On December 5, 2011, the CFTC approved final rules under the Dodd-Frank Act, as detailed in a fact sheet and Q&A, establishing registration requirements and procedures for foreign boards of trade (FBOTs) seeking to provide their members or other participants located in the US with direct access to their electronic swaps trading systems. FBOTs are CFTC-registered non-US swap exchanges.

The rules may ultimately facilitate an open and competitive central global swaps market. However, the requirement that an FBOT must be subject to a regulatory regime similar to that which US exchanges are subject to is likely to raise extraterritoriality and overreach concerns among foreign regulators attempting to craft their own swaps regulatory framework.

The registration requirements apply to any FBOT that wants to provide its members and participants located in the US with direct access to its swaps trading system. They also provide that it would be unlawful for an FBOT to permit US firms direct access to its electronic swaps order entry and trade matching systems unless the CFTC has issued an order of registration. It would also be unlawful for FBOT to make a false or misleading statement in connection with a registration application.

The new system replaces the existing staff-issued, direct access no-action relief letters traditionally relied on by FBOTs providing direct access to US trading firms. The regulation includes a limited registration application process for FBOTs that are currently relying on staff no-action relief letters.

Under the new system, the CFTC would evaluate the same categories in an FBOT's application for registration that its staff currently examines in determining no-action relief. These are:

The new rules set out a new standard that links approval for registration of an FBOT with its affiliated clearing organization meeting certain requirements.

The final rules also detail the conditions that a registered FBOT must meet to retain its registration, including ongoing reporting obligations, conditions that apply to contracts it offers for trade and certain other requirements.

The types of entities to which an FBOT could grant direct access under the new regulations are:

The rules more closely align FBOT registration in the US with that of other countries that permit US exchanges to provide direct market access to non-US customers. The CFTC states that the purpose of these final rules is to provide a more standardized and transparent system to both FBOTs and the general public. Further, the rules are expected to provide greater legal certainty for FBOTs because staff-issued no-action letters are not binding on the CFTC.

The rules are designed to accommodate and facilitate the interoperability of US and non-US swap exchanges and clearinghouses with the ultimate goal of creating an open and competitive global central swap market. However, the CFTC registration requirement that an FBOT must be subject to a regulatory regime similar to that which the CFTC provides for US exchanges is likely to raise concerns among foreign regulators attempting to craft their own swaps regulatory framework.

The final rules take effect 60 days after publication in the Federal Register.

Update: This rule filing was published in the Federal Register on December 23, 2011. The final rules take effect on February 21, 2012.

For more information on CFTC rulemaking activity under the Dodd-Frank Act, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives.

To learn more about the mechanics of the clearing process for swaps and derivatives, see Practice Note, Mechanics of Derivatives Clearing.