CFTC Proposes Rules on the Cross-Border Application of Certain Aspects of Its Dodd-Frank Swaps Rules, Including Registration Thresholds and External Business Conduct Standards for Swap Dealers and Major Swap Participants


On October 11, 2016, the Commodity Futures Trading Commission (the "CFTC" or "Commission") voted unanimously to propose rules and interpretations (together, the "Proposal") addressing the cross-border application of certain swaps provisions of the Commodity Exchange Act (the "CEA"), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank" or the "Dodd-Frank Act"), and Commission regulations thereunder. The Proposal is specifically addressed to "cross-border" swap transactions and/or positions wherein at least one counterparty is either a non-U.S. person (including affiliates of U.S. persons) or, in some instances, a foreign branch of a U.S. person. The Proposal specifically includes proposed definitions for the terms "U.S. person" and "Foreign Consolidated Subsidiary," as well as a proposed interpretation that would be used to determine whether a transaction involving U.S.-based personnel of a non-U.S. swap dealer was arranged, negotiated or executed in the United States (each such transaction referred to herein as an "ANE Transaction") and should be subject to the CFTC's transaction-level rules. Building in part on the proposed definitions and interpretation, the Proposal also includes proposed rules that would specifically address the circumstances under and the extent to which (i) market participants must include a cross-border swap dealing transaction or swap position in their calculations of the level of activity subject to CFTC jurisdiction, for purposes of determining whether they are required to register as either a swap dealer ("SD") or major swap participant ("MSP"), and (ii) SDs and MSPs must comply with external business conduct standards in connection with a cross-border swap. The Proposal also indicates that the CFTC intends to use or reference theproposed definitions and interpretation in subsequent rulemakings addressing the cross-border application of other swap requirements and provisions of the Dodd-Frank Act.


The Proposal includes definitions of the key terms "U.S. person" and "Foreign Consolidated Subsidiary" that would mirror those adopted in the Commission's May 31, 2016 rulemaking determining the applicability of margin requirements for uncleared swaps to cross-border transactions ("Cross-Border Margin Rule"). Market participants would be permitted to reasonably rely on counterparty representations with respect to these definitions.


Under the Proposal, a "U.S. person" would be defined to include, among other things,

  • Any natural person who is a resident of the United States;
  • Any legal entity that is organized or incorporated under the laws of the United States or that has its principal place of business in the United States, including any branch (i.e., both foreign and U.S. branches) of the legal entity; and
  • Any legal entity (other than a limited liability entity) that is owned by one or more U.S. person(s) who bear(s) unlimited responsibility for the obligations and liabilities of the legal entity.

As in the Cross-Border Margin Rule definition, the proposed definition does not include collective investment vehicles that are majority-owned by one or more U.S. persons unless such owners also guarantee the legal entity's obligations and liabilities; however, such investment vehicles may nonetheless be considered U.S. persons if they are organized under U.S. law or have their principal place of business in the United States. The Proposal specifically requests comment on how the CFTC should approach the definition of "principal place of business" in the context of the U.S. person definition, asking whether and in what respects the Commission should further harmonize the U.S. person definition in the Proposal to either (1) the interpretation of U.S. person included in CFTC's 2013 guidance on the crossborder application of its swap provisions, or (2) the U.S. person definition adopted by the Securities and Exchange Commission ("SEC") as rule 3a71-3(a)(4) under the Securities Exchange Act of 1934 ("Exchange Act").


The Proposal would define a "Foreign Consolidated Subsidiary" ("FCS"), which is treated as a U.S. person for certain purposes, as a non-U.S. person in which an ultimate parent entity ("Ultimate Parent") that is a U.S. person has a controlling financial interest, such that the Ultimate Parent includes the nonU.S. person's financial statements in the Ultimate Parent's consolidated financial statements, in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). An Ultimate Parent would be defined as a parent entity in a consolidated group in which none of the other entities in the consolidated group has a controlling interest under U.S. GAAP. According to the Proposal, the definition is designed to encompass entities that are subject to the financial control of, and create risk to, the Ultimate Parent, as a result of consolidation with the Ultimate Parent's financial statements. The consequences of an entity being within the definition of an FCS, on the entity and its counterparties, are addressed below.


In November 2013, the Division of Swap Dealer and Intermediary Oversight (the "DSIO") of the Commission issued an advisory (the "Advisory") in which the DSIO took the position that non-U.S. SDs registered with the Commission must comply with certain transaction-level swaps provisions of DoddFrank ("Transaction-Level Requirements") when they use personnel or agents located in the United States to arrange, negotiate or execute swaps--even if the counterparty is also a non-U.S. person. The Transaction-Level Requirements include (i) required clearing and swap processing; (ii) margining (and segregation) for uncleared swaps; (iii) mandatory trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards.8 DSIO has issued a series of no-action letters delaying compliance with the terms of the Advisory for non-U.S. SDs pending further Commission action on this issue.9 In the Proposal, the Commission endorses the DSIO staff position set forth in the Advisory, asserting that such ANE Transactions implicate the market risk and consumer protection concerns intended to be addressed by Dodd-Frank and the Transaction-Level Requirements.

However, the Proposal would clarify the scope of the Advisory by providing that only "market-facing" activities fall within the scope of ANE Transactions. "Arranging" and "negotiating" are interpreted to include those activities normally associated with sales and trading, while "executing" is interpreted to mean the act of executing a swap so as to become legally and irrevocably bound to the terms of the transaction. In contrast, "back-office" activities--such as processing swaps, preparing swap documentation (including negotiation of master agreements and related documentation), and providing research--would fall outside the scope of ANE Transactions. Importantly, under the Commission's interpretation, transactions involving algorithmic trading or automated electronic execution potentially would fall within the scope of ANE transactions if personnel or agents located in the United States specify the underlying strategy or technique.

For the purpose of determining whether a transaction constitutes an ANE Transaction, only the activities of personnel or agents assigned to, or regularly working in, a U.S. location would be considered; incidental activity occurring in the United States would be excluded. The Commission would make no distinction as to whether an activity is performed by U.S.-located personnel associated directly with the non-U.S. SD, by U.S.-located third parties acting on the non-U.S. SD's behalf, or by personnel or third parties acting outside the U.S. at the direction of U.S.-located personnel or agents of the non-U.S. SD.


Under CEA 1a(49)(D) and Commission regulations thereunder, a market participant is exempt from designation as an SD if the aggregate gross notional value of its swap dealing activity in the prior twelvemonth period, together with that of its unregistered affiliates, does not exceed the de minimis threshold (currently set at a phase-in level of $8 billion, which automatically will be reduced to $3 billion at the end of 2018 absent further Commission action). The Proposal addresses the circumstances in which a cross-border transaction or position must be included in a potential registrant's determination of whether the aggregate gross notional value of its swap transactions or positions exceeds the applicable threshold. Specifically:

  • A U.S. person would include all of its swap dealing transactions.
  • An FCS would include all of its swap dealing transactions.
  • A non-U.S. person would:
    • include all swap dealing transactions with respect to which
      • its obligations are guaranteed by a U.S. person (i.e., it is a "U.S. Guaranteed Entity"), or
      • its counterparty is a U.S. person, an FCS, or a U.S. Guaranteed Entity,

unless the swap is executed anonymously on a registered designated contract market ("DCM"), swap execution facility ("SEF"), or foreign board of trade ("FBOT") and cleared; and

  • not include any swap dealing transactions with respect to non-U.S. persons that are neither FCSs nor U.S. Guaranteed Entities ("Other Non-U.S. Persons").

Whether a person qualifies as a U.S. person or a non-U.S. person would be determined at the entity level. However, consistent with prior Commission guidance, all non-SDs would be required to aggregate their includable swap dealing transactions with those of persons under common control unless the affiliated person is itself a registered SD or MSP. A summary table of the Proposal's approach to swap dealer de minimis counting follows:

Click here to view table.

The Proposal would not require an "Other Non-U.S. Person" to include a swap transaction with an "Other Non-U.S. Person" counterparty in its de minimis threshold calculation even if the swap is arranged, negotiated, or executed by personnel located in the United States. The Commission stated that although a non-U.S. person that engages in ANE transactions is performing dealing activity in the United States, the Commission preliminarily does not believe that requiring Other Non-U.S. Persons to include ANE transactions in their de minimis threshold calculations would be necessary to advance the policy objectives of the Dodd-Frank swap regime when taking the Proposal in context.

  • U.S. SDs would be subject to EBC standards except with respect to transactions conducted through a foreign branch of the U.S. SD when facing either a non-U.S. person or another foreign branch of a U.S. person.
  • Non-U.S. SDs and foreign branches of U.S. SDs would be subject to EBC standards if the counterparty is a U.S. person other than a foreign branch of a U.S. SD.
  • Non-U.S. SDs and foreign branches of U.S. SDs would not be subject to EBC standards if the counterparty is a non-U.S. person or a foreign branch of a U.S. SD, except that foreign branches of U.S. SDs and non-U.S. SDs that engage in ANE Transactions would be subject to the Commission's regulations requiring fair dealing in communications and prohibiting fraud, manipulation and other abusive practices.

A summary table follows:

Click here to view table.