The CFTC Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued an advisory which clarified that the Transaction-Level Requirements, as defined in the CFTC Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, are applicable to non-U.S. SDs that enter into swaps with a non-U.S. person if the swap is arranged, negotiated, or executed by personnel or agents of a non-U.S. SD located in the United States.
According to the letter, the DSIO believes that the CFTC intended substituted compliance to be available, or for Transaction-Level Requirements not to apply, where the activities of the non-U.S. SD takes place outside the United States; however, the DSIO stated that the CFTC has a strong supervisory interest in swap dealing activities that occur within the U.S. regardless of the status of the counterparties.
The DSIO stated that persons arranging, negotiating or executing swaps for or on behalf of an SD are performing “core, front-office activities” of that SD’s dealing business. Therefore, the DSIO believes that a non-U.S. SD (whether or not an affiliate of a U.S. person) regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute a swap with a non-U.S. person generally would be required to comply with the Transaction-Level Requirements. This view also applies to a swap between a non-U.S. SD and a non-U.S. person booked in a non-U.S. branch of the non-U.S. SD, if the non-U.S. SD is using personnel or agents located in the United States.
Lofchie Comment: The CFTC’s position — that trades executed through agents in the United States are subject to the Transaction Level requirements is not surprising. Further, it brings the CFTC more in line with the SEC’s proposed position on this issue.
What is more distressing than the substance of the CFTC’s position is the process it entails. As we have previously noted, the CFTC’s “Interpretative Guidance” on — cross-border application of the swaps rules was not itself promulgated as a rule subject to the requirements of the Administrative Procedures Act. Further, because the Interpretative Guidance has a material effect on the scope of every other swaps rule issued by the CFTC under Dodd-Frank, real questions can be raised as to the Commission’s attentiveness to cost-benefit analysis in any of its rulemaking. Yet, the CFTC staff now issues further “guidance” on an issue that really ought to have been part of a comprehensive rulemaking on the cross-border regulation of swaps.
In the long run, it is not obvious that the CFTC will obtain any benefit from its avoidance of APA requirements. Certainly, any firm that is charged with a violation of the CFTC’s “guidance” as to a swap that has a cross-border element should consider whether that guidance is legally enforceable as a rule.
See: CFTC Letter 13-69.
Related news: CFTC Approves Cross-Border Guidance and Exemptive Order (July 15, 2013).