On July 27, 2016, the U.S. Commodity Futures Trading Commission (“CFTC”) proposed amendments to its rules (“Proposed Rules”) that loosen the conditions for exemption from registration as a futures commission merchant (“FCM”), commodity pool operator (“CPO”), commodity trading advisor (“CTA”) and introducing broker (“IB”) for non-U.S. persons who act solely on behalf of persons located outside the United States, or on behalf of certain international financial institutions (“IFIs”), in connection with commodity interest transactions (including swaps). The Proposed Rules essentially would codify and expand previously issued staff no-action relief. They are subject to a 30-day comment period, which closes on September 6, 2016. The Proposed Rules are available here.

CFTC Regulations 3.10(c)(2)(i) and 3.10(c)(3)(i) currently provide an exemption from FCM, IB, CPO or CTA registration with respect to commodity interest transactions (including swaps) executed bilaterally or made on or subject to the rules of a designated contract market (“DCM”) or swap execution facility (“SEF”), if:

  • The FCM, IB, CPO or CTA is located outside the United States;
  • The FCM, IB, CPO or CTA acts only on behalf of persons located outside the United States; and
  • The commodity interest transaction is submitted for clearing through a registered FCM.

The last condition means that bilaterally executed swaps or swaps executed on a SEF would have to be cleared in order for an FCM, IB, CPO or CTA to rely on the exemption from registration, even if the swap was not required to be cleared under CFTC rules.

In response to a request for relief, the CFTC staff issued a no-action letter earlier this year that clarified that non-U.S. IBs, CPOs or CTAs are not subject to the clearing requirement condition contained in the registration exemption if the swap is not required to be cleared. A similar no-action letter was provided for relief from registration as an IB or CTA for non-U.S. intermediaries acting for International Financial Institutions (“IFIs”), such as the International Monetary Fund, that may have headquarters or significant presence in the United States, but, because of their unique attributes and multinational status, the CFTC staff believed that relief was warranted.

The Proposed Rules will remove the clearing requirement from CFTC Regulations 3.10(c)(2)(i) and 3.10(c)(3)(i) (and remove the references to bilateral execution, DCMs and SEFs), which will allow a non-U.S. person to be eligible for a registration exemption as an FCM, IB, CPO or CTA if, in connection with commodity interest transactions, the non-U.S. person acts solely on behalf of persons located outside the United States or on behalf of an IFI. For this purpose, the Proposed Rules would add a definition of IFI to include certain enumerated institutions as well as any the CFTC may designate. The Proposed Rules make clear that the registration exemption does not absolve any person from compliance with the Commodity Exchange Act or CFTC Rules, including any applicable clearing requirement for futures or swaps that the CFTC has determined are required to be cleared.

If adopted, the Proposed Rules will provide welcome registration relief for non-U.S. asset managers and other intermediaries who effectuate transactions in U.S. derivatives markets (including bilaterally executed swaps) acting in the capacity of FCMs, IBs, CPOs or CTAs solely on behalf of persons located outside the United States.