CFTC Approves Exemptive Order on Cross-Border Application of the Swaps Provisions of Dodd-Frank

On December 21, 2012, the Commodity Futures Trading Commission (“CFTC”) approved a final exemptive order (the “Order”) providing time-limited relief from the cross-border application of certain swaps provisions of Title VII of the Dodd-Frank Act and CFTC regulations.  The Order provides an interim definition of “U.S. person,” and also clarifies several outstanding calculation issues for non-U.S. persons assessing their status as a swap dealer (“SD”) or major swap participant (“MSP”) under the CFTC’s de minimis and MSP threshold tests.  Additionally, the Order permits registered non-U.S. persons to delay compliance with certain entity-level requirements adopted under Dodd-Frank, and provides relief from certain transaction-level requirements to both registered non-U.S. persons and the foreign branches of U.S.-based SDs and MSPs.[1]  The Order, which is effective immediately, will expire on July 12, 2013.

I. U.S. Person

The Order provides market participants with a new, interim definition of “U.S. person” for use during the effective period of the Order.  Note that this new  December 21 definition differs from both the one set forth in the CFTC’s proposed cross-border interpretive guidance, published in July, CFTC No-Action Letter 12-22, issued on October 12.

For purposes of this Order, an entity is a “U.S. person” if it is any of the following:

(i) A natural person who is a resident of the United States;

(ii) A corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing, in each case that is (A) organized or incorporated under the laws of a state or other jurisdiction in the United States or (B) effective as of April 1, 2013 for all such entities other than funds or collective investment vehicles, having its principal place of business in the United States;

(iii) A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is primarily for foreign employees of such entity;

(iv) An estate of a decedent who was a resident of the United States at the time of death, or a trust governed by the laws of a state or other jurisdiction in the United States if a court within the United States is able to exercise primary supervision over the administration of the trust; or

(v) An individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in (i) through (iv) above.

Any entity not described in (i) to (v) above will be considered a non-U.S. person.

II. De Minimis and MSP Threshold Calculations

For the duration of the Order, a non-U.S. person will not have to aggregate, under either the de minimis test or the MSP threshold tests, the following:

(i) Any swap where the counterparty is not a U.S. person; and

(ii) Any swap where the counterparty is a foreign branch of a U.S. person that is registered as an SD, or represents that it intends to register as an SD by March 31, 2013.

Note that these exclusions will apply regardless of whether the non-U.S. person’s obligations under the swap are guaranteed by a U.S. person.

The Order also provides that a non-U.S. person will not have to aggregate, under the de minimis test, any swaps to which it is not a party because the swap is entered into by an affiliated central booking entity.

III. Aggregation under the De Minimis Calculation for Affiliates under Common Control

The Order provides that a non-U.S. person may exclude, in its de minimis calculation, any swaps entered into by its U.S. affiliates.  Non-U.S. persons will also be able to exclude any non-U.S. facing swaps entered into by non-U.S. affiliates.

Additionally, and only in the case of a non-U.S. person already affiliated with a registered SD, such non-U.S. person will be able to exclude from its de minimis calculation the swaps of any non-U.S. affiliate that is either (i) currently engaged in swap dealing activities with U.S. persons, or (ii) registered as an SD.

IV. Non-U.S. SDs and MSPs

Non-U.S. SDs and MSPs will not have to comply with entity-level requirements until the Order expires, except that:

(i) Non-U.S. SDs and MSPs must comply with applicable swap data repository (“SDR”) reporting and large trader reporting (“LTR”) requirements for all swaps with U.S. counterparties; and

(ii) Non-U.S. SDs and MSPs that are part of an affiliated group in which the ultimate parent entity is a U.S. SD or MSP, U.S. bank, U.S. financial holding company or U.S. bank holding company must comply with SDR reporting and LTR requirements for swaps with non-U.S. counterparties.

Non-U.S. SDs and MSPs will not have to comply with transaction-level requirements when facing a non-U.S. counterparty, except as required by such registrants’ local jurisdictions, provided that such registrants comply with transaction-level requirements when facing U.S. counterparties.

V. Foreign Branches of U.S. Registrants

The Order reiterates the CFTC’s view, first set out in the proposed guidance, that the foreign branch of a U.S. SD or MSP is a “U.S. person.”  Nevertheless, under the Order, foreign branches of registered U.S. persons will not have to comply with transaction-level requirements when facing a non-U.S. counterparty, except as required by the local jurisdictions of such branches.

Additionally, while a swap between two foreign branches of U.S. registrants would be considered a swap between two U.S. persons, the Order also provides temporary relief from compliance with transaction-level requirements for such swaps, except as required by the local jurisdictions of the branches.  For purposes of this relief with respect to a swap between foreign branches of U.S. registrants, a swap is with the foreign branch when (i) the personnel negotiating and agreeing to the terms of the swap are located in the jurisdiction of the foreign branch; (ii) the documentation of the swap specifies that the counterparty or “office” for the U.S. person is the foreign branch and (iii) the swap is entered into by the foreign branch in its normal course of business.

VI. Additional Comment Period

The Commission is seeking additional public comment on the definition of “U.S. person” and issues relating to affiliate aggregation under the SD de minimis calculation.  The comment period for these issues will be open for 30 days after the Order is published in the Federal Register.


[1] Entity-level requirements refer to the requirements set forth in CFTC regulations 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, 23.607, 23.608 and 23.609 and parts 20, 45 and 46. Transaction-level requirements refer to the requirements set forth in CEA section 2(h)(8) and CFTC regulations 23.202, 23.400 to 23.451, 23.501, 23.502, 23.503, 23.504(a), 23.504(b)(2), (b)(3) and (b)(4), 23.505(b)(1), 23.506 and 23.610 and part 43.

[2] 77 Fed. Reg. 41214 (July 12, 2012).

Lofchie Comment:  Firms are required to register as swap dealers on December 31.  This means that the business day by which a registration must be absolutely completed and filed is December 28th as the next two days are on the weekend.  The CFTC issued this order, defining who must register as a swap dealer, sometime on December 21st.  The 22nd and the 23rd were on the weekend; for much of the country, the 24th is a holiday and for all of the country, the 25th is a holiday.  This means that the CFTC is giving firms two full business days (the 26th and the 27th) to determine whether they are required to register or how the registration requirements will apply to them.  I also add that on these two business days, many people will be on vacation and computer systems may be in a year-end slowdown mode.  Further, this “relief” (and it is relief) will require coordination with overseas offices, who may have different holiday or vacation schedules, leave aside the time zone differences.  On top of that, one aspect of the relief requires firms to obtain a representation from counterparties, which again will be logistically difficult to obtain given the timing and the holiday schedule. 

On top of that, we are all dealing with a torrent of no-action letters, some helpful, some useless because of all the conditions attached to reliance, and virtually all of them quite complicated.

It goes without saying that the impacts of swap dealer registrations are tremendous, both for firms that are required to register and for firms that are saved from registration.  The competitive impacts of this order are large; i.e., firms that are not required to register (primarily non-U.S. firms) will likely have a competitive advantage over firms that are required to register assuming, as I fear, that non-U.S. counterparties prefer to stand clear of the ongoing regulatory uncertainty. 

Accordingly, the better course for the CFTC would have been to simply postpone the registration date for all firms.  I think that the CFTC is making a mistake by proceeding in this manner, granting more partial/conditional/last minute relief, rather than simply electing to put its rules fully on hold until they can be coordinated with the rules of the SEC and other global regulators.  This is particularly the case given that that the CFTC’s rules, even its adopted rules, are in a state of flux.  Witness the remarkable number of no-action letters and interpretations that the agency has issued in just over two months.

See: Final Exemptive Order Regarding Compliance with Certain Swap Regulations – Further Proposed Guidance.
See also: Chairman Gensler’s Statement of Support; Commissioner O’Malia’s Concurring Statement; Commissioner Sommers Dissenting Statement; Commissioner Chilton on Global Regulatory Harmonization.
Related statement: SIFMA Statement on CFTC Delay of Cross-Border Rules.