Introduction

The Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “Commission”) recently issued a no-action letter (the “DSIO No-Action Letter”) granting relief from the registration requirements in the Commodity Exchange Act (“CEA”) for certain intermediaries located outside of the United States (“Foreign Intermediaries”) who would be exempt from registration under Commission Regulation 3.10(c)(3)(i) but for the condition therein that commodity interest transactions  be  submitted  for  clearing  through  a  futures  commission  merchant (“FCM”) registered with the Commission.1

Background

With respect to activities involving commodity interest transactions executed bilaterally or made on or subject to the rules of a designated contract market or a swap execution facility, Commission Regulation 3.10(c)(3)(i) provides an exemption from registration as a commodity pool operator (“CPO”), a commodity trading advisor (“CTA”) or an introducing broker (“IB”) if such person and the transaction meet the following three conditions:

  1. The Foreign Intermediary is located outside the United States;
  2. The Foreign Intermediary acts only on behalf of persons located outside the United States (i.e., non-United States persons); and
  3. The commodity interest transaction is submitted for clearing through a registered FCM. 

Analysis

The Division recognized that the CEA and Commission regulations do not currently require that all swaps be  cleared,  and  that  certain  swaps  are  not  yet  accepted  for  clearing  by  any  derivatives  clearing organization.2 In this context, the third prong of Commission Regulation 3.10(c)(3)(i) has led to some ambiguity as to whether or not this language was intended to impose an independent clearing requirement on commodity interest transactions  involving Foreign Intermediaries that the CEA and Commission regulations do not otherwise require to be cleared. As a practical matter, this ambiguity generated concern regarding whether a Foreign Intermediary transacting in commodity interests, specifically uncleared swaps, solely on behalf of persons located outside the United States may rely on this exemption.  In  the  DSIO  No-Action  Letter,  the  Division  confirmed  that  Commission Regulation 3.10(c)(3)(i) was not intended to impose such an independent clearing requirement, thereby addressing this uncertainty.

Conclusion

A Foreign Intermediary engaged in the activity of a CPO, a CTA or an IB seeking to relying on Commission Regulation 3.10(c)(3)(i) in connection with swaps not subject to a Commission clearing requirement3 may do so, notwithstanding the third prong of such regulation, provided that the other requirements of the exemption are met.