On October 10, the Commodity Futures Trading Commission proposed new rules for cross-border swaps (the Proposed Rules) that are intended to supersede the non-binding guidance with respect to such swaps that it issued in in 2013. (See Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292 (July 26, 2013) (Guidance)). The key elements of the Proposed Rules are as follows:
- The Proposed Rules contain an explicit definition of the term “U.S. Person” that will replace the “interpretation” of that term found in the Guidance. The proposed U.S. person definition is generally consistent with the interpretation, with certain exceptions. In particular, the proposed definition does not include the prong of the interpretation that turned any commodity pool, pooled account, investment fund, or other collective investment vehicle that is majority-owned by one or more U.S. persons into a U.S. person. In the interest of providing legal certainty, the proposed definition does not have the “catchall” provision found in the interpretation, thereby limiting the definition of “U.S. person” to persons enumerated in the rule. The preamble to the Proposed Rules confirms that the explanation in the Guidance of how the principal place of business test applies with respect to funds will continue to be operative in the context of the Proposed Rules.
- The Proposed Rules clarify and simplify the circumstances under which an entity must count dealing swaps against the swap dealing de minimis registration threshold. The most novel element of the Proposed Rules in this regard is the requirement that any non-U.S. person (a “Foreign Consolidated Subsidiary,” or FCS) that is consolidated into the financials of an ultimate U.S. parent entity must count all of its dealing swaps against the de minimis threshold, including swaps with other non-U.S. persons. Under the Guidance, only a conduit affiliate (not mentioned in the Proposed Rules) or a guaranteed affiliate had to count dealing swaps with non-U.S. persons. That obligation will now apply as a practical matter to virtually all non-U.S. entities dealing in swaps that are subsidiaries of U.S. persons. The Proposed Rules will also require other non-U.S. persons to count dealing swaps with an FCS towards the de minimis threshold, thus potentially making all FCSs less attractive as counterparties. The Proposed Rules also modify the circumstances under which an entity must count swaps for purposes of determining if it is a major swap participant.
- The Proposed Rules clarify and simplify the extent to which the CFTC’s external business conduct rules apply to cross-border swaps. Under the Proposed Rules, a swap dealer registered with the CFTC that is a non-U.S. person or a foreign branch of a U.S. person will not be subject to any of the external business conduct rules with respect to any transaction in swaps (or any swap that is offered but not entered into) when its counterparty is another non-U.S. person or a foreign branch of a U.S. person that is a swap dealer. However, §§ 23.410 (Prohibition on Fraud, Manipulation and Other Abusive Practices) and 23.433 (Fair Dealing) of the external business conduct rules relating to fair dealing will apply if the swap dealer uses personnel located in the United States to arrange, negotiate, or execute a transaction in swaps or a swap that is offered but not entered into. The preamble to the Proposed Rules contains an interpretation concerning the type of activity that constitutes arranging, negotiating and executing a swap.The Proposed Rules do not address the cross-border application of any substantive Dodd-Frank requirements beyond the SD/MSP registration thresholds and external business conduct standards. The CFTC expects to address the cross-border application of other Dodd-Frank requirements, including the availability of substituted compliance, in subsequent rulemakings.
The Proposed Rules is available here.