Alert January 02, 2013

CFTC Issues Exemptive Order and Further Proposed Guidance on Cross-Border Application of Dodd-Frank Swaps Provisions

The CFTC issued an exemptive order and further proposed guidance (the “Order”) regarding the cross-border application of Dodd-Frank swaps provisions.  The Order builds on the proposed order and proposed guidance issued by the CFTC in July 2012 (collectively, the “Proposal”) (discussed in the July 10, 2012 Financial Services Alert).  Although the Order does not delay the deadlines for non-U.S. persons to register as a swap dealer or major swap participant, it allows certain non-U.S. persons to delay compliance with certain requirements of the Commodity Exchange Act and CFTC regulations.  It also allows certain persons to exclude certain transactions for purposes of the swap dealer de minimis exception.

The Order maintains the Proposal’s system of classifying certain requirements as “entity-level” and others as “transaction-level.” Entity-level requirements, which apply to all of the firm’s activities or transactions, include those pertaining to capital adequacy, chief compliance officer, risk management, swap data recordkeeping, swap data repository reporting, and large-trader reporting.  Transaction-level requirements, in contrast, apply on a transaction-by-transaction basis and include those pertaining to clearing and swap processing, margining and segregation for uncleared swaps, trade execution, swap trading relationship documentation, portfolio reconciliation and compression, real-time public reporting, trade confirmation, daily trading records, and external business conduct standards.

The Order permits non-U.S. persons that register as swap dealers or major swap participants to delay compliance with certain entity-level requirements until July 12, 2013.  Non-U.S. swap dealers and non-U.S. major swap participants are also permitted to comply with the transactional-level requirements of their local jurisdiction (rather than those imposed by the Commodity Exchange Act and CFTC regulations) for transactions with a non-U.S. counterparty, as are foreign branches of U.S. swap dealers and U.S. major swap participants with respect to swaps with a non-U.S. counterparty.

The Order allows a non-U.S. person to exclude from its calculations regarding the swap dealer de minimis exception (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 a swap dealer or represents that it intends to register as such by March 31, 2013.  In addition, a non-U.S. person that is engaged in swap dealing activities with U.S. persons as of December 21, 2012 may exclude from the swap dealer de minimis calculations the swaps of its U.S. affiliates under common control.  A non-U.S. person that is engaged in swap dealing activities with U.S. persons as of December 21, 2012 and that is an affiliate under common control with a registered swap dealer is also permitted to exclude swaps connected with the swap dealing activity of any non-U.S. affiliate under common control that is either (i) engaged in swap dealing activities with U.S. persons as of December 21, 2012 or (ii) is registered as a swap dealer. 

The Order includes a definition of “U.S. person,” which generally includes (i) a natural person who is a resident of the United States, (ii) a corporation, partnership, limited liability company, or certain other business forms organized or incorporated under the laws of a state or other jurisdiction of the United States or, effective as of April 1, 2013 for certain business entities, having its principal place of business in the United States; (iii) certain pension plans for the employees, officers, or principals of an entity described in the previous clause; (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 of the United States; or (v) an individual account or joint account where the beneficial owner is a person described in a previous clause.  The definition is narrower than that included in the Proposal.  However, the release accompanying the order states that “the [CFTC] wishes to emphasize that the discussion here is not, and should not be construed as, an indication of, or a limitation on, the definition of the term ‘U.S. person’ that the [CFTC] may adopt in final cross-border interpretive guidance.”

The release also notes that the CFTC views a foreign branch of a U.S. person to itself be a U.S. person, adding that if a foreign branch were a swap dealer or major swap participant, its U.S. principal would be required to register as such. 

The Order also requests additional comments on certain matters raised by the Proposal. 

The Order became effective on December 21, 2012, and the relief provided thereunder will expire on July 12, 2013.  Comments on the Order are due 30 days after its forthcoming publication in the Federal Register.