Cross-Border Activities Regulation

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Gavel.png FINAL CFTC GUIDANCE: Approved July 12, 2013. To view, click HERE.
Gavel.png FINAL SEC RULES: Application of Security-Based Swap Entity Definitions to Cross-Border Activities approved June 24, 2014.
Cross-Border Security-Based Swap Rules Regarding Activity in the United States approved February 10, 2016
Dodd-Frank Timeline, Cross-Border Application of Swaps Provisions, CFTC
Proposal Date Comment Deadline Compliance Extension Guidance Effective Date
July 12, 2012 August 27, 2012 July 12, 2013 July 26, 2013
Dodd-Frank Timeline, Cross-Border Application of Swap Entity Provisions, SEC
Final Rule Posted Effective Date Final Rule - Non-U.S. Persons
July 9, 2014 September 8, 2014 February 10, 2016

Among the provisions of Title VII of the Dodd-Frank Act is a requirement that swaps reforms shall not apply to activities outside the United States unless those activities have “a direct and significant connection with activities in, or effect on, commerce of the United States.” The CFTC is tasked with developing a framework for oversight of the swaps market, and to adapt the Commodity Exchange Act to include swaps oversight. The SEC is tasked with developing a framework for oversight of security-based swaps, and to adapt the SEC regulations to include such oversight.

The concern is that swap trading by foreign affiliates of large financial entities pose a systemic risk to the U.S., and thus should be under CFTC jurisdiction. This guidance is meant to be the starting point for discussion with market participants regarding the structure of cross-border jurisdiction.

Cross-Border Activities Regulation in the News

  • On May 24, 2016, the U.S. CFTC adopted a final rule implementing a cross-border approach to the margin requirements for uncleared swaps. [1]
  • On February 10, 2016, the U.S. CFTC and European Union commissioner Jonathan Hill announced a common approach for mutual recognition of central counterparties. The following month, on March 16, 2016, the CFTC approved a substituted compliance framework for dually-registered CCPs. To see the key elements of the framework, click HERE.
  • Also on February 10, 2016, the SEC approved a final rulemaking that requires a non-U.S. company that uses personnel located in a U.S. branch or office to arrange, negotiate, or execute a security-based swap transaction in connection with its dealing activity to include that transaction in determining whether it is required to register as a security-based swap dealer. The rule will become effective 60 days after it is published in the Federal Register.[2]
  • On June 29th, 2015 the CFTC proposed a new rule that will close the loophole allowing foreign branches to avoid margin requirements.
  • On April 29th, 2015 The SEC proposed a new rule on Cross-Border Security-Based Swaps. The proposed rule would require non-US firms using U.S. personnel in arranging, negotiating, or executing security based swaps to register as a security-based swap dealer. [3]
  • On September 15, 2014, a D.C. judge dismissed the bulk of the ISDA/SIFMA/IIB lawsuit against the CFTC. The court did, however, request the commission reconsider its cost-benefit analysis of the rules.[4]
  • On June 27, 2014, EC Commissioner Michel Barnier announced he would propose "equivalence" decisions for five jurisdictions outside the EU - Japan, Singapore, Australia, Hong Kong and India - thus allowing these countries' clearing houses to clear EU transactions. He also said the U.S. may be granted equivalence if the CFTC gives "effective equivalence" to third-country central counterparties.[5]
  • On June 24, 2014, the SEC approved a final set of rules and guidance on cross-border activities for security-based swaps. Specifically, the rule adapts swap entity definitions to cross-border activities.
  • On February 15, 2014, as the first set of swaps became made available to trade in the U.S., the CFTC issued statement and two no-action letters related to the "Path Forward" with the EU. The statement contains a set of criteria by which multilateral trading systems (MTFs) in Europe may avoid the registration requirements of the CFTC. The statement can be found HERE.
  • On January 3, 2014, the CFTC issued a request for comment on the November 14, 2013 staff advisory on registered, non-U.S. swap dealers when entering into swaps with non-U.S. persons.(see below). [6] The commission also extended no-action relief for such non-U.S. persons until September 15, 2014.
  • On December 20, 2013, the CFTC issued a determination on substituted compliance on business conduct standards for Australia, Canada, the European Union (“EU”), Hong Kong, Japan, and Switzerland.[7] Substituted compliance was not granted for certain rules on swap data reporting, swap clearing and trading on non-exchange execution venues. The commission has deferred its determination on capital requirements until U.S. rules are in place.[8]
  • In the final draft of the Volcker Rule, released on December 10, 2013, included a requirement that foreign banks with U.S. operations will be subject to the rule, which bans proprietary trading by banks and limits ownership of private funds.
  • On December 4, 2013, SIFMA, ISDA and the Institute of International Bankers (IIB) filed a legal challenge to the CFTC’s Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations (“Cross-Border Rule”), and to the cross-border aspects of related rules. Click here to view summary of the suit.
  • On November 14, 2013, the Division of Swap Dealer and Intermediary Oversight issued an advisory saying, essentially, that if the U.S. affiliate is performing, "core, front-office functions," the affiliate must register. To view the advisory, click HERE. Subsequent letters extended temporary relief until September 30, 2016.

CFTC Final Rule: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

Re-proposal approved September 17, 2014, Final rule approved December 16, 2015

On December 16, 2015, the CFTC approved a final rulemaking requiring swap dealers, major swap participants and "financial end users" to exchange two way (posting and collecting) initial ("IM") and daily variation margin ("VM"). Commercial ("non-financial") end users would be exempt.

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Final Rule: Cross Border Margin

Proposed June 29th, 2015, Final rule adopted May 24, 2016

On June 29th, 2015 the CFTC proposed a new rule on cross border margin requirements. The rule seeks to prevent the circumvention of margin requirements through the use of foreign subsidiaries. Additionally it provides substitute compliance in approved foreign jurisdictions for uncleared swaps and guidance as to who would be subject to the requirements. A final rule was adopted on May 24, 2016.

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SEC Final Rule: Cross-Border Security-Based Swap Rules Regarding Activity in the United States

Proposed April 29th, 2015; Finalized February 10, 2016

On April 29, 2015 the SEC proposed new rules on Cross-Border Security Based (CBSB) swaps. The proposed rule would require non-US companies using U.S. personnel in arranging, negotiating, or executing security based swaps to be included in the de minimis threshold calculation for determining if they need to register as Security-Based Swap Dealer. This would also require that the swaps undertaken by these companies be subject to reporting and dissemination requirements under the Regulation SBSR. The final rule was approved February 10, 2016.

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Cross-Border Fragmentation of Global OTC Derivatives, January 2014

January 2014

In January 2014, the International Swaps And Derivatives Association (ISDA) published a research paper detailing its findings from a survey regarding the impact of the CFTC's swap execution facilities regulation on liquidity, volume, volatility and other potential concerns.

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OTC Regulators' Report to the G20, August 30, 2013

August 2013

On August 30, 2013, per the request of the G20, a consortium of authorities responsible for OTC derivatives regulation in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States issued a report regarding common understandings to improve the cross-border implementation of OTC derivatives reforms. The report reflects a number of substantive understandings to improve the cross-border implementation of OTC derivatives reforms.

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"Path Forward" between CFTC and European Union, July 2013

Though the cross-border rulemaking process has been at times contentious - between regulators and market participants, as well as between jurisdictions - global progress has been made. On July 11, 2013, the CFTC and the European Union, led by Michel Barnier, the commissioner tasked with overseeing the developing the rules in Europe, announced the "Path Forward" toward synchronized regulation of the OTC derivatives market. The agreements in the joint statement include trade execution, clearing, and reporting requirements, uncleared swap margin, and treatment of offshore funds, branches and guaranteed affiliates.

To view the "Path Forward" click HERE.

On July 12, 2013, the CFTC approved final interpretive guidance and a policy statement regarding cross-border activities related to the Dodd-Frank Act. The commission also approved an exemptive order that will phase-in compliance with cross-border activities.

The SEC proposed its rules on May 1, 2013.

CFTC Guidance, July 2013

On July 12, 2013, the CFTC approved final guidance regarding cross-border application of swaps rules related to the Dodd-Frank Act.

The final guidance contains the following:

  • Definitions: an interpretation of the term “U.S. person;"
  • De Minimis Threshold and MSP Calculation: a determination of whether a person meets the threshold for swap dealer or major swap participant (SD/MSP), including the de minimis threshold, and the treatment for registration purposes of foreign branches, agencies, affiliates, and subsidiaries of U.S. swap dealers and of U.S. branches of non-U.S. swap dealers;
  • Entity Level vs. Transaction Level: an interpretation of the Commodity Exchange Act as it applies the Dodd-Frank Act and the Commission’s regulations by classifying requirements as entity-level or transaction-level;
  • Substituted Compliance: the process by which a non-U.S. SD/MSP may comply with foreign regulatory requirements, in order to satisfy applicable statutory and regulatory requirements under the Dodd-Frank Act, and may be permitted to substitute compliance with a comparable and comprehensive foreign regulatory requirement;
  • Compliance for non- SD/MSPs: an interpretion of the extent to which the CEA applies to the clearing, trading, and certain reporting requirements under the Dodd-Frank Act with respect to swap transactions between counterparties that are not SD/MSPs.[9]
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Archived Video, CFTC Meeting, July 12, 2013

SEC Final Rule, June 2014

On June 24, 2014, the SEC approved a final set of rules and guidance on cross-border activities for security-based swaps, including:

  • An explanation of when a cross-border transaction needs to be counted toward the requirement to register as a security-based swap dealer or major security-based swap participant (SB-SD/MSP, including transactions guaranteed by a U.S. person and transactions by a “conduit affiliate” (a foreign affiliate of a U.S. person that could be used to evade the requirements of Title VII of the Dodd-Frank Act).
  • Procedures for foreign regulators or market participants to apply for substituted compliance, which would permit market participants to comply with U.S. requirements by complying with foreign requirements.
  • An anti-fraud rule that addresses the scope of the Commission’s cross border anti-fraud enforcement authority, clarifying that the authority applies where the fraud occurs or is felt within the U.S.

This rule was originally proposed in May 2013, but also included other provisions to be finalized at a later date:

  • the criteria for determination of whether a transaction must be reported, disseminated, cleared, or executed on a swap execution facility (SEF); and
  • the conditions by which a data repository would turn over data without requiring an indemnification agreement from the requesting regulator.
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  1. CFTC Issues Final Cross-Border Margin Rule. CFTC. Retrieved on July 26, 2016.
  2. SEC Adopts Cross-Border Security-Based Swap Rules Regarding Activity in the U.S.. SEC. Retrieved on February 12, 2016.
  3. SEC re-proposes some key rules for swap dealers on U.S. soil. Reuters. Retrieved on April 30th, 2015.
  4. Court Dismisses Lawsuit Against CFTC Over Cross-Border Swaps Rule. Wall Street Journal. Retrieved on September 16, 2014.
  5. Statement by Commissioner Barnier on Global Derivatives Regulation. Retrieved on July 14, 2014.
  6. CFTC Approves Request for Comment on Application of Commission Regulations to U.S. Activities of Non-U.S. Swap Dealers. CFTC. Retrieved on January 3, 2014.
  7. U.S. permits some foreign swaps rules, EU still unhappy. Reuters. Retrieved on December 23, 2013.
  8. CFTC Extends Some Swaps Rules to Overseas Firms. Retrieved on December 23, 2013.
  9. Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations. CFTC. Retrieved on July 12, 2013.

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