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OTC derivatives activity outside of the United States
may be subject to US law.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Act) will regulate most over-the counter (OTC) derivatives,
with much of the regulation currently set to become effective on 12
October 2012. The Act will require the central clearing and
exchange-style trading of many OTC derivatives and will impose
capital, margin, registration, reporting, recordkeeping, and
business conduct requirements on certain market participants. There
is considerable overlap with the proposed EU regulation of OTC
derivatives (including the European Market Infrastructure
Regulation (EMIR)).
The US Commodity Futures Trading Commission (CFTC) has recently
issued proposed guidance on the extraterritorial application of
regulations under the Act. The Securities and Exchange Commission
(SEC) has not yet released guidance on this topic.
Under the proposed CFTC guidance (which is not final and may
change), the CFTC regulations under the Act would generally apply
to OTC derivatives where the counterparty is, or is guaranteed by,
a "US Person". In this context, a US Person includes the
following:
Natural persons who are residents of the United States
Legal entities organised under US law or having a principal
place of business within the United States or entities in which the
owners are responsible for the liabilities of the entity and one of
the owners is a US Person
Any individual account where the beneficial owner is a US
Person
Any commodity pool, pooled account, or collective investment
vehicle of which a majority ownership is held by a US Person
Any commodity pool, pooled account, or collective investment
vehicle, the operator of which would be required to register as a
commodity pool operator under the US Commodity Exchange Act
A pension plan for the employees, officers, or principals of a
legal entity with its principal place of business inside the United
States
An estate or trust, the income of which is subject to US income
tax
The definition of US Person includes foreign branches or
agencies of US Persons. However, a foreign affiliate or subsidiary
of a US Person that is a separate legal entity is considered a
non-US Person (even if guaranteed by a US Person).
The proposed guidance is quite nuanced and different regulatory
outcomes may apply depending upon whether a party is (i) a US
Person, (ii) a non-US Person guaranteed by a US Person, (iii) a
non-US Person not guaranteed by a US Person, (iv) a US-based swap
dealer, (v) a foreign affiliate of a US-based swap dealer that
books swaps in the United States, (vi) a foreign branch of a
US-based swap dealer, (vii) a foreign affiliate of a US Person
where swaps are guaranteed by a US Person, (viii) a foreign
affiliate of a US Person where swaps are not guaranteed by a US
Person, or (ix) a non-US-based swap dealer where swaps are neither
booked in the United States nor guaranteed by a US person.
In some of these instances, the CFTC rules will apply; in other
instances, compliance with foreign laws may be an acceptable
alternative to compliance with CFTC rules; and, in still other
instances, no regulation will be imposed by CFTC rules. US counsel
should be consulted to ascertain the potential application of the
Act to each individual situation.
In summary, trading OTC derivatives in Europe is subject to
increased risk of overlapping (and sometimes contradictory)
regulation from the US and the EU. Caution should be exercised when
the counterparty is a US Person.
Copyright 2012. Morgan, Lewis & Bockius LLP. All Rights
Reserved.
This article is provided as a general informational service
and it should not be construed as imparting legal advice on any
specific matter.
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