The Commodity Futures Trading Commission proposed rules regarding the application of certain of its swaps requirements, including registration, in connection with cross-border transactions. Among other provisions, the CFTC proposed that all non-US persons that are consolidated for accounting purposes with a US entity (Foreign Consolidated Subsidiary or FCS) be required to count all swaps opposite US persons and non-US persons in determining whether they exceed the so-called de minimis threshold that would trigger their registration as a swap dealer. However, the CFTC also proposed that only non-natural persons organized or incorporated in the United States or that have their principal places of business in the United States (including any branch) would constitute US persons under its new proposal. The CFTC expressly noted that its proposed definition would “not include a commodity pooled account, pooled account, investment fund or other collective investment vehicle that is majority-owned by one or more US persons” unless the investment vehicle met the new proposed territorial requirements. The CFTC also proposed that when a non-US swap dealer uses US persons to arrange, negotiate or execute a swap (ANE Transaction) that, if executed, would be booked outside the United States, such transactions would be subject to the CFTC’s anti-fraud and anti-manipulation rules as well as obligations to communicate in a fair and reasonable manner. ANE Transactions, opined the CFTC, will include activities “normally associated with sales and trading, as opposed to internal back-office activities, such as ministerial or clerical tasks performed by personnel not involved in the actual sale or trading of the relevant swap.” The CFTC will accept comments for 60 after publication of its proposed rules in the Federal Register. (Click here for additional details regarding the CFTC proposal in the article, “CFTC Proposes New Rules for Cross-Border Swaps” in the October 14, 2016 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)

My View: The CFTC’s proposed cross-border rules regarding application of certain of its swap requirements contains at least one potentially deleterious expansion and one potential improvement over its 2013 Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations. (Click here for details of the CFTC’s 2013 guidance in the article, “CFTC Enacts Interpretive Guidance and Passes Exemptive Order regarding Cross Border Swaps Transactions” in the July 16, 2013 edition of Between Bridges.) The bad provision is the proposal that all FCSs – even if non-guaranteed or bankruptcy remote from their ultimate parent company – must count all swaps with US and non-US persons in determining their potential registration requirement as a swap dealer. Moreover, a non-US person would have to include a bilateral swap opposite an FCS in its own threshold calculation to assess its own potential registration requirement. This could dissuade non-US persons from engaging in swaps with FCSs. On the other hand, by defining a bright light territorial test to assess whether an investment vehicle is a US person, non-US persons might be inclined to engage in more swaps with non-US-based investment vehicles since they will not have to worry about such swaps causing them potential US swap dealer registration headaches.

Legal Weeds: In September 2014, a US federal court mostly tossed out all legal challenges brought by three industry groups to the CFTC’s 2013 Interpretive Guidance. In ruling generally against the plaintiffs, the court adopted the CFTC’s principal argument, that the Dodd-Frank Wall Street Reform and Consumer Protection Act’s swaps requirements applied extraterritorially when swaps activity outside the United States had a “direct and significant connection” with US commerce without the need for any implementing regulations. As a result, the court said, “[t]he CFTC was not required to issue any guidance (let alone binding rule) regarding its intended enforcement policies. … Indeed, the CFTC’s decision to provide such a non-binding policy statement benefits market participants and cannot now, all other things being equal, be turned against it.” Notwithstanding, the court ordered the CFTC to conduct a cost-benefit analysis regarding the extraterritorial application of many of the CFTC’s rules addressed in the cross-border guidance. In response, the CFTC sought comment on its cross-border guidance in March 2015. (Click here for details in the article, “CFTC Formally Responds to Court Judgment on International Guidance; Calls for Public Comments” in the March 15, 2015 edition of Bridging the Week.) The current proposed rules incorporate the CFTC’s response to that input.