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Legal Update

The CFTC’s July 12, 2013 Cross-Border Exemptive Order

17 July 2013
Mayer Brown Legal Update

On July 12, 2013, the Commodity Futures Trading Commission (“CFTC”) issued a time-limited exemptive order (the “Order”) under Commodity Exchange Act (“CEA”) section 4(c) to allow a phase-in period for the implementation of its finalized interpretive guidance and policy statement regarding cross-border application of the Dodd-Frank Title VII swap provisions (the “Guidance”), adopted on the same date.[1] The Order in large measure continues the relief afforded under the CFTC’s prior order (the “January Order”),[2] which expired on July 12. The CFTC is soliciting comments on the Order for 30 days. This update addresses the Order independently of the Guidance, which we will address in a subsequent alert and which may shed further interpretive light on the Order. This summary is based on the version of the Order bearing a creation timestamp of 5:38 p.m., July 16.

US Person Definition; SD and MSP Registration Thresholds

Market participants may continue to apply the “US person” definition and the swap dealer (“SD”) de minimis and major swap participant (“MSP”) threshold calculations as set out in the January Order (including aggregation rules) until 75 days after Federal Register publication of the Guidance. A non-US person required to register as a SD as a result of changes to the definition of US person or the de minimis calculation will not be required to register until two months after the end of the month in which the person exceeds the de minimis threshold.

Entity-Level Requirements – Non-US SDs/MSPs

Non-US SDs and non-US MSPs established in Australia, Canada, the EU, Hong Kong, Japan or Switzerland (collectively, the “Six Jurisdictions”) need not comply with “Entity-Level Requirements for which substituted compliance is possible” under the Guidance until the earlier of December 21, 2013 or 30 days following the issuance by the CFTC of the applicable substituted compliance determination.[3] This in large part continues the relief from entity-level requirements under the January Order, except that Large Trader Reporting (for which substituted compliance is not possible under the Guidance)[4] is no longer included as an Entity-Level Requirement. In addition, it appears that relief may no longer be available from certain aspects of swap recordkeeping relating to complaints and marketing and sales materials for transactions with US counterparties.[5]

Exemption from CFTC Regulations Part 45 and Part 46 reporting remains available, for the same period as described above, to a non-US SD/MSP established in one of the Six Jurisdictions that is not part of an affiliated group of which the ultimate parent is a US SD or MSP, US bank, US financial holding company or US bank holding company, subject, however, to a new condition that such non-US SD or MSP either (i) is in compliance with swap data reporting and recordkeeping requirements in its home jurisdiction or (ii) where no swap data reporting requirements have been implemented in the home jurisdiction, complies with the recordkeeping and identifier requirements of CFTC Rules 45.2, 45.6, 46.2, 46.4.

If a non-US SD or MSP established outside the Six Jurisdictions files a registration request and a concurrent substituted compliance request before December 21, 2013, the CFTC may consider a request for deferring compliance with the Entity-Level Requirements.[6]

Transaction-Level Requirements – Non-US SDs/MSPs and Foreign Branches of US SDs and MSPs in the Six Jurisdictions

Non-US SDs and MSPs established in, and foreign branches[7] of a US SD or MSP located in, one of the Six Jurisdictions may comply with any law and regulations of the home jurisdiction where it is established (or where the foreign branch is located), and only to the extent required by such home or branch jurisdiction, in lieu of any “Transaction-Level Requirements for which substituted compliance would be possible” under the Guidance until the earlier of December 21, 2013 or 30 days following the issuance of the relevant substituted compliance determination, except as set out below:

  1. A non-US SD or MSP or foreign branch that was not required to clear under the January Order may delay complying with clearing requirements under CEA section 2(h)(1), CFTC Regulations Part 50 and CFTC Rule 23.506 until 75 days after Federal Register publication of the Guidance.
  2. The Order does not provide relief from the trade execution requirements under CEA section 2(h)(8) and CFTC Rules 37.12 or 38.11.[8]
  3. For swap transactions with a guaranteed[9] non-US affiliate of a US person, until September 30, 2013, the non-US SD or MSP or foreign branch may comply with any law and regulations of the home jurisdiction where it is established (or where the foreign branch is located) related to real-time reporting (and only to the extent required by such home or branch jurisdiction) in lieu of Part 43.

Transaction-Level Requirements – Non-US SDs/MSPs and Foreign Branches of US SDs and MSPs outside the Six Jurisdictions

For swap transactions with a guaranteed non-US affiliate of a US person, non-US SDs and MSPs established in, and foreign branches of a US SD or MSP located in, a jurisdiction other than one of the Six Jurisdictions may comply with any law and regulations of the home jurisdiction where they are established (or where the foreign branch is located), and only to the extent required by such home or branch jurisdiction, in lieu of any Transaction-Level Requirements for which substituted compliance would be possible under the Guidance until 75 days after Federal Register publication of the Guidance.[10]

Transaction-Level Requirements – Guaranteed Affiliates and Affiliate Conduits

The Order provides relief from Transaction-Level Requirements for swap transactions between non-SD/MSPs in which both counterparties are guaranteed non-US affiliates of US persons. In such cases, the guaranteed affiliates may comply with any law and regulations of the jurisdiction where they are established (and only to the extent required by such home jurisdiction) for the relevant Transaction-Level Requirement in lieu of any Transaction-Level Requirement for which substituted compliance would be possible under the Guidance until 75 days after Federal Register publication of the Guidance. Under a different but partially overlapping provision of the Order, guaranteed non-US affiliates of US persons and affiliate conduits for US persons need not comply with Transaction-Level Requirements relating to swaps with non-US persons and foreign branches of US SDs and MSPs until 75 days after Federal Register publication of the Guidance.

Obligations under Inter-Affiliate Clearing Exemption Unaffected

The CFTC’s clearing exemption for inter-affiliate swaps[11] imposes certain conditions on swaps between group entities relying on the exemption and unaffiliated third parties, including that such outward-facing swaps be cleared if they are within scope of the CFTC’s clearing mandate, unless an exception or alternative compliance method is available. In cases where one of the counterparties to a swap is electing the inter-affiliate clearing exemption, the Order does not relieve any party of the obligation to comply with the conditions of the exemption, including those related to clearing of outward-facing swaps.

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Footnotes:

[1] Exemptive Order Regarding Compliance with Certain Swap Regulations (July 12, 2013), http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister071213.pdf; Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (July 12, 2013), http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister071213b.pdf.
[2] Final Exemptive Order Regarding Compliance With Certain Swap Regulations, 78 Fed. Reg. 858 (Jan. 7, 2013); see also Mayer Brown, CFTC Issues a Final, Time-Limited Exemptive Order and Proposes Further Guidance Regarding Cross-Border Regulation of Swaps (Dec. 31, 2012), available at https://www.mayerbrown.com/CFTC-Issues-a-Final-Time-Limited-Exemptive-Order-and-Proposes-Further-Guidance-Regarding-Cross-Border-Regulation-of-Swaps-12-31-2012/.
[3] Non-US SDs and MSPs may require additional time after a substituted compliance determination in order to phase in compliance with home jurisdiction requirements. The CFTC and its staff intend to address the need for further transitional relief in connection with the substituted compliance determination. See preamble to the Order (“Preamble”), footnote 41.
[4] See Preamble, footnote 27.
[5] See Preamble, footnote 40. An additional difference from the January Order is that Rule 23.607 (antitrust considerations) is no longer included as an Entity-Level Requirement. Rule 1.3 (books and records), while not listed as an Entity-Level Requirement in the text of the Order (as it was in footnote 87 of the January Order), is referred to as an Entity-Level Requirement in footnote 30 of the Preamble.
[6] Preamble, footnote 41.
[7] The Preamble cites the Guidance for a discussion regarding the types of offices which the CFTC would consider to be a “foreign branch” and the circumstances in which a swap is with such foreign branch. Preamble, footnote 43.
[8] As of the date of the Order, there were no swaps as to which an “available to trade” determination had been made and, consequently, no swaps were subject to a trade execution requirement. The CFTC has adopted a compliance schedule for the trade execution requirement. Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 Fed. Reg. 33606 (June 4, 2013).
[9] For purposes of the Order, the term “guarantee” generally includes not only traditional guarantees of payment or performance, but also other formal arrangements that, in view of all the facts and circumstances, support the non-US person’s ability to pay or perform its swap obligations. Exemptive Order, footnote 67. Footnote 65 of the Order states that, to the extent that a guaranteed affiliate “is given exemptive relief from any particular Transaction-Level Requirement under this Exemptive Order, the same exemptive relief would apply to affiliate conduits.”
[10] In an amendment to the text of the Order after its initial release, the limitation to swap transactions with guaranteed non-US affiliates of a US person was removed from the relief for foreign branches, but not from that for non-US SDs/MSPs.  See Order, paragraphs 10 and 14.
[11] Exemption for Swaps Between Certain Affiliated Entities, 78 Fed. Reg. 21750 (Apr. 11, 2013).

Authors

  • Curtis A. Doty
    T +1 212 506 2224
  • David R. Sahr
    T +1 202 263 3332
  • Jerome J. Roche
    T +1 202 263 3773
  • Donald S. Waack
    T +1 202 263 3165
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