Final Dodd-Frank Cross-border Swap Exemptive Order Issued by CFTC | Practical Law

Final Dodd-Frank Cross-border Swap Exemptive Order Issued by CFTC | Practical Law

The CFTC issued a final exemptive order and further proposed guidance providing temporary relief from certain cross-border, or extraterritorial, applications of the swaps provisions of the Commodity Exchange Act (CEA) as added under Title VII of the Dodd-Frank Act.

Final Dodd-Frank Cross-border Swap Exemptive Order Issued by CFTC

Practical Law Legal Update 5-523-3290 (Approx. 6 pages)

Final Dodd-Frank Cross-border Swap Exemptive Order Issued by CFTC

by PLC Finance
Published on 03 Jan 2013 • USA (National/Federal)
The CFTC issued a final exemptive order and further proposed guidance providing temporary relief from certain cross-border, or extraterritorial, applications of the swaps provisions of the Commodity Exchange Act (CEA) as added under Title VII of the Dodd-Frank Act.
On December 21, 2012, the CFTC issued a final exemptive order and further proposed guidance providing temporary relief from certain cross-border, or extraterritorial, applications of the swaps provisions of the Commodity Exchange Act (CEA) as added under Title VII of the Dodd-Frank Act. Under the exemptive order:
  • A non-US person registered with the CFTC as a swap dealer (SD) or major swap participant (MSP) may delay compliance with certain entity-level requirements of the CEA, which were added by the Dodd-Frank Act.
  • Subject to certain conditions, non-US SDs and MSPs and foreign branches of US SDs and MSPs may delay compliance with certain transaction-level requirements of the CEA, added by Dodd-Frank.
A foreign branch of a US person will be viewed as a US person for purposes of the exemptive order. The exemptive order became effective on December 21, 2012 and expires on July 12, 2013.

Entity-level Requirements

The entity-level requirements of Dodd-Frank consist of:
  • Capital adequacy.
  • Chief compliance officer.
  • Risk management.
  • Swap data recordkeeping.
  • Swap data repository (SDR) reporting.
  • Large-trader reporting (LTR).
The final exemptive order provides that non-US SDs and MSPs may delay compliance with the entity-level requirements, except that non-US SDs and MSPs may delay compliance with SDR and LTR reporting only for transactions:
  • With non-US counterparties.
  • Where the non-US SD or MSP is not part of an affiliated group where the ultimate parent entity is a US SD, US MSP, US bank, US financial holding company or US bank holding company.

Transaction-level Requirements

The transaction-level requirements of Dodd-Frank consist of:
  • Clearing and swap processing.
  • Margining and segregation for uncleared swaps.
  • Trade execution.
  • Swap trading relationship documentation.
  • Portfolio reconciliation and compression.
  • Real-time public reporting.
  • Trade confirmation.
  • Daily trading records.
  • External business conduct (EBC) standards.
The final exemptive order provides that:
  • Non-US SDs and MSPs may delay compliance with the transaction-level requirements for swaps with non-US counterparties, provided the non-US SDs and MSPs comply with home country regulations.
  • Non-US branches of US SDs and MSPs may delay compliance with transaction-level requirements with non-US person counterparties and other non-US branches, provided the non-US branches comply with regulatory requirements in the foreign location of the branch.

US Person

The further proposed guidance defines "US person" for purposes of the final exemptive order only. A US person will be any person who meets one of the following criteria:
  • A natural person who is a US resident.
  • A corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any similar enterprise that:
    • is organized or incorporated in a US state or other US jurisdiction; or
    • effective as of April 1, 2013, has its principal place of business in the US (except for funds or collective investment vehicles).
  • A pension plan for employees, officers or principals of a legal entity described above, unless the plan is primarily for foreign employees.
  • An estate of a decedent who was a US resident or a trust governed by the laws of a US state or other US jurisdiction if a court in the US can exercise primary supervision over administration of the trust.
  • An individual account or joint account (discretionary or not) where a beneficial owner is a person described above.
A foreign branch of a US person will be viewed as a US person for purposes of the exemptive order.
In order to rely on the exemptive relief in the order, a party to a swap may reasonably rely on its counterparty's representation in determining whether the counterparty is a US person if it conducts reasonable due diligence on the counterparty.

How Does the Order Impact SD/MSP Threshold Calculations?

Under the exemptive order, non-US persons (regardless of whether their swap obligations are guaranteed by US persons) do not need to include in their SD or MSP calculations the aggregate gross notional amount of:
  • Any swap where the counterparty is a non-US person.
  • Any swap where the counterparty is a foreign branch of a US person that is registered (or intends to register by March 31, 2013) as an SD.
For details on SD and MSP notional thresholds, see Practice Note, Is Your Client a Swap Dealer or Major Swap Participant? Breakdown of Final Dodd-Frank Definitional Rulemaking.
The exemptive order provides:
  • Relief from the requirement that a person include the aggregate notional value of swap dealing transactions entered into by its affiliates under common control when determining if its swap dealing activities exceed the de minimis SD threshold.
  • A non-US person engaged in swap dealing activities with US persons as of December 21, 2012 does not need to include the swap dealing transactions of any of its US affiliates when determining if it exceeds the de minimis threshold.
  • If a non-US person is an affiliate of a person registered as an SD, it does not need to include the swap dealing transactions of any of its non-US affiliates, provided each excluded affiliate is engaged in swap dealing activities with US persons as of December 21, 2012 or is registered as an SD.
  • Non-US persons do not need to include in their calculation of the aggregate gross notional amount of swaps any swap to which it is not a party because the swap is entered into by an affiliated central booking entity.

Registration of SDs and MSPs

The exemptive order provides criteria for determining whether a non-US person must register as an SD or MSP:
  • A non-US person does not need to include in its SD de minimis or MSP threshold calculations:
    • swaps where the counterparty is a non-US person, whether or not the potential registrant's swap obligations are guaranteed by a US person; or
    • swaps where the counterparty is a foreign branch of a US person that is registered as an SD or that represents that it intends to register as an SD by March 31, 2013.
  • In aggregating swap dealing activity with the activity of its affiliates to determine whether it exceeds the SD de minimis threshold:
    • a non-US person engaged in swap dealing activities with US persons as of December 21, 2012 is not required to include the aggregate gross notional amount of swaps connected with the swap dealing activity of its US affiliates under common control; and
    • a non-US person engaged in swap dealing activities with US persons as of December 21, 2012 who is an affiliate under common control with a person registered as an SD is not required to include the aggregate gross notional amount of swaps connected with the swap dealing activity of any non-US affiliate under common control that is either engaged in swap dealing activities with US persons as of the effective date or is registered as an SD.
    • a non-US person is not required to include the aggregate gross notional amount of swaps connected with the swap dealing activity of its non-US affiliates under common control with other non-US persons as counterparties.

Enforcement Authority

The final exemptive order clarifies that the CFTC does not intend to bring an enforcement action against an SD or MSP for failing to comply with applicable Dodd-Frank requirements before July 12, 2013 provided:
  • There is either:
    • a practical or technical impediment to compliance resulting in an inability to comply with compliance deadlines; or
    • uncertainty in interpreting Dodd-Frank requirements.
  • The SD or MSP is acting reasonably and in good faith to comply with the applicable requirements.
At a minimum, acting reasonably and in good faith would include:
  • Material progress toward timely implementation and compliance.
  • Identification of any implementation or interpretive issue as soon as reasonably possible.
  • Timely elevation of issues to the SD's or MSP's senior management for consideration and resolution.
  • Timely consultation with other industry participants and the CFTC as necessary to seek resolution of the issues.

Additional Proposed Guidance

The final exemptive order seeks comments on the following additional proposed guidance:
  • An alternative de minimis aggregation rule for non-US persons that would require a non-US person to aggregate its swap dealing activities with US person and non-US person affiliates but would not require a non-US person to aggregate with its non-US affiliates that are registered SDs.
  • An alternative to the part of the definition of US person in the proposed guidance relating to the responsibility of a US person for the debts of an entity, clarifying that it is meant to include situations of unlimited liability by a US person instead of a guarantee by a US person.
  • An alternative to the part of the definition of US person in the proposed guidance relating to majority-owned commodity pools, pooled accounts or collective investment vehicles.
The CFTC is accepting further comments on the additional proposed guidance until 30 days after publication in the Federal Register.
To learn more about the cross-border application of swaps rules under Dodd-Frank, see Practice Note, The Dodd-Frank Act: Cross-border Application of Swaps Rules. For information on other recent swap data reporting no-action relief from the CFTC, see Legal Updates, Limited No-action Relief from Swap Data Reporting Rules Issued by CFTC, Further Limited Swap Data Reporting Relief for Swap Dealers Issued by CFTC, Legal Opinion Language Issued by CFTC in Connection with LEI No-action Compliance, and Swap Data Reporting Relief for Prime Brokers Issued by CFTC.