On June 29, 2012, the US Commodity Futures Trading Commission (the “CFTC”) proposed interpretive guidance (the “Proposed Guidance”) regarding the cross-border application of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).1 The same day, the CFTC issued a proposed exemptive order (the “Proposed Exemptive Order”) that, if adopted, would implement temporary exemptions for certain swap regulations and give the CFTC time to finalize and implement the principles established in the Proposed Guidance.2 In brief, the Proposed Exemptive Order would provide swap dealers and major swap participants (“MSPs”) that are subject to CFTC registration with temporary relief from certain “Entity-Level Requirements” (defined below) under the Commodity Exchange Act (“CEA”), as amended by the Dodd-Frank Act.3 The Proposed Exemptive Order would also grant non-US swap dealers and MSPs, as well as non-US branches of US swap dealers and MSPs, temporary relief from applicable “Transaction-Level Requirements” (defined below) with respect to transactions with non-US counterparties so long as these swap dealers, MSPs and branches comply with applicable non-US law. The Proposed Exemptive Order adopts key definitions from the Proposed Guidance—US person, Entity-Level Requirements, and Transaction-Level Requirements—and should be read in light of the interpretive positions expressed by the CFTC in the Proposed Guidance.
We identify and summarize below key aspects of the Proposed Exemptive Order, including page references to the version posted on the CFTC’s website. Comments on the Proposed Exemptive Order are due 30 days after its publication in the Federal Register (whereas comments will be due on the Proposed Guidance 45 days after its publication in the Federal Register). Both the Proposed Guidance and the Proposed Exemptive Order are expected to be published shortly.
As defined in the Proposed Guidance, Entity-Level Requirements are those requirements that apply to a swap dealer or MSP on a firm-wide basis and relate to: (i) capital adequacy; (ii) designation of a chief compliance officer; (iii) risk management; (iv) swap data recordkeeping; (v) swap data reporting (“SDR Reporting”); and (vi) physical commodity swaps reporting (“Large Trader Reporting”) (see pages 14-20 of the Proposed Exemptive Order).
Delayed Compliance for Non-US Swap Dealers and MSPs
For non-US swap dealers and MSPs that are not affiliated with a US swap dealer:
- If engaging in swaps with non-US counterparties, there is a 12 month exemption from all Entity-Level Requirements;4
- If engaging in swaps with US counterparties, there is a 12 month exemption from Entity-Level Requirements other than SDR Reporting and Large Trader Reporting requirements.
For non-US swap dealers and MSPs that are affiliated with a US swap dealer, there is a 12 month exemption from Entity-Level Requirements other than SDR Reporting and Large Trader Reporting requirements for all swaps (with US or non-US counterparties).5
Non-US swap dealers and MSPs wishing to avail themselves of an Entity-Level Requirements exemption must:
- apply to become registered (as a swap dealer or MSP) when registration is required; and
- within 60 days of applying for registration, submit to the National Futures Association (the “NFA”) a compliance plan addressing how they plan to comply with all applicable Entity-Level Requirements and Transaction-Level Requirements, including any comparability determinations they may seek (see pages 7-9 and 32-35).6
Delayed Compliance for US Swap Dealers and MSPs
The Proposed Order also would grant US swap dealers and MSPs additional time to prepare for the application of Entity-Level Requirements, except with respect to swap data recordkeeping, SDR Reporting and Large Trader Reporting requirements. This limited, temporary relief for US swap dealers and MSPs would be effective until January 1, 2013 (see page 34).
As defined in the Proposed Guidance, Transaction-Level Requirements relate to individual swap transactions and include requirements for: (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 (see pages 20-24).
The Proposed Exemptive Order would grant a 12-month exemption from the Transaction-Level Requirements applicable to non-US swap dealers and MSPs, as well as those applicable to non-US branches of US swap dealers and MSPs, for swaps with a non-US counterparty provided that these non-US persons comply with applicable regulations in their home jurisdiction (or in the case of non-US branches of a US swap dealer or MSP, the non-US location of the branch) (see pages 7-8, 33-5).7 For swaps with a US counterparty, however, these non-US persons would be required to comply with all applicable Transaction-Level Requirements (see pages 33 and 34).8
For more information about any of the issues raised in this legal update, please contact Joshua Cohn at +1 212 506 2539, Curtis Doty at +1 212 506 2224, Brad Resnikoff at +1 202 263 3110, Jerome Roche at +1 202 263 3773, David Sahr at +1 212 506 2540, or Donald Waack at +1 202 263 3165.
1 A copy of the Proposed Guidance is available from the CFTC website at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister062912.pdf. Our Legal Update analyzing the Proposed Guidance is available at https://www.mayerbrown.com/Proposed-CFTC-Guidance-Regarding-the-Cross-Border-Application-of-US-Swaps-Regulations-07-02-2012/.
2 A copy of the Proposed Exemptive Order is available from the CFTC website at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister062912b.pdf
3 As described herein, the exemptive relief from Entity-Level Requirements would be broader for non-US swap dealers and MSPs than for US swap dealers and MSPs. For purposes of this legal update, the modifier “non-US” will apply to persons, including legal entities, that are not “US persons” as that term is interpreted under the Proposed Guidance.
4 Except where noted otherwise, all exemptive periods described in this legal update would run from the date upon which swap dealers and MSPs must first apply for registration until 12 months following the publication of the Proposed Exemptive Order in the Federal Register.
5 Upon their respective effective dates and without an exemption under the Proposed Exemptive Order, the SDR Reporting and Large Trader Reporting requirements would therefore apply not only to the non-US affiliates of US banks that register as swap dealers but also to the non-US affiliates of non-US banks that register a US subsidiary as a swap dealer.
6 Compliance plans should be updated periodically, as appropriate, and resubmitted to the NFA upon modification. In the Proposed Guidance, the CFTC indicates that it will seek to make any comparability determinations within the 12 month phase-in period with respect to Entity-Level Requirements.
7 The burden of applicable Transaction-Related Requirements varies based on the types of transactions and parties. For example, there effectively are no Transaction-Level Requirements applicable to transactions between a non-US swap dealer or MSP with a non-US counterparty unless that non-US counterparty is a conduit to, or guaranteed by, a US person. Accordingly, the utility of the exemption is correspondingly variable.
8 Consistent with the Proposed Guidance and for purposes of the Proposed Exemptive Order, a non-US branch of a US person is deemed a US person (that is, a part of a US person). Therefore the CFTC states that swaps entered into between a non-US branch of a US person with another non-US branch of a US person would be subject to Transaction-Level Requirements. On page 8, the CFTC requests comments on whether substituted compliance should be permitted for such swaps, allowing non-US branches to comply only with the regulations of the non-US location of the branches.