CFTC Update: Final Guidance On Cross-Border Application Of Swaps Provisions Of The Dodd-Frank Act And Exemptive Order Regarding Phased Compliance With Certain Swaps Provisions Of The Dodd-Frank Act

On July 12, 2013, the Commodity Futures Trading Commission (the "CFTC" or "Commission") approved a final version of its interpretive guidance and policy statement (the "Guidance") and an exemptive order (the "Exemptive Order") regarding the application of certain swaps provisions under The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")1 to U.S. and non-U.S. swap dealers ("SDs"), major swap participants ("MSPs") and their affiliates and branches, other market participants, and various related issues. The Guidance sets forth the Commission's general policy regarding the cross-border application of certain swaps provisions of the Dodd-Frank Act. The Exemptive Order provides time-limited relief for non-U.S. SDs, non-U.S. MSPs, and foreign branches of a U.S. SD or MSP from certain swaps provisions of the Dodd-Frank Act. The Exemptive Order became effective on July 13, 2013 and the Commission is soliciting comments for thirty days.2

Background

The Dodd-Frank Act amended the Commodity Exchange Act (the "CEA") to establish a comprehensive new regulatory framework for swap transactions. Section 722(d) of the Dodd-Frank Act added Section 2(i) of the CEA, which states that the CEA swaps provisions enacted by Title VII of the Dodd-Frank Act do 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 Commission may prescribe or promulgate as are necessary and appropriate to prevent the evasion of any provision of [the CEA] that was enacted by [Title VII of the Dodd-Frank Act].

For over a year, the Commission has been developing a policy to interpret the applicability of CFTC swap provisions and related requirements to cross-border transactions in light of Section 2(i) of the CEA. On June 29, 2012, the Commission issued its proposed interpretive guidance and policy statement on the cross-border application of certain swaps provisions (the "Proposed Guidance"). See 77 Fed. Reg. 41214 (July 12, 2012). In the Proposed Guidance, the Commission addressed, among other things:

how it would consider whether a non-U.S. person's swap dealing activities require registration as an SD, whether a non-U.S. person's swap positions require registration as an MSP, and the treatment of foreign branches, agencies, affiliates, and subsidiaries of U.S. SDs and U.S. branches of non-U.S. SDs; the framework for determining whether and to what extent compliance with a foreign jurisdiction's regulatory requirements would be deemed to constitute substituted compliance with the requirements of the CFTC's swaps provisions ("Substituted Compliance"); and the manner by which the CFTC would interpret the application of Section 2(i) of the CEA to clearing, trade execution, and certain reporting requirements with respect to counterparties that are not SDs or MSPs. The Commission issued its further proposed guidance clarifying certain aspects of the Proposed Guidance on December 21, 2012. See 78 Fed. Reg. 909 (January 7, 2013).

On June 29, 2012, the CFTC also issued its notice of proposed exemptive order concurrently with the Proposed Guidance to promote an orderly transition to the new swaps regulatory regime and to provide market participants with greater certainty regarding the application of swaps rules to cross-border transactions (the "Proposed Exemptive Order"). See 77 Fed. Reg. 41110 (July 12, 2012). The Proposed Exemptive Order established a phased compliance program with respect to swap dealing by non-U.S. SDs and MSPs, U.S. SDs and MSPs, and foreign branches of U.S. SDs and MSPs. The CFTC issued a final exemptive order on December 21, 2012 (the "January Exemptive Order"). See 78 Fed. Reg. 858 (January 7, 2013). In the January Exemptive Order, the Commission:

applied a narrow definition of "U.S. person" for purposes of the January Exemptive Order; provided relief regarding SD de minimis and MSP threshold calculations; classified Dodd-Frank Act swap provisions and related CFTC regulations applicable to SDs and MSPs as "Entity-Level Requirements" or "Transaction-Level Requirements" for purposes of the January Exemptive Order; permitted non-U.S. persons registered as SDs or MSPs to delay compliance with certain Entity-Level and Transaction-Level Requirements; and permitted foreign branches of U.S. SDs or MSPs to delay compliance with certain Transaction-Level Requirements. The January Exemptive Order expired on July 12, 2013.

On July 12, 2013, the Commission approved the Guidance and the Exemptive Order by a three-to-one vote of the Commissioners, with Commissioner O'Malia dissenting. In conjunction with these determinations, the Commission staff issued four no-action letters.3 Together, the Guidance, the Exemptive Order, and the no-action letters establish the framework by which swap market participants must transition to and comply with the Dodd-Frank Act swap requirements in the cross-border context. These determinations reflect, in part, an agreement reached on July 11, 2013 between the CFTC and the European Commission regarding how they will address cross-border swap transactions that fall under the regulatory purview of both the CFTC and the European authorities.4 The analysis and interpretations set forth in the Guidance, the Exemptive Order, and the four no-action letters pertain exclusively to the application of the CFTC swap rules under the Dodd-Frank Act, and thus do not affect the application of CEA provisions and CFTC rules regarding futures contracts or options on futures contracts.

Guidance Regarding Cross-Border Application of Certain Swaps Provisions

Definition of "U.S. Person"

In the Guidance, the Commission sets forth its territorial-based interpretation of the term "U.S. person." In this regard, the Commission explains that its interpretation of the term "U.S. person" encompasses persons whose activities individually or in the aggregate have the requisite "direct and significant" connection with activities in, or effect on, U.S. commerce within the meaning of Section 2(i) of the CEA.

Under this interpretation, the term "U.S. person" would include, but not be limited to:5

(i) any natural person who is a resident of the U.S.; (ii) any estate of a decedent who was a resident of the U.S. at the time of death; (iii) any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund, or any form of enterprise similar to any of the foregoing (other than an entity described in prongs (iv) or (v), below) (a "legal entity"), in each case that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its...