CFTC Final Guidance: Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, July 2013
|FINAL GUIDANCE: Approved July 12, 2013|
|Proposal Date||Comment Deadline||Compliance Extension||Guidance Effective Date|
|July 12, 2012||August 27, 2012||July 12, 2013||July 26, 2013|
On July 12, 2013, the CFTC approved 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 guidance appeared in the Federal Register on July 26, 2013, and became effective on that day.
Additionally, in July 2013, the commission announced a "Path Forward" toward synchronized regulation of the OTC derivatives market.
To view the "Path Forward" click HERE.
NOTE: 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. Click here to view summary of the suit.
- 1 Archived Video, CFTC Meeting, July 12, 2013
- 2 Background
- 3 Summary of the Final Interpretive Guidance
- 4 U.S. Persons
- 5 Footnote 513
- 6 Registration Thresholds
- 7 "Entity Level" Versus "Transaction Level" Activities
- 8 Substituted Compliance
- 9 Non-Registered Entity Requirements
- 10 Exemptive Order Regarding Phased-in Compliance
- 11 Related Documents: Final Guidance and Phase-in Order Fact Sheets; Federal Register Entries
- 12 References
Archived Video, CFTC Meeting, July 12, 2013
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 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.
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. Comments can be found HERE.
Summary of the Final Interpretive Guidance
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.<ref>Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations. CFTC. Retrieved on July 12, 2013.</ref>
The definition of U.S. person, which includes collective investment vehicles such as hedge funds, depends largely on
- the domicile of the direct or indirect majority ownership, or
- the location of the principal place of business of investment managers, fund sponsors and
promoters, and the sales and trading desk of a fund.
If either of these criteria are considered to be in the United States, the entity is a "U.S. person."
A non-U.S. person that is guaranteed by and an affiliate of a U.S. person is not included in the definition of U.S. person.
Buried in the footnotes of the cross-border guidance was number 513, which, in the context of explaining transaction level requirements, said that the U.S. branch of a non-U.S. swap dealer is a non-U.S. person. There was subsequent concern that some foreign swap dealers might use the footnote as a loophole whereby foreign entities could sidestep the registration requirements. 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 the relief, the latest one being in August 2015 that extended the relief until September 30, 2016. allowed temporary relief until January 14, 2014.
On January 3, 2014, the CFTC issued a request for comment on the November 14, 2013 staff advisory. <ref>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.</ref> Once the request appears in the Federal Register, there will be a 60 day comment period. Comments on cross-border issues can be found HERE. Also on January 3, the commission extended no-action relief for such non-U.S. persons until September 15, 2014. VIEW NO-ACTION LETTER.
A U.S. person should generally count in its swap dealer de minimis calculations all of its dealing swaps, whether with U.S. or non-U.S. counterparties. A non-U.S. person that is a guaranteed or conduit affiliate should also generally include in its swap dealer calculation all of its dealing swaps, whether with U.S. or non-U.S. counterparties.
A non-U.S. person that is not a guaranteed or conduit affiliate should generally count swaps with U.S. persons, but may exclude swaps foreign branches of U.S. swap dealers.
For major swap participants, the CFTC believes that the focus should be on whether swaps have a "direct and significant" impact on U.S. commerce, rather than whether each particular swap has such a connection or effect. As such, the MSP determination for a non-U.S. person should include only its positions in which a U.S. person or a guaranteed affiliate of a U.S. person is a counterparty.
"Entity Level" Versus "Transaction Level" Activities
The Commission believes that, in determining the cross-border applicability of the Dodd-Frank swap provisions to a swap dealer or major swap participant, should distinguish between requirements that apply to the firm as a whole ("Entity-level") and those that apply to each swap ("Transaction-level"). Entity level requirements include:
- capital adequacy;
- chief compliance officer;
- risk management;
- Swap data repository (SDR) reporting requirements;
- swap data recordkeeping and reporting; and
- physical commodity swaps reporting (i.e., large swap trader reporting).
Transaction-Level Requirements relate to:
- clearing and swap processing;
- margining (and segregation) for uncleared swaps;
- trade execution;
- swap trading relationship documentation;
- trade confirmation, portfolio reconciliation and compression;
- real-time public reporting;
- daily trading records; and
- external business conduct standards.
Substituted compliance means that "non-U.S. swap dealers or non-U.S. major swap participants are permitted to conduct business by complying with their home regulations." Under the proposed rules, if a non-U.S. jurisdiction has regulations "analagous" to those of the Commission, a non-U.S. SD/MSP may substitute compliance with the home jurisdiction in lieu of CEA and Commission regulations. The Commission proposes to recognize substituted compliance in only those areas that are determined to be "comparable and comprehensive to relevant Dodd-Frank Act requirements."
Comparability may be made on a requirement-by-requirement basis, rather than on the basis of the foreign regime as a whole. Each of the above transaction- and entity-level requirements may be considered separately. The foreign regulations must be "comparable and comprehensive" but not necessarily "identical."
In December 2013, the commission made its first substituted compliance determinations. The information can be found HERE.
Non-Registered Entity Requirements
Certain requirements, namely clearing, trade execution, real-time public reporting, Large Trader Reporting, SDR Reporting, and swap data recordkeeping also apply to persons or counterparties other than a swap dealer or MSP.
Exemptive Order Regarding Phased-in Compliance
Also on July 12, 2013, the commission approved an exemptive order that phases in compliance, in order to facilitate transition to the Dodd-Frank swaps regime. The Final Order is effective on July 13, 2013 and will expire on December 31, 2013 or such earlier date specified in the Order.
The Commission is soliciting comments for 30 days. Among the key points of the order:
- Until 75 days after the guidance appears in the Federal Register, market participants may continue to apply the term "U.S. Person" from the prior order.
- Also until 75 days after the guidance appears in the Federal Register, non-U.S. persons may exclude from its de minimis calculation and swaps where the counterparty is not a U.S. person and any swap where the counterparty is a foreign branch of a U.S. swap dealer.
- Until the earlier of December 21, 2013 or 30 days following the issuance of a substituted compliance determination, non-U.S. participants may be entitled to relief from certain aggregation, entity-level and transaction-level requirements.
The deadline for public comment was August 12, 2013. A selection of comments received can be found HERE.
Related Documents: Final Guidance and Phase-in Order Fact Sheets; Federal Register Entries