On December 20, 2013, the Commodity Futures Trading Commission (CFTC) issued a series of comparability determinations for certain swap dealer (SD) and major swap participant (MSP) business conduct requirements included in the Entity-Level Requirements with respect to the law and regulations applicable in Australia, Canada, the European Union, Hong Kong, Japan and Switzerland (the Comparability Determinations). The Division of Market Oversight (the Division) also issued no-action relief from certain reporting requirements under Parts 451 and 462 of the CFTC regulations (collectively, the SDR Reporting Rules) under CFTC Letter No. 13-75 (CFTC Letter 13-75). The Division of Swap Dealer and Intermediary Oversight (DSIO) also issued time-limited no-action relief from certain Entity-Level Requirements under CFTC Letter No. 13-78 (CFTC Letter 13-78). The substituted compliance determinations were adopted by the Commissioners in a closed door voting session, and mark the culmination of a collaborative process with foreign financial regulators and market participants. Allen & Overy LLP has actively participated in these discussions, particularly on behalf of swap dealers based in the European Union and Japan.
Section 2(i) of the Commodity Exchange Act (CEA) provides the basis for the CFTC's extraterritorial application of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Under Section 2(i), provisions of the CEA relating to swaps generally do not apply to activities outside the U.S. unless those activities have a direct and significant connection with U.S. commerce or contravene the CFTC's anti-evasion rules.
The CFTC has interpreted the cross-border applicability of the Dodd-Frank Act in its Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (the Cross-Border Guidance).3 The Cross-Border Guidance introduces the concept of substituted compliance. Where the CFTC determines that the law of a non-U.S. SD's or MSP's home jurisdiction is comparable with the CFTC's requirements, the non-U.S. SD or MSP may substitute compliance with the requirements of its home jurisdiction in lieu of the relevant CFTC requirements.4
The CFTC has made Comparability Determinations for SDs or MSPs incorporated in Australia, Canada, the European Union, Hong Kong, Japan and Switzerland. Today's release is only a summary; more detail will be provided in the determinations published in the Federal Register. In addition, the statement released by Chairman Gensler and Commissioners Chilton and Wetjen mentions that the CFTC has reached comparability determinations with respect to swap-specific Transaction-Level Requirements for the European Union and Japan. These are not included in the summary chart released today.
Consistent with the approach proposed in the Cross-Border Guidance, the CFTC appears to have taken an outcomes-based approach to analyzing foreign regulatory regimes and reaching its Comparability Determinations. Based on the information in the summary, this results in largely favorable determinations for non-U.S. SDs or MSPs and recognizes the robust regulatory frameworks in which they operate. It will, however, be necessary to examine the detail of the Comparability Determinations to ensure that the CFTC has not imposed additional conditions that undermine the benefit of the Comparability Determinations for SDs or MSPs seeking to rely upon substituted compliance.
We note that with respect to Australia, Canada, the European Union, Hong Kong and Switzerland, the CFTC has reserved the right to require registrants to provide direct access to or produce records required to be maintained under the CFTC's regulations, preserving CFTC Rules 23.203(b)(2) and 23.606(a)(2) for non-U.S. swap dealers in these jurisdictions. This reservation does not apply to non-U.S. swap dealers in Japan.
The CFTC found that none of the six jurisdictions has comparable regulations to the CFTC's requirement for Periodic Risk Exposure Reports under CFTC Rule 23.600(c)(2) (Periodic Risk Exposure Reports). However, the DSIO issued CFTC Letter 13-78 which allows non-U.S. swap dealers in Australia, Canada, the European Union, Japan or Switzerland until March 3, 2014 to come into compliance with the requirements of CFTC Rules 23.600(c)(2) and 23.608 (Restrictions on counterparty clearing relationships) and for non-U.S. swap dealers in Switzerland, until March 3, 2014 to comply with CFTC Rule 23.609 (Clearing member risk management).
The Comparability Determinations do not address the requirements of the SDR Reporting Rules. Although the CFTC has received requests for comparability determinations with respect to the swap data reporting rules in Australia, Canada, the European Union and Japan, such determination was not included in the Comparability Determinations. Instead the Division issued CFTC Letter 13-75 which provided relief for certain non-U.S. SDs and MSPs from certain requirements of the SDR Reporting Rules.
Under CFTC Letter 13-75, the Division will not recommend enforcement action against a non-U.S. SD or MSP established in Australia, Canada, the European Union, Japan or Switzerland that is not part of an affiliated group in which the ultimate parent is a U.S. SD or MSP, U.S. bank, U.S. financial holding or U.S. bank holding company for its failure to comply with:
- the requirements of the SDR Reporting Rules for its swaps with non-U.S. counterparties that are not guaranteed affiliates, or conduit affiliates, of a U.S. person, until the earlier of:
- 30 days following the issuance of a comparability determination with respect to the SDR Reporting Rules of the jurisdiction in which the non-U.S. SD or MSP is established; or
- December 1, 2014;
- the requirements of Part 45 with respect to its swaps with non-U.S. counterparties that are guaranteed affiliates, or conduit affiliates, of a U.S. person, until March 3, 2014; and
- the requirements of Part 46 with respect to its swaps with non-U.S. counterparties that are guaranteed affiliates, or conduit affiliates, of a U.S. person, until April 2, 2014.
No relief was granted with respect to SDs or MSPs established under the laws of Hong Kong.
Non-U.S. SDs or MSPs that intend to take advantage of the relief provided under CFTC Letter 13-75 will still have to comply with the recordkeeping requirements of CFTC Rules 45.2 and 46.2. CFTC Rule 45.2 requires SDs and MSPs to keep full, complete and systematic records, together with all pertinent data and memoranda, of all activities relating to the business of such entity with respect to swaps, including without limitation, all records required by Part 23 of the CFTC's regulations (the Part 23 Recordkeeping Rules) and all records demonstrating that they are entitled to elect the clearing requirement exception. However, footnote 9 to CFTC Letter 13-75 notes that this requirement is independently governed by the applicability of such underlying Part 23 Recordkeeping Rules. Pursuant to the Comparability Determinations, a non-U.S. SD or MSP established in Australia, Canada, the European Union, Japan or Switzerland could comply with the Entity-Level recordkeeping requirements of its home jurisdiction instead of complying with the recordkeeping requirements under CFTC Rules 23.201 and 23.203, although the CFTC reserves the right to require the SD or MSP to provide direct access to or to produce such records. As no substituted compliance determination has been issued yet with respect to the Transaction-Level daily trading records requirements under CFTC Rule 23.202, a non-U.S. SD or MSP will need to comply with such requirements with respect to swaps with foreign branches of U.S. banks that are SDs or MSPs or with non-U.S. persons guaranteed by, or conduit affiliates of, a U.S. person. It will be necessary to consider this requirement in more detail when the Comparability Determinations are published in the Federal Register.
Furthermore, non-U.S. SDs or MSPs that intend to take advantage of the relief provided under CFTC Letter 13-75 will still have to comply with the requirements of CFTC Rules 45.6 and 46.4. CFTC Rules 45.6 and 46.4 require SDs and MSPs to use legal entity identifiers (LEIs) in all records required to be kept pursuant to Parts 45 and 46. The CFTC mandated the use of CFTC Interim Compliant Identifiers (CICIs) until the LEI program is implemented globally. Pursuant to footnote 10 to CFTC Letter 13-75, notwithstanding the fact that non-U.S. SDs or MSPs are required to comply with the LEI/CICI requirements, the Division will not recommend enforcement action if a non-U.S. SD or MSP does not include an LEI/CICI in its records if:
- the counterparty's LEI/CICI is not publicly available,
- the counterparty has not already provided its LEI/CICI to the non-U.S. SD or MSP, and
- the counterparty does not provide its LEI/CICI to the non-U.S. SD or MSP in connection with the swap transaction, provided that the non-U.S. SD or MSP generates a substitute counterparty identifier for such counterparty and utilizes such identifier in the records that it is required to maintain as a condition of relying on the relief granted in CFTC Letter 13-75.