The amendments to the CFTC’s registration rules will codify no-action relief that permits non-US asset managers to rely on an exemption from the requirement to register with the CFTC by virtue of trading uncleared swaps in the United States on behalf of non-US clients.

The US Commodity Futures Trading Commission (CFTC) provides an exemption from CFTC registration for certain intermediaries located outside the United States (Foreign Intermediaries).[1] This permits non-US asset managers to trade commodity interests (as defined in CFTC Regulation 1.3(yy)) on US exchanges on behalf of non-US customers without registering as a commodity pool operator (CPO) or commodity trading adviser (CTA).[2] Prior to the Dodd-Frank Act, the registration exemption for Foreign Intermediaries was unambiguous and provided a registration exemption as long as a Foreign Intermediary (1) was located outside the United States, (2) traded on behalf of persons located outside the United States, and (3) submitted commodity interest transactions for clearing through a CFTC-registered futures commission merchant (FCM).[3] (For a more extensive regulatory history of CFTC Regulation 3.10(c)(3)(i), please see our earlier LawFlash, CFTC Staff Clarifies Registration Relief Available to Non-US Asset Managers.)

When the Dodd-Frank Act amended the definition of “commodity interest” to encompass swap transactions, however, it became unclear whether the third condition of the exemption would require the clearing of swaps that are not subject to the CFTC’s mandatory clearing requirement. Because the CFTC also regulates swaps that are not required to be cleared, Foreign Intermediaries sought clarity on the exemption’s clearing condition. In response, the CFTC issued no-action relief (the No-Action Relief) to clarify that Foreign Intermediaries are not subject to a separate clearing requirement to qualify for the registration exemption. As a result, Foreign Intermediaries may continue to act on behalf of persons located outside the United States and engage in swaps, including those that are not submitted for clearing by a derivatives clearing organization (DCO) that is registered or exempt from registration with the CFTC (to the extent that such swaps are not subject to the CFTC’s mandatory clearing requirement). The No-Action Relief, which grants relief from registration as a CPO, introducing broker (IB), or CTA, expires on the later of the effective date or compliance date of a final rule amendment to CFTC Regulation 3.10(c)(3)(i).[4]

Proposed Codification of No-Action Relief

On July 26, the CFTC proposed amendments to CFTC Regulation 3.10(c) to codify the No-Action Relief applicable to non-US asset managers, and similar no-action relief from registration as an IB or CTA applicable to international financial institutions, such as the International Monetary Fund.[5] The CFTC makes clear in the Proposed Amendments that the exemption does not excuse any person from compliance with the Commodity Exchange Act or CFTC regulations, including requirements that a commodity interest transaction be cleared by a DCO (i.e., there is no relief from clearing swaps that are subject to the mandatory clearing requirement).[6] The CFTC’s policy rationale for the Proposed Amendments echoes its policy rationale in 1983, when the CFTC provided registration relief to associated persons who confined their activities outside the United States. The CFTC reasons that the Proposed Amendments codify the CFTC’s “longstanding policy to focus its customer protection activities upon domestic firms and upon firms soliciting or accepting orders from domestic participants,” maintaining that the protection of non-US customers is better suited to their home country regulators.[7]

Conclusion

The Proposed Amendments are welcome relief to non-US asset managers and other non-US brokers that rely on the No-Action Relief. The codification provides greater clarity to one of the Dodd-Frank Act’s unintended consequences.

Comments on the Proposed Amendments must be received within 30 days of publication in the Federal Register, which has not occurred as of this writing.