The Commodity Futures Trading Commission (Commission) today approved for public comment proposed interpretive guidance regarding the cross-border application of the swaps provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and the Commission’s regulations. The proposed guidance interprets Section 2(i) of the Commodity Exchange Act (CEA), which states that the swaps provisions of the CEA shall not apply to activities outside the United States unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States. The vote was conducted via seriatim, which was approved by all five commissioners. The guidance will be open for public comment for 45days after publication in the Federal Register.
Under the proposed guidance, the Commission:
Proposes an interpretation of the term “U.S. person”.
Proposes guidance to determine: (1) whether a non-U.S. person’s swap dealing activities are sufficient to require registration as a “swap dealer”; (2) whether a non-U.S. person’s swap positions are sufficient to require registration as a “major swap participant”; and (3) the treatment for registration purposes of foreign branches, agencies, affiliates, and subsidiaries of U.S. swap dealers and of U.S. branches of non-U.S. swap dealers.
Proposes to interpret section 2(i) of the CEA as it applies to the requirements under the Dodd-Frank Act and the Commission’s regulations by classifying requirements as entity-level or transaction-level.
Proposes guidance to permit a non-U.S. swap dealer or non-U.S. major swap participant to comply with comparable and comprehensive foreign regulatory requirements, in order to satisfy applicable statutory and regulatory requirements under the Dodd-Frank Act.
Generally describes a process by which a non-U.S. applicant for swap dealer or major swap participant registration may seek the Commission’s recognition of substituted compliance with a comparable and comprehensive foreign regulatory requirement and the general scope of Commission review in making the requisite comparability finding.
Proposes to interpret the extent to which section 2(i) of the CEA applies to the clearing, trading, and certain reporting requirements under the Dodd-Frank Act with respect to swap transactions between counterparties that are not swap dealers or major swap participants.
term “U.S. Person”
The Commission proposes to interpret the term “U.S. person” by reference to the extent to which swap activities or transactions involving one or more such person has relevant effect on U.S. commerce. The interpretation would help determine, for example, whether foreign entities engaging in swap dealing transactions with “U.S. persons” in excess of the de minimis level would be required to register and be regulated as swap dealers. Additionally, the interpretation would help to determine the level of U.S. interest for purposes of analyzing and applying principles of international comity when considering the extent to which U.S. transaction level requirements should apply to swap transactions.
Registration Thresholds
For swap dealers, the Commission proposes that the level of swap dealing that is substantial enough to require a person to register as a swap dealer when conducted by a U.S. person, also constitutes a “direct and significant connection” within the meaning of section 2(i) of the CEA when such dealing activities are conducted by a non-U.S. person with U.S. persons as counterparties. Accordingly, the Commission proposes to interpret CEA section 2(i) as requiring a non-U.S. person to register as a swap dealer when the aggregate notional value of its swap dealing activities with U.S. persons, or of its swap dealing activities with non-U.S. persons where the dealing non-U.S. person’s obligations are guaranteed by a U.S. person, exceed the de minimis level of swap dealing as set forth in § 1.3(ggg)(4) of the Commission’s regulations. In determining whether a non-U.S. person’s swap dealing transactions exceed the de minimis threshold, the non-U.S. person would include the aggregate notional value of: (i) any swap dealing transactions between U.S. persons and any of its non-U.S. affiliates under common control; and (ii) any swap dealing transactions of any of its non-U.S. affiliates under common control where the obligations of such non-U.S. affiliates are guaranteed by U.S. persons. However, a non-U.S. person would not include the notional value of dealing transactions in which its U.S. affiliates engage.
For major swap participants, the Commission proposes that the level of swap positions that is substantial enough to require a person to register as a major swap participant when held by a U.S. person, also constitutes a “direct and significant connection” within the meaning of section 2(i) of the CEA when such positions reflect swaps between a non-U.S. person and U.S. persons. The Commission believes that in determining whether it is a major swap participant, a non-U.S. person would “count” all of its swap positions where it’s counterparty is a U.S. person, but would not “count” any swap position where its counterparty is a non-U.S. person. For purposes of applying section 2(i) of the CEA to the major swap participant definition and associated requirements, the Commission believes the appropriate focus is on whether in the aggregate such swaps have a direct and significant connection with activities in, or effect on, U.S. commerce, rather than whether each particular swap has such a connection or effect.
Entity-Level Requirements and Transaction-Level Requirements
Various commenters recommended that the Commission, in determining the cross-border applicability of the Dodd-Frank swap provisions to a registered swap dealer or major swap participant, should distinguish between requirements that: (i) apply to the firm as a whole; or (ii) apply to the individual transaction or trading relationship. The Commission agrees that the various Dodd-Frank Act swap provisions can be conceptually divided into: (i) entity-level requirements, which apply to a swap dealer or major swap participant as a whole (Entity-Level Requirements); and (ii) transaction-level requirements, which apply to each swap (Transaction-Level Requirements).
Entity-Level Requirements relate to: (i) capital adequacy; (ii) chief compliance officer; (iii) risk management; (iv) swap data recordkeeping; (v) swap data reporting; and (vi) physical commodity swaps reporting (i.e., large swap trader reporting). The Entity-Level Requirements apply to registered swap dealers and major swap participants, across all their swap transactions, without distinctions as to the counterparty or the location of the swap.
Transaction-Level Requirements relate to: (i) clearing and swap processing; (ii) margining (and segregation) for uncleared swaps; (iii) trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards.
Substituted Compliance
Substituted compliance means that non-U.S. swap dealers or non-U.S. major swap participants are permitted to conduct business by complying with their home regulations. The Commission proposes to permit non-U.S. swap dealers and non-U.S. major swap participants to substitute compliance with the requirements of the relevant home jurisdiction’s law and regulations in lieu of the CEA and Commission regulations, if the Commission finds that such requirements are comparable to analogous requirements under the CEA and Commission regulations. This approach would build on the Commission’s long-standing policy of recognizing comparable regulatory regimes based on international coordination and comity principles with respect to cross-border activities involving futures and options.
Regarding Entity-Level Requirements, the Commission would permit substituted compliance where a non-U.S. swap dealer or non-U.S. major swap participant is subject to comparable requirements in its home jurisdiction.
Regarding Transaction-Level Requirements, the Commission would permit substituted compliance for swaps between a non-U.S. swap dealer or non-U.S. major swap participant with a non-U.S. person guaranteed by a U.S. person, as well as swaps with non-U.S. affiliate conduits. The Commission also would permit substituted compliance for swaps between a foreign branch of a U.S. swap dealer and a non-U.S. person.
Process for Comparability Determination
The Commission proposes to recognize substituted compliance in only those areas that are determined to be comparable and comprehensive to relevant Dodd-Frank Act requirements. The Commission would determine comparability and comprehensiveness by taking into consideration all relevant factors, including (among others): the scope and objectives of the regulatory requirement(s), the comprehensiveness of such requirements, the comprehensiveness of the foreign regulator’s supervisory compliance program; and the foreign regulator’s authority to support and enforce its oversight of the non-U.S. swap dealer or non-U.S. major swap participant.
The Commission expects that a request for a finding of comparability with respect to a particular Dodd-Frank Act requirement would, at a minimum, state the factual basis for such request and include with specificity all applicable legislation, rules and policies. Subsequently, the Commission would expect to receive notifications from non-U.S. swap dealers or non-U.S. major swap participants regarding any material changes to information submitted in support of a comparability finding (e.g., changes in the relevant supervisory or regulatory regime).
With respect to substituted compliance and comparability determinations, the Commission expects that it would enter into an appropriate memorandum of understanding or similar arrangement with the relevant foreign supervisor(s).
Transactions Involving Non-Swap Dealers and Non-Major Swap Participants
Certain Dodd-Frank Act provisions (e.g., clearing, trade execution, real-time public reporting, large trader reporting, swap data reporting and recordkeeping) generally apply to persons or counterparties other than swap dealers or major swap participants. Regarding cross-border activities, the Commission believes that the swap activities of U.S. persons outside the United States, as a class, have a direct and significant connection with activities in, or effect on, U.S. commerce. Accordingly, the Commission proposes to interpret CEA section 2(i) such that:
The clearing, trade execution, and real-time public reporting requirements would apply to any swaps where one of the counterparties is a U.S. person (irrespective of the location of the transaction), without permitting substituted compliance.
Non-U.S. clearing members would be required to report all reportable positions under Part 20 rules and traders with reportable positions would be subject to the relevant recordkeeping obligations, without permitting substituted compliance.
Substituted compliance would be permitted with respect to transactions between a U.S. person and a non-U.S. person that are subject to the swap data repository reporting and swap data recordkeeping requirements, provided that the Commission has direct access to the swap data for these transactions that is stored at the foreign trade repository.
