Regulatory Developments: CFTC Approves Proposed Interpretive Guidance on Cross-Border Application of the Swaps Provisions of the Dodd-Frank Act
Section 722(d) of the Dodd-Frank Act amends the Commodity Exchange Act ("CEA") to add Section 2(i) which states that the provisions added to the CEA by Title VII of the Dodd-Frank Act shall not apply to activities outside the United States unless those activities: (1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) contravene such rules or regulations as the CFTC may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of the CEA.
On Friday June 29, the CFTC voted unanimously to approve proposed interpretative guidance regarding the extraterritorial reach of the Dodd-Frank Act. The proposed interpretative guidance is open for comment by the public for 45 days following publication in the Federal Register. The proposed guidance is more closely in line with the CFTC's traditional approach of relying on equivalent foreign regulator requirements as opposed to actively regulating entities subject to the jurisdiction of a foreign regulator – this is in contrast to the CFTC's initial stance.
Key elements of the proposed interpretive guidance are as follows:
(1) Definition of US Person: the CFTC proposes to interpret the term "U.S. person" by reference to the extent to which swap activities or transactions involving one or more such persons have the relevant effect on U.S. commerce. Under the CFTC's interpretation, the term "U.S. person" generally means that a foreign branch or agency of a U.S. person would be covered by virtue of the fact that it is a part, or an extension, of a U.S. person. By contrast, a foreign affiliate or subsidiary of a U.S. person would be considered a non-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.
(2) Swap Dealing: the CFTC has addressed the level of swap dealing activity above which a foreign entity dealing with US persons must register with the CFTC as a swap dealer ("SD"). The CFTC's proposal would require a non-US person to register if the aggregate notional value of its swap dealing activities with US persons exceeds the de minimis level of swap dealing set forth in Section 1.3(ggg) of the CFTC's regulations (initially $8 billion with respect to CFTC regulated swaps). The non-US person’s swap dealing activities relevant for the determination would include transactions (i) between US persons and any non-US affiliate under common control and (ii) of its non-US affiliates under common control where such obligations are guaranteed by a US person, but would not include swaps between majority-owned affiliates.
(3) Major Swap Participants: registration with the CFTC as a Major Swap Participant ("MSP") would be required at the same level as is required by a US Person. In determining swap activities attributable to a non-US Person, such person must count all swaps where it faces a US Person but not those where it faces a non-US Person.
(4) Entity-Level Requirements: such as capital adequacy, appointment of a chief compliance officer, risk management and reporting and recordkeeping apply to all registered SDs and MSPs. However, the CFTC proposes to exempt foreign SDs and MSPs, and foreign affiliates of U.S. SDs and MSPs from entity-level requirements if they are subject to comparable and comprehensive foreign regulations.
(5) Transaction-Level Requirements: include clearing and swap processing, margin, segregation, trade execution, real time reporting, business conduct standards, trade confirmation and daily trading records. Non-US persons are not exempt generally from transaction-level requirements for swaps facing US Persons and foreign persons guaranteed by a US Person. However, non-US Persons will be generally exempt from transaction-level requirements for swaps facing non-US Persons if they are subject to comparable and comprehensive foreign regulations.
The CFTC proposes to recognize a non-US Person's home jurisdiction regulations to the extent that the CFTC finds that such requirements are analogous to the requirements of the CFTC. In making its determination, the CFTC proposes to consider, among other things, the scope and objectives of the foreign regulatory requirements, the comprehensiveness of such requirements and the comprehensiveness of the foreign regulator's supervisory compliance program and authority to enforce oversight.
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