Cross-Border Activities Regulation - Comment Letters

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Gavel.png FINAL GUIDANCE: Approved July 12, 2013
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

On June 29, 2012, the CFTC approved proposed guidance and a request for comment regarding cross-border application of swaps rules related to the Dodd-Frank Act. The guidance appeared in the Federal Register on July 12, 2012. The deadline for public comment was August 27, 2012. Comment letters are filed below. In May 2013 the SEC proposed a rule on cross-border activities for security-based swaps under its jurisdiction. The comment period closed Augist 21, 2013.

After ISDA, SIFMA and the IIB filed a legal challenge to the CFTC Cross-Border Guidance in December 2013 (see below), the commission opened a 60-day comment period on the guidance. A selection of these letters will be posted after the comment period closes, estimated to be in March 2014.

ISDA/SIFMA/IIB - December 4, 2013

Legal Challenge to CFTC Cross-border Rules
December 4, 2013

In December 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. The lawsuit alleges that the CFTC:

  • Unlawfully circumvented the requirements of the Administrative Procedure Act and the Commodity Exchange Act by characterizing its regulations as “guidance”;
  • Failed to conduct any cost-benefit analysis as required by law;
  • Conducted a flawed rulemaking process; and
  • Imposed a series of rules that are contrary to the spirit and the letter of international cooperation and may harm global markets.

VIEW SUMMARY OF THE LEGAL CHALLENGE

Futures and Options Association - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

In its letter, the FOA proposes enhancements for the SEC's substituted compliance regime, should reassess its jurisdiction over transactions "within the United States" and should converge, as appropriate, with the CFTC's approach.

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CME Group - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

In its letter, CME Group states its beliefs that location of clearing should not be a determinant as to whether a non-U.S. person qualifies as a SD/MSP, and that a clearing agency should be allowed to select the swap data repository to which it reports a transaction.

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FIA/SIFMA/Financial Services Roundtable - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

In its letter, the three entities propose greater harmonization with the CFTC approach, and also explain three issues they have with the SEC's "conduct test" as proposed.

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European Securities and Markets Authority - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

In its letter, ESMA comments on the definition of a U.S. person, substituted compliance and transactions conducted within the U.S.

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Depository Trust & Clearing Corporation - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

In its letter, DTCC "focuses on how the Cross-Border Proposal may impact the SDR regime, including the sharing of information and preservation of confidentiality with respect to data collected and maintained by SDRs. This response also addresses specific provisions of proposed Regulation SBSR and the Commission’s proposed substituted compliance framework."

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Markit - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

From the comment letter:

  • "Market participants and infrastructure providers should be given sufficient time to analyze final requirements and prepare for compliance."
  • "Compliance dates should be set to fall on the start of the week."
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Citadel - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

From the comment letter:

"The principal place of business test within the U.S. person definition and the definition of transaction conducted within the United States should be included in the final rules in substantially the same form as proposed. They each embody an accurate recognition of actual market practices and represent a practical approach to identifying those market participants who are engaged in U.S. SBS market activity, and therefore, are both appropriate determinants of when the transaction-level requirements should apply in the cross-border context."

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Better Markets - August 21, 2013

SEC Proposed Rules on Cross-Border Security-Based Swaps Activities
August 21, 2013

The comment letter criticizes several facets of the proposal, including:

  • "The SEC's definition of "U.S. person" is too narrow, as it excludes guaranteed affiliates and other entities so connected with U.S. persons that they are effectively U.S. persons."
  • "Distinguishing between entity-level and transaction-level requirements is appropriate, but the treatment and applicability of certain requirements must be changed."
  • "Substituted compliance should be subject to more rigorous tests and a more public process."
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Consortium of Trade Associations - June 6, 2013

Request for Extension of CFTC Final Exemptive Order Regarding Compliance with Certain Swap Regulations
June 6, 2013

The June 6 letter was co-authored by six trade associations representing the financial sector:

  • American Bankers Association
  • ABA Securities Association
  • Futures Industry Association
  • Institute of International Bankers
  • International Swaps and Derivatives Association
  • Securities Industry and Financial Markets Association

The letter requests a six-month extension of an exemptive order on cross-border activities set to expire July 12, 2013. Such an extension would "provide sufficient time for swap market participants and for the Commission itself to consider the potential implications of the Securities and Exchange Commission’s recent proposals on cross-border activities," and that failing to extend the Exemptive Order in the absence of final cross-border guidance could increase uncertainty for international market participants."

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SIFMA - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

Summary of key points from the comment letter:

  • The Proposed Interpretive Guidance could harm U.S. investors and asset managers.
  • The U.S. person definition should consist of objective factors with bright-line tests designed to avoid uncertainty and undue burdens.
  • Market participants should be able to rely on representations from their counterparties as to their U.S. person status.
  • Market participants should be given sufficient time to comply with a new U.S. person definition and any ongoing requirements stemming from U.S. person status.
  • The Commission’s approach to substituted compliance should be consistent with its past approach and general principles of comity.
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Futures Industry Association - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

From the comment letter:

  • "FIA strongly supports SIFMA's recommendation...this approach is operationally and logistically sound and supports portfolio margining to the extent available."
  • If the commission nonetheless were to determine to apply the definition of a U.S. person more broadly, we reiterate our view that the commission must first publish such a definition for comment, along with proposed amendments to all commission rules that would be affected by such definition."
  • "We urge the commission to reconsider its proposed policy with regard to substituted compliance and adopt a policy that, in line with its current policies, focuses on regulatory comparability."
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Managed Funds Association/Alternative Investment Management Association - August 28, 2012

Cross-Border Proposed Interpretive Guidance
August 28, 2012

Summary of key points from the comment letter:

  • MFA and AIMA believe that a rulemaking, rather than guidance, is more appropriate, in that it would add legal certainty to foreign entities and would require the commission to conduct thorough cost-benefit analysis.
  • The associations question whether defining a non-U.S. fund as a “U.S. person”, because of the proportion of U.S. investors, is consistent with the stated aims of the Dodd-Frank Act.
  • Regarding international harmonization, the associations are "increasingly concerned that the duplicative scope of the various international reforms will create substantial regulatory conflicts that if not resolved, could impair the derivatives markets."
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CIEBA - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

Summary of key points from the comment letter:

  • Congress did not intend that every activity outside the United States be deemed to have a “direct and significant connection” with the United States solely because one of the parties to such transaction is a U.S. person.
  • The Commission should provide guidelines both as to when an activity (i) is deemed to occur “outside the United States” for purposes of Section 2(i) of the CEA and (ii) satisfies the “direct and significant” connection or effect with United States test.
  • The definition of “U.S. person” should be amended to exclude U.S. investors acting outside the United States through a non-U.S. discretionary investment adviser or similar fiduciary.
  • The costs of compliance with Dodd-Frank are so significant that some foreign investment advisers may either refuse to manage U.S. pension plan assets or limit the types of investments they are willing to make on behalf of such plans.
  • Substituted compliance (i.e., compliance with comparable foreign regulatory requirements rather than Dodd-Frank regulations) should be allowed with respect to swaps between a U.S. pension plan and a non-U.S. dealer.
  • The Commission should allow U.S. investors to avail themselves of better client protections overseas that aren’t available or permitted in the United States.
  • The Exemptive Order should defer compliance dates for swaps between U.S. pension plans and non-U.S. swap dealers (and foreign branches of U.S. swap dealers).
  • The CFTC should apply Part 30 to cleared swaps transactions.
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Deutsche Bank - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

From the comment letter:

"...the Proposed Definition introduces a number of novel and practically challenging components—including the concept of “indirect” ownership for both corporations and commodity pools and the linking of a commodity pool’s U.S. person status to the operator of the pool rather than the pool’s investors—that are both difficult from a compliance standpoint and exceed the restriction on the Commission’s cross-border jurisdiction in Section 2(i) of the Commodity Exchange Act (“CEA”), which limits application of the Title VII swap regulations outside the United States to those activities that have a direct and significant connection with activities in, or effect commerce of, the United States or contravene anti-evasion rules promulgated by the CFTC."

Consequently, we support the definition proposed by the Securities Industry and Financial Markets Association (“SIFMA”) in their comment letter to the Commission on the Proposed Interpretive Guidance.

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State Street - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

From the comment letter:

"We are concerned that the Proposed Guidance fails to sufficiently recognize the prerogative of non-U.S. regulators to regulate markets under their jurisdiction, and instead too often attempts to impose U.S. rules on activity outside of the U.S., primarily to the competitive detriment of U.S.-based firms. While we understand and agree with the Commission’s interest in imposing entity level requirements on U.S. registered firms wherever they operate, we believe transactional level requirements should defer to local regulation, provided such regulation is consistent with the overall G20 commitments."

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CME Group - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

From the comment letter:

"Although through central counterparty clearing, the credit of the clearing house is substituted for the credit of each counterparty through the novation process, a clearing house is not a "counterparty" as contemplated by these definitions. To treat the clearing house as a "counterparty" within the meaning of a SD and/or MSP would render every person who clears an SD under DFA and commission regulations. Congress did not intend such an extreme result."

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Coalition for Derivatives End-Users - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

From the comment letter:

The Coalition is concerned that the Proposal would impose burdens and costs on end-users and end-user transactions without any corresponding regulatory benefit or prevention of systemic risk. We are also concerned that the term “conduit,” as used in the Proposal could lead some end-users to move away from using a central hedging center for executing their trades. Because central hedging increases efficiency and reduces a company’s risk, the Coalition urges the Commission to revise the portions of the Proposal that would discourage the use of central hedging.

Also, as a general matter, the Coalition represents all end-users and believes there is not a compelling reason to impose disparate cross-border requirements on financial and non-financial end-users. Financial end-users include pension plans, captive finance affiliates, mutual life insurance companies, and commercial companies with non-captive finance arms. Like nonfinancial end-users, these entities do not pose systemic risk to the financial system and use derivatives predominantly to hedge risks associated with their business.

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Credit Suisse - August 27, 2012

Cross-Border Proposed Interpretive Guidance
August 27, 2012

From the comment letter:

"...we recommend that the Exemptive Order, which, in its proposed form incorporates the Guidance’s definition of U.S. person, be revised to include an interim definition of U.S. person that is simpler and more readily implementable and is based on the information that swap market participants currently maintain. This definition should be in place during the pendency of the Exemptive Order. Specifically, a person should be deemed to be a U.S. person only if such person is:

  • a natural person who is a resident of the United States; or
  • a corporation, partnership, LLC, business, trust, association, joint-stock company, fund, or any form of enterprise similar to any of the foregoing that is organized under the laws of the United States or has its principal place of business in the United States."

"Although we believe that the Commission should adopt a single definition of “U.S. person” that applies for all swap dealer registration and regulation purposes, we do not believe that this definition should override existing market practice as it relates to other areas overseen by the Commission, such as futures commission merchant and introducing broker registration."

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Futures and Options Association - August 13, 2012

Cross-Border Proposed Interpretive Guidance
August 13, 2012

Summary of key points from the comment letter:

  • "the release, in its final form, should comprise a set of rules rather than guidance and, because of the severe cost implications for non-US firms and their customers of a limited approach to substituted compliance, be subject to cost-benefit analysis;
  • the differentiated terms of ”regulatory recognition”, “equivalence”, “comparability” and “substituted compliance” represented different facets of the same policy, i.e. “regulatory recognition” based on “equivalent” regimes with “comparable” policy objectives, processes and outcomes, which are given practical effect through “substituted compliance”, by which compliance with the rules of the home state of a non-US firm substitutes for compliance with host state rules;
  • providing that the home state will draw no differentiation between the domicile or nationality of customers or counterparties, and subject to satisfying the regulatory compatibility test, particularly as it relates to customer protection matters, compliance with host state rules should generally apply regardless of the location of the customer or counterparty;
  • it is critical that, in this climate of regulatory change and continuing uncertainty in terms of the final supporting rules, particularly in the EU, market participants should be given practical timescales in which to come into compliance, which takes into account the huge burden being placed on firms’ resources in coming into compliance with the global regulatory change agenda, the need to sustain business continuity and the need for continuous review to monitor the impact of unintended consequences; and
  • from the perspective of non-US firms and institutions undertaking business in different classes of swaps, the importance of a co-ordinated approach with the SEC is critically important, and that includes a common approach to ”substituted compliance” covering key prudential and business conduct requirements.
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ISDA - August 10, 2012

Cross-Border Proposed Interpretive Guidance
August 10, 2012

From the comment letter:

  • "ISDA believes that the Proposed Guidance and Proposed Order are unlikely to facilitate, and may hinder, cooperation or commonality of derivatives regulation in and among the G-20 nations."
  • "The Commission should further extend its temporary exemptive relief from all swap provisions of Title VII as though the final rules further defining 'swap' had not been published, pending the issuance of final cross-border guidance developed in coordination with the Securities and Exchange Commission (“SEC”) and international regulators."
  • "The Commission should permit US swap dealers transacting (either directly or through a branch or affiliate) in a non-US jurisdiction to comply only with host country Transaction-level requirements in their transactions with non-US counterparties."
  • "Non-US persons should be permitted to disregard transactions with foreign branches of US swap dealers in determining whether the non-US person exceeds the thresholds for 'Major Swap Participant' MSP status."
  • "ISDA believes that the inclusion in prong of the proposed US person definition of any non-US entity in which the direct or indirect owners are responsible for liabilities and one or more of which are US persons may be unworkable"
  • "ISDA recommends that the Commission postpone issuance of final cross-border guidance until an understanding in principle as to overlapping jurisdiction and comparable regulatory content is reached among the Commission, the SEC, and important non-US regulators...Although the lack of certainty and of an adequate period to adapt to the novel elements of the Proposed Guidance might appear to affect only the extraterritorial application of Title VII, a comparably extended timeline for compliance domestically is necessary so as not to distort the competitive dynamics of the marketplace and to allow decisions regarding the allocation of swaps"
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FINMA - July 5, 2012

Cross-Border Proposed Interpretive Guidance
July 16, 2012

From the comment letter:

  • FINMA is concerned about "the potential extraterritorial effects of registration rules for swaps dealers...it is our understanding that the final rules adopted so far only address registration issues, while specific requirements remain pending."
  • "We are in no position to fully assess the consequences of a registration with the CFTC and whether these can be reconciled with Swiss regulatory standards..We have serious doubts as to whether the registration as a swap dealer of a Switzerland-domiciled bank as a whole."
  • "We are particularly concerned about potential CFTC margin requirements for swap deals that are not cleared by a central counterparty."
  • "We are not comfortable with the idea of a Swiss-based bank as a whole registering with the NFA and the CFTC while the extraterritorial effects of the registration remain unclear."
  • "Alternatives could include the provisional registration of foreign branches of Swiss-based banks in which swap transactions with U.S. persons are booked until a separate legal entity has been set up.
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French Ministry of the Economy and Finance - July 27, 2012

Cross-Border Proposed Interpretive Guidance
July 27, 2012

From the comment letter:

  • "We support the concept of 'substituted compliance' related to non-US Swap Dealers or non-US Major swap participants. We are firmly convinced that the equivalence system is the best way to prevent overlaps and to achieve an efficient regulation and oversight of the OTC derivatives markets."
  • "We wish to emphasize any that any entity-by-entity approach should be articulated with and complemented by the assessment, in a comprehensive perspective, of the rule applicable on both sides of the Atlantic.
  • "In addition, we would like to point out the main legal impediments we will face namely the professional secret rules and the protection of strategic data... similarly, you mus clarify the scope of the activities which would be concerned bu the application of the Volcker rule in order to prevent significant extraterritorial consequences for the non-resident banking entities that could induce unexpected impact for both US and EU economies.
  • "Finally, we consider that the specific issue to the cross-boarder transactions should also be explicitly covered in the interpretative guidance, especially when such transaction occur between an EU and US counterparty...authorities should be able to rely on each other, regardless of the type of rules concerned."


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