The CFTC voted unanimously to propose rules and interpretations that address the
cross-border application of certain swap provisions under the
The proposal would, among other things, base the definitions of
"U.S. person" and "Foreign Consolidated
Subsidiary" on similar definitions in the CFTC's recent
cross-border margins rulemaking in order to apply Dodd-Frank Act
swaps provisions to cross-border transactions. The proposal also
addresses the cross-border application of registration thresholds
and external business conduct ("EBC") standards for swap
dealers ("SDs") and major swap participants
("MSPs"), including whether the standards would apply to
swap transactions that are arranged, negotiated or executed
("ANE transactions") using personnel located in the
In her concurring statement, CFTC Commissioner Sharon
Y. Bowen voiced general support for the proposal, but "invited
robust comment" on aspects of the proposal, particularly (i)
the disinclusion of the concept of "conduit affiliates,"
as used in the CFTC Cross-Border Guidance, and the fact that it
does not capture the affiliates' dealing activity, and (ii) the
fact that so-called ANE transactions in which both parties are not
U.S. persons do not fall within the criteria for scrutinizing
whether a swap dealer has crossed the de minimis
CFTC Commissioner J. Christopher Giancarlo commended the CFTC for "at last putting
the guidance and advisory through the formal rulemaking
process," and for limiting the scope of CEA requirements that
will apply to ANE transactions. Commissioner Giancarlo urged CFTC
staff to extend No-Action
Letter 16-64 in order to clarify that the Dodd-Frank Act swap
requirements will not apply to ANE transactions "until the
[CFTC] takes further action."
Comments on the proposal must be submitted within 60 days after
its publication in the Federal Register.
Commentary / Nihal Patel
In the proposed rules, the CFTC takes a similar approach to that
which it took in its Cross-Border Guidance. However, the proposal
deviates from the guidance in a few noteworthy ways. The 114-page
proposal requires more careful scrutiny than a short comment can
provide (a Cadwalader memorandum on the topic will be published in
the coming days), but a few notable aspects of the rulemaking are
The definition of "U.S.
Person" is the same as that which is used in the
cross-border application of requirements in the uncleared swap
margin rules. Most notably, the definition does not cover
investment vehicles solely because they are majority-owned by U.S.
In what might be an oversight, the
CFTC does not include a definition of
"guarantee" in the unofficial rule text. But see
release at p. 6 (indicating that the same definition of
"guarantee" used in margin rulemaking would be used
Generally, foreign subsidiaries of
U.S. parent companies that are consolidated for accounting purposes
are required to count all of their transactions for registration
purposes. The CFTC indicated that it would not necessarily treat
such entities in the same way as it does U.S. persons according to
"other Dodd-Frank swap provisions." See release
at p. 19 and n. 41.
Unlike the Cross-Border Guidance, the
proposal would require a fully non-U.S. person (i.e., one
who is neither guaranteed by, nor consolidated with, a U.S. parent)
to count, for registration purposes, transactions with the foreign
branches of U.S. swap dealers. The CFTC expressed concern that
allowing for an exception in the proposal could create a
"substantial regulatory loophole," resulting in
additional risks to the U.S. financial system. That aspect of the
proposal deserves further analysis, since it potentially could
damage the competitiveness of U.S. bank swap dealers who transact
overseas. See release at pp. 37-38.
In its approach to ANE transactions, the CFTC proposal is more
reasonable than many market participants expected. The CFTC does
not propose applying the full scope of external business
conduct requirements to ANE transactions, but, rather, only the
anti-fraud and "fair dealing" aspects found in CFTC
23.433. With regard to swap dealer registration, the CFTC
allowed that transactions between two fully non-U.S. persons will
not be counted solely because the transactions are arranged,
negotiated or executed by personnel in the United States.
The CFTC also expounded on what it would consider to be
"arranging," "negotiating" or
"executing" a transaction. See pp. 27-31 of the
release. In that section, the CFTC seems largely to have taken the
approach used by the SEC in
its comparable rulemaking.
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How will derivatives regulation change in the Trump Administration? During the campaign and since the election, President-elect Trump and his advisors, as well as key Congressional Republicans and other market participants, have suggested that aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), should be rolled back, or even repealed outright.
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