The CFTC approved final guidance on the cross-border application of the Commodity Exchange Act and CFTC regulations. It also issued a related exemptive order, announced a “Path Forward” with European regulators, and issued related no-action relief.
Because the full text of the final cross-border guidance did not become publicly available until shortly before the Financial Services Alert’s deadline, this article provides a brief description of the guidance based on a fact sheet for the final guidance published on the CFTC website and the discussion of the final guidance during the CFTC meeting at which it was approved. The next issue of the Financial Services Alert will provide a more detailed description of the guidance.
The final guidance provides a definition of “U.S. person” that includes natural persons that are U.S. residents as well as corporations, business entities, and funds that are organized in the United States or have their principal place of business in the United States. It also includes collective investment vehicles, such as hedge funds, that have their principal place of business in the United States or are majority-owned by U.S. persons, directly or indirectly.
The final guidance maintains the proposed division of Dodd-Frank Act requirements into two main categories: (1) entity-level requirements (such as capital adequacy, chief compliance officer, and swap data repository reporting) and (2) transaction-level requirements (such as clearing and margin requirements, real-time public reporting requirements, and external business conduct standards). Registered swap dealers and major swap participants that are not U.S. persons will generally be required to comply in full with all entity-level requirements, although under certain conditions they will be allowed to use “substituted compliance” to satisfy the relevant CFTC requirements by following foreign regulations determined by the CFTC to be equivalent to those of the CFTC. Transaction-level requirements generally apply to swaps between non-U.S. persons that are registered swap dealers or major swap participants and U.S. persons (and guaranteed affiliates of U.S. persons), again subject in certain cases to substituted compliance, but do not generally apply to swaps with non-U.S. persons. Certain Commodity Exchange Act provisions and CFTC regulations, such as those pertaining to clearing, record-keeping, and certain reporting requirements, apply to persons or counterparties other than swap dealers and major swap participants, but generally only apply to transactions involving a U.S. person.
The CFTC also approved a cross-border phase in exemptive order intended to provide time for market participants “to facilitate an orderly transition to the Dodd-Frank regulatory regime.” Under the exemptive order, market participants may continue to apply the definition of the term “U.S. person” included in a CFTC order published in the Federal Register in January 2013, until 75 days after the publication of the final cross-border guidance in the Federal Register. The order also provides that, during the same time period, a non-U.S. person does not need to include any swaps where the counterparty is a non-U.S. person or a foreign branch of a U.S. person that is registered as a swap dealer for purposes of the swap dealer de minimis calculations and major swap participant calculations. In addition, the order provides for time-limited no-action relief from certain entity-level and transaction-level requirements for certain entities in certain non-U.S. jurisdictions.
In a related action, European Commissioner Michel Barnier and CFTC Chairman Gary Gensler announced a “Path Forward” on how to approach cross-border swaps. The document explains that, due to cooperation between European and CFTC officials, “in many places certain final rules are already essentially identical” between the two jurisdictions. The Path Forward calls for both sides to continue to work together to continue harmonizing their rules, to resolve remaining issues, and to periodically assess progress.
The Path Forward discusses several different rule-making areas and states how each will be addressed in a cross-border context. For example, the CFTC will issue no-action relief for certain transaction-based requirements pertaining to bilateral uncleared swaps where the market participants comply with EU regulations, and the European Commission is conducting an equivalence assessment that will allow market participants the choice to comply either with EU regulations or with CFTC rules in areas found to be equivalent. For cleared swaps, a “stricter rule applies” approach will be used where exemptions from mandatory clearing apply in one jurisdiction but not the other, thereby preventing loopholes and regulatory arbitrage.
The CFTC issued a series of four no-action letters related to cross-border regulation. In the first two letters, the CFTC staff issued time-limited no-action relief to LCH.Clearnet SA and Eurex Clearing AG, each of which is a European clearinghouse that is in the process of registering with the CFTC as a derivatives clearing organization (“DCO”). The relief states that the Division of Clearing and Risk will not recommend taking an enforcement action against either of the clearinghouses for failure to register as DCOs, or against their U.S. clearing members for failure to clear certain swaps through a registered or exempt DCO, until the earlier of December 31, 2013, or the date on which the relevant clearinghouse becomes registered as a DCO, subject to certain conditions. The third letter provides that the CFTC’s Division of Swap Dealer and Intermediary Oversight will not recommend taking an enforcement action against a swap dealer or major swap participant for failure to comply with certain CFTC regulations (referred to in the letter as “CFTC Risk Mitigation Rules”) if it complies instead with comparable European regulations, which the letter explains are “essentially identical” to those of the CFTC. The letter conditions the relief on the swap dealer or major swap participant fully complying with certain CFTC regulations not included within the scope of the CFTC Risk Mitigation Rules. Finally, the fourth letter amends a series of previous no-action letters to allow foreign boards of trades (“FBOTs”) to permit identified members or other participants located in the United States to enter swap contracts directly into the FBOT’s trade matching system, subject to certain conditions.