\609\ See, e.g., CFTC Regulation Sec.  4.13(a)(3) (exempting
from CPO registration operators of commodity pools engaged in a de
minimis amount of trading in CFTC-jurisdictional contracts).
    \610\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
    \611\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
---------------------------------------------------------------------------

    Separately, subclause (A)(v)(III) of the ECP definition, both
before and after enactment of the Dodd-Frank Act, provides that a
corporation, partnership, proprietorship,\612\ organization, trust or
other business entity may qualify as an ECP if it has a net worth
exceeding $1 million and ``enters into an agreement, contract, or
transaction in connection with the conduct of the entity's business or
to manage the risk associated with an asset or liability owned or
incurred or reasonably likely to be owned or incurred by the entity in
the conduct of the entity's business.'' \613\
---------------------------------------------------------------------------

    \612\ Individuals also are covered by a different prong of the
ECP definition. An individual can qualify as an ECP under clause
(A)(xi) of the ECP definition. See CEA section 1a(18)(A)(xi), 7
U.S.C. 1a(18)(A)(xi).
    \613\ There are two other ways a person can qualify as an ECP
under clause (A)(v): (i) being an entity with total assets exceeding
$10 million; or (ii) being an entity the obligations of which under
an agreement, contract, or transaction are guaranteed or otherwise
supported by a letter of credit or keepwell, support, or other
agreement by an entity with total assets exceeding $10 million or an
entity described in clause (A)(i), (ii), (iii), (iv) or (vii), or
paragraph (C), of the ECP definition. See CEA section
1a(18)(A)(v)(I) and (II), 7 U.S.C. 1a(18)(A)(v)(I) and (II),
respectively.
---------------------------------------------------------------------------

2. Proposed Approach
    The Commissions stated in the Proposing Release that ``in some
cases commodity pools unable to satisfy the conditions of clause
(A)(iv) of the ECP definition may rely on clause (A)(v) to qualify as
ECPs instead for purposes of retail forex'' and that permitting such
reliance would frustrate the intent of Congress in imposing the look-
through requirement on Forex Pools in clause (A)(iv) of the ECP
definition.\614\
---------------------------------------------------------------------------

    \614\ Proposing Release, 75 FR at 80185.
---------------------------------------------------------------------------

    The Commissions proposed to further define the term ``eligible
contract participant'' to preclude a Forex Pool from qualifying as an
ECP for purposes of retail forex transactions in reliance on clause
(A)(v) of the ECP definition if

such Forex Pool has any participant that is not an ECP and, therefore,
is not an ECP due to the look-through provision added to clause
(A)(iv). Further, because commodity pools can be structured in various
ways and can have one or more feeder funds and/or pools, the
Commissions proposed to preclude a Forex Pool from being an ECP for
purposes of retail forex transactions if there was any non-ECP
participant at any level of the pool structure (e.g., the pool itself,
a direct participant that invests in the pool, or any indirect
participant that invests in that pool through other pools or vehicles).
3. Commenters' Views
    One commenter supported the Commissions' efforts to close the
potential loophole of Forex Pools that are unable to qualify as ECPs
due to the new look-through provision in clause (A)(iv) of the ECP
definition instead qualifying as ECPs under clause (A)(v) of the ECP
definition.\615\ This commenter indicated that it shares the
Commissions' concern that Forex Pools that do not satisfy the amended
ECP definition due to the look-through provision for commodity pools in
clause (A)(iv) may alternatively rely upon clause (A)(v) of the ECP
definition to qualify as an ECP for purposes of retail forex
transactions.\616\ This commenter further stated that Congressional
intent in requiring a look-through for Forex Pools would be frustrated
if fraudulent pool operators could avail themselves of this
alternative.\617\
---------------------------------------------------------------------------

    \615\ See letter from the NFA. The NFA indicated that it
recently took separate emergency actions against two firms that did
not qualify under the NFA's requirements for retail forex
transactions. In one case, the commodity pool fell short of the $5
million total asset requirement in clause (A)(iv) of the ECP
definition; in the other case, the firm never properly formed a
commodity pool. The NFA cautioned in its letter, ``these cases
illustrate that firms will attempt to obtain ECP status to shield
themselves from the jurisdiction of regulators to the detriment of
pool participants.''
    \616\ Id.
    \617\ Id.
---------------------------------------------------------------------------

    However, several commenters recognized the importance of the
concern about a potential loophole \618\ but stated that the
Commissions should revise the proposal to mitigate the potential
adverse consequences to market participants. One commenter, for
example, commented on the expected effects of the proposed rule on
funds of funds (``FOFs'').\619\ According to this commenter, FOFs (i)
normally face as counterparties foreign subsidiaries of U.S. banks and
foreign banks, and (ii) would incur substantial counterparty,
documentation and operational costs in moving their retail forex
transactions onto DCMs or toward the Enumerated Counterparties.
---------------------------------------------------------------------------

    \618\ See, e.g., letters from SIFMA--AMG dated September 15,
2011 (``SIFMA AMG IV'') (acknowledging some form of ECP look-through
is appropriate to prevent evasion where circumvention otherwise
could occur and stating that it is sympathetic to the Commissions'
implicit objective of ensuring that a person that would not qualify
as an ECP not be permitted to accomplish indirectly what it is not
permitted to do directly), Sidley Austin LLP (``Sidley'') (stating
that the commenter fully appreciates that Congress added the look-
through language to the ECP definition to prevent unscrupulous forex
market participants from avoiding the retail forex provisions of the
CEA and the CFTC's rules by ``engineering'' an ECP by pooling the
capital of a large group of retail customers, thus depriving those
investors of the protections otherwise afforded to them), AIMA I
(stating that ``we understand Congress has made a decision to try to
protect retail investors by amending the definition of ECP under
Section 1a(1[8]) of the [CEA] to include that, for a commodity pool
to qualify as an ECP under sub-section (A)(iv), the pool's
underlying participants must also qualify as ECPs under section
1a(1[8])).''
    \619\ See letter from Sidley. Sidley noted that FOF managers'
retail forex transactions are largely undertaken for hedging
purposes and that most FOF managers offer investments to non-U.S.
persons, a significant number of which pay for their investments in
FOF interests using their own currency. Sidley further noted that,
because most FOFs accept investments only in U.S. dollars, FOF
managers must convert to U.S. dollars the foreign currency received
from such investors and invest those dollars in underlying funds,
and that they enter into a hedging transaction to reduce the risk of
exchange rate changes between an investor's currency and the U.S.
dollar.
---------------------------------------------------------------------------

    In a similar vein, two commenters advised that a substantial number
of hedge funds, as well as publicly offered commodity pools, would,
under the Commissions' proposal, fail to qualify as ECPs for purposes
of retail forex transactions, as most such funds have at least one
direct or indirect non-ECP participant.\620\ These commenters indicated
that this would disrupt the trading strategies employed by many
commodity trading advisors (``CTAs'') on behalf of commodity
pools.\621\ One of these commenters suggested an anti-evasion approach
combining a lower level of pool assets with a requirement that the
commodity pool not be formed for the purpose of evading the regulatory
requirements applicable to retail forex transactions.\622\
---------------------------------------------------------------------------

    \620\ See letters from Willkie Farr & Gallagher LLP (``Willkie
Farr'') and the NYCBA Committee.
    \621\ Id.
    \622\ See letter from Willkie Farr.
---------------------------------------------------------------------------

    Another commenter argued that Congress did not include the look-
through provision in clause (A)(v) of the ECP definition because of its
effect on bona fide hedgers.\623\ This commenter also advised that the
primary entities affected are hedge fund and private equity fund
managers investing in securities who use retail forex transactions
solely to hedge investment portfolio currency risks, and/or because
they accept subscriptions in currencies other than U.S. dollars.\624\
---------------------------------------------------------------------------

    \623\ See letter from Akin Gump Strauss Hauer & Feld LLP (``Akin
Gump'').
    \624\ Id.
---------------------------------------------------------------------------

    Several commenters disagreed with the Commissions' statement in the
proposal that extending the look-through provision in clause (A)(iv) of
the ECP definition to clause (A)(v) would effectuate Congressional
intent. Two commenters noted that there is no specific Dodd-Frank Act
provision requiring such a change.\625\ Two other commenters argued
that clause (v) of the ECP definition provides an independent basis for
qualification as an ECP, which should not be affected by the changes in
clause (A)(iv) of the ECP definition.\626\
---------------------------------------------------------------------------

    \625\ See letters from AIMA I and Ropes & Gray LLP (``Ropes &
Gray'').
    \626\ See letters from Akin Gump, Sidley and Skadden, Arps,
Slate, Meagher & Flom LLP (``Skadden''). Sidley also indicated that
there seems to be no compelling reason to treat commodity pools
worse than other sophisticated market participants with respect to
retail forex transactions with non-Enumerated Counterparties, and no
reason to treat them worse than a corporation or other entity with
only $10 million in total assets that therefore qualifies as an ECP
under clause (A)(v) of the ECP definition to trade retail forex
transactions although it may have no particular expertise in such
markets.
---------------------------------------------------------------------------

    One commenter indicated that the extraterritorial application of
the proposed rules regarding the ECP definition is unclear.\627\ Among
other things, this commenter indicated it is unnecessary to extend the
scope of the look-through to protect possible retail investors outside
of the U.S., especially where a CPO has not marketed a pool in the U.S.
and does not otherwise have any U.S. investors.\628\
---------------------------------------------------------------------------

    \627\ See letter from AIMA I.
    \628\ Id.
---------------------------------------------------------------------------

    Commenters proposed several alternative approaches that they
believed would address the Commissions' concerns. One commenter
suggested that the Commissions create a new category of ECPs for Forex
Pools comprised entirely of qualified eligible persons (``QEPs'') \629\
and operated by persons subject to regulation under the CEA.\630\ This
commenter also suggested that the Commissions create a new category of
ECPs for Forex Pools that satisfy a monetary threshold for total assets
or for the minimum initial investment of a Forex Pool to be
sufficiently large that, in general, only legitimate pools would exceed
such thresholds.\631\ Finally, this commenter suggested that the
Commissions create a category of ECPs

for non-U.S. persons.\632\ A second commenter suggested that the
Commissions create a category of ECPs for commodity pools that are
operated by a CPO or advised by a CTA subject to regulation by a
foreign regulator comparable to the CFTC.\633\
---------------------------------------------------------------------------

    \629\ The term ``qualified eligible person'' is defined in CFTC
Regulation Sec. Sec.  4.7(a)(2) and (3).
    \630\ See letter from Sidley.
    \631\ Id.
    \632\ Id. Sidley cited to the approach in Regulation S under the
Securities Act (17 CFR 230.901 et seq.), Sections 3(c)(1) and (7) of
the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1) and (7)),
and CFTC Regulation Sec.  4.7(a)(2)(xi).
    \633\ See letter from Willkie Farr.
---------------------------------------------------------------------------

    One commenter suggested (i) allowing commodity pools and their
counterparties to rely, for the duration of an investment and each time
commodity pool participants make an investment decision, on participant
ECP representations provided in connection with an initial investment,
provided that each participant covenants to update such representations
if they become inaccurate, and (ii) providing specific relief for FOFs
because they generally invest all or substantially all of their assets
in underlying portfolio funds and use retail forex transactions to
reduce foreign exchange exposure.\634\
---------------------------------------------------------------------------

    \634\ See letter from Sidley.
---------------------------------------------------------------------------

4. Final Rule
    After considering commenters' concerns, the Commissions are
adopting final rules that have been revised from the proposal. In
particular, consistent with the statutory text of the Dodd-Frank Act,
CFTC Regulation Sec.  1.3(m)(5)(i) further defines the term ``eligible
contract participant'' to prohibit a Forex Pool that directly enters
into a retail forex transaction (i.e., a transaction-level commodity
pool) \635\ from qualifying as an ECP under clause (A)(iv) or clause
(A)(v) of the ECP definition, solely for purposes of entering into
retail forex transactions, if the pool has one or more direct
participants that are not ECPs. In response to commenters' concerns
described above, CFTC Regulation Sec.  1.3(m)(5)(ii) is revised to
provide that, in determining whether a commodity pool that is a direct
participant in a transaction-level Forex Pool is an ECP, the indirect
participants in the transaction-level Forex Pool \636\ will not be
considered unless such Forex Pool, a commodity pool holding a direct or
indirect (through one or more intermediate tiers of pools) interest in
such Forex Pool, or any commodity pool in which such Forex Pool holds a
direct or indirect interest has been structured to evade Subtitle A of
Title VII of the Dodd-Frank Act by permitting persons that are not ECPs
to participate in agreements, contracts, or transactions described in
section 2(c)(2)(B)(i) or section 2(c)(2)(C)(i) of the Commodity
Exchange Act. That is, absent evasion, the Commissions are changing the
proposed ``indefinite look-through'' to an ``evasion-based look-
through'' in the final rule.\637\
---------------------------------------------------------------------------

    \635\ Commodity pool structures can take various forms. One
common commodity pool structure is a ``master-feeder'' fund
structure. In such a structure, investors purchase interests in
``feeder funds,'' which in turn purchase interests in a ``master
fund.'' Typically, the only fund in a commodity pool structure that
enters into retail forex transactions (and other transactions)
directly is the master fund; the feeder funds (and their investors)
typically would participate indirectly by receiving the profit or
loss from such retail forex transactions (and other transactions) as
distributions based on the feeder funds' interests in the master
fund. Notwithstanding that the master-feeder structure is common,
other structures exist. Thus, each fund in a commodity pool
structure that directly enters into retail forex transactions is a
transaction-level commodity pool.
    \636\ A fund that does not itself engage in retail forex
transactions but that holds an interest in a transaction-level Forex
Pool that engages in retail forex transactions is itself a commodity
pool. Cf. U.S. Regulation of the International Securities and
Derivatives Markets--Greene, Beller, Rosen, Silverman, Braverman and
Sperber, Sec.  12.13[1], n.351 and related text.
    \637\ The Commissions caution, however, that they will closely
monitor developments in this part of the market and will not
hesitate to revisit their decision to limit the look-through
provision pursuant to 1.3(m)(5)(ii) should they observe a pattern of
evasion or misconduct.
---------------------------------------------------------------------------

    In adding the look-through provision to the commodity pool prong of
the ECP definition, Congress made a decision to protect retail foreign
exchange investors by requiring that the participants in a Forex Pool
qualify as ECPs for the Forex Pool itself to qualify as an ECP. The
Commissions believe that the intent of the look-through provision--
protecting Forex Pool participants from fraudulent and abusive
conduct--must be given effect to comply with this Congressional
mandate. Nevertheless, the Commissions acknowledge commenters' concerns
about potential unintended consequences of applying an indefinite look-
through to every direct and indirect participant of a Forex Pool, as
proposed. Accordingly, to avoid unintended consequences and related
costs for Forex Pools whose operators and managers have not
historically presented the risks that the look-through provision was
intended to address,\638\ the Commissions are replacing the proposed
indefinite look-through of every participant in a Forex Pool with a
limited, evasion-based look-through pursuant to which a transaction-
level Forex Pool will qualify as an ECP, for purposes of retail forex
transactions, if all of such Forex Pool's direct participants are ECPs,
and will look through a commodity pool participant in such Forex Pool
only if it, at any level, has been structured to evade the look-through
provision in clause (A)(iv) of the ECP definition.
---------------------------------------------------------------------------

    \638\ The proposed rule was based on the CFTC's longstanding,
broad view of what constitutes a ``pool,'' a view recently codified
in the ``commodity pool'' definition by section 721(a)(5) of the
Dodd-Frank Act in CEA section 1a(10), 7 U.S.C. 1a(10), and
recognized by courts, and thus applied the look-through provision at
each level of a Forex Pool's investment structure. See CFTC,
Commodity Pool Operators and Commodity Trading Advisors: Amendments
to Compliance Obligations, 77 FR 11252 (Feb. 24, 2012) (``CPO/CTA
Compliance Release'') (advising that ``it is the position of the
[CFTC] that a fund investing in an unaffiliated commodity pool it
itself a commodity pool'' and ``[t]his interpretation is consistent
with the statutory definition of commodity pool, which draws no
distinction between direct and indirect investments in commodity
interests''); CFTC v. Equity Financial Group, 572 F.3d 150, 157-158
(July 13, 2009) (concluding, in the context of a commodity pool that
invested all of its assets with a commodity pool operated by a
different CPO, that the CFTC's commodity pool regulations ``cover
pools that invest in other pools'' and that ``the remedial purposes
of the statute would be thwarted if the operator of a fund could
avoid the regulatory scheme simply by investing in another pool
rather than trading''). The same logic applies to a master-feeder
structure operated by the same CPO: the remedial purpose of the
look-through proviso in clause (A)(iv) of the statutory ECP
definition would be thwarted if the look-through could be defeated
simply by funneling pool participants into a master fund through a
feeder fund.
    The proposed rule also was borne of the CFTC's long history of
combating fraudulent practices by typically unregistered individuals
or entities that prey upon often unsophisticated retail customers
through complex and highly leveraged off-exchange transactions in
foreign currency. However, the operators and managers of commodity
pool FOFs, master-feeder structures and hedge funds for
sophisticated investors have not generally been the subject of CFTC
enforcement actions with respect to retail forex transactions. For
an in depth discussion of the history of the CFTC's authority over
retail forex transactions, the abuses giving rise to that authority,
and related enforcement actions, see CFTC, Regulation of Off-
Exchange Retail Foreign Exchange Transactions and Intermediaries, 75
FR 3282 (Jan. 20, 2010). Congress acted three times in a decade to
clarify the CFTC's authority to prosecute the rampant fraud seen in
this area--first in the Commodity Futures Modernization Act of 2000,
Public Law 106-554, 114 Stat. 2763 (Dec. 21, 2000) in 2000, then
again in the CRA, and finally in the Dodd-Frank Act in 2010.
---------------------------------------------------------------------------

    The Commissions believe the final rule strikes the right balance
between implementing strong protections for non-ECP commodity pool
participants and not imposing undue burdens or costs on CPOs, CTAs and
commodity pool participants related to retail forex transactions. In
addition, the Commissions believe that replacing the indefinite look-
through with the limited, evasion-based look-through alleviates many of
the commenters' concerns. Accordingly, the Commissions believe it is
appropriate to limit the look-through provision to the level of a
commodity pool structure that enters into retail forex transactions and
to look through commodity pools to their ultimate participants only in
those

cases in which it is required to prevent evasion of the protections for
those persons whom Congress intended to be subject to retail forex
transactions restrictions.
    At the same time, the Commissions do not believe that Forex Pools
failing to qualify as ECPs due to the look-through provision in clause
(A)(iv) of the ECP definition should, nonetheless, be permitted
unfettered access to ECP status under clause (A)(v).\639\ The look-
through provision for Forex Pools provides heightened investor
protection from forex fraud for Forex Pool participants that are not
themselves ECPs. Thus, the Commissions believe that permitting Forex
Pools with one or more non-ECP participants to achieve ECP status by
relying on clause (A)(v) of the ECP definition, which applies to
business entities generally, would serve to undermine the look-through
provision that Congress specifically imposed on Forex Pools under
clause (A)(iv).\640\
---------------------------------------------------------------------------

    \639\ In section 712(d)(2)(A) of the Dodd-Frank Act, Congress
granted the Commissions the authority to adopt such rules regarding
the ECP definition as the Commissions determine are necessary and
appropriate, in the public interest, and for the protection of
investors.
    \640\ The Commissions note that several commenters requested
clarification regarding the relationship between the look-through
provision set forth in CFTC Regulation Sec.  1.3(m)(5) and the
prohibition on a commodity pool qualifying as an ECP under clause
(A)(v) of the ECP definition if it does not qualify as an ECP under
clause (A)(iv) of the ECP definition set forth in CFTC Regulation
Sec.  1.3(m)(6). See, e.g., meeting with SIFMA--AMG on August 2,
2011. The look-through provision is limited to determining ECP
status under clause (A)(iv) or clause (A)(v) of the ECP definition
for purposes of retail forex transactions entered into by Forex
Pools. The look-through provision does not reference or implicate
ECP status for purposes of CEA section 2(e) (which prohibits non-
ECPs from entering into swaps other than on or subject to the rules
of a DCM), Securities Act section 5(d) (which prohibits a person
from offering to sell, offering to buy or purchase, or selling a
security-based swap to a person that is a non-ECP unless a
registration statement under the Securities Act is in effect with
respect to that security-based swap), or Exchange Act section 6(l)
(which prohibits a person from effecting a transaction in a
security-based swap with or for a person that is a non-ECP unless
the transaction is effected on a national securities exchange
registered with the SEC). The prohibition in CFTC Regulation Sec.
1.3(m)(6) on a commodity pool qualifying as an ECP under clause
(A)(v) of the ECP definition if it does not qualify as an ECP under
clause (A)(iv) of the ECP definition does not involve any look-
through. Rather, in contrast with CFTC Regulation Sec.  1.3(m)(5),
CFTC Regulation Sec.  1.3(m)(6) applies for purposes of all
agreements, contracts and transactions for which ECP status is
relevant. See part III.C, infra, for a discussion of the prohibition
on a commodity pool qualifying as an ECP under clause (A)(v) of the
ECP definition if it does not qualify as an ECP under clause (A)(iv)
of the ECP definition.
---------------------------------------------------------------------------

    Moreover, developments subsequent to the issuance of the Proposing
Release should ameliorate commenters' concerns that CEA section
2(c)(2)(E)(ii)(I) significantly limits the universe of possible retail
forex transaction counterparties.\641\ At the time the Commissions
issued the Proposing Release and throughout the comment period, the
CFTC was the only Federal regulatory agency that had issued final rules
governing retail forex transactions by its regulated persons and
entities.\642\ Since then, though, both the OCC and the FDIC finalized
(effective July 15, 2011) rules governing retail forex transactions by
Enumerated Counterparties regulated by those agencies.\643\ In
addition, the SEC has issued interim temporary final rules (also
effective July 15, 2011) governing retail forex transactions by
registered broker-dealers.\644\ Also, the Federal Reserve Board
proposed rules to govern retail forex transactions by its regulated
banks on August 3, 2011.\645\ As a result of these regulatory actions,
Forex Pools that are not ECPs due to the look-through provision and who
are subject to a counterparty limitation \646\ may enter into retail
forex transactions with any Enumerated Counterparty but for those
regulated by the Federal Reserve Board.\647\
---------------------------------------------------------------------------

    \641\ See also part III.G, infra, discussing CFTC Regulation
Sec.  1.3(m)(8), one effect of which is to eliminate the retail
forex transaction counterparty restriction for Forex Pools
qualifying as ECPs.
    \642\ See generally Part 5 of the CFTC's regulations, 17 CFR 5,
and CFTC, Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 FR 55410 (Sept. 10, 2010). See
also CFTC, Retail Foreign Exchange Transactions; Conforming Changes
to Existing Regulations in Response to the Dodd-Frank Wall Street
Reform and Consumer Protection Act 76 FR 56103 (Sept. 12, 2011).
    \643\ See FDIC, Retail Foreign Exchange Transactions, 76 FR
40779 (July 12, 2011) (final FDIC retail forex rules); OCC, Retail
Foreign Exchange Transactions, 76 FR 41375 (July 14, 2011) (final
OCC retail forex rules); see also OCC, Retail Foreign Exchange
Transactions, 76 FR 56094 (Sept. 12, 2011) (interim final OCC retail
forex rules for federal savings associations and their operating
subsidiaries).
    \644\ See SEC, Retail Foreign Exchange Transactions, 76 FR 41676
(July 15, 2011). In the release accompanying the rules, the SEC
requested comment on broker-dealers' involvement in retail forex
transactions to inform the SEC in developing permanent rules to
regulate these activities. See id. at 46181-83.
    \645\ See Board, Retail Foreign Exchange Transactions
(Regulation NN), 76 FR 46652 (Aug. 3, 2011) (proposed Board rules
for retail forex transactions).
    \646\ See part III.B.1, supra, discussing the applicability of
the counterparty limitation.
    \647\ Of course, upon the Board's finalization of its retail
forex rules, U.S. financial institutions regulated by the Board also
will be acceptable counterparties.
---------------------------------------------------------------------------

    The Commissions believe that the final rules reasonably address
commenters' concerns. In this regard, the Commissions note that in
applying the look-through provision, the Commissions will consider the
indirect participants in a transaction-level Forex Pool if such Forex
Pool, a commodity pool holding a direct or indirect (through one or
more intermediate tiers of pools) interest in such Forex Pool, or any
commodity pool in which such Forex Pool holds a direct or indirect
interest has been structured to evade Subtitle A of Title VII of the
Dodd-Frank Act by permitting persons that are not ECPs to participate
in agreements, contracts, or transactions described in section
2(c)(2)(B)(i) or section 2(c)(2)(C)(i) of the Commodity Exchange Act.
One example of a scheme to evade would be if a commodity pool tier has
been included in the structure of the Forex Pool primarily to provide
non-ECP participants exposure to retail forex transactions rather than
to achieve any other legitimate business purpose.\648\ One example of a
``legitimate business purpose'' that would not trigger the look-through
provision is a FOF operated primarily for the purpose of investing in
underlying funds and using retail forex transactions solely to hedge
the currency risk posed by an unfavorable change in the exchange rate
between the currency in which underlying funds accept investments and
the currency in which FOF investors pay for their investments in the
FOF.\649\ Similarly, the Commissions would not consider a commodity
pool using retail forex transactions solely for bona fide hedging
purposes \650\ with

respect to currency risk as being structured to avoid the look-through
provision.\651\ The ``participate in agreements, contracts, or
transactions described in section 2(c)(2)(B)(i) or section
2(c)(2)(C)(i) of the Act'' language of CFTC Regulation Sec.
1.3(m)(5)(ii) is aimed at exposure to retail forex transactions as an
asset class, investment strategy, or an end in itself, not at exposure
to retail forex transactions solely designed for bona fide hedging
purposes with respect to foreign exchange exposure arising in the
course of a commodity pool's business.\652\
---------------------------------------------------------------------------

    \648\ Feeder funds are usually added to commodity pool
structures for purposes such as tax efficiency. A master-feeder
structure ``[permits] U.S. taxable investors to take advantage of
investing in a U.S. limited partnership feeder fund, which[,]
through certain elections made at the time the structure is
established, is tax effective for such U.S. taxable investors'' and
``[permits] [n]on-U.S. and U.S. tax-exempt investors [to] subscribe
via a separate offshore feeder company so as to avoid coming
directly within the U.S. tax regulatory net applicable to U.S.
taxable investors.'' Effie Vasilopoulos & Katherine Abrat, The
Benefits of Master-Feeder Fund Structures for Asian-based Hedge Fund
Managers, Hedge Fund Monthly (April 2004), available at http://www.eurekahedge.com/news/04apr_archive_Sidley_master_feeder.asp.
Other benefits can include efficiencies gained by the use of only a
single trading entity, avoiding the need to split trade tickets,
eliminating the need to duplicate agreements with counterparties and
greater economies of scale in administering the fund. Id.
    \649\ Sidley notes that the typical FOF operates in this manner.
See generally letter from Sidley for a more detailed discussion of
these transactions.
    \650\ In this context, bona fide hedging purposes means bona
fide hedging purposes within the meaning and intent of CFTC
Regulation Sec.  1.3(z)(1), except that the requirement therein that
the transaction or position be on a DCM or SEF that is a trading
facility will not be a factor in the bona fide hedging purpose
analysis. Compare CFTC Regulation Sec.  4.5(c)(2)(iii)(A) (relying
in part on the bona fide hedging concepts in CFTC Regulations
Sec. Sec.  1.3(z)(1) and 151.5 to provide relief from the CPO
definition). See also CPO/CTA Compliance Release at 11256-11257
(discussing and declining to adopt commenters' request to expand the
definition of bona fide hedging to include risk management). Where a
Forex Pool's counterparty, but not the Forex Pool, is hedging its
risks, it is not the case that the Forex Pool is entering the retail
forex transaction solely to hedge its own risk.
    \651\ The examples mentioned in text should not be construed to
mean that any other fact pattern does or does not constitute
evasion, which must be determined on a case-by-case basis.
    \652\ Based on the same reasoning, the Commissions do not
believe it was the intent of the look-through proviso in CEA section
1a(18)(A)(iv) to subject to a retail forex regime a single level
commodity pool engaging in retail forex transactions solely for bona
fide hedging purposes with respect to foreign exchange exposure
arising in the course of a commodity pool's operations.
Consequently, the Commissions will interpret such a commodity pool
as an ECP if it otherwise satisfies the terms of CEA section
1a(18)(A)(iv) even if such a pool has one or more non-ECP
participants.
---------------------------------------------------------------------------

    In applying the limited look-through provision in the final rule,
the Commissions would consider a Forex Pool's direct participants to
include not only persons that initially hold interests in the level of
the commodity pool structure that enters into retail forex
transactions, but also persons that can acquire those interests or that
subsequently hold those interests. As applied to exchange-traded
products (``ETPs'') that are Forex Pools, any person that acquires an
interest in the ETP Forex Pool in secondary market transactions would
be a direct participant. ETPs typically issue shares only in the large
aggregations or blocks (such as 50,000 ETP shares) called ``Creation
Units.'' An authorized purchaser, usually an investment bank, broker
dealer or large institutional investor, may purchase a Creation Unit.
After purchasing a Creation Unit, the authorized purchaser may hold the
Creation Unit, or sell some or all of the ETP shares in the Creation
Unit to investors in secondary market transactions by splitting up the
Creation Unit and selling the individual ETP shares on a national
securities exchange or in off-exchange transactions. The ability to
break up the Creation Unit into ETP shares permits other investors,
such as non-ECPs, to purchase the individual ETP shares in secondary
market transactions.
    All participants in an ETP Forex Pool must be ECPs when they
purchase or otherwise acquire an interest in the ETP Forex Pool. In
addition, an ETP Forex Pool will not be able to verify whether the
persons that acquire interests in the ETP Forex Pool in exchange
transactions are ECPs. The ability of non-ECPs to acquire interests in
an ETP Forex Pool and the inability of the ETP Forex Pool to verify ECP
status with respect to exchange transactions create a presumption that
ETP Forex Pools are not ECPs and, therefore, are Retail Forex Pools.
This presumption would not apply in the case of a Forex Pool that is
structured in a manner that does not involve exchange trading and in
which the Forex Pool would be able to verify the ECP status of its
participants.
    One commenter suggested that the Commissions allow commodity pools
and their counterparties to rely on participant ECP representations
provided in connection with an initial investment.\653\ The Commissions
note that the obligation to determine that the parties to retail forex
transactions are ECPs is imposed on the CPOs of Forex Pools and the
counterparties looking to enter into retail forex transactions with
Forex Pools. In making that determination, the Commissions expect CPOs
and retail forex transaction counterparties to Forex Pools to be guided
by the principles for verifying the ECP status of a swap dealer's or
major swap participant's counterparty discussed in the CFTC's recently
adopted external business conduct standards, including the safe
harbor.\654\ Thus, solely for purposes of CEA section 1a(18)(A)(iv) and
CFTC Regulation Sec.  1.3(m)(5), the Commissions will permit CPOs and
retail forex transaction counterparties to rely on written
representations from, as applicable, pool participants or potential
pool participants that the person making the representation is an ECP
(or is a non-U.S. person; as discussed below in this section III.B.4.,
solely for purposes of CEA section 1a(18)(A)(iv) and CFTC Regulation
Sec.  1.3(m)(5), the Commissions will consider Forex Pools whose
participants are limited solely to non-U.S. persons (and which are
operated by CPOs located outside of the U.S., its territories or
possessions) to be ECPs), or from Forex Pools that the Forex Pool is an
ECP, provided that the CPO or retail forex transaction counterparty has
a reasonable basis to so rely, just as swap dealers and major swap
participants are permitted to do pursuant to the safe harbor in new
CFTC Regulation Sec.  23.430(d), 17 CFR 23.430(d). Solely for purposes
of CEA section 1a(18)(A)(iv) and CFTC Regulation Sec.  1.3(m)(5), a CPO
or retail forex transaction counterparty will have a reasonable basis
to rely on such written representations if the person making the
representation specifies therein the provision(s) of, as applicable,
section 1a(18) of the CEA or CFTC Regulation Sec.  4.7(a)(1)(iv)
pursuant to which the person qualifies as an ECP or a non-U.S. person,
respectively, unless it has information that would cause a reasonable
person to question the accuracy of the representation.\655\ Solely for
purposes of CEA section 1a(18)(A)(iv) and CFTC Regulation Sec.
1.3(m)(5), persons representing that they qualify as non-U.S. persons
based on CFTC Regulation Sec.  4.7(a)(1)(iv)(D) must represent that
they are relying on such provision as modified as discussed below
(i.e., without the 10% carve-out for U.S. persons).
---------------------------------------------------------------------------

    \653\ See letter from Sidley.
    \654\ See CFTC, Business Conduct Standards for Swap Dealers and
Major Swap Participants With Counterparties; Final Rule, 77 FR 9733
(Feb. 17, 2012).
    \655\ Cf. CFTC Regulation Sec. Sec.  23.430(d), 23.402(d).
---------------------------------------------------------------------------

    Furthermore, the CFTC recognizes that, despite a counterparty's
reasonable good faith efforts to ensure that Forex Pools do not in fact
have any U.S. participants, a situation may arise where a Forex Pool
does turn out to have U.S. participants. If a counterparty has
reasonable policies and procedures in place to verify the ECP status of
Forex Pool counterparties and, notwithstanding such reasonable good
faith efforts and following such policies and procedures, enters into
retail forex transactions with such a Forex Pool in good faith and it
was subsequently determined that U.S. participants represented no more
than a de minimis number of participants or amount of ownership of the
Forex Pool, absent other material factors, the CFTC would not expect to
bring an enforcement action against the counterparty for entering into
a retail forex transaction in contravention of the requirements of the
retail forex regime. For purposes of this analysis only, and without
this being viewed as a de minimis threshold for purposes of this rule
or otherwise, the CFTC would consider as de minimis, ownership of units
of participation of a Forex Pool held by U.S. participants of less than
10% of the beneficial interest in the Forex Pool. The fact that, absent
other material factors, the CFTC would not expect to bring an
enforcement action against a forex transaction counterparty in such
case does not

relieve any obligation on the part of the CPO of the Forex Pool either
to register as a CPO, claim the 4.13(a)(3) exemption therefrom or
redeem the U.S. participants as described above.
    One commenter suggested that the Commissions allow commodity pools
and their counterparties to rely on participant ECP representations
provided in connection with an initial investment.\656\ The Commissions
believe that if participants make ECP representations in connection
with an initial investment in a Forex Pool, absent an additional
investment (which would require a new ECP verification, other than in
the case of automatically reinvested distributions), the subsequent
loss of a participant's ECP status would not cause the Forex Pool to
lose its own ECP status for purposes of retail forex transactions so
long as the operating agreement of the Forex Pool or the subscription
or other agreement pursuant to which the participant invested in the
Forex Pool requires the participant to advise the CPO of the Forex Pool
promptly of a loss of the participant's ECP status. In the event of the
loss of ECP status of a participant, the CPO would be required to
redeem the non-ECP from the Forex Pool at the first opportunity
following notification to avoid the Forex Pool losing its ECP status
for subsequent retail forex transactions.
---------------------------------------------------------------------------

    \656\ See letter from Sidley. The Commissions note that the
obligation to determine that the parties to retail forex
transactions are ECPs is imposed on the CPOs of Forex Pools and the
persons looking to engage in retail forex transactions with Forex
Pools.
---------------------------------------------------------------------------

    The Commissions are mindful that several commenters indicated that
CPOs do not customarily include a question or representation as to ECP
status in subscription agreements for pool participants, and stated
that requiring CPOs to qualify or redeem existing participants due to
the new look-through provision would be expensive, burdensome and
disruptive.\657\ In this regard, the Commissions note that the look-
through requirement for commodity pools was imposed by statute. As a
result of the Commissions adopting the limited look-through in the
final rule (as compared to the proposed indefinite look-through),
however, the number of commodity pools subject to the look-through
provision should be dramatically reduced, reducing the number of pools
subject to regulation of their retail forex transactions, and the
associated costs, accordingly.\658\
---------------------------------------------------------------------------

    \657\ See, e.g., letter from SIFMA AMG IV.
    \658\ The adoption of CFTC Regulation Sec.  1.3(m)(8), discussed
in part III.G, infra, also should reduce the number of pools subject
to regulation of their retail forex transactions, and the associated
costs, accordingly.
---------------------------------------------------------------------------

    Also, in response to commenter concerns that the look-through
provision would be applied to entities other than commodity pools
(e.g., operating companies),\659\ the Commissions revised the text of
CFTC Regulation Sec.  1.3(m)(5)(i) to reflect their intent to apply the
look-through provision solely to commodity pools qualifying as ECPs, if
at all, under clause (A)(iv) and clause (A)(v) of the ECP
definition.\660\ This is consistent with the statutory text, which is
limited to looking through commodity pools under clause (A)(iv) of the
ECP definition, and the intent behind the look-through provision, as it
relates to clause (A)(v) thereof.
---------------------------------------------------------------------------

    \659\ See, e.g., letter from Sandalwood Securities, Inc.
(expressing concern that ``the Proposed Rule extends Dodd-Frank's
limited look-through provision to all sub-sections of section
la(12)'').
    \660\ Thus, for example, investment companies qualifying under
clause (A)(iii) of the ECP definition and employee benefit plans
qualifying under clause (A)(vi) of the ECP definition (and, as
stated in each clause, ``a foreign person performing a similar role
or function subject as such to foreign regulation'') would not be
covered by the look-through provision. To the extent that other
entities would otherwise be captured by the look-through as proposed
(such as collective investment trusts whose investors are ERISA
plans not excluded from the commodity pool definition by CFTC
Regulation Sec.  4.5(a)(4) and which qualify as ECPs under clause
(A)(v) of the ECP definition), the Commissions believe that focusing
on the level of the Forex Pool entering into the retail forex
transactions, and such Forex Pool's direct participants (absent
evasion), should alleviate such concerns.
---------------------------------------------------------------------------

    Commenters also stated that Retail Forex Pools will no longer be
able to enter into retail forex transactions with foreign financial
institutions.\661\ As discussed in section III.B.1. above, however,
this is not the case with respect to retail forex transactions
described in CEA section 2(c)(2)(C)(i)(I)(bb). With respect to retail
forex transactions described in CEA section 2(c)(2)(B)i)(I), this is a
consequence of the express statutory text of the Dodd-Frank Act, which
removed non-U.S. financial institutions from the list of Enumerated
Counterparties eligible to enter into retail forex transactions with
non-ECPs.\662\
---------------------------------------------------------------------------

    \661\ Cf. letters from Sidley and Millburn Ridgefield
Corporation (``Millburn'').
    \662\ See section 742(c) of the Dodd-Frank Act, amending CEA
section 2(c)(2)(B)(i)(II)(aa), 7 U.S.C. 2(c)(2)(B)(i)(II)(aa).
---------------------------------------------------------------------------

    Commenters further suggested generally that the Commissions create
additional categories of ECPs to address the Commissions' concerns
regarding the potential loophole of Retail Forex Pools that are unable
to qualify as ECPs due to the new look-through provision in clause
(A)(iv) of the ECP definition qualifying as an ECP under clause (A)(v)
of the ECP definition. While one commenter proposed adopting a new rule
clarifying that Forex Pools comprised entirely of QEPs and operated by
persons subject to regulation under the CEA are ECPs,\663\ Congress
chose to look to ECP status of Forex Pool participants, not QEP status,
as the basis for determining whether such Forex Pools are ECPs.
Therefore, it is more appropriate to rely on Retail Forex Pool
participants' ECP status than to rely on QEP status to establish ECP
status.
---------------------------------------------------------------------------

    \663\ See letter from Sidley. This commenter also suggested
deeming non-U.S. persons to be ECPs by definition. The Commissions
have addressed this comment below in this section in response to the
comment regarding the extraterritorial impact of the proposed ECP
rules.
---------------------------------------------------------------------------

    One commenter stated a concern regarding what it characterized as
the lack of clarity surrounding the extraterritoriality impact of the
proposed ECP rules.\664\ The Commissions recognize the potential
consequences of the broad look-through language in CEA section
1a(18)(A)(iv) \665\ and are providing guidance as to the application of
the look-through to Forex Pools whose participants are limited solely
to non-U.S. persons and which are operated by CPOs located outside the
United States, its territories or possessions.
---------------------------------------------------------------------------

    \664\ See letter from AIMA I.
    \665\ 7 U.S.C. 1a(18)(A)(iv).
---------------------------------------------------------------------------

    As discussed below, while foreign entities are not necessarily
immune from U.S. jurisdiction for commercial activities undertaken with
U.S. counterparties or in U.S. markets, canons of statutory
construction ``assume that legislators take account of the legitimate
sovereign interests of other nations when they write American laws,''
\666\ particularly when limited U.S. interests are at stake.\667\
---------------------------------------------------------------------------

    \666\ See F. Hoffman-LaRoche, Ltd. v. Empagran S.A., 542 U.S.
155, 164 (2004), citing Murray v. Schooner Charming Betsy, 2 Cranch
64, 118, 2 L.Ed. 208 (1804) (``[A]n act of congress ought never to
be construed to violate the law of nations if any other possible
construction remains''); Hartford Fire Insurance Co. v. California,
509 U.S. 764 (1993) (Scalia, J., dissenting). See also Restatement
(Third) Foreign Relations Law Sec.  403 (scope of a statutory grant
of authority must be construed in the context of international law
and comity including, as appropriate, the extent to which regulation
is consistent with the traditions of the international system).
    \667\ See also CFTC, Exemption From Registration for Certain
Foreign Persons, 72 FR 63976 (Nov. 14, 2007) (where the CFTC stated
that:
    Given this agency's limited resources, it is appropriate at this
time to focus [the Commission's] customer protection activities upon
domestic firms and upon firms soliciting or accepting orders from
domestic users of the futures markets and that the protection of
foreign customers of firms confining their activities to areas
outside this country, its territories, and possessions may best be
for local authorities in such areas)
    (citing CFTC, Introducing Brokers and Associated Persons of
Introducing Brokers, Commodity Trading Advisors and Commodity Pool
Operators; registration and Other Regulatory Requirements, 48 FR
35248, 35261 (Aug. 3, 1983)).

---------------------------------------------------------------------------

    The Commissions do not believe that Congress intended for Forex
Pools with no U.S. participants and operated by CPOs located outside
the United States, its territories or possessions to be subject to a
U.S. retail forex regime and, therefore, will consider Forex Pools
whose participants are limited solely to non-U.S. persons and which are
operated by CPOs located outside the United States, its territories or
possessions to be ECPs for purposes of CFTC Regulation Sec.  1.3(m)(5).
For this purpose, a Forex Pool participant is a non-U.S. person if it
satisfies the definition of ``Non-United States person'' in CFTC
Regulation 4.7(a)(1)(iv); provided, however, that, if a participant is
an entity organized principally for passive investment, such as a pool,
investment company or other similar entity, such entity will be
considered to be a Non-United States person under paragraph (D) of CFTC
Regulation 4.7(a)(1)(iv) for purposes of CFTC Regulation Sec.
1.3(m)(5) solely if all units of participation in such passive
investment vehicle participant are held by Non-United States
persons.\668\ A broader interpretation or relief is not appropriate at
this time.\669\
---------------------------------------------------------------------------

    \668\ CFTC Regulation Sec.  4.7(a)(i)(iv)(D) lists the following
as one category of non-United States person:
    An entity organized principally for passive investment such as a
pool, investment company or other similar entity; Provided, That
units of participation in the entity held by persons who do not
qualify as Non-United States persons or otherwise as qualified
eligible persons represent in the aggregate less than 10% of the
beneficial interest in the entity, and that such entity was not
formed principally for the purpose of facilitating investment by
persons who do not qualify as Non-United States persons in a pool
with respect to which the operator is exempt from certain
requirements of part 4 of the Commission's regulations by virtue of
its participants being Non-United States persons.
    It would be inappropriate to disregard the presence of U.S.
persons constituting as much as 10% of such entities' participants
in the context of this interpretive guidance. As discussed elsewhere
herein, however, entities described in CEA section 1a(18)(A)(iii) or
(vi), 7 U.S.C. 1a(18)(A)(iii) or (vi), are not subject to the look-
through and are ECPs irrespective of the ECP status of their
participants.
    \669\ Cf. CPO/CTA Compliance Release at 11264 (stating that ``it
is prudent to withhold consideration of a foreign advisor exemption
until the [CFTC] has received data regarding such firms on Forms
CPO-PQR and/or CTA-PR * * * to enable the [CFTC] to better assess
[which] firms * * * may be appropriate to include within the
exemption, should the [CFTC] decide to adopt one'').
---------------------------------------------------------------------------

C. ECP Status for Commodity Pools Under Clause (A)(v) vs. Under Clause
(A)(iv) of the ECP Definition

1. Proposed Approach
    The Commissions stated in the Proposing Release that they believe
``some commodity pools unable to satisfy the total asset or regulated
status components of clause (A)(iv) of the ECP definition may rely on
clause (A)(v) to qualify as ECPs instead.'' \670\ The Commissions
further stated in the Proposing Release that ``a commodity pool that
cannot satisfy the monetary and regulatory status conditions prescribed
in clause (A)(iv) should not qualify as an ECP in reliance on clause
(A)(v) of the ECP definition.'' \671\ Based on those views, the
Commissions proposed to further define the term ``eligible contract
participant'' to prevent such a commodity pool from qualifying as an
ECP pursuant to clause (A)(v) of the ECP definition. This proposal
applied to all commodity pools, not just Forex Pools engaged in retail
forex transactions.
---------------------------------------------------------------------------

    \670\ Proposing Release, 75 FR at 80185.
    \671\ Id.
---------------------------------------------------------------------------

2. Commenters' Views
    Two commenters argued that, had Congress wished to prevent
commodity pools from relying on the general ECP provision for business
entities in clause (A)(v), it could have expressly excluded commodity
pools from clause (A)(v).\672\ Another commenter attempted to
illustrate that clause (A)(v) of the ECP definition is an independent
basis for qualifying as an ECP by distinguishing clause (A)(v) from
clause (A)(iv).\673\
---------------------------------------------------------------------------

    \672\ See letters from Sidley and Skadden.
    \673\ See letter from Akin Gump. Akin Gump noted that ``[a]s
opposed to [clause] (A)(iv), [clause] (A)(v) includes as one means
of satisfying its criteria that the entity be entering into a
contract for hedging purposes.'' While correct, clause (A)(v) also
includes as another means of satisfying its criteria that an entity
enter into agreements, contracts or transactions in connection with
the conduct of the entity's business, which would be a much lower
standard.
---------------------------------------------------------------------------

    One commenter expressed the view that it is unclear whether
``subject to regulation under this Act'' in CEA section
1a(18)(A)(iv)(II) \674\ means a registered CPO or something else (e.g.,
a person excluded from the definition of a CPO, a CPO exempt from
registration conditioned in part upon making a filing to claim such
relief).\675\
---------------------------------------------------------------------------

    \674\ 7 U.S.C. 1a(18)(A)(iv)(II).
    \675\ See letter from SIFMA AMG IV. CEA Section
1a(18)(A)(iv)(II) refers to a commodity pool that ``is formed and
operated by a person subject to regulation under this Act or a
foreign person performing a similar role or function subject as such
to foreign regulation (regardless of whether each investor in the
commodity pool or the foreign person is itself an eligible contract
participant) provided, however, that for purposes of section
2(c)(2)(B)(vi) and section 2(c)(2)(C)(vii), the term `eligible
contract participant' shall not include a commodity pool in which
any participant is not otherwise an eligible contract participant.''
---------------------------------------------------------------------------

3. Final Rule
    The Commissions are adopting CFTC Regulation Sec.  1.3(m)(6) as
proposed, which states that ``[a] commodity pool that does not have
total assets exceeding $5,000,000 or that is not operated by a person
described in subclause (A)(iv)(II) of section 1a(18) of the Act is not
an eligible contract participant pursuant to clause (A)(v) of such
Section.'' \676\ As noted, the Commissions are concerned that clause
(A)(v) of the ECP definition may undermine the protections that
specifically apply to commodity pool participants pursuant to the
limitations on ECP status for commodity pools set forth in clause
(A)(iv) of the ECP definition. Allowing a commodity pool that cannot
satisfy the monetary and regulatory status conditions prescribed for
commodity pools in clause (A)(iv) to qualify as an ECP under clause
(A)(v) would undermine these protections.
---------------------------------------------------------------------------

    \676\ The Commissions have made certain technical corrections to
proposed CFTC Regulation Sec.  1.3(m)(6)(i) as concerns its
citations to the CEA.
---------------------------------------------------------------------------

    The Commissions acknowledge the comments stating that clause (A)(v)
of the ECP definition is an independent basis for qualifying as an ECP
and that Congress did not explicitly provide that a commodity pool that
fails to qualify as an ECP under clause (A)(iv) cannot do so under
clause (A)(v). However, when specifically legislating for commodity
pools, Congress determined that total assets of $5 million and
operation by a person subject to regulation under the CEA (or a foreign
equivalent) are necessary to assure appropriate protection for non-ECP
participants in a commodity pool. Furthermore, the commenters' view
that Congress's use of the disjunctive term ``or'' between clauses
(A)(x) and (A)(xi) of the ECP definition means that an entity can rely
on clause (A)(v) of the ECP definition, notwithstanding that such
entity cannot satisfy a prong more specific to it, would largely render
superfluous each clause under subparagraph (A) of the ECP definition
other than clause (v) and clause (xi) (for individuals).\677\ As such,
the Commissions believe that the final rule adopted in this release is
consistent with Congressional intent.
---------------------------------------------------------------------------

    \677\ Interpreting statutory language as surplusage is
disfavored. Effect should be given to every clause and word of a
statute. See Negonsott v. Samuels, 507 U.S. 99 (1993).
---------------------------------------------------------------------------

    The Commissions also are mindful that one commenter expressed a
concern that the Commissions' reliance on clause (A)(iv) of the ECP
definition

might cause commodity pools to lose their ability to claim ECP status
under clauses of the ECP definition, other than clause (v), and asked
the Commissions to clarify the meaning of the phrase ``formed and
operated by a person subject to regulation under the [CEA]'' in clause
(A)(iv).\678\ In response, the Commissions note that a commodity pool
that does not qualify for ECP status under clause (A)(iv) of the ECP
definition may still qualify as an ECP under either of the two clauses
of the ECP definition other than clause (A)(v) applicable to
subcategories of commodity pools. Thus, registered investment companies
and foreign equivalents may qualify as ECPs under clause (A)(iii) of
the ECP definition, and ERISA plans and the other entities described in
clause (A)(vi) of the ECP definition may qualify as ECPs thereunder.
The Commissions' actions in this release do not change that result.
---------------------------------------------------------------------------

    \678\ See letter from SIFMA AMG IV.
---------------------------------------------------------------------------

    Also, with regard to that commenter's request for clarification,
for purposes of CFTC Regulation Sec.  1.3(m)(6), the Commissions
interpret the language ``subject to regulation under the [CEA]'' in
clause (A)(iv) of the ECP definition as requiring lawful operation of
the commodity pool by a person excluded from the CPO definition, a
registered CPO, or a person properly exempt from CPO registration.\679\
Congress did not limit ECP status under clause (A)(iv) to commodity
pools operated by persons registered as CPOs; it used the more
encompassing phrase ``subject to regulation'' under the CEA.\680\ On
the other hand, to construe that phrase to include any person operating
a commodity pool would render the phrase superfluous.\681\ The
commenters' view would enable a CPO that fails to register as required
to claim that the commodity pool it operates is an ECP under clause
(A)(v) and thus is not subject to regulation of its retail forex
transactions. The Commissions believe that construing the phrase
``formed and operated by a person subject to regulation under the
[CEA]'' to refer to a person excluded from the CPO definition,
registered as a CPO or properly exempt from CPO registration
appropriately reflects Congressional intent.
---------------------------------------------------------------------------

    \679\ For these purposes, the Commissions would take the same
approach to insignificant deviations from exemptive filings as the
CFTC does in CFTC Regulation Sec.  4.7(e).
    \680\ If the Commissions interpreted the ``subject to regulation
under this Act'' language in CEA section 1a(18)(A)(iv)(II) to mean
that the commodity pool operator must be registered as a CPO and
limited CPOs to claiming ECP status solely under clause (iv) of the
ECP definition, then the operators of all commodity pools trading
swaps would have to register as CPOs to be ECPs. While more CPOs
will be registering with the CFTC because the CFTC has withdrawn
CFTC Regulation Sec.  4.13(a)(4), see CPO/CTA Compliance Release,
and the Dodd-Frank Act has expanded the scope of the transactions
within the CFTC's jurisdiction, thus reducing the number of CPOs who
can rely on the 5 percent threshold in CFTC Regulation Sec.
4.13(a)(3) and thus claim the CPO registration exemption, the CFTC
did not withdraw 4.13(a)(3), so some CPOs will be able to continue
to rely on it. Also, not all persons operating commodity pools will
be CPOs. See CFTC Regulation Sec.  4.5 (exclusion from the
definition of the term ``commodity pool operator''). The Commissions
do not believe Congress intended commodity pool ECP status to
require CPO registration by the commodity pools' operators in all
cases.
    \681\ If the mere act of forming or operating a commodity pool
means that a person is ``subject to regulation'' under the CEA, then
the ``subject to regulation'' language would not be needed.
---------------------------------------------------------------------------

D. Dealers and Major Participants as ECPs

1. Proposed Approach
    The Commissions proposed to add swap dealers, security-based swap
dealers, major swap participants and major security-based swap
participants to the ECP definition on the basis that such persons ``are
likely to be among the most active and largest users of swaps and
security-based swaps.'' \682\
---------------------------------------------------------------------------

    \682\ Proposing Release, 75 FR at 80184.
---------------------------------------------------------------------------

2. Commenters' Views
    Several commenters supported the proposed addition of swap dealers,
security-based swap dealers, major swap participants, and major
security-based swap participants to the ECP definition.\683\ No
commenter opposed this aspect of the proposal.
---------------------------------------------------------------------------

    \683\ One representative commenter stated that ``the proposed
definition in CFTC Proposed CFTC Regulation Sec.  1.3(m)(1)-(4)
fills important gaps left by Congress by ensuring that major swap
participants, major security-based swap participants, swap dealers
and security-based swap dealers are treated as ECPs.'' See letter
from Sidley.
---------------------------------------------------------------------------

3. Final Rule
    The Commissions are adopting the new ECP categories as proposed.
The rules as adopted clarify that the terms ``swap dealer,''
``security-based swap dealer,'' ``major swap participant,'' and ``major
security-based swap participant'' have their respective meanings as
defined in the CEA and the Exchange Act and as otherwise further
defined by the Commissions.\684\
---------------------------------------------------------------------------

    \684\ These new ECP categories are set forth in new CFTC
Regulation Sec.  1.3(m)(1)-(4).
---------------------------------------------------------------------------

E. Government Entities: Incorrect Cross-Reference

1. Description of the Issue
    Clause (A)(vii) of the ECP definition conditions the ECP status of
governmental entities, and their political subdivisions, agencies,
instrumentalities and departments (collectively, ``government
entities''), in part, on the identity of their counterparties.
Specifically, a government entity may qualify as an ECP under the
provision in clause (A)(vii) that requires the entity's counterparty to
be ``listed in any of subclauses (I) through (VI) of section
2(c)(2)(B)(ii)'' of the CEA.\685\ However, subclauses (I) through (III)
of CEA section 2(c)(2)(B)(ii) \686\ are unrelated to counterparty types
(rather, they describe the dollar amounts that apply for purposes of
retail forex transactions under CEA section 2(c)(2)(B)), and subclauses
(IV) through (VI) of CEA section 2(c)(2)(B)(ii) no longer exist in the
statute. Read literally, then, this provision of the ECP definition is
inherently a nullity and, thus, cannot enable government entities to
qualify as ECPs.\687\
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    \685\ CEA section 1a(18)(A)(vii)(cc), 7 U.S.C.
1a(18)(A)(vii)(cc).
    \686\ 7 U.S.C. 2(c)(2)(B)(ii)(I)-(III).
    \687\ A government entity, though, can still qualify as an ECP
under the other provisions of clause (A)(vii) if it is a certain
type of ``eligible commercial entity'' as defined in CEA section
1a(17), 7 U.S.C. 1a(17), or owns and invests on a discretionary
basis $50 million or more in investments.
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2. Commenters' Views
    One commenter traced the history of the relevant provisions and
concluded that the reference to subclauses (I) through (VII) of CEA
section 2(c)(2)(B)(ii) in clause (A)(vii) of the ECP definition is
erroneous.\688\ This commenter pointed instead to CEA section
2(c)(2)(B)(i)(II) \689\ as the reference that should be included in
clause (A)(vii) of the ECP definition because it lists the entities
that are eligible to serve as counterparties in retail forex
transactions.
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    \688\ See letter from Wells Fargo dated June 3, 2011 (``Wells
Fargo I'').
    \689\ 7 U.S.C. 2(c)(2)(B)(i)(II).
---------------------------------------------------------------------------

    This commenter noted that the cross-reference in clause (A)(vii) of
the ECP definition was correct when it was added to the CEA as part of
the CFMA, but that it became incorrect in 2008 when an unrelated
amendment to the CEA was enacted \690\ that changed the numbering of
the CEA's provisions governing retail forex transactions but that
failed to make a conforming amendment to clause (A)(vii) of the ECP
definition. As a result of this 2008 amendment to the CEA, the list of
entities that formerly appeared in subclauses (I) through (VI) of CEA
sections 2(c)(2)(B)(ii) now appear in items (aa) through (ff) of CEA
section

2(c)(2)(B)(i)(II) instead.\691\ This commenter requested that ``the
Commissions correct this clearly erroneous reference in the definition
of ECP through interpretive guidance, rulemaking or Commission order.''
\692\
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    \690\ See section 13101 of the CRA.
    \691\ 7 U.S.C. 2(c)(2)(B)(i)(II)(aa)-(ff).
    \692\ See letter from Wells Fargo I.
---------------------------------------------------------------------------

3. Interpretive Guidance
    Clause (A)(vii) of the ECP definition contains an erroneous cross-
reference to subclauses (I) through (VI) of CEA section 2(c)(2)(B)(ii).
Accordingly, the Commissions are issuing interpretive guidance by
identifying the counterparties with which a governmental entity can
enter into swaps to attain ECP status under the provision in clause
(A)(vii) that requires the entity's counterparty to be ``listed in any
of subclauses (I) through (VI) of section 2(c)(2)(B)(ii)'' of the CEA.
The Commissions consider a government entity covered by the
counterparty limitation in clause (A)(vii) to be an ECP with respect to
an agreement, contract, or transaction that is offered by, and entered
into with, a person that is listed in items (aa) through (ff) of
section 2(c)(2)(B)(i)(II) of the CEA. The limitation of ECP status
``with respect to'' a particular transaction is consistent with
Congress' determination that, for purposes of this provision of clause
(A)(vii), governmental entities may derive their ECP status from the
status of their counterparty.

F. Qualification as an ECP With Respect to Swaps Used To Hedge or
Mitigate Commercial Risk in Connection With the Conduct of an Entity's
Business

1. Proposing Release
    In the Proposing Release, the Commissions requested comment on
whether any additional categories should be added to the definition of
ECP, ``such as the following categories suggested by commenters [on the
ANPRM]: Commercial real estate developers; energy or agricultural
cooperatives or their members; or firms using swaps as hedges pursuant
to the terms of the CFTC's Swap Policy Statement.'' \693\ As noted
above, the ECP definition is important because the Dodd-Frank Act
amended the CEA to prohibit a person that is not an ECP from entering
into swaps other than on or subject to the rules of a DCM.\694\
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    \693\ See Proposing Release, 75 FR at 80185. The reference to
the ``Swap Policy Statement'' is to the CFTC's Policy Statement
Concerning Swap Transactions, 54 FR 30694 (July 21, 1989). The Swap
Policy Statement ``identifie[d] those swap transactions which [were]
not * * * regulated as futures or commodity option transactions
under the [CEA] or the related regulations.'' 54 FR at 30694. One
element of the Swap Policy Statement required that the swap be
entered into in connection with each swap counterparty's line of
business. Id. at 30697. The Swap Policy Statement was applicable to
cash-settled swaps only, with foreign exchange considered to be cash
for this purpose. Id. at 30696. The Swap Policy Statement required
that the terms of the relevant swap be individually tailored,
meaning that the material terms of the swap had to be negotiated,
the parties had to make individualized credit determinations, and
the swap documentation could not be fully standardized. Id. at
30696-97. The Swap Policy Statement did not apply to swaps subject
to exchange-style offset, swaps that were cleared or subject to a
margin system, or swaps marketed to the public. Id. As noted in the
Product Definitions Proposal, the Dodd-Frank Act supersedes the Swap
Policy Statement. 76 FR at 29829, n. 74.
    \694\ The discussion in this section relates only to swaps and
has no effect on the laws or regulations applicable to security-
based swaps, security-based swap agreements or mixed swaps.
    As noted above, the Dodd-Frank Act also amended the Exchange Act
and the Securities Act to make it unlawful for a person to effect a
transaction in a security-based swap with or for a person that is
not an ECP unless the transaction is effected on a national
securities exchange registered with the SEC, and to make it unlawful
for a person to offer to sell, offer to buy or purchase, or sell a
security-based swap to a person that is not an ECP unless a
registration statement under the Securities Act is in effect with
respect to that security-based swap.
---------------------------------------------------------------------------

2. Commenters' Views
    Several commenters supported the addition of categories to the
definition of ECP because, these commenters said, not all current swap
market participants are ECPs. Many of these commenters said that non-
ECPs have entered into swaps in reliance on the Swap Policy
Statement.\695\ Commenters highlighted, among other things, the
importance of the Swap Policy Statement to pass-through entities used
by farmers,\696\ operating companies \697\ and commercial property
developers,\698\ noting that such entities may not meet the ECP
criteria. According to these commenters, these pass-through entities
often are small and medium-sized businesses that enter into interest
rate swaps with lending financial institutions in reliance on the Swap
Policy Statement.\699\ The commenters explained that the loans usually
are guaranteed by the principals of the entity entering into the swap,
and that the borrower would qualify as an ECP if structured as a
single-level corporate entity or sole proprietorship.\700\ Commenters
said that if these non-ECP entities were limited to swaps that are
available on or subject to the rules of a DCM, many regional bank
borrowers would lose the ability to use swaps, real estate companies
would have less flexibility in risk management, and smaller lenders
would be at a competitive disadvantage.\701\ Another commenter said
that Dodd-Frank Act provisions such as the end-user clearing exception
indicate that Congress intended to preserve the availability of swaps
used for business reasons rather than for investment or
speculation.\702\
---------------------------------------------------------------------------

    \695\ See letter from CDEU. One commenter estimated that swap
transactions completed by regional and community banks in reliance
on the Swap Policy Statement constituted 30-40% of all of such
banks' swaps, representing approximately 7,000 to 10,000 swaps per
year and $15 to $20 billion in related loan principal. See letter
from B&F I. Another commenter advised that it has entered 11 swaps,
with a total notional of $26 million, since its formation in 2007,
almost all of the counterparties to which ``qualified for the swap
under the [Swap Policy Statement] business purpose exemption.'' See
letter from Capstar. The CFTC stated when issuing the Swap Policy
Statement that it ``reflects the [CFTC]'s view that at this time
most swap transactions, although possessing elements of futures or
options contracts, are not appropriately regulated as such under the
[CEA] and [CFTC] regulations.'' Swap Policy Statement at 30694.
    \696\ See, e.g., letter from Rabobank, N.A., Rabo AgriFinance,
Inc. and Co[ouml]peratieve Centrale Raiffeisen-Boerenleenbank B.A.
(``Rabobank, New York Branch'') (relating that ``[f]or a variety of
estate planning and regulatory purposes, farmers commonly hold their
ownership interests in land, buildings and farm equipment
indirectly, through a network of legal entities'').
    \697\ See, e.g., letter from Fifth Third Bank and Union Bank,
N.A. (advising that ``[i]t is common for an operating business to
organize a separate limited liability company (for tax and legal
reasons) to acquire * * * assets * * * and to lease these assets to
the operating company[, which] becomes the borrow[er] * * * for the
loan used to acquire those assets'' and that ``[t]he limited
liability company often does not maintain sufficient capital to
qualify as an ECP'').
    \698\ See, e.g., letters from Capstar, Frost National Bank, FTN
Financial Capital Markets, Midsize Banks and NAREIT.
    \699\ See letters from BB&T I and B&F I. Commenters said that
these businesses may intentionally maintain less than $1 million in
equity primarily for tax and legal reasons. See letters from Capital
One and Columbia State Bank (stating that over 65% of its borrowers
are structured as limited liability companies or S corporations and
intentionally maintain less than $1 million in equity at the entity
entering into the swap).
    \700\ See letter from Columbia State Bank. See also letter from
BB&T I.
    \701\ See letters from BB&T I, Capital One, Capstar, Columbia
State Bank, Midsize Banks, NAREIT and Wells Fargo II.
    \702\ See letter from FSR I.
---------------------------------------------------------------------------

    To mitigate the impact of restricting non-ECPs to swaps that are
available on or subject to the rules of DCMs, some commenters said that
an entity should be able to qualify as an ECP based on the financial
qualifications of related entities, so long as various conditions
proposed by the commenters are satisfied. Some commenters said that an
entity should be eligible to be an ECP if its swap obligations are
guaranteed by an ECP,\703\ or if its controlling entity qualifies as an
ECP under clause (A)(v) of the statutory definition.\704\ Another
commenter suggested revisions to the

ECP definition that included looking to the ECP status or
sophistication of the majority owner of an entity in determining if the
entity itself is an ECP.\705\ Other commenters suggested other
provisions to allow non-ECPs to enter into swaps other than on or
subject to the rules of a DCM, so long as the non-ECP meets various
conditions indicating that the swap is used in connection with its line
of business.\706\
---------------------------------------------------------------------------

    \703\ See letters from BB&T I, Midsize Banks and Wells Fargo II.
    \704\ See letters from CDEU and Regional Banks.
    \705\ See letter from NAREIT.
    \706\ See letters from the American Public Gas Association
(``APGA''), Capital One and Gavilon dated December 23, 2010
(``Gavilon I'').
---------------------------------------------------------------------------

    Other commenters argued for per se ECP qualification based on their
status as certain types of persons, such as farmers\707\ or for ECP
status based solely on a combination of a person's status and the swap
being related to a person's line of business with no additional
conditions.\708\
---------------------------------------------------------------------------

    \707\ See meeting with Ron Eliason on December 16, 2010 (in
which Mr. Eliason contended that farmers should be able to enter
into swaps, even if they do not meet the income or asset tests in
the current ECP definition and, therefore, would not be permitted to
enter into swaps other than on or subject to the rules of a DCM).
    \708\ See letter from APGA (requesting that ``the [CFTC]
exercise its authority under section la(18)(C) of the Act and
determine that public natural gas distribution companies, including
member-owned co-operatives, that enter into swaps in connection with
their business of supplying customers with natural gas are ECPs
within the meaning of section la(18) of the Act'').
---------------------------------------------------------------------------

3. Final Rules and Interpretation
    In response to the commenters' concerns, the CFTC is adopting CFTC
Regulation Sec.  1.3(m)(7) to permit an entity, in determining its net
worth for purposes of subclause (A)(v)(III) of the ECP definition,\709\
to include the net worth of its owners, solely for purposes of
determining its ECP status for swaps used to hedge or mitigate
commercial risk, provided that all of its owners are themselves ECPs
(disregarding shell companies). Under CFTC Regulation Sec.  1.3(m)(7)
as adopted, an entity seeking to qualify under subclause (A)(v)(III) of
the ECP definition in order to enter into a swap used to hedge or
mitigate commercial risk is permitted to count the net worth of its
owners in determining its own net worth, so long as all its owners are
ECPs. This regulation applies only to entities that are otherwise
eligible to rely on subclause (A)(v)(III) to determine ECP status; it
does not expand or change the scope of application of that
paragraph.\710\
---------------------------------------------------------------------------

    \709\ CEA section 1a(18)(A)(v)(III) provides that the term
``eligible contract participant'' includes ``a corporation,
partnership, proprietorship, organization, trust, or other entity *
* * that (aa) has a net worth exceeding $1,000,000; and (bb) enters
into an agreement, contract, or transaction in connection with the
conduct of the entity's business or to manage the risk associated
with an asset or liability owned or incurred or reasonably likely to
be owned or incurred by the entity in the conduct of the entity's
business.'' 7 U.S.C. 1a(18)(A)(v)(III).
    \710\ For example, if a commodity pool were precluded by CFTC
Regulation Sec.  1.3(m)(6) from relying on clause (A)(v) of the
statutory definition to qualify as an ECP, such pool would not be
able to rely on CFTC Regulation Sec.  1.3(m)(7) to qualify as an
ECP.
---------------------------------------------------------------------------

    CFTC Regulation Sec.  1.3(m)(7) as adopted applies only when
determining ECP status for swaps used to hedge or mitigate commercial
risk. This new regulation does not apply when determining ECP status
for other swaps or for security-based swaps, security-based swap
agreements, mixed swaps, or agreements, contracts or transactions that
are not swaps (regardless of the purpose for which they are used).
    The Commissions have considered the comments indicating that, as
currently structured, many businesses are owned by multiple legal
entities and/or individuals, and the net worth of all the owners in the
aggregate in some cases would satisfy the $1 million net worth
requirement in subclause (A)(v)(III), even though the particular legal
entity that enters into a swap does not have a net worth exceeding $1
million.\711\ While the Commissions recognize that the requirement, in
subclause (A)(v)(III)(aa) of the ECP definition, that the entity
relying on that paragraph have a net worth exceeding $1 million
evidences Congress' intent that only entities with this level of
financial resources should be eligible for ECP status under this
paragraph of the definition, the Commissions agree with commenters that
application of this requirement in these circumstances would
inappropriately limit the ability of business entities to use swaps to
hedge or mitigate commercial risk. As a result, the Commissions are
persuaded that in this limited situation, the entity should qualify as
an ECP and be eligible to enter into swaps other than on or subject to
the rules of a DCM, so long as the entity is using the swap to hedge or
mitigate commercial risk and all of the owners of the entity are ECPs
(other than shell companies).
---------------------------------------------------------------------------

    \711\ See, e.g., letters from B&F I (stating that ``[i]f the
customer does not * * * [itself] meet the ECP definition, then the
transaction would have to be guaranteed by any entity or individual
who is an owner * * * [who] meets the $10,000,000 total asset test
of section 1(a)(18)(A)(v)(I) of the Act or the $1,000,000 net worth
test of section 1(a)(18)(A)(v)(III) of the Act.''), NAREIT (urging
that the Commissions impute ECP status to non-ECP entities involved
in specified real estate businesses to such entities whose
``majority owner or controlling entity'' is an ECP) and Midsize
Banks (recommending that the ECP determination be made with respect
to a non-ECP entity's owners based on criteria including qualifying
natural persons as ECPs based on a $1,000,000 net worth).
---------------------------------------------------------------------------

    In response to those commenters requesting per se ECP status or the
ability to qualify as an ECP based on a combination of status and
engaging in swaps related to a line of business, without further
restriction, the Commissions do not believe it is necessary or
appropriate to further define the term ECP to such an extent in order
to address most commenters' concerns. The Commissions note that such
approaches would undermine the prohibition in CEA section 2(e) \712\ on
non-ECPs executing swaps other than on or subject to the rules of a
DCM. The Commissions also note that focusing solely on a link between a
swap and a line of business would undermine the application of the ECP
definition to swaps in that the various prongs of the ECP generally are
linked to dollar thresholds, regulated status, or a combination of the
two.
---------------------------------------------------------------------------

    \712\ 7 U.S.C. 2(e).
---------------------------------------------------------------------------

    The Commissions also note that it currently is considering a draft
petition for relief pursuant to CEA section 4(c)(6)(C) \713\ for
certain entities described in Federal Power Act section 201(f),\714\
which may address the concerns of some commenters. Additionally, the
Commissions are developing joint rules to further define the term
``swap,'' including the forward exclusion from the swap definition
which, in turn, may result in certain transactions not being considered
swaps. Further, the CFTC also is considering today a form of trade
option exemption, which may further address commenters' concerns.
---------------------------------------------------------------------------

    \713\ 7 U.S.C. 6(c)(6)(C).
    \714\ 16 U.S.C. 824(f).
---------------------------------------------------------------------------

    With respect to farmers, in response to the CFTC's Commodity
Options and Agricultural Swaps rulemaking proposal,\715\ commenters
generally were of the view that the ECP definition is appropriate in
its current form.\716\ While

the Commissions may consider providing further relief should experience
show, after the ECP definition becomes effective, that further relief
is warranted, neither the ECP definition nor the various actions cited
in the foregoing paragraph are final, so providing further relief is
premature. The Commissions' measured approach, which builds on the
existing net worth requirement in the general entity ECP category,
provides broad relief to many of the commenters (e.g., borrowers
generally) while otherwise adhering to the existing ECP categories.
---------------------------------------------------------------------------

    \715\ 76 FR 6095 (Feb. 3, 2011).
    \716\ See, e.g., letters from NCFC dated April 4, 2011 (``NCFC
II'') (stating ``[o]n behalf of the more than two million farmers
and ranchers who belong to one or more farmer cooperative(s), the
[NCFC] * * * [believes] the limitation on participation [in
agricultural swaps] to [ECPs] outside of a DCM * * * should limit
[agricultural swap] participation to appropriate persons'' and that
``[t]he ECP requirement with a threshold of $1 million in net worth
to be allowed to use swaps and options, other than on a DCM, is
appropriate for the products cooperatives offer their members''), ;
letter from NGFA dated April 4, 2011 (``NGFA II'') (stating that
``[t]he use of agricultural swaps has been constrained relative to
other swaps by virtue of being subject to CFTC regulatory
requirements, while other swaps have been exempted from CFTC
oversight,'' ``the Dodd-Frank Act * * * institutes a number of
safeguards, including the limitation that only [ECPs] may engage in
swaps unless entered into on a designated contract market,'' and
``[t]he NGFA believes that these safeguards provide more-than-ample
protection in the swaps marketplace for both agricultural and non-
agricultural swaps and that there is no compelling reason to place
additional burdens on agricultural swaps.'').
---------------------------------------------------------------------------

    The Commissions note that commenters said that, because of the way
some businesses are structured for tax, estate planning or other
purposes, they enter into swaps through a legal entity that does not,
by itself, qualify as an ECP even though the net worth of the business
and its owners, taken in the aggregate, would qualify as an ECP
pursuant to subclause (A)(v)(III) of the ECP definition. The
Commissions believe that the best way to address this concern is to
allow such a business to consider the net worth of all its owners in
determining whether the net worth requirement in subclause (A)(v)(III)
is satisfied.\717\
---------------------------------------------------------------------------

    \717\ The Commissions note that this regulation provides an
alternative means for certain business entities to qualify as ECPs.
It neither diminishes nor qualifies in any way the requirement in
CEA section 2(e) that persons that are not ECPs enter into swaps
only on or subject to the rules of a DCM.
---------------------------------------------------------------------------

    CFTC Regulation Sec.  1.3(m)(7) is available only to an entity that
seeks to qualify as an ECP under subclause (A)(v)(III) of the statutory
definition in order to enter into a swap that will be used to hedge or
mitigate commercial risk. The Commissions limited CFTC Regulation Sec.
1.3(m)(7) to subclause (A)(v)(III) because this provision of the ECP
definition is available to a business entity that uses swaps in
connection with the conduct of its business or to manage risks
associated with assets or liabilities related to the conduct of its
business.\718\
---------------------------------------------------------------------------

    \718\ CEA section 1a(18)(A)(v)(III)(bb), 7 U.S.C.
1a(18)(A)(v)(III)(bb). The Commissions note that an entity that
would qualify as an ECP under subclause (A)(v)(III) without
application of CFTC Regulation Sec.  1.3(m)(7) is not required to
meet the conditions stated in, this regulation.
---------------------------------------------------------------------------

    The purpose of CFTC Regulation Sec.  1.3(m)(7) is to maintain the
ability of business entities to enter into swaps other than on or
subject to the rules of a DCM for limited purposes. This regulation
therefore is available only with respect to a swap that is used to
hedge or mitigate commercial risk within the meaning of CFTC Regulation
Sec.  1.3(kkk).\719\ CFTC Regulation Sec.  1.3(m)(7) applies only if
all of an entity's owners qualify as ECPs under the provision of the
ECP definition applicable to such owner. Although some commenters
suggested that an entity should be able to qualify as an ECP based on
the status of its majority or controlling owners,\720\ the Commissions
believe that CFTC Regulation Sec.  1.3(m)(7) should be available only
when all of an entity's owners qualify as ECPs. The Commissions do not
believe it would be appropriate to impair the protection of non-ECPs
that flows from the requirement that non-ECPs enter into swaps only on
or subject to the rules of a DCM.\721\ In order to maintain these
protections and prevent evasion, CFTC Regulation Sec.  1.3(m)(7)
provides that any shell company will be disregarded, and in order to
determine if the underlying entity may use CFTC Regulation Sec.
1.3(m)(7), each owner of such shell company must be an ECP.\722\
---------------------------------------------------------------------------

    \719\ See part IV.C. The use of the phrase ``hedge or mitigate
commercial risk'' in CFTC Regulations Sec. Sec.  1.3(m)(7) and
1.3(kkk) is similar to the use of the same phrase in the exception
to the mandatory clearing requirement in CEA section 2(h)(7), 7
U.S.C. 2(h)(7).
    \720\ See, e.g., letter from NAREIT.
    \721\ See CEA section 2(e), 7 U.S.C. 2(e).
    \722\ See CFTC Regulation Sec.  1.3(m)(7)(ii).
    The term ``shell company'' means any entity that limits its
holdings to direct or indirect interests in entities that are ECPs
through reliance on CFTC Regulation Sec.  1.3(m)(7). Any entity that
holds at least one direct or indirect interest in an entity not
relying on CFTC Regulation Sec.  1.3(m)(7) would not be a shell
company. The ECP status of owners of entities that are not shell
companies is not relevant for purposes of CFTC Regulation Sec.
1.3(m)(7), which should permit wider financing of small businesses
using swaps to hedge or mitigate commercial risk.
    To be clear, an individual will never be considered to be a
shell company for purposes of CFTC Regulation Sec.  1.3(m)(7).
---------------------------------------------------------------------------

    Correspondingly, in aggregating net worth for purposes of
determining the ECP status of an entity pursuant to CFTC Regulation
Sec.  1.3(m)(7), if the entity is owned by a shell company, then it is
the net worth of the owners of that shell company that is relevant, not
the net worth of the shell company.\723\
---------------------------------------------------------------------------

    \723\ This provision may apply repeatedly in a ``chain.'' For
example, if in determining whether an entity may rely on CFTC
Regulation Sec.  1.3(m)(7), an owner of that entity that is a shell
company is disregarded, then if the owner of that shell company is
also a shell company, that second shell company also is disregarded,
and so on.
---------------------------------------------------------------------------

    Last, also in order to prevent evasion, CFTC Regulation Sec.
1.3(m)(7)(ii)(C) specifies that an individual may rely on the
proprietorship provision of clause (A)(v) of the statutory definition
for purposes of determining its status as an ECP owner of an entity
only if the proprietorship \724\ status arises independent of the
business conducted by such entity \725\ and the individual proprietor
acquires his/her interest in such entity (i) in connection with the
conduct of the individual's proprietorship or (ii) to manage the risk
associated with an asset or liability owned or incurred or reasonably
likely to be owned or incurred by the proprietorship.\726\ The
Commissions are adopting CFTC Regulation Sec.  1.3(m)(7)(ii)(C) because
they believe that the only circumstance in which a proprietorship
should be considered an ECP for purposes of CFTC Regulation Sec.
1.3(m)(7)(i) is if it is making an investment related to the
proprietorship.\727\ The ECP status of an individual acting other than
with respect to its proprietorship is determined based on the ECP
clause applicable to individuals. The Commissions note that they have
authority to take action to prevent evasion of the provisions regarding
shell companies and proprietorships by entities relying on CFTC
Regulation Sec.  1.3(m)(7) to establish ECP status.
---------------------------------------------------------------------------

    \724\ A proprietorship generally is a business that a person
operates in a personal capacity and with respect to which that
person directly owns all the assets and directly is responsible for
all of the liabilities, rather than through a corporation,
partnership or other structure conveying limited liability. See
letters from Midmarket Banks and Wells Fargo II (stating that
``proprietors . . . typically are not separate legal entities'');
see also State of California Franchise Tax Board Web site (advising
that ``[t]he business and the owner are one. There is no separate
legal entity and thus no separate legal person''), at https://www.ftb.ca.gov/businesses/bus_structures/soleprop.shtml. A
proprietorship is not a separate taxable entity but reports the
income or loss of the business, which is taxed along with a sole
proprietor's other income, on a separate schedule attached to his or
her individual federal income tax return. See letter from Midmarket
Banks. See also 2011 Form1040 Schedule C: Profit or Loss from
Business (Sole Proprietorship), available at http://www.irs.gov/pub/irs-pdf/f1040sc.pdf; 2011 Instructions for Schedule C, available at
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf.
    \725\ CFTC Regulation Sec.  1.3(m)(7)(ii)(C)(I) is designed to
ensure that the individual qualifies as a proprietorship, if at all,
other than due to its interest in either an entity seeking to
qualify as an ECP under CFTC Regulation Sec.  1.3(m)(7)(i) or in any
other entity.
    \726\ See CFTC Regulation Sec.  1.3(m)(7)(ii)(C)(IV). This
language is modeled on the language in 7 U.S.C.
1a(18)(A)(v)(III)(bb).
    \727\ The Commissions note that this guidance regarding
proprietorships applies only when an entity is relying on CFTC
Regulation Sec.  1.3(m)(7). The Commissions do not intend that this
guidance would expand or limit the circumstances when a
proprietorship may otherwise rely on clause (A)(v) of the statutory
definition in establishing its ECP status.

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G. ECP Status for Forex Pools Operated by Registered CPOs or CPOs
Exempt From Registration Under Certain Conditions

1. Description of the Issue and Commenters' Views
    Notwithstanding the modifications to the look-through provisions
for Forex Pools discussed above in section III.B., the Commissions
acknowledge commenters' concerns about the potential for unintended
consequences arising from the look-through provisions of the Dodd-Frank
Act. Several commenters asserted that many Forex Pools are operated by
sophisticated, professional managers that do not need the protections
of a retail forex regime designed to protect non-ECPs that are engaging
in retail forex transactions.\728\ More specifically, some commenters,
based on CFTC enforcement actions involving Forex Pools, suggested that
commodity pools of a sufficient size, and/or operated by a registered
or exempt CPO, do not pose the risks of fraud and abuse of non-ECP
customers that the statutory look-through provision is intended to
address.\729\
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    \728\ See, e.g., letters from Millburn (characterizing the
proposed rules as ``greatly limit[ing] the ability of entities
managed by sophisticated money managers that are subject to
registration and examination by regulators to qualify as ECPs'') and
Sidley (describing ``[a] commodity pool, like a registered
investment company or an employee benefit plan, [a]s a pool of
assets from investors of varying (and, in some cases, undetermined)
levels of sophistication that are advised by a sophisticated
adviser'').
    \729\ See joint letter from the Global Foreign Exchange Division
(``GXFD'') and MFA dated January 19, 2011 (``GFXD II'') (describing
35 CFTC Forex Pool enforcement cases from 2010 and 2011 and noting
that in 80% of these cases, the amount at issue in the misconduct
was less than $10 million, and that only one case involved a
registered CPO where the amount at issue in the misconduct was more
than $10 million; two additional cases involved misconduct involving
CPOs exempt from registration as such under CFTC Regulation Sec.
4.13(a). While the commenter did not characterize these amounts as
``total assets'' (instead, the commenter used terms such as
``fraudulently obtained'' or ``sustained losses of'' to modify the
cited dollar amounts) in most cases, it is clear that these amounts
are equivalent to, or subsets of, total assets. For instance, for a
CPO to have fraudulently obtained $10 million from commodity pool
participants, the CPO must have taken in $10 million from them,
resulting in the commodity pool at one time having $10 million in
total assets. See also letter from Sidley (providing 26 examples of
CFTC Forex Pool-related enforcement cases, all but one of which
involved Forex Pools with less than $50 million in total assets). A
number of the cases cited by GXFD and Sidley overlap; in the
aggregate, these commenters appear to have presented data on 45
different cases rather than 61.
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    As a result, commenters suggested that the look-through provision
should not apply in determining ECP status of commodity pools that meet
certain conditions. For example, commenters suggested that the look-
through not be applied to a commodity pool with $10 million in total
assets paired with another or other factors, such as not being
structured to evade,\730\ being subject to regulation under the
CEA\731\ or the CPO being registered as such.\732\ Another commenter
suggested requiring the total assets or minimum initial investment of a
Forex Pool to be sufficiently large that, in general, only legitimate
pools would exceed such thresholds.\733\ This commenter suggested a
total asset threshold of $50 million.\734\
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    \730\ See letter from GFXD II.
    \731\ See letters from GXFD II and Skadden.
    \732\ See meeting with SIFMA on January 20, 2012 (in which
representatives of SIFMA proposed a new non-exclusive set of
criteria for a Forex Pool to qualify as an ECP, which included, as
one of several alternatives in one element of the proposed criteria,
that a Forex Pool be operated by a registered CPO). See also letter
from Willkie Farr (observing that ``[i]t may be time to regulate
certain previously unregulated transactions and traders, so that
more CPOs are registered'' and that ``many commodity pools are
operated and advised by registered professionals'').
    \733\ See letter from Sidley.
    \734\ See id.
---------------------------------------------------------------------------

    Separately, one commenter also claimed that the statutory look-
through, if strictly implemented, might inappropriately preclude Forex
Pools and their CPOs, many of whom are registered, from engaging in
retail forex transactions with swap dealers because swap dealers are
not Enumerated Counterparties (and some swap dealers also may not be
Enumerated Counterparties in a different capacity, such as being a U.S.
financial institution).\735\ This commenter stated that such a result
could reduce close out netting opportunities in the event of the
insolvency of a counterparty.
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    \735\ See joint letter from the GFXD and MFA dated January 10,
2012 (``GFXD I''). These commenters indicated that, while
    [s]ome swap dealers may be dually licensed as a bank or a
broker-dealer [and therefore] eligible to transact in OTC foreign
exchange with retail investors as well as swaps with institutional
investors * * * as an operational matter, it is not clear that firms
will be able to and find it efficient to structure their business so
that the retail foreign exchange platform is conducted from the same
entity as the institutional swaps business.
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2. Final Rule
    In response to commenters, the CFTC is adopting CFTC Regulation
Sec.  1.3(m)(8), pursuant to which certain Forex Pools may qualify as
ECPs notwithstanding the look-through requirement. As adopted, CFTC
Regulation Sec.  1.3(m)(8) enables a Forex Pool that enters into a
retail forex transaction to qualify as an ECP with respect thereto,
irrespective of whether each participant in the Forex Pool is an ECP,
if the Forex Pool satisfies the following conditions:
     It is not formed for the purpose of evading CFTC
regulation under Section 2(c)(2)(B) or Section 2(c)(2)(C) of the CEA or
related CFTC rules, regulations or orders governing Retail Forex Pools
and retail forex transactions);
     It has total assets exceeding $10 million; and
     It is formed and operated by a registered CPO or by a CPO
who is exempt from registration as such pursuant to CFTC Regulation
Sec.  4.13(a)(3).
    CFTC Regulation Sec.  1.3(m)(8) as adopted requires that the Forex
Pool not be formed for the purpose of evading CFTC regulation of Retail
Forex Pools and retail forex transactions under CEA Section 2(c)(2)(B)
or (C). A Forex Pool that is formed for that purpose would not be an
ECP under new CFTC Regulation Sec.  1.3(m)(8).
    CFTC Regulation Sec.  1.3(m)(8) as adopted also requires that the
Forex Pool have total assets exceeding $10 million to qualify as an
ECP. The $10 million threshold is twice the current total asset
threshold for a commodity pool to qualify as an ECP under CEA section
1a(18)(A)(iv). The Commissions believe the $10,000,000 threshold is
appropriate in light of the potential regulatory burdens a higher
threshold might impose on smaller commodity pools. The Commissions
believe that such a threshold, coupled with the other conditions of the
rule, is sufficiently high to assure that the protections provided to
retail forex transactions are not needed for these types of commodity
pools. The Commissions will vigilantly monitor developments with
respect to Forex Pools, including enforcement activity, and revisit
this total asset threshold if warranted by subsequent events.
    Finally, CFTC Regulation Sec.  1.3(m)(8) as adopted requires that
Forex Pool be formed \736\ and operated by a CPO registered as such
with the CFTC or by a CPO who is exempt from registration as such
pursuant to CFTC Regulation Sec.  4.13(a)(3). The Commissions believe
that the registered CPO aspect of this condition is appropriate for
several reasons, including that it will ensure

that the NFA oversees compliance by those registered CPOs relying on
this new regulation.\737\ CPO registration also provides a clear means
of addressing wrongful conduct.\738\ Although some commenters suggested
that a CPO need only be ``subject to regulation under the CEA'' in
order for a Forex Pool operated by that CPO to qualify as an ECP
notwithstanding the look-through requirements, CFTC Regulation Sec.
1.3(m)(8) instead requires that the CPO of a Forex Pool be registered
as a CPO or be a CPO who is exempt from registration as such pursuant
to CFTC Regulation Sec.  4.13(a)(3), alternative conditions supported
by other commenters. The Commissions are requiring operation by a
registered CPO, or by a CPO who is exempt from registration as such
pursuant to CFTC Regulation Sec.  4.13(a)(3), as a condition for a
Forex Pool to qualify for ECP status under CFTC Regulation Sec.
1.3(m)(8) because, based on the data presented by commenters, CFTC
enforcement actions involving Forex Pools rarely involve registered
CPOs or CPOs exempt from registration as such.\739\
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    \736\ Given that (i) many CPOs will be registering as such for
the first time due to the CFTC's recent rescission of the exemption
from CPO registration set forth in CFTC Regulation Sec.  4.13(a)(4)
or its modification of the criteria for claiming the exclusion from
the CPO definition in CFTC Regulation Sec.  4.5 and (ii) such pools
were formed prior to their CPOs' registration as such, commodity
pools formed prior to December 31, 2012 need not have been
``formed'' by a registered CPO or by a CPO exempt from registration
as such pursuant to CFTC Regulation Sec.  4.13(a)(3) in order to be
qualified as ECPs under the new prong, so long as they are operated
by a registered CPO on or before such date.
    \737\ See CPO/CTA Compliance Release at 11254 (noting that
``registration allows the Commission to ensure that all entities
operating collective investment vehicles participating in the
derivatives markets meet minimum standards of fitness and
competency''). See http://www.nfa.futures.org/NFA-registration/cpo/index.html for an overview of registration and related requirements
for CPOs, their principals and their associated persons and http://www.nfa.futures.org/NFA-compliance/NFA-commodity-pool-operators/index.html for an overview of the compliance regime for registered
CPOs overseen by the NFA. The CFTC anticipates that more CPOs will
register in the coming months now that it has withdrawn the CFTC
Regulation Sec.  4.13(a)(4) exemption from CPO registration,
increasing the number of registered CPOs, in turn increasing the
number of CPOs who can satisfy the registered CPO alternative under
CFTC Regulation Sec.  1.3(m)(8)(iii).
    \738\ See CPO/CTA Compliance Release at 11254 (stating that
``the [CFTC] has clear authority to take punitive and/or remedial
action against registered entities for violations of the CEA or of
the [CFTC''s regulations * * * [and] to deny or revoke registration,
thereby expelling an individual or entity from serving as an
intermediary in the industry'' and that the CFTC's reparations
program and the NFA's arbitration program also are available avenues
``to seek redress for wrongful conduct by a [CFTC] registrant'').
    \739\ As discussed above in note 729, only one of the 45 unique
cases presented by commenters involved a pool with more than $10
million in total assets and a registered CPO. Only two of those
cases involved a pool operated by CPOs exempt from registration: in
both of those cases, however, the CPO raised less than $10 million.
In addition, one of those CPOs relied on the CFTC Regulation Sec.
4.13(a)(4) CPO registration exemption. As discussed above, the CFTC
has withdrawn that exemption.
---------------------------------------------------------------------------

    While NFA oversight of CPOs operating Retail Forex Pools is a
useful criterion to determine whether an exclusion from the look-
through provisions of CEA section 1a(8)(A)(iv) and CFTC Regulation
Sec.  1.3(m)(5) is warranted, the Commissions believe that Retail Forex
Pools operated by CPOs exempt from registration as such pursuant to
CFTC Regulation Sec.  4.13(a)(3) also merit relief from those look-
through provisions. On September 10, 2010, the CFTC published in the
Federal Register a final rule revising the CPO registration exemption
in CFTC Regulation Sec.  4.13(a)(3) to incorporate retail forex
transactions into the transactions subject to the alternative caps on
the use of commodity interests \740\ by CPOs claiming the
exemption.\741\ The CFTC explained in the related Federal Register
proposing release that the proposed change to CFTC Regulation Sec.
4.13(a)(3) was part of a proposal to adopt a comprehensive regulatory
scheme to implement the CRA with respect to retail forex transactions
(``CRA-Related Forex Proposal'').\742\ The CFTC also explained that
``the NFA-specified minimum security deposit for off-exchange retail
forex transactions would be included among the amounts that cannot
exceed 5 percent of the liquidation value of the pool's portfolio in
order for the operator to claim the exemption from registration under
Regulation 4.13(a)(3)''\743\ and that ``such amounts are roughly
equivalent to initial margin and option premiums).'' \744\ The CFTC
also described the CRA-Related Forex Proposal as ``amend[ing] existing
regulations as needed to clarify their application to, and inclusion
in, the new regulatory scheme for retail forex.'' \745\ More recently,
notwithstanding the Dodd-Frank Act's addition of the look-through
provision in CEA section 1a(8)(A)(iv), the CFTC determined to retain
the exemption from CPO registration under Regulation 4.13(a)(3),
reasoning that ``overseeing entities with less than five percent
exposure to commodity interests is not the best use of the Commission's
resources.'' \746\
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    \740\ The term ``commodity interest'' is defined in CFTC
Regulation Sec.  1.3(yy), and includes ``[a]ny contract, agreement
or transaction subject to [CFTC] jurisdiction under section 2(c)(2)
of the [CEA].'' CFTC Regulation Sec.  1.3(yy)(3).
    \741\ See CFTC, Regulation of Off-Exchange Retail Foreign
Exchange Transactions and Intermediaries; Final Rules, 75 FR 55410
(Sept. 10, 2010).
    \742\ CFTC, Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries; Proposed Rules, 75 FR 3282 (Jan.
10, 2010).
    \743\ Section 12 of the NFA's Financial Requirements impose the
following minimum security deposit requirements for retail forex
transactions: (i) 2% of the notional value of transactions in the
British pound, the Swiss franc, the Canadian dollar, the Japanese
yen, the Euro, the Australian dollar, the New Zealand dollar, the
Swedish krona, the Norwegian krone, and the Danish krone; (ii) 5% of
the notional value of other transactions; (iii) for short options,
the above amount plus the premium received; and (iv) for long
options, the entire premium. See NFA Manual, available at http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=SECTION%2012&Section=7.
    \744\ CFTC, Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries; Proposed Rules, 75 FR 3282, 3287
(Jan. 10, 2010).
    \745\ Id. at 3282.
    \746\ CPO/CTA Compliance Release at 11261. The CFTC also stated
that:
    [t]he Commission believes that trading exceeding five percent of
the liquidation value of a portfolio, or a net notional value of
commodity interest positions exceeding 100 percent of the
liquidation value of a portfolio, evidences a significant exposure
to the derivatives markets, and that such exposure should subject an
entity to the Commission's oversight.
    Id. at 11263.
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    Given that, shortly before the adoption of the Dodd-Frank Act, the
CFTC proposed to add retail forex transactions to those that can be
entered into by CPOs claiming relief from registration as such under
CFTC Regulation Sec.  4.13(a)(3), that it finalized that action shortly
after the Dodd-Frank Act was adopted and that it recently left CFTC
Regulation Sec.  4.13(a)(3) in place despite having proposed to
withdraw that CPO registration exemption, and for the reasons described
above, the Commissions believe CPOs exempt from registration as such
pursuant to CFTC Regulation 4.13(a)(3) and operating Retail Forex Pools
should be able to continue to do so outside the retail forex regime.
    Section 712(d)(2)(A) of the Dodd-Frank Act grants the Commissions
the authority to adopt such rules related to the ECP definition as the
Commissions determine are necessary and appropriate, in the public
interest, and for the protection of investors. Based on commenters'
views, the Commissions have determined that CFTC Regulation Sec.
1.3(m)(8) as adopted is necessary and appropriate because the statutory
look-through provision, if strictly implemented, would subject Forex
Pools operated by CPOs that are sophisticated, professional asset
managers to an array of additional compliance costs and deprive them of
access to swap dealers as counterparties when engaging in retail forex
transactions.\747\ The Commissions also have determined that it is
appropriate to limit the availability of ECP status under CFTC
Regulation Sec.  1.3(m)(8) to Forex

Pools operated by registered CPOs or by CPOs exempt from registration
as such pursuant to CFTC Regulation Sec.  4.13(a)(3).\748\ The
conditions in CFTC Regulation Sec.  1.3(m)(8) also are appropriate in
that they require Forex Pools seeking ECP status thereunder to have
total assets exceeding $10 million. Historically, CFTC enforcement
actions have involved fewer instances of misconduct by CPOs of Forex
Pools with total assets above this threshold.\749\
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    \747\ The nature of a swap dealer's business activities and
assets may detract from what is considered regulatory capital for an
FCM or RFED engaging in retail forex transactions, thereby making it
difficult for some swap dealers to dually register both as such and
as an FCM or RFED in order to do retail forex business. As an ECP, a
Forex Pool's choice of retail forex transaction counterparties will
not be limited to Enumerated Counterparties, and thus may include
swap dealers.
    \748\ The Commissions note that the statistics presented by
commenters indicate that Forex Pool misconduct by registered CPOs
and those exempt from CPO registration is significantly rarer than
Forex Pool misconduct by otherwise unregistered CPOs. See letter
from the GFXD II.
    \749\ See letter from Sidley (showing that 6 of the 27 cases
presented involved more than $10 million).
---------------------------------------------------------------------------

    The Commissions have determined that CFTC Regulation Sec.
1.3(m)(8) is in the public interest in that it will make available a
category of counterparty (i.e., swap dealers) that likely would not
otherwise be available, and help to assure that sophisticated,
professional managers operating qualifying Forex Pools can continue to
engage in retail forex transactions. The Commissions have determined
that the conditions of CFTC Regulation Sec.  1.3(m)(8) are sufficient
for the protection of investors for the reasons discussed above, such
as a significant reduction in the incidence of Forex Pool misconduct
among CPOs, whether registered as such or exempt therefrom, operating
Forex Pools with more than $10 million in total assets. The Commissions
intend to monitor developments in the Forex Pool area and will revisit
the conditions of this regulation as warranted by subsequent events.

IV. Definitions of ``Major Swap Participant'' and ``Major Security-
Based Swap Participant''

    The statutory definitions of ``major swap participant''\750\ and
``major security-based swap participant''\751\ (collectively, ``major
participant'') encompass any person that is not a swap dealer or
security-based swap dealer \752\ and that satisfy any one of three
alternative statutory tests that encompass a person: (i) That maintains
a ``substantial position'' in swaps or security-based swaps for any of
the major swap categories as determined by the Commissions; (ii) whose
outstanding swaps or security-based swaps create substantial
counterparty exposure that could have serious adverse effects on the
financial stability of the U.S. banking system or financial
markets;\753\ or (iii) that is a ``financial entity'' that is ``highly
leveraged'' relative to the amount of capital it holds (and that is not
subject to capital requirements established by an appropriate Federal
banking agency) and maintains a ``substantial position'' in outstanding
swaps or security-based swaps in any major category as determined by
the Commissions.\754\ The first--and only the first--of those three
statutory tests explicitly excludes: (i) Positions held for ``hedging
or mitigating commercial risk,'' and (ii) positions maintained by any
employee benefit plan as defined in sections 3(3) and (32) of ERISA for
the ``primary purpose of hedging or mitigating any risk directly
associated with the operation of the plan.''\755\
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    \750\ CEA section 1a(33).
    \751\ Exchange Act section 3(a)(67).
    \752\ As discussed above, a person may be designated as a dealer
for particular activities involving swaps or security-based swaps,
or particular swap or security-based swap activities, without being
deemed to be a dealer with regard to other categories or activities.
See part II.E, supra. To the extent that a person is subject to that
type of limited designation as a swap dealer or security-based swap
dealer, the person may be subject to being a major swap participant
or a major security-based swap participant in connection with
positions that fall outside of that limited dealer designation.
    \753\ See CEA section 1a(33)(A)(ii); Exchange Act section
3(a)(67)(A)(ii)(II).
    \754\ See CEA section 1a(33)(A)(iii); Exchange Act section
3(a)(67)(A)(ii)(III).
    \755\ See CEA section 1a(33)(A)(i); Exchange Act section
3(a)(67)(A)(ii)(I).
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    The statutory definitions require the Commissions to define the
term ``substantial position'' at the threshold determined to be prudent
for the effective monitoring, management, and oversight of entities
that are systematically important or can significantly impact the
financial system of the U.S. In setting these thresholds, the
Commissions are required to consider the person's relative position in
uncleared as opposed to cleared swaps and may take into consideration
the value and quality of collateral held against counterparty
exposures.\756\
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    \756\ See CEA section 1a(33)(B) and Exchange Act section
3(a)(67)(B).
---------------------------------------------------------------------------

    The statutory definitions further permit the Commissions to limit
the scope of the major participant designations so that a person may be
designated as a major participant in certain categories of swaps or
security-based swaps, but not all categories.\757\
---------------------------------------------------------------------------

    \757\ See CEA section 1a(33)(C); Exchange Act section
3(a)(67)(C).
---------------------------------------------------------------------------

    In addition, the ``major swap participant'' definition excludes
certain entities whose primary business is providing financing and that
use derivatives for the purpose of hedging underlying commercial risks
related to interest rate and foreign currency exposures, 90 percent or
more of which arise from financing that facilitates the purchase or
lease of products, 90 percent or more of which are manufactured by the
parent company or another subsidiary of the parent company.\758\ The
``major security-based swap participant'' definition does not contain
this type of exclusion.
---------------------------------------------------------------------------

    \758\ See CEA section 1a(33)(D).
---------------------------------------------------------------------------

    As detailed in the Proposing Release, the major participant
definitions focus on the market impacts and risks associated with a
person's swap and security-based swap positions.\759\ This is in
contrast to the definitions of ``swap dealer'' and ``security-based
swap dealer,'' which focus on a person's activities and account for the
amount or significance of those activities only in the context of the
de minimis exception. However, persons that meet the major participant
definitions in large part must follow the same statutory requirements
that will apply to swap dealers and security-based swap dealers.\760\
In this way, the statute applies comprehensive regulation to entities
whose swap or security-based swap activities do not cause them to be
dealers, but nonetheless could pose a high degree of risk to the U.S.
financial system generally.\761\
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    \759\ See Proposing Release, 75 FR at 80185.
    \760\ In particular, under CEA section 4s and Exchange Act
section 15F, dealers and major participants in swaps or security-
based swaps generally are subject to the same types of margin,
capital, business conduct and certain other requirements, unless an
exclusion applies. See CEA section 4s(h)(4), (5); Exchange Act
section 15F(h)(4), (5). See also CFTC, Business Conduct Standards
for Swap Dealers and Major Swap Participants with Counterparties;
Final Rule, 77 FR 9733 (Feb. 17, 2012); Notice of Proposed
Rulemaking: Capital requirements of swap dealers and major swap
participants, 76 FR 27802 (May 12, 2011); and SEC, Notice of
Proposed Rulemaking: Business Conduct Standards for Security-Based
Swap Dealers and Major Security-Based Swap Participants, Securities
Exchange Act Release No. 64766, 76 FR 42396 (July 18, 2011).
    \761\ As discussed below, the tests of the major participant
definitions use terms--particularly ``systemically important,''
``significantly impact the financial system'' or ``create
substantial counterparty exposure''--that denote a focus on entities
that pose a high degree of risk through their swap and security-
based swap activities. In addition, the link between the major
participant definitions and risk was highlighted during the
Congressional debate on the statute. See 156 Cong. Rec. S5907 (daily
ed. July 15, 2010) (colloquy between Senators Hagen and Lincoln,
discussing how the goal of the major participant definitions was to
``focus on risk factors that contributed to the recent financial
crisis, such as excessive leverage, under-collateralization of swap
positions, and a lack of information about the aggregate size of
positions'').
---------------------------------------------------------------------------

    Although the two major participant definitions are similar, they
address instruments that reflect different types of risks and that can
be used by end-users and other market participants for

different purposes. Interpretation of the definitions must account for
those differences as appropriate.
    The Commissions in the Proposing Release proposed to further define
the ``major swap participant'' and ``major security-based swap
participant'' definitions, by specifically addressing: (i) The
``major'' categories of swaps or security-based swaps; (ii) the meaning