CFTC Temporarily Exempts Swap Dealers and Major Swap Participants from Many Dodd-Frank Rules | Practical Law

CFTC Temporarily Exempts Swap Dealers and Major Swap Participants from Many Dodd-Frank Rules | Practical Law

The CFTC has given notice that would delay compliance by US swap dealers and major swap participants (MSPs) with certain Dodd-Frank swaps regulations until January 1, 2013.

CFTC Temporarily Exempts Swap Dealers and Major Swap Participants from Many Dodd-Frank Rules

by PLC Finance
Published on 13 Jul 2012 • USA (National/Federal)
The CFTC has given notice that would delay compliance by US swap dealers and major swap participants (MSPs) with certain Dodd-Frank swaps regulations until January 1, 2013.
The CFTC has issued a Notice of a Proposed Exemptive Order Regarding Compliance with Certain Swap Regulations in connection with its proposed cross-border interpretive guidance (see Legal Update, CFTC Defines Cross-border Reach of Dodd-Frank Swaps Rules) that would delay compliance by swap dealers (SDs) and major swap participants (MSPs) with certain Dodd-Frank swap regulations. The CFTC has proposes permitting delayed compliance with all entity-level requirements other than:
  • Swap data recordkeeping.
  • Swap data repository (SDR) reporting.
  • Large trader reporting.
These rules are therefore effective for all swaps entered into by SDs and MSPs on or after October 12, 2012. For US SDs and MSPs, the CFTC proposes to permit delayed compliance with all other entity-level requirements until January 1, 2013. The exemption for non-US SDs and non-US MSPs would expire 12 months following the publication of the final exemptive order in the Federal Register.
The proposed exemption would become effective on the compliance date for registration of SDs and MSPs, which is October 12, 2012 (60 days after final rules defining the term "swap" were published in the Federal Register).
The CFTC may consider extending the exemptive relief upon its expiration based primarily on whether and when so-called "substituted compliance" with foreign regulatory requirements for non-US persons becomes available (for information on substituted compliance with Dodd-Frank swaps rules, see Legal Update, CFTC Defines Cross-border Reach of Dodd-Frank Swaps Rules).
With respect to transaction-level requirements for swaps entered into with non-US counterparties, temporary relief would be granted to:
  • Non-US SDs and MSPs.
  • Foreign branches of US persons.
These entities would be required to comply only with those transaction-level requirements that are required in the home jurisdiction of the non-US SD or MSP or in the foreign location of the branch. This relief for non-US SDs and MSPs and foreign branches of US persons with respect to transaction-level requirements would become effective on the compliance date for registration of SDs and MSPs (October 12, 2012) and expire 12 months following the publication of the proposed order in the Federal Register, which occurred on August 13, 2012.
For the purposes of this exemptive relief, the CFTC adopts the interpretation of the terms "US person," "entity-level requirement" and "transaction-level requirement" contained in the proposed cross-border interpretive guidance.
The CFTC has issued the proposed exemptive order to give both US and non-US SDs and MSPs time to comply with Dodd-Frank swaps rules, many of which will soon be triggered due to the adoption of final Dodd-Frank rulemaking on key definitional terms such as "swap" and "security-based swap" (see Legal Update, Regulators Define Key Dodd-Frank Terms "Swap" and "Security-based Swap" Triggering Title VII Compliance).
**Note that compliance by swap dealers and MSPs with final Dodd-Frank external business conduct rules has been delayed until January 1, 2013 to permit parties time to bring their documentation into compliance with the rules (see Legal Update, CFTC Delays Compliance with External Business Conduct Standards for Swap Dealers and MSPs).

Conditions to Relief

To qualify for the proposed exemptive relief, US SDs and MSPs must simply register as such with the CFTC on or before October 12, 2012. Non-US SDs and MSPs must satisfy the following conditions:
  • The non-US person must register as an SD or MSP, as required by final CFTC rules (see Legal Update, Final Rules on Registration of Swap Dealers and Major Swap Participants under Dodd-Frank Issued by CFTC). This registration has been triggered by publication of final rules defining the term "swap" in the Federal Register, which occurred on August 13, 2012. Therefore, aggregation of non-exempt swap transactions for the purposes of determining whether an entity is an SD or MSP begins on October 12, 2012 (60 days after publication of the final "swap" definitional rules in the Federal Register). Firms have two months from the end of the month they cross the $8 billion notional threshold in non-exempt swap activity to register as swap dealers. This means that if a firm crosses the threshold in mid-October, it would not be required to register until January 1, 2013, though it may elect to do so earlier. For more information on these thresholds and other SD/MSP criteria, see Practice Note, Is Your Client a Swap Dealer or Major Swap Participant? Breakdown of Final Dodd-Frank Definitional Rulemaking. (Non-US SDs will also be required to report to a swap data repository (or the CFTC) data on any swaps entered into with US persons, including branches of US person.)
  • Within 60 days of such registration, the non-US applicant would be required to submit to the National Futures Association (NFA) a compliance plan addressing how it plans to comply, in good faith, with all applicable requirements under the CEA and related rules and regulations upon the effective date of the cross-border interpretive guidance. At a minimum, for each entity-level and transaction-level requirement, the plan should include a description of:
    • whether the non-US SD or MSP plans to comply with each of the requirements that are in effect at that time or plans to seek a comparability determination and rely on substituted compliance with one or more of the requirements of the home jurisdiction; and
    • the requirements of the home jurisdiction if the non-US SD or MSP plans to seek substituted compliance (for detailed information on substituted compliance and comparability determinations, as well as other details of the CFTC's cross-border interpretive guidance, see Legal Update, CFTC Defines Cross-border Reach of Dodd-Frank Swaps Rules).
A non-US SD or MSP may modify or alter its compliance plan as appropriate, provided that it submits an amended plan to the NFA.