CFTC Proposed Guidance: Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, June 2012
|FINAL RULE: This page refers to the proposed CFTC rulemaking on Cross-Border Activities Regulation. For a summary of the final rule, click here.|
|Proposal Date||Comment Deadline||Compliance Extension||Guidance Effective Date|
|July 12, 2012||August 27, 2012||July 12, 2013||July 26, 2013|
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. On December 21, 2012, the commission issued a final exemptive order on swap compliance with certain entity-level requirements for non-U.S. persons registering as swap dealer. The guidance expired on July 12, 2013, but on that date the CFTC approved final guidance and an exemptive order that will phase-in compliance.
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.
Summary of the Proposed Guidance
The proposed guidance contains the following:
- an interpretation of the term “U.S. person;"
- a determination of whether a person meets the threshold for swap dealer or major swap participant (SD/MSP), 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;
- 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;
- 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;
- 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>CFTC Approves Notice of Proposed Rulemaking Regarding Regulations on Aggregation for Position Limits for Futures and Swaps. CFTC. Retrieved on May 21, 2012.</ref>
In general, the thresholds for swap dealers and major swap participants would follow those set by the joint rules on swap entity definitions, approved on April 18, 2012. For swap dealers, the de minimis level would include the aggregate notional value of swaps transactions between U.S. persons and non-U.S. affiliates, plus swap transactions by U.S. affiliates guaranteed by the U.S. persons. However, a non-U.S. person would not include the notional value of dealing transactions in which its U.S. affiliates engage.
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 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 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;
- portfolio reconciliation and compression;
- real-time public reporting;
- trade confirmation;
- 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."
Related Document: Proposed Rule as it Appeared in the Federal Register