United States: CFTC Adopts Final Rules Regarding The Cross-Border Application Of Its Swap Margin Requirements

On May 24, 2016, the US Commodity Futures Trading Commission ("CFTC") adopted a final rule defining the cross border application of its margin requirements for uncleared swaps. The final rule covers all swap dealers and major swap participants subject to the CFTC's margin rules—that is, those registered with the CFTC but not subject to the margin rules of the US bank regulators.1

Such entities are referred to as covered swap entities ("CSEs")2. The CFTC rule generally requires CSEs engaging in uncleared cross-border swaps to comply with the CFTC's margin requirements, with certain exceptions depending on the location of the CSE and the type of counterparty with which the CSE transacts:

  • US CSEs must comply with the CFTC margin rules when transacting with a US counterparty or a non-US counterparty whose swap obligations are guaranteed by a US person.
  • US CSEs must comply with the CFTC margin rules when transacting with certain other non-US counterparties, but may be eligible for substituted compliance with respect to certain requirements.
  • Non-US CSEs must generally comply with the CFTC margin rules when transacting with a US counterparty, but may be eligible for substituted compliance with respect to certain requirements.
  • Non-US CSEs must generally comply with CFTC margin rules when transacting with a non-US counterparty whose swap obligations are guaranteed by a US person, but may be eligible for substituted compliance with respect to certain requirements.
  • Non-US CSEs whose swap obligations are not guaranteed by a US person generally need not comply with the CFTC margin rules when transacting with a non-US counterparty whose swap obligations are not guaranteed by a US person. These rules are generally similar to the cross-border approach adopted by the US banking regulators (the "Prudential Regulators")3 for swap dealers and major swap participants under their jurisdiction.4 As discussed further below, however, the Prudential Regulators' approach may allow more expansive application of substituted compliance for Non-US CSEs that are not guaranteed by US persons than under the CFTC cross-border rule.


Requiring initial and variation margin for uncleared swaps is a key aspect of derivatives regulatory reform both in the United States under the Dodd-Frank Act and in other jurisdictions. In furtherance of this goal, on December 16, 2015, the CFTC adopted final rules imposing margin requirements for uncleared swaps entered into by CSEs5. At that time, the CFTC deferred addressing the application of its rules on a cross-border basis until the current rulemaking.6

The final rules on cross-border application of margin requirements will take effect in accordance with the same compliance schedule for the margin requirements themselves set forth in the Final Margin Rules. The timetable for implementation is set out in Appendix B.

Key Categories

The cross-border rules classify CSEs and their counterparties based on regulated status and certain connections to the US. Under the rules, a "US person" is (i) a natural person who is a resident of the United States; (ii) an estate of a decedent who was a resident of the United States at the time of death; (iii) a corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of entity similar to any of the foregoing other than an entity described in (iv) or (v) below (a "legal entity"), in each case that is organized or incorporated under the laws of the United States or that has its principal place of business in the United States, including any branch of such legal entity; (iv) a pension plan for the employees, officers or principals of a legal entity described in (iii), unless the pension plan is primarily for foreign employees of such entity; (v) a trust governed by the laws of a state or other jurisdiction in the United States, if a court within the United States is able to exercise primary supervision over the administration of the trust; (vi) a legal entity (other than a limited liability company, limited liability partnership or similar entity where all of the owners of the entity have limited liability) that is owned by one or more persons described in (i) through (v) and for which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity, including any branch of the legal entity; or (vii) an individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in (i) through (vi). Notably, the definition does not include one of the prongs of the US person definition under the CFTC's general Cross-Border Guidance: collective investment vehicles that are organized and have their principal places of business outside the United States, but are majority owned by US persons.7

As used herein, a "US CSE" is a CSE that is a US person, and a "Non-US CSE" is a CSE that is not a US person. The CFTC definition of a Non-US CSE includes a US branch of a non-US CSE and a Foreign Consolidated Subsidiary. The distinction is relevant in that US branches of non-US CSEs and Foreign Consolidated Subsidiaries are not treated as US persons but are treated differently from other Non-US CSEs in some instances under the cross-border rules. A Foreign Consolidated Subsidiary ("FCS") is a non-US CSE in which a US person ultimate parent entity has a controlling financial interest, such that the FCS's operating results, financial position and statement of cash flows is consolidated in the US ultimate parent entity's financial statements, as determined in accordance with US GAAP. The cross-border rules also distinguish among counterparties based on whether there is a guarantee by a US person of the relevant swap obligations of a party to the uncleared swap. A guarantee for this purpose is an arrangement pursuant to which one party to an uncleared swap has rights of recourse against a guarantor, with respect to its counterparty's obligations under the uncleared swap.8

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1 17 C.F.R. § 23.160 (2016) available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2016-12612a.pdf.

2 Specifically, a CSE is a swap dealer and major swap participant registered with the CFTC for which there is no Prudential Regulator (as defined below).

3 The Prudential Regulators are as follows: Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; Farm Credit Administration; and Federal Housing Finance Agency.

4 See Margin and Capital Requirements for Covered Swap Entities, 80 Fed. Reg. 229 (Nov. 30, 2015) (to be codified at 12 C.F.R. pts. 45, 237, 349, 624, 1221); 12 C.F.R. pts. 45, 237, 349, 624, 1221 (2016). ("Prudential Regulators' Final Margin Rule").

5 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed. Reg. 3 (Jan. 6, 2016) (to be codified at 17 C.F.R. pts. 23, 140); 17 C.F.R. pts. 23, 140 (2016). (the "Final Margin Rules").

6 The CFTC had previously reproposed rules regarding the cross-border application of the margin rules after taking into consideration comments on their prior proposal. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants-Cross-Border Application of the Margin Requirements, 80 Fed. Reg. 134 (proposed July 14, 2015) (to be codified at 17 C.F.R. pt. 23).

7 See Interpretative Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 144 (July 26, 2013).

8 For these purposes, it is a guarantee if a party to an uncleared swap has rights of recourse against a guarantor if the party has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from the guarantor with respect to its counterparty's obligations under the uncleared swap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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