6 January 2014
On January 3, 2014, the U.S. Commodity Futures Trading Commission (CFTC) invited public comment on a Staff Advisory1 issued on November 14, 2013, and the CFTC staff simultaneously extended the expiry date of time-limited no-action relief from the effect of the Staff Advisory granted to non-U.S. swap dealers (SDs) transacting, aided by U.S. personnel, with non-U.S. persons (other than guaranteed affiliates or conduit affiliates of U.S. persons). In the Staff Advisory, the Division of Swap Dealer and Intermediary Oversight (DSIO) declared that “persons regularly arranging, negotiating, or executing swaps for or on behalf of an SD are performing core, front-office activities of that SD’s dealing business,” and thus, “a non-U.S. SD (whether an affiliate or not of a U.S. person) regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute a swap with a non-U.S. person generally would be required to comply with the Transaction-Level Requirements.”
On November 26, 2013, DSIO and two other CFTC Divisions granted no-action relief2 to non-U.S. SDs from certain Transaction-Level Requirements with respect to Covered Transactions until January 14, 2014. The January 3 no-action letter3 extended such relief until September 15, 2014. (As defined in the no-action letters “Covered Transactions” are swaps with non-U.S. persons, other than guaranteed affiliates or conduit affiliates of a U.S. person, entered into using personnel or agents located in the United States to arrange, negotiate, or execute such swaps.)
Also on January 3, 2014, in order to “further inform the [CFTC]’s and its staff’s deliberations” regarding the subjects addressed in the Staff Advisory, the CFTC took the procedurally unusual step of requesting comment on all aspects of the Staff Advisory, including but not limited to:
- whether the CFTC should adopt the Staff Advisory as CFTC policy, in whole or in part;
- whether transactional requirements should apply to Covered Transactions (defined more narrowly and for a different purpose than in the no-action letters)4 with non-U.S. persons that are not guaranteed affiliates or conduit affiliates of a U.S. person;
- whether there should be any differentiation in the treatment of swaps depending on the nature of the SD (i.e., whether it is a guaranteed affiliate or conduit affiliate of a U.S. person);
- whether substituted compliance should be available for some or all of the transactional requirements with respect to Covered Transactions; and
- the meaning of “regularly”, the distinguishing characteristics of “core, front-office” activity, and the scope and degree of “arranging, negotiating, or executing” swaps, as such terms are used by the staff (but without definitions) in the Staff Advisory.
In his dissenting statement, Commissioner O’Malia raised additional questions to be considered as part of the overall comment file in order to “better understand the legal underpinnings” for asserting CFTC jurisdiction in the transactional scenarios at issue. Topics on which Commissioner O’Malia requested comment include whether Covered Transactions with non-U.S. persons who are not guaranteed affiliates or conduit affiliates of a U.S. person meet the direct and significant jurisdictional test under section 2(i) of the Commodity Exchange Act (CEA) or fall within CFTC jurisdiction under CEA section 2(a)(1) or other provisions of the CEA.
Neither the CFTC request for comments nor the January 3 no-action letter refer to Staff Guidance of the Division of Market Oversight issued on November 15,5 which like the Staff Advisory dealt with a complex aspect of cross-border jurisdiction, or the pending trade association lawsuit challenging the underlying July 2013 “Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations”.6
Comments must be received on or before 60 days after the publication of the request in the Federal Register.
For more information about the matters raised in this Legal Update, please contact
1 Division of Swap Dealer and Intermediary Oversight, Applicability of Transaction-Level Requirements to Activity in the United States, Nov. 14, 2013 (available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.)
2 CFTC Letter No. 13-71 (available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-71.pdf.)
3 CFTC Letter No. 14-01 (available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-01.pdf.) CFTC Letter No. 14-01 did not repeat a footnote, included in CFTC Letter No. 13-71, which stated that non-U.S. SDs and MSPs may comply with certain documentation rules of the CFTC by complying with “essentially identical” rules under Article 11 of the European Market Infrastructure Regulation (EMIR) and related technical standards and cited CFTC Letter No. 13-45. CFTC Letter No. 14-1, which describes itself as extending the date of the relief provided in CFTC Letter No. 13-71 and does not explain the omission of the footnote, gives no express indication that alternative compliance with the essentially identical EMIR rules, as described in the footnote, is no longer possible.
4 As defined in the CFTC request for comment, “Covered Transactions” are transactions arranged, executed, or negotiated by personnel or agents located in the United States of non-U.S. SDs (whether affiliates or not of a U.S. person) regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute swaps with non-U.S. persons. The CFTC uses the term to provide a restatement of the position set forth in the Staff Advisory, under which restatement both (i) use of U.S. personnel to perform the stated functions with respect to a particular transaction and (ii) regularity of involvement of U.S. personnel in transactions with non-U.S. persons must be present in order for Transaction-Level Requirements to be applicable. The Staff Advisory did not have this degree of precision.
5 Division of Market Oversight, Application of Certain Commission Regulations to Swap Execution Facilities, Nov. 15, 2013 (available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/dmosefguidance111513.pdf).
6 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013) (available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.) Note that the CFTC request for comment uses without explanation the term “transactional requirements”, rather than “Transaction-Level Requirements”, which is used in the Staff Advisory and the CFTC Guidance itself.