commodities; or

13 “(III) futures for swaps; or

14 “(iii) a futures commission merchant, acting as principal or agent, to

15 enter into or confirm the execution of a contract for the purchase or sale of

16 a commodity for future delivery if the contract is reported, recorded, or

17 cleared in accordance with the rules of the contract market or a derivatives

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

4
 1 in the prevention of customer and market abuses and providing evidence of any

2 violations of the rules of the contract market.

3 “(11) FINANCIAL INTEGRITY OF TRANSACTIONS.—The board of trade shall establish

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

8 brokers and the protection of customer funds.

9 “(12) PROTECTION OF MARKETS AND MARKET PARTICIPANTS.—The board of trade shall

10 establish and enforce rules to protect markets and market participants from abusive

11 practices committed by any party, including abusive practices committed by a party

12 acting as an agent for a participant, and to promote fair and equitable trading on the

13 contract market.

14 “(13) DISCIPLINARY PROCEDURES.—The board of trade shall establish and enforce

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.

19 “(14) DISPUTE RESOLUTION.—The board of trade shall establish and enforce rules

20 regarding and provide facilities for alternative dispute resolution as appropriate for

21 market participants and any market intermediaries.

5
 1 “(15) GOVERNANCE FITNESS STANDARDS.—The board of trade shall establish and

2 enforce appropriate fitness standards for directors, members of any disciplinary

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

8 establish a process for resolving such conflicts of interest.

9 “(17) COMPOSITION OF GOVERNING BOARDS OF CONTRACT MARKETS.—The

10 governance arrangements of the board of trade shall be designed to promote the

11 objectives of market participants.

12 “(18) RECORDKEEPING.—The board of trade shall maintain records of all activities

13 related to the business of the contract market in a form and manner acceptable to the

14 Commission for a period of 5 years.

15 “(19) ANTITRUST CONSIDERATIONS.—Unless appropriate to achieve the purposes of

16 this chapter, the board of trade shall avoid—

17 “(A) adopting any rules or taking any actions that result in any unreasonable

18 restraints of trade; or

19 “(B) imposing any material anticompetitive burden on trading on the contract

20 market.

21 “(20) SYSTEM SAFEGUARDS.—The board of trade shall—

6
 1 “(A) establish and maintain a program of risk analysis and oversight to identify

2 and minimize sources of operational risk, through the development of appropriate

3 controls and procedures, and the development of automated systems, that are reliable,

4 secure, and have adequate scalable capacity;

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

7 the fulfillment of the board of trade’s responsibilities and obligations; 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

10 surveillance, and maintenance of a comprehensive and accurate audit trail.

11 “(21) FINANCIAL RESOURCES.—

12 “(A) The board of trade shall have adequate financial, operational, and

13 managerial resources to discharge its responsibilities.

14 “(B) The board of trade’s financial resources shall be considered adequate if

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.”.

7
 1 ATTACHMENT D

2 Retail Off-Exchange Commodity Transactions

3 [EXPLANATION – Despite the recent amendments to the CEA enacted as part of last

4 year’s Farm Bill, retail off-exchange foreign currency (“forex”) trading continues to be a

5 fertile area of fraud and trading abuse of retail customers. What is more, the CFTC has

6 started to see these problems migrate to other commodities as well. The provisions below

7 would continue in place the Farm Bill’s fraud fix for Zelener-type “futures look-alike”

8 contracts in foreign currency, and extend that fix to contracts in all other commodities.

9 They also would reaffirm that such retail “futures look-alike” contracts must be traded on

10 designated contract markets (except for retail foreign currency trading, which is permitted

11 under the CFMA).]

12

13 The amendments to the Treasury document are shown below in track changes.

14

15 SEC. 730. RETAIL COMMODITY TRANSACTIONS.

16 Section 2(c) of the Commodity Exchange Act (7 U.S.C. 2(c)) is amended—

17 (1) in paragraph (1), by striking “5a (to the extent provided in section 5a(g), 5b,

18 5d, or 12(e)(2)(B))” and inserting “5b, or 12(e)(2)(B))”;

19 (2) in paragraph (2), by inserting after subparagraph (C) the following:

20 “(D) RETAIL COMMODITY TRANSACTIONS.—

21 “(i) This subparagraph shall apply to any agreement, contract, or

22 transaction in any commodity that is—

23 “(I) entered into with, or offered to (even if not entered into

 1 with), a person that is not an eligible contract participant or eligible

2 commercial entity; and

3 “(II) entered into, or offered (even if not entered into), on a

4 leveraged or margined basis, or financed by the offeror, the

5 counterparty, or a person acting in concert with the offeror or

6 counterparty on a similar basis.

7 “(ii) Clause (i) shall not apply to—

8 “(I) an agreement, contract, or transaction described in that

9 is subject to paragraph (1) or subparagraphs (A), (B), or (C),

10 including any agreement, contract, or transaction specifically

11 excluded from subparagraph (A), (B), or (C);

12 “(II) any security;

13 “(III) a contract of sale that—

14 “(aa) results in actual delivery within 28 days or

15 such other period as the Commission may determine by

16 rule or regulation based upon the typical commercial

17 practice in cash or spot markets for the commodity

18 involved; or

19 “(bb) creates an enforceable obligation to deliver

20 between a seller and a buyer that have the ability to deliver

21 and accept delivery, respectively, in connection with their

22 line of business;.

23 “(IV) an agreement, contract, or transaction that is listed on

 1 a national securities exchange registered under section 6(a) of the

2 Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or

3 “(V) an identified banking product, as defined in section

4 402(b) of the Legal Certainty for Bank Products Act of 2000 (7

5 U.S.C. 27(b)).

6 “(iii) Sections 4(a), 4(b) and 4b shall apply to any agreement,

7 contract or transaction described inthat is subject to clause (i), that is not

8 excluded from clause (i) by clause (ii), as if the agreement, contract, or

9 transaction were a contract of sale of a commodity for future delivery.

10 “(iv) This subparagraph shall not be construed to limit any

11 jurisdiction that the Commission may otherwise have under any other

12 provision of this Act over an agreement, contract, or transaction that is a

13 contract of sale of a commodity for future delivery.;

14 “(v) This subparagraph shall not be construed to limit any

15 jurisdiction that the Commission or the Securities and Exchange

16 Commission may otherwise have under any other provisions of this Act

17 with respect to security futures products and persons effecting transactions

18 in security futures products.;

19 “(vi) For the purposes of this subparagraph, an agricultural

20 producer, packer, or handler shall be considered an eligible commercial

21 entity for any agreement, contract, or transaction for a commodity in

22 connection with its line of business.”.

23 “(vii) For the purposes of clause (ii)(III)(aa), the term “actual

1 delivery” shall not include delivery to a third party in a financed

2 transaction where the commodity is held as collateral.”.