The Division of Swap Dealer and Intermediary Oversight of the Commodity Futures Trading Commission granted relief from its introducing broker and commodity trading advisory registration requirements to certain market participants outside the United States who engage in certain over-the-counter swaps activities while acting as underwriters in connection with non-US offerings of structured notes for international financial institutions that maintain US offices. (IFIs are entities that extend loans and grants to developing countries for economic and social development activities, including such organizations as the International Monetary Fund, the International Bank for Reconstruction and the Multilateral Investment Guarantee Agency, among other similar organizations.) Ordinarily any person, including non-US persons, who solicits or accepts orders for the purchase or sale of a swap from any US person and does not accept any money, securities or property as collateral or to guarantee such instruments must register as an IB, absent an exemption. Likewise, any person who for compensation or profit advises any US person to trade a swap ordinarily has to register as a CTA, unless there is an exemption. There is an available exemption from CFTC registration requirements for non-US based persons who act as IBs or CTAs in connection with swaps, provided “any such commodity interest transaction is submitted for clearing” through a registered futures commission merchant. However, non-cleared OTC swaps are not cleared through FCMs. Notwithstanding, given the “unique attributes and status of IFIs, and in consideration of international comity,” DSIO granted registration relief to the requesting non-US market participants, particularly since the CFTC has taken the position that “IFIs should not be subject to mandatory clearing.” The relief is available until the date any equivalent final rule or CFTC order is effective.

Legal Weeds: Although there may be introducing brokers in connection with swaps activities, the CFTC’s IB rules do not neatly apply to swaps activities –particularly in connection with over-the-counter, non-cleared swaps. One CFTC rule – CFTC Rule 1.57 (click here to access) expressly sets forth requirements for all IBs, including that they must “[o]pen and carry each customer’s and option customer’s account with a carrying futures commission merchant” and transmit for execution all customer and option customer orders to a carrying FCM or a floor broker. These requirements, and others, make no sense in the context of OTC swaps. CFTC staff is applauded for deriving a common sense result in the circumstance of non-US persons handling swaps for international financial institutions located in the United States. However, the CFTC should reconsider its entire regulation of IBs to more appropriately align the current scope of IBs' authorized activities with an appropriate regulatory scheme.