The Commodity Futures Trading Commission has unanimously
voted by seriatim (without a meeting) to issue two proposals which will affect
"U.S. persons" who engage in swaps activities. The proposals address the
hotly debated application of Dodd-Frank outside US soil, commonly referred to
as "extraterritoriality" or "ET" by the derivatives industry but termed
"cross border" by the CFTC. It is believed that the CFTC issued the proposals
as "interpretive guidance" and an "exemptive order" rather than a rulemaking in
order to avoid the need to present a cost-benefit analysis required in a
The proposals, issued on June 29, 2012, are:
(1) Proposed Interpretive Guidance regarding the
cross-border application of the swaps provisions of the Commodity Exchange Act
(2) a Proposed Exemptive Order allowing delayed
implementation for certain provisions of the CEA (and corresponding CFTC
Proposed Interpretive Guidance regarding
cross-border application of CEA's swaps provisions
Section 2(i) of the CEA provides that the Dodd-Frank Wall
Street Reform and Consumer Protection Act 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," or otherwise contravene rules or regulations necessary to prevent
evasion of the Dodd-Frank Act.1
The Proposed Interpretive Guidance:
(1) defines the term "U.S. person" and explains
which non-U.S. persons must register as swap dealers (SDs) or major swap
(2) classifies swap provisions under the Dodd-Frank Act
as "entity-level" or "transaction-level"
(3) allows non-U.S. SDs and non-U.S. MSPs to satisfy
certain requirements of the Dodd-Frank Act by complying with comparable and
comprehensive foreign requirements and
(4) interprets the extent to which the clearing, trading
and certain reporting requirements of the Dodd-Frank Act apply to cross-border
swap transactions between counterparties that are not SDs or MSPs.
Definition of "U.S. person," registration of
non-U.S. persons as SDs and MSPs
The Proposed Interpretive Guidance "interpret[s] the
term 'U.S. Person' by reference to the extent to which swap activities or
transactions involving one or more such person have the relevant effect on U.S.
commerce."2 The CFTC notes that
this definition includes a variety of entities, including (among other things)
any natural person who resides in the United States and commercial entities
that are organized or incorporated under the laws of the United States or have
their primary places of business in the United States.3
The CFTC notes that the term "U.S. person" generally includes foreign
branches or agencies of a U.S. person, but does not include foreign
affiliates or subsidiaries of a U.S. person, "even where such an affiliate
or subsidiary has certain or all of its swap-related obligations guaranteed by
the U.S. person."4 Since branches
and agencies are not separate legal entities, the CFTC proposes to treat a
financial institution and its foreign branches and agencies as a single entity
for registration purposes, regardless of the booking office of the relevant
transactions. However, the extent to which a foreign affiliate or
subsidiary of a U.S. SD needs to comply with requirements of the Dodd-Frank Act
"would depend on where their swaps are booked and whether the affiliate or
subsidiary engages in activities that trigger swap dealer registration".5
The Proposed Interpretive Guidance notes that "[t]he
statutory definitions of swap dealer and MSP do not contain any geographic
limitations and do not distinguish between U.S. and non-U.S. swap dealers or
non-U.S. MSPs."6 It provides that
a non-U.S. person engaged in swap dealing as part of a "regular
business" must register as an SD when the notional value of that person's
swap dealing activities with U.S. counterparties, or with non-U.S.
counterparties where the dealing non-U.S. person's obligations are guaranteed
by a U.S. person, exceed the de minimis threshold under Section
1.3(ggg)(4) of the Commission's regulations.7
The de minimis thresholds are (i) an aggregate gross notional amount of
$8 billion with a phase-in to $3 billion after 5 years without further
regulatory action and (ii) and an aggregate gross notional amount of $25
million with regard to swaps in which the counterparty is a "special entity"
(e.g., certain governmental entities and pension plans). To calculate whether
its swap dealing activities exceed the de minimis threshold, a non-U.S.
person must include the aggregate notional value of any swap dealing
transactions between (1) U.S. persons and any non-U.S. affiliate under common
control and (2) non-U.S. persons and any non-U.S. affiliate under common
control if the non-U.S. affiliate is guaranteed by a U.S. person.8
Similarly, the Proposed Interpretive Guidance provides that a non-U.S. person
must register as an MSP when that person holds swaps positions with U.S.
counterparties with a notional value above the thresholds specified in Sections
1.3(jjj)(1) and 1.3(lll)(1) of the CFTC's regulations.9
Section 1.3(jjj)(1) sets forth MSP thresholds by product type and contains
separate thresholds for rate swaps, credit swaps, equity swaps and commodity
swaps. Section 1.3(lll)(1) sets forth the aggregate MSP thresholds for
determining whether an entity has substantial counterparty exposure that could
have serious adverse effects on the financial stability of the United States
banking system or financial markets. The aggregate MSP thresholds in
Section 1.3(lll)(1) are (i) $5 billion in daily average aggregate
uncollateralized outward exposure and (ii) $8 billion in daily average
aggregate uncollateralized outward exposure plus daily average aggregate
potential outward exposure. For the purposes of MSP registration,
non-U.S. persons need not aggregate the notional value of obligations that are
guaranteed by a U.S. person, because such obligations should generally be
attributed to the U.S. person.10
Dodd-Frank Act swap provisions:
"Entity-Level" or "Transaction-Level"
The Proposed Interpretive Guidance divides the Dodd-Frank
Act swap provisions into two broad categories: "(i) Entity-Level
Requirements, which apply to a swap dealer or MSP to the firm as a whole; and
(ii) Transactional-Level Requirements, which apply to the individual
The "Entity-Level Requirements"
include the provisions of the Dodd-Frank Act (and the CFTC's regulations)
regarding: "(i) capital adequacy; (ii) chief compliance officer; (iii)
risk management; (iv) swap data recordkeeping; (v) swap data reporting ('SDR
reporting'); and (vi) physical commodity swaps reporting ('Large Trader
Reporting')."12 The Entity-Level
Requirements "apply to registered swap dealers and MSPs across all their
swaps without distinctions as to the counterparty or the location of the
include those related to: "(i) clearing and swap processing; (ii)
margining and segregation for uncleared swaps; (iii) trade execution; (iv) swap
trading relationship documentation; (v) portfolio reconciliation and
compression; (vi) real-time public reporting; (vii) trade confirmation; (viii)
daily trading records; and (ix) external business conduct standards."14 Non-U.S. SDs and MSPs must
"comply with Transaction-Level Requirements for all of their swaps with
U.S. persons, other than foreign branches of U.S. persons, as
when non-U.S. SDs and MSPs enter into swaps with a non-U.S. counterparty but
the counterparty's performance is guaranteed by a U.S. person, the non-U.S. SD
or MSP must comply with all Transaction-Level Requirements except those related
to external business conduct standards.16
Finally, non-U.S. SDs and MSPs must comply with the Transaction-Level
Requirements when they enter into a swap with a non-U.S. person that is an
"affiliate conduit" of a U.S. person. The "affiliate
conduit" provision applies when "(i) a non-U.S. counterparty is
majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S.
counterparty regularly enters into swaps with one or more other U.S. affiliates
or subsidiaries of the U.S. person; and (iii) the financials of such non-U.S.
counterparty are included in the consolidated financial statements of the U.S.
Substituting compliance with foreign
In accordance with statutory guidance and with principles
of international comity, the Proposed Interpretive Guidance would allow a
non-U.S. SD and MSP "to substitute compliance with the requirements of [its]
relevant home jurisdiction's laws and regulations, in lieu of compliance with
the CEA and Commission's Regulations, if the Commission finds that such
requirements are comparable to cognate requirements under the CEA and
Commission regulations."18 The
CFTC "would make comparability determinations on an individual requirement
basis, rather than the foreign regime as a whole."19
The Proposed Interpretive Guidance sets a process for making such comparability
For Entity-Level Requirements,
the CFTC will permit substituted compliance where the non-U.S. SDs and MSPs
"are subject to comparable regulation in their home jurisdiction."21 With respect to SDR Reporting, the
CFTC would allow substituted compliance with respect to swaps between non-U.S.
SDs or MSPs and non-U.S. counterparties only if the CFTC "has direct
access to the swap data for such non-U.S. swap dealers or non-U.S. MSPs that is
stored at the foreign trade depository."22
For Transaction-Level Requirements,
the CFTC generally will not permit substituted compliance for swaps between
non-U.S. SDs or MSPs and U.S. persons, but the CFTC will permit
substituted compliance for swaps between: (1) a non-U.S. SD or MSP and a
non-U.S. person guaranteed by a U.S. person; (2) a non-U.S. SD or MSP and a
non-U.S. affiliate conduit; and (3) a foreign branch or agency of a U.S. SD and
a non-U.S. person.23 Additionally, in
limited circumstances when foreign regulations in emerging markets are not comparable
to regulations under the Dodd-Frank Act, the CFTC will nevertheless permit
foreign branches and agencies of U.S. SDs to comply with foreign
transaction-level requirements rather than the CFTC's Transaction-Level
Requirements.24 The CFTC will only
allow this exemption for a foreign branch or agency when the aggregate notional
value of swaps "of all foreign branches and agencies in such countries
[does] not exceed five percent of the aggregate notional value... of all of the
swaps of the U.S. swap dealer."25
When counterparties are not SDs or MSPs
Because certain Dodd-Frank Act provisions apply to
persons other than SDs and MSPs (including clearing, trade execution, real-time
public reporting, Large Trader Reporting, SDR Reporting and recordkeeping), the
Proposed Interpretive Guidance details when those provisions apply to cross-border
transactions.26 Where one counterparty
to a cross-border swap transaction is a U.S. person, the Dodd-Frank Act
provisions described above will apply.27
Where a non-U.S. person enters into a swap with another non-U.S. person outside
the United States, however, and neither party is an SD or an MSP, then the
Dodd-Frank provisions described above would not apply.28
The CFTC is not currently proposing to apply these provisions to transactions
in which a non-U.S. affiliate or subsidiary of a U.S. person executes a swap in
a foreign jurisdiction, but the CFTC "is considering whether to propose
measures to address" the possibility that "a non-U.S. affiliate or
subsidiary of a U.S. person could effectively act as a 'conduit' for the U.S.
person...to execute swaps with counterparties in foreign jurisdictions, outside
the Dodd-Frank regulatory regime."29
The Proposed Interpretive Guidance also requires non-U.S.
clearing members to report all reportable positions under Part 20 of the
Commission's regulations (the Large Trader Reporting rules).30
Non-U.S. traders with reportable positions will also be required to comply with
Part 20's recordkeeping obligations.31
Finally, the CFTC would permit substituted compliance
with respect to transactions between a U.S. person and a non-U.S. person that
are subject to the SDR reporting and swap data recordkeeping requirements,
"provided that the Commission has direct access to the swap data for these
transactions that is stored at the foreign trade repository."32
Proposed Exemptive Order regarding compliance
with certain swap regulations
The Proposed Exemptive Order would allow entities to delay
compliance with certain provisions of the CEA (and corresponding CFTC
regulations), with the goal of promoting an orderly transition to the
Dodd-Frank regulatory regime. The phased-in compliance would become
effective on the date when SDs and MSPs must first apply for registration.
For non-U.S. SDs, non-U.S. MSPs, foreign branches of U.S. SDs and foreign
branches of U.S. MSPs, the exemptive relief would expire 12 months following
the publication of the Proposed Exemptive Order in the Federal Register.
For U.S. SDs and MSPs, the exemptive relief would expire on January 1, 2013.
Non-U.S. SDs and MSPs: compliance timetables
The Proposed Exemptive Order would allow non-U.S. SDs and
MSPs to delay compliance with all the Entity-Level Requirements (except with
respect to the SDR Reporting and Large Trader Reporting requirements for all
swaps with U.S. counterparties) until 12 months after the date that the
Proposed Exemptive Order is published in the Federal Register. Similarly,
for Transaction-Level Requirements, non-U.S. SDs and MSPs would only be
required to comply with such regulations as required by their home
jurisdictions until 12 months after publication of the Proposed Exemptive
Order, except that when non-U.S. SDs and MSPs enter into swaps with U.S.
counterparties, they "would be required to comply with all applicable
Transaction-Level Requirements that are in effect."
In order to qualify for the proposed phased-in
compliance, non-U.S. SDs and MSPs would be required to (1) file an application
to register as an SD or MSP with the National Futures Association and (2)
within 60 days of applying for registration, submit a compliance plan to the
National Futures Association explaining how the non-U.S. applicant intends to
comply the Entity-Level Requirements and the Transaction-Level Requirements.
U.S. SDs and MSPs: compliance timetables
The Proposed Exemptive Order would allow U.S. SDs and
MSPs to delay compliance with the Entity-Level Requirements (except with
respect to the swap data recordkeeping, SDR Reporting and Large Trader
Reporting requirements) until January 1, 2013. In general, U.S. SDs and
MSPs will not be permitted to delay compliance with Transaction-Level
Requirements, except that foreign branches of U.S. SDs and MSPs entering into
swaps with non-U.S. counterparties would only be required to comply with the
regulations of the foreign location of the branch until 12 months after
publication of the Proposed Exemptive Order.33 In
order to qualify for exemptive relief regarding Transaction-Level Requirements,
a foreign branch of an SD or MSP would need to submit a compliance plan
explaining how it intends to comply with all applicable Transaction-Level
Requirements upon expiration of the Proposed Exemptive Order.
For more information about the impact of these proposals
on your business, please contact:
Mary Anne Mason
.As events develop, DLA Piper is monitoring the regulators'
actions. To learn more about this landscape, visit our library of Dodd-Frank
1 7 U.S.C. § 2(i).
2 Proposed Interpretive Guidance at 15.
3 Id. at 16.
5 Id. at 62-4. See also
id. at 28-30.
6 Id. at 19.
7 Id. at 20.
8 Id. at 21-2.
9 Id. at 24.
10 Id. at 26-7.
11 Id. at 36.
12 Id. at 37.
14 Id. at 43.
15 Id. at 53.
16 Id. at 52-6.
17 Id. at 55.
18 Id. at 57.
20 Id. at 68-73.
21 Id. at 58.
23 Id. at 58-61.
24 Id. at 61-62.
25 Id. at 62.
26 Id. at 74.
27 Id. at 75.
29 Id. at 75-6.
30 Id. at 76-7.
32 Id. at 77.
33 The temporary relief regarding
Transaction-Level Requirements for foreign branches of U.S. SDs and MSPs would not
apply to swap transactions entered between a foreign branch of a U.S.
person and a foreign branch of another U.S. person. The CFTC is
soliciting comments on whether it should allow substitute compliance for such
This information is intended as a general overview and
discussion of the subjects dealt with. The information provided here was
accurate as of the day it was posted; however, the law may have changed since
that date. This information is not intended to be, and should not be used as, a
substitute for taking legal advice in any specific situation. DLA Piper is not
responsible for any actions taken or not taken on the basis of this
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