On December 20, 2013, the CFTC issued further guidance addressing the cross-border application of its swaps rules under Dodd-Frank. The guidance took the form of “substituted compliance” determinations and no-action relief for swap dealers (and major swap participants) located in certain non-US jurisdictions. The “substituted compliance” determinations apply to dealers located in Australia, Canada, the EU, Hong Kong, Japan, and Switzerland; the no-action relief applies to dealers in all the same jurisdictions except Hong Kong. This relief was issued because the interim exemption that the CFTC had issued in July 2013 expired by its terms on December 21, 2013. (Because so few firms have registered as major swap participants, we refer only to swap dealers below.)
The guidance released on December 20 does not address many of the CFTC’s “transaction-level” swaps requirements that apply to trades and trading relationships with non-US swap dealers. Those requirements were addressed generally in the CFTC’s July 2013 guidance.
This alert briefly recaps the developments on December 20, other recent actions, and key points from the July 2013 guidance. For further background, please see our earlier cross-border alerts, which are available here and here.
December 20 Guidance and Relief. On December 20, the CFTC announced in a press release “substituted compliance” determinations for non-US swap dealers located in Australia, Canada, the EU, Hong Kong, Japan, and Switzerland. The CFTC determined that, subject to certain qualifications, “entity-level” requirements applicable to dealers under local law were effectively equivalent to those imposed under Dodd-Frank. (The CFTC’s chart summarizing its determinations is available here.) The requirements covered by these “substituted compliance” determinations include:
The CFTC also announced that additional “substituted compliance” determinations will apply to dealers located in the EU and Japan:
In addition, the CFTC staff issued no-action relief from business conduct and swap data reporting requirements for certain non-US dealers. The relief from business conduct requirements, which is available here, expires on March 3, 2014. The relief from swap data reporting requirements, which is available here, expires on March 3, April 2, or December 1, 2014, depending on the specific reporting requirement and whether the non-US counterparties are guaranteed affiliates, or conduit affiliates, of a US person.
Current Status of Other Requirements. The CFTC’s actions on December 20 do not address many of the “transaction-level” requirements that may apply to trades and relationships between non-US swap dealers and their counterparties, such as real-time public reporting, clearing, trade execution, and segregation of initial margin. How these requirements apply across borders was addressed in the CFTC’s July 2013 guidance:
Other Recent Cross-Border Developments. On November 14, the CFTC staff issued an advisory indicating that transaction-level requirements apply to a swap between a non-US based swap dealer and a non-US person counterparty if there are dealer personnel in the United States who arrange, negotiate, or execute the swap. On November 26, the staff issued a no-action letter indicating that it would not recommend an enforcement action against a non-US dealer for failure to adhere to those requirements in the manner described by the advisory. This relief is set to expire on January 14, 2014.
In effect, the staff’s advisory imports a “conduct” test into what had otherwise generally been an “entity” test under the cross-border guidance. The advisory, coupled with other concerns raised by market participants, led industry groups to file a lawsuit on December 4 challenging the CFTC’s July 2013 cross-border guidance. It is expected that this action will likely prompt some changes to the CFTC’s cross-border approach, even if it does not succeed in having the cross-border guidance vacated.
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**US Person Definition Under the CFTC’s July 2013 Cross-Border Guidance**
(i) Any natural person who is a resident of the United States;
(ii) Any estate of a decedent who was a resident of the United States at the time of death;
(iii) Any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing (other than an entity described in prongs (iv) or (v), below) (a ‘‘legal entity’’), in each case that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States;
(iv) Any pension plan for the employees, officers or principals of a legal entity described in prong (iii), unless the pension plan is primarily for foreign employees of such entity;
(v) Any 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) Any commodity pool, pooled account, investment fund, or other collective investment vehicle that is not described in prong (iii) and that is majority-owned by one or more persons described in prong (i), (ii), (iii), (iv), or (v), except any commodity pool, pooled account, investment fund, or other collective investment vehicle that is publicly offered only to non-US persons and not offered to US persons;
(vii) Any 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 directly or indirectly majority-owned by one or more persons described in prong (i), (ii), (iii), (iv), or (v) and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity; or
(viii) Any 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 prong (i), (ii), (iii), (iv), (v), (vi), or (vii).
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Belani-Akshay
This article was originally published by Bingham McCutchen LLP.