CFTC Posts “Cross-Border Guidance” and “Cross-Border Exemptive Order” for Swaps

On July 12, 2013, the CFTC adopted further guidance (the “Final Cross-Border Guidance”) and exemptive relief (the “Cross-Border Exemptive Order”) with respect to cross-border swaps activities.  The two documents were published on the CFTC’s website on July 15, 2012, but the CFTC Staff has been authorized to continue making corrections to them prior to their publication in the Federal Register. 

I. Jurisdiction.  The Guidance begins with a discussion of the CFTC’s view of its jurisdiction under Dodd-Frank. Essentially, the CFTC views itself as potentially having jurisdiction over transactions anywhere in the world, albeit limited by considerations of “international comity.”

II. U.S. Person Definition.  More substantively, the Guidance then moves into a discussion of the definition of U.S. person.  This definition is summarized at pages 94-5 of the Guidance to generally include the following:

(i) a natural person who is a U.S. resident;
(ii) an estate of a decedent who was a U.S. resident at the time of death;
(iii) legal entities organized or incorporated in the United States or having their principal place of business in the United States;
(iv) any pension plan for U.S. legal entities unless the pension plan is primarily for foreign employees;
(v) any trust governed by the laws of a state or other jurisdiction in the United States;
(vi) any commodity pool or other collective investment that is majority-owned by persons described above unless it is publicly offered only to non-U.S. persons and not offered to U.S. persons;
(vii) certain legal entities that are directly or indirectly majority-owned by U.S. person(s) and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity; and
(viii) any 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 U.S. person.

Under this interpretation, (a) the term “U.S. person” generally means that a non-U.S. branch of a U.S. bank or other legal entity is a U.S. person and (b) a non-U.S. fund with majority non-U.S. ownership may be considered a U.S. person by virtue of having a U.S. adviser and thus being deemed to have its principal place of business in the United States.

Under the Cross-Border Exemptive Order, market participants may continue to apply the definition of the term U.S. person contained in the January 2013 Exemptive Order until 75 days after the Final Cross-Border Guidance is published in the Federal Register (i.e., until approximately early October 2013).

III. Swap Dealer De Minimis Calculations as to Aggregation.  The Final Cross-Border Guidance provides that, although U.S. and non-U.S. persons must aggregate their dealing activity with the dealing activity of any affiliate (U.S. or non-U.S.) under common control, swaps of a registered swap dealer may be excluded from its affiliates’ de minimis calculations.  When an affiliated group meets the de minimis threshold on an aggregate basis, at least one affiliate within the group will be required to register as a swap dealer, but the remaining affiliates may remain unregistered for as long as their aggregate dealing activity (excluding the dealing activity of any registered swap dealer) falls below the de minimis threshold.

IV. What Goes into a Non-U.S. Swap Dealer’s De Minimis Calculations.  A non-U.S. person that is guaranteed by a U.S. person or is a so-called conduit affiliate of a U.S. person is required to include in its de minimis calculation all of its dealing swaps with U.S. and non-U.S. person counterparties. Otherwise, a non-U.S. person is required to include in its swap dealer de minimis calculation:

(1) dealing swaps with counterparties who are U.S. persons (but excluding foreign branches of U.S. swap dealers); and
(2) dealing swaps with certain guaranteed affiliates of U.S. persons.

V. Entity-Level and Transaction-Level.  The Guidance generally preserves the distinction between entity-level and transaction-level compliance requirements that was contained in prior CFTC statements, but it significantly expands the large trader reporting requirements as to non-U.S. entities.

VI. Substituted Compliance and the Six Jurisdictions.  In theory, the Guidance establishes the possibility of a broad recognition of substituted compliance but does not provide any details as to how that might work in practice.  However, the exemptive order provides a more definitive plan of substituted compliance for registered swap dealers that are located in the EU, Switzerland, Canada, Japan, Australia and Hong Kong.  These are the only non-U.S. jurisdictions in which any swap dealers are registered with the CFTC.  Under the current regulatory scheme, it would seem doubtful that any swap dealers from outside of the six jurisdictions would register with the CFTC.  Thus, for all practical purposes, the workings of substituted compliance will likely be decided in negotiations between the CFTC and regulators in each of these six jurisdictions.

See:  Link to page containing (i) opening statements of the various Commissioners; (ii) the Fact Sheets published prior to the meeting; and (iii) the pre-Federal Register versions of the Final Cross-Border Guidance the the Cross-Border Exemptive Order.
See also: CFTC Approves Cross-Border Guidance and Exemptive Order.