The Commodity Futures Trading Commission (the “Commission” or “CFTC”) is proposing to adopt certain amendments to Commission Regulation 3.10(c) (the “Proposed Amendments”).1 The Proposed Amendments would alter the conditions for exemption from the registration requirements in the Commodity Exchange Act (“CEA”) for certain intermediaries located outside of the United States (“Foreign Intermediaries”) acting in commodity interest transactions solely on behalf of persons located outside the U.S., or on behalf of certain international financial institutions. The Proposed Amendments are intended to codify certain no-action relief issued by the Commission’s Division of Swap Dealer and Intermediary Oversight (the “Division”) in 2015 and 2016. Comments must be received on or before September 6, 2016.
Currently, Commission Regulation 3.10(c) provides an exemption from registration, subject to certain conditions, for certain persons located outside the U.S. acting in the capacity of a futures commission merchant (“FCM”), an introducing broker (“IB”), a commodity trading advisor (“CTA”) or a commodity pool operator (“CPO”) in commodity interest transactions with respect to persons also located outside the U.S., even though such transactions may be executed bilaterally, or on or subject to the rules of a designated contract market (“DCM”) or swap execution facility (“SEF”).
More specifically, with respect to commodity interest transactions (including swaps)2 executed bilaterally, or made on or subject to the rules of any DCM or SEF, existing Commission Regulation 3.10(c)(3)(i) provides exemptions from registration as a CPO, a CTA or an IB if (1) a Foreign Intermediary is located outside the U.S., (2) a Foreign Intermediary acts only on behalf of persons located outside the U.S. and (3) the commodity interest transaction is submitted for clearing through an FCM registered with the Commission. Existing Commission Regulation 3.10(c)(2)(i) provides a similar exemption from registration for any Foreign Intermediary acting as an FCM.
In 2015 and 2016, no-action relief was sought on behalf of certain Foreign Intermediaries located outside of the U.S. who would be exempt from registration under Commission Regulation 3.10(c)(3)(i) but for the condition thereunder that commodity interest transactions be submitted for clearing through an FCM registered with the Commission.3 In support of the request for relief, it was noted that the CEA and Commission regulations do not require that all swaps be cleared and, moreover, some swaps are not yet accepted for clearing by any CFTC-registered derivatives clearing organization (“DCO”).4 In granting the requested no-action relief, the Division stated that Commission Regulation 3.10(c)(3)(i) was not 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. The Division thus confirmed that it would not recommend an enforcement action against a person located outside the U.S. engaged in the activity of a CTA, a CPO or an IB only on behalf of persons located outside the U.S. in connection with swaps not subject to a Commission clearing requirement.5
In 2015, no-action relief was sought from registration as an IB or CTA on behalf of Foreign Intermediaries acting for International Financial Institutions (as defined in the Proposed Amendments, “IFIs”) located within the U.S.6 In support of that request for relief, it was noted that while IFIs may have headquarters or another significant presence in the U.S., they are operated to satisfy public purposes and have as their members sovereign nations from around the world. In granting the requested relief, the Division concluded that no-action relief was warranted based on the unique attributes and status of IFIs, and in consideration of international comity. The Division thus confirmed that it would not recommend an enforcement action against a person located outside the U.S. (1) for failure to register as an IB solely with regard to activities involving swaps for a customer that is an IFI or (2) for failure to register as a CTA in connection with providing advice solely incidental to those activities.
The Proposed Amendments
Pursuant to the Proposed Amendments, the Commission is proposing to eliminate from Commission Regulations 3.10(c)(2)(i) and (3)(i) both the clearing requirement and references to DCMs and SEFs consistent with the registration relief in No-Action Letters 15-37 and 16-08 because, as stated in the Proposed Amendments, persons located outside the U.S. that are subject to an applicable clearing requirement for futures or swaps, or any other applicable provision of the CEA or Commission regulations, must comply with those requirements, regardless of the availability of any registration exemption for a Foreign Intermediary.7
The Proposed Amendments are consistent with the Commission’s longstanding policy to focus its customer protection activities upon domestic firms and upon firms soliciting or accepting orders from domestic participants. The Commission has stated that where a Foreign Intermediary’s customers are located outside the U.S., the jurisdiction in which the customer is located has the preeminent interest in protecting such customers.
The Commission is, however, proposing to retain the reference to the definition of “foreign broker” in paragraph (c)(2)(i) to make clear that a foreign broker is one who is engaged in soliciting or accepting orders only from persons located outside the U.S., and to maintain symmetry with the Proposed Amendments to Regulation 3.10(c)(3)(i), which specify that the exemption from registration applies to intermediary activity by a foreign located person on behalf of IFIs or persons located outside the U.S., its territories or possessions.8
Finally, the Commission is proposing to include a definition of IFIs for purposes of Commission Regulation 3.10(c) to provide legal clarity on the scope of the registration exemption.9
If the Proposed Amendments are adopted, they would (1) eliminate the clearing requirement that is currently incorporated in Commission Regulations 3.10(c)(2) and (3) and (2) define IFIs as set forth therein. As a result, a Foreign Intermediary would be eligible for an exemption from registration with the Commission if the Foreign Intermediary, in connection with a commodity interest transaction, only acts on behalf of (1) persons located outside the U.S. or (2) IFIs, without regard to whether such persons or institutions clear such commodity interest transaction.
It is interesting to note, however, that these proposed changes to Commission Regulations 3.10(c)(2)(i) and (3)(i) may potentially go further than eliminate the clearing requirement for the exemption in connection with swaps which are not subject to a CFTC clearing requirement. By proposing the deletion in such sections of language related to the submission of commodity interest transactions for clearing “through a futures commission merchant [“FCM”] registered in accordance with section 4d of the [CEA],” the Commission, perhaps inadvertently, has left open the possibility that a Foreign Intermediary that is itself a clearing firm, but is not registered as an FCM could clear transactions in the U.S. for customers located outside the U.S., subject of course to the rules of the applicable DCO.