On December 18, 2019, the Commodity Futures Trading Commission (the "CFTC" or "Commission"), in a 3 to 2 vote, proposed rules (the "Proposed Rules") that would, if finalized, supersede the Commission's current policy with respect to the cross-border application of swaps regulations under Commodity Exchange Act ("CEA") Section 2(i), as set forth in the guidance published by the CFTC in July 2013 (the "2013 Guidance").1
More specifically, the Proposed Rules would classify swap market participants (e.g., U.S. person, guaranteed entity, foreign branch), address which cross-border or extraterritorial swaps or swap positions a person would need to consider when determining whether it needs to register with the Commission as a swap dealer ("SD") or major swap participant ("MSP" and, together with SDs, "Swap Entities"), categorize certain swaps requirements applicable to Swap Entities for purposes of how they apply to cross-border or extraterritorial swaps transactions, and codify a process for the CFTC to permit Swap Entities to substitute compliance with comparable foreign requirements.
OVERVIEW OF THE PROPOSED RULES
Since July 2013, the cross-border application of the CFTC's swaps rules has been governed by the 2013 Guidance, a policy statement that, unlike a formal rule, is not legally binding on the CFTC or market participants. The CFTC has frequently sought to revisit the 2013 Guidance, most recently in a white paper published by former Chairman J. Christopher Giancarlo, 2 and previously in a rule proposal issued in late 2016 under then-Chairman Timothy Massad (the "2016 Proposal")3 and staff guidance published in November 2013 ("Advisory 13-69"), 4 which was quickly superseded by no-action relief that remains in effect today.5
If, unlike his predecessors, Chairman Heath Tarbert is successful in codifying a final cross-border rule, it will be a significant achievement—especially considering the CFTC's crowded agenda over the course of the next year and the significant controversy that frequently attaches to rulemakings in this area.
The key elements of the Proposed Rules are as follows:
Key Definitions. The Proposed Rules would eliminate the concept of a "conduit affiliate" from the 2013 Guidance and replace it with a new class of entity defined as a "significant risk subsidiary." The Proposed Rules would also clarify and streamline a number of key definitions from the 2013 Guidance, such as "U.S. person" and "guarantee," to harmonize with related CFTC and Securities and Exchange Commission ("SEC") rules. The Proposed Rules also would, for the first time, introduce new definitions relating to U.S. branches of non-U.S. banks.
These definitional changes comprise perhaps the most controversial aspects of the Proposed Rules; in particular, the dissenting Commissioners strongly challenged the new "guarantee" definition, which is narrower— but much clearer—than the parallel definition in the 2013 Guidance, and the "significant risk subsidiary" definition, which is much narrower and more risk-focused than the "foreign consolidated subsidiary" definition from the 2016 Proposal.
ANE Transactions. In contrast to the approach taken by the SEC and Advisory 13-69, but consistent with the 2013 Guidance, the CFTC would not apply swaps-related requirements, other than anti-fraud and antimanipulation rules, to transactions between non-U.S. counterparties that are arranged, negotiated or executed by U.S.-located personnel or agents ("ANE Transactions"), so long as neither non-U.S. counterparty is a significant risk subsidiary or guaranteed by a U.S. person.
Registration Thresholds. The Proposed Rules would largely codify the 2013 Guidance with respect to which cross-border swaps transactions and positions a person would need to consider when determining whether it needs to register as a Swap Entity with the CFTC, subject to conforming changes appropriate to reflect the revised definitions noted above.
Categorization of Swap Dealer Requirements. The Proposed Rules would categorize certain of the entity-level and transaction-level requirements from the 2013 Guidance into Group A, B, or C requirements, each with corresponding eligibility for exceptions and/or substituted compliance. Again, here the Proposed Rules would mostly codify the 2013 Guidance. Notably, however, the Proposed Rules do not address mandatory clearing, mandatory trade execution, real-time public reporting or swap data reporting requirements, which would continue to be governed by the 2013 Guidance pending any further CFTC rulemaking.
Recordkeeping. The Proposed Rules would require Swap Entities to create a record of their compliance with the Proposed Rules and to retain such records.
Comment Period. The comment period for the Proposed Rules will be 60 days after the date of publication in the Federal Register.
1. Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013).
2. CFTC Chairman J. Christopher Giancarlo, "Cross Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-US Regulation" (Oct. 1, 2018), available at: https://www.cftc.gov/sites/default/files/2018- 10/Whitepaper_CBSR100118_0.pdf. Our Alert Memorandum regarding this white paper can be found at https://www.clearygottlieb.com/-/media/files/alert-memos-2018/cftc-chairman-proposes-crossborder-swaps-regulationversion.pdf.
3. Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to [SDs] and [MSPs], 81 Fed. Reg. 71946 (Oct. 18, 2016).
4. CFTC Staff Advisory No. 13-69 (Nov. 14, 2013).
5. See, e.g., CFTC No-Action Letter No. 17-36 (July 25, 2017).
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