The final cross-border guidance provides market participants with the CFTC’s definitive interpretation of the cross-border application of its rules under the Dodd-Frank Act.

On July 12, 2013, the Commodity Futures Trading Commission (CFTC) approved its final interpretative guidance (the Final Guidance)1 regarding the cross-border application of its rules under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The CFTC also approved an exemptive order (the Exemptive Order)2 that largely preserves the status quo for the cross-border application of swaps regulations (albeit with certain differences discussed below) for at least 75 days following the publication of the Final Guidance in the Federal Register –October 9, 2013. The Exemptive Order became effective immediately, but remains open for public comment for 30 days in order to provide market participants the opportunity to opine on “any issues that are not fully addressed by the Exemptive Order.” The day before the Final Guidance and Exemptive Order were adopted, the CFTC also issued four no-action letters relating to cross-border issues and a joint statement regarding plans for harmonizing derivatives regulation between the CFTC and the European Commission.3

Overview

Section 722(d) of the Dodd-Frank Act states that the amendments to the Commodity Exchange Act (CEA) effected by the Dodd-Frank Act will not apply to activities outside of the US unless, among other things, those activities have a direct and significant connection with activities in, or effect on, commerce of the US. The Final Guidance sets forth the CFTC’s interpretation of when swap activities outside the US and/or by non-US persons have a sufficient impact on US commerce for US jurisdiction to attach. The Exemptive Order grants a limited amount of time for market participants to come into compliance with the Final Guidance, but differs in certain ways from the CFTC’s previous exemptive order, which was published in January 2013 (the Previous Exemptive Order).4

When the Exemptive Order expires and the Final Guidance becomes operative, market participants will need to adjust to several significant changes from the status quo. For example:

  1. The definition of a US person will be expanded to include funds that have their principal place of business in the US or have a majority of US investors.5 In some circumstances, funds will have to “look through” their investors to determine whether US persons beneficially own such investors. More significantly, in determining the principal place of business of funds, the Commission is taking an approach of focusing on the “nerve center” of the fund, which will generally require considering the location of the key personnel of the sponsor of the fund, rather than its jurisdiction of formation, location of officers and directors or other formal organizational attributes.
  2. Dealers that are currently below the de minimis threshold for swap dealer (SD) registration may exceed the threshold due solely to changes in the definition of a US person under the Final Guidance.
  3. The Final Guidance contains new rules regarding the aggregation of the swap dealing activity of affiliates when determining whether they collectively exceed the de minimis threshold for SD registration. US and non-US persons that are currently below this threshold will need to reevaluate their status after giving effect to the aggregation rules under the new guidance.
  4.  Under the Final Guidance, entities required to register with the CFTC as SDs and major swap participants (MSPs) will be required in certain circumstances to determine whether their counterparties are guaranteed by a US person or function as a conduit for a US person’s swaps activities. Although the Proposed Guidance had addressed these matters, neither of these determinations was operative under the Previous Exemptive Order.
  5. The CFTC’s substituted compliance regime will begin to take shape over the coming months, which will potentially allow non-US entities to comply with the regulations of their home regulators rather than those of the CFTC.

These and other effects are described in more detail below. Additionally, this Client Alert contains an overview of the most notable impacts applicable to specific types of market participants under the Exemptive Order and Final Guidance.

Exemptive Order

The Exemptive Order provides immediate relief similar to that in the Previous Exemptive Order. Specifically, under the Exemptive Order, market participants may continue to rely on the Previous Exemptive Order’s definition of a US person6 and the rules governing the type of swaps that count toward a non-US person’s de minimis threshold.7 Market participants may also delay aggregating the swap dealing activity of their affiliated entities. These aspects of the Exemptive Order will be effective until October 9, 2013.

The Exemptive Order also provides certain non-US SDs and non-US MSPs with relief similar to that in the Previous Exemptive Order from the CFTC’s “entity-level” and “transaction-level” requirements, including clearing requirements.8

With regard to entity-level requirements (other than swap data reporting and large trader reporting), non-US SDs and non-US MSPs in Australia, Canada, the EU, Hong Kong, Japan or Switzerland (the jurisdictions from which the CFTC has already received requests for substituted compliance) are not required to comply with entity-level requirements for which substituted compliance is available until the earlier of December 21, 2013 or 30 days following the issuance of a substituted compliance determination.9 For swap data repository (SDR) reporting, the Exemptive Order extends relief for all swaps with non-US entities by non-US SDs and non-US MSPs in those jurisdictions, provided that: (i) the non-US SD or MSP is not part of an affiliated group in which the ultimate parent entity is a US SD, US MSP, US bank, US financial holding company or US bank holding company, and (ii) the non-US SD or MSP complies with swap data recordkeeping and reporting requirements imposed by its domestic regulator.10 If the domestic regulator has not implemented such requirements, the non-US SD or MSP must comply with specified rules from the CFTC’s recordkeeping requirements. This relief also applies until the earlier of December 21, 2013 or 30 days following the issuance of a substituted compliance determination. For non US SDs and non-US MSPs located in a jurisdiction other than Australia, Canada, the EU, Hong Kong, Japan or Switzerland, the CFTC indicated that it may consider a request for deferring compliance with entity-level requirements if a substituted compliance request is filed concurrently with the entity’s registration application.11 Substituted compliance is not permitted for the large trader reporting rules.

Non-US SDs, non-US MSPs, and foreign branches of US SDs or MSPs in the six jurisdictions identified above are generally permitted to comply with the laws of the home jurisdiction for any transaction-level requirements for which substituted compliance would be possible.12 Again, this relief applies until the earlier of December 21, 2013 or 30 days following the issuance of a substituted compliance determination. Notably, however:

  • In the case of swaps with guaranteed affiliates of a US person, the CFTC believes that its real-time reporting rules should be effective as soon as possible, and therefore is only providing relief from real-time reporting to non-US SDs, non-US MSPs, and foreign branches of US SDs and MSPs until September 30, 2013; and
  • With respect to clearing, a non-US SD, non-US MSP, or foreign branch of a US SD or MSP that was not required to clear swaps subject to the mandatory clearing requirement under the Previous Exemptive Order may delay compliance until October 9, 2013.

The Exemptive Order also provides certain relief to non-US SDs and MSPs located in jurisdictions other than the six identified above. Specifically, a non-US SD, non-US MSP, or foreign branch of a US SD located in a jurisdiction other than one of the six jurisdictions identified above may comply with the laws of its home jurisdiction (and only to the extent required) in lieu of any transaction-level requirements for which substituted compliance would be possible under the Final Guidance.13 This relief applies until October 9, 2013.14

Finally, under the Exemptive Order, non-US persons that are guaranteed by their US affiliates but are not registered as SDs or MSPs may delay compliance with any otherwise applicable CFTC transaction-level requirements for transactions with another non-US person with such a guarantee until October 9, 2013.15 The Exemptive Order does not affect the CFTC’s exemption from mandatory clearing for certain inter-affiliate swaps under CFTC rule 50.52 (the Inter-Affiliate Exemption).16

Final Guidance

The Final Guidance sets forth the guidelines that will apply to cross-border transactions after the Exemptive Order (or the applicable aspect of the Exemptive Order) expires. The cross-border application of the CFTC’s policy under the Final Guidance is, in many ways, very different from the application under the Exemptive Order. The Final Guidance, for example, not only includes a broader definition of “US person” but also expands the application of the rules to transactions with non-US persons, such as those that have a US guarantee or act as a “conduit” for a US person (as further described below). These requirements will require significant additional diligence by counterparties. The Final Guidance also sets out a complex set of rules defining the specific Dodd-Frank Act requirements that will apply to a given cross-border transaction, which vary based on the status of the counterparties. These requirements are divided into two categories: entity-level requirements and transaction-level requirements.

US Person Definition

As discussed above, the Exemptive Order temporarily preserves the definition of a US person from the Previous Exemptive Order. However, when the definition of a US person under the Final Guidance becomes effective (October 9, 2013), many more persons will be US persons for purposes of the CFTC’s Final Guidance.

Under the Final Guidance, a US person includes:

  1. Any natural person who is a resident of the United States
  2. Any estate of a decedent who was a resident of the United States at the time of death
  3. Any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing (other than an entity described in prongs (iv) or (v), below) (a Legal Entity), in each case that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States
  4. Any pension plan for the employees, officers or principals of a Legal Entity described in prong (iii), unless the pension plan is primarily for foreign employees of such entity
  5. Any trust governed by the laws of a state or other jurisdiction in the United States, if a court within the United States is able to exercise primary supervision over the administration of the trust
  6. Any commodity pool, pooled account, investment fund, or other collective investment vehicle that is not described in prong (iii) and that is majority-owned by one or more persons described in prong (i), (ii), (iii), (iv), or (v), except any commodity pool, pooled account, investment fund, or other collective investment vehicle that is publicly offered only to non-US persons and not offered to US persons
  7.  Any Legal Entity (other than a limited liability company, limited liability partnership or similar entity where all of the owners of the entity have limited liability) that is directly or indirectly majority-owned by one or more persons described in prong (i), (ii), (iii), (iv), or (v) and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the Legal Entity and
  8.  Any individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in prong (i), (ii), (iii), (iv), (v), (vi), or (vii).17

This definition from the Final Guidance is significantly more expansive than the definition in the Previous Exemptive Order. For example, this definition includes funds with their principal place of business in the US,18 funds that have a majority of US investors, and unlimited liability corporations majority-owned (directly or indirectly) by US persons.19 The CFTC stated in the Final Guidance that it would generally consider a fund or collective investment vehicle to have its principal place of business in the US if “the senior personnel responsible for either (1) the formation and promotion of the collective investment vehicle or (2) the implementation of the vehicle’s investment strategy are located in the United States, depending on the facts and circumstances that are relevant to determining the center of direction, control and coordination of the vehicle.”20 Thus, as a practical matter, funds sponsored by US-based investment advisers or commodity pool operators will be US persons even if the funds are formed outside the US, have their board meetings outside the US, and otherwise comply with the organizational formalities that are typically used to keep a fund offshore for tax purposes. Moreover, the CFTC recognized that many of the persons that are officially responsible for decision making for the fund may not be part of its center of direction, control and coordination. For instance, acknowledging the practice of establishing fund boards of directors that are essentially service providers selected by the fund sponsor, the CFTC stated that such boards of directors of a fund will not generally be considered key personnel of the fund for purposes of determining its US person status.21 It is unclear whether this approach may have broader implications for regulatory analysis of fund jurisdiction beyond the Title VII sphere. On these points, however, Chairman Gensler has said that a fund that is operated out of New Jersey but is incorporated in the Cayman Islands must prepare to clear interest rate swaps as of October 2013. Under the present definition, such fund is not a US person.

Additionally, despite several comment letters objecting to this approach, the CFTC retained the phraseology that the definition of a US person includes, but is not limited to, the types of entities above.22

The CFTC has thus retained the ability to find US person status in other circumstances if it feels that such a determination is warranted.

The US person definition in the Final Guidance does not specifically include commodity pools with registered commodity pool operators, as would have been the case under the CFTC’s proposed cross-border guidance released last July (the Proposed Guidance).23 Given the changes regarding the principal place of business of a fund, this may be relevant only for registered commodity pool operators that are not themselves US persons.

De Minimis Thresholds

The definition of “US person” is only the starting point for determining which transactions count toward registration thresholds and compliance obligations. To the extent that an entity qualifies as a “US person,” such entity must include all of its swap dealing activity, whether with US or non-US counterparties, in its de minimis calculation.24 According to the CFTC, this interpretation reflects that swap markets are global, and therefore, in the CFTC’s view, all of a US person’s swap dealing activities, whether with US persons or non-US persons, have the requisite jurisdictional nexus and potential to impact the US financial system.25

The CFTC has also added a complicated overlay of rules related to affiliate guarantees and other affiliate relationships. The CFTC believes that all of the swap dealing activities of a non-US person that is an affiliate and guaranteed by a US person (Guaranteed Affiliate)26 or that is an “affiliate conduit” (Conduit Affiliate)27 of a US person have the requisite statutory nexus and potential to impact the US financial system. A Conduit Affiliate is generally an entity that acts as a vehicle for US persons conducting swaps with third-parties. Factors relevant to considering whether a non-US person is a Conduit Affiliate include whether: (i) the non-US person is majority-owned, directly or indirectly, by a US person; (ii) the non-US person controls, is controlled by, or is under common control with the US person; (iii) the non-US person, in the regular course of business, engages in swaps with non-US third parties for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its US affiliates, and enters into offsetting swaps or other arrangements with such US affiliates in order to transfer the risks and benefits of such swaps with third-parties to its US affiliates; and (iv) the financial results of the non-US person are included in the consolidated financial statements of the US person.28

The CFTC is less concerned about these types of entities when they are affiliated with registered SDs or when the guarantor is a non-financial entity. Accordingly, under the Final Guidance:

  • A non-US person that is a Guaranteed Affiliate or a Conduit Affiliate must count all of its US and non-US facing swap dealing activity toward its de minimis threshold; and
  • A non-US person that is not guaranteed by a US person and is not a Conduit Affiliate need not count the following types of swaps toward its de minimis threshold:
    • Swaps with a foreign branch of a US SD;
    •  Swaps with a non-US person that is not guaranteed by a US person;
    •  Swaps with a non-US person (Party B) that is guaranteed by a US person if: (i) Party B is an SD, (ii) Party B is affiliated with an SD (but is not one itself) and engages in a de minimis amount of swap dealing activity, or (iii) the guarantor is a non-financial entity; or
    • Cleared swaps that are executed anonymously on registered swap execution facilities (SEFs), designated contract markets (DCMs) or foreign boards of trade (FBOTs).29

Affiliate Aggregation

The Final Guidance applies the same aggregation principles to all affiliates in an affiliated group, whether they are US or non-US persons, for purposes of each entity’s de minimis calculation. For non-US entities, this approach is broader than the Proposed Guidance and will require different management strategies for multi-national organizations with multiple entities that engage in swap dealing activities. Specifically, the Final Guidance requires that, when determining whether they have exceeded the de minimis thresholds, US and non-US persons include all swap dealing activity of any of their US and/or non-US affiliates other than the swap dealing activity of any affiliated entities registered as SDs. Once an affiliate group collectively exceeds the de minimis threshold, one or more entities in that group must register as an SD so that the swap dealing activities of the unregistered affiliates remain below the threshold.30 The exclusion of the activity of registered SDs is a significant change to the CFTC’s previous approach to aggregation, and preserves the ability for affiliates of registered SDs to rely on the de minimis exception.31

MSP Calculations

The Final Guidance also contains specific rules regarding MSP calculations. These rules are complicated and in some cases appear to be inconsistent within the Final Guidance. However, some key aspects of these rules include the following:

  • Non-US persons generally only count US-facing swaps toward their MSP calculations,32 but there are a range of exceptions to this general rule.
  •  Non-US persons that are Guaranteed Affiliates or Conduit Affiliates may need to count swaps with other non-US persons, but there are exceptions tied to the status of the counterparty.33
  • A Guaranteed Affiliate that itself provides guarantees to another affiliated entity may need to include exposure under that entity’s swaps in its own MSP calculations.34
  • The US guarantor of a Guaranteed Affiliate may need to count certain of the Guaranteed Affiliate’s swaps in its own MSP calculations.35
  • Exposure to the foreign branch of a US bank sometimes, but not always, counts toward MSP calculations.36
  • Non-US financial entities may be subject to different rules than non-financial entities.37

We are hoping that the CFTC will clarify some of the ambiguities around these calculations when it responds to comments on the Exemptive Order. In the meantime, we encourage clients to consult with outside counsel regarding any specific concerns relating to these provisions.

Substituted Compliance

Under certain circumstances, if the CFTC finds certain laws and regulations of a foreign jurisdiction comparable to and as comprehensive as a corresponding category of US laws and regulations,38 then market participants will be deemed to have satisfied the US laws (including CFTC regulations) if they comply with the corresponding foreign laws and regulations. The CFTC will rely upon an outcomes-based approach to determine whether these requirements achieve the same regulatory objectives of the Dodd-Frank Act, which determinations may be conditional and are currently expected to be made on a requirement-by-requirement basis, rather than on the basis of the foreign regime as a whole.39 If substituted compliance is available, a non-US SD or MSP, foreign branch of a US SD, or non-US non-registrant that is a Guaranteed Affiliate or Conduit Affiliate may follow the requirements of the relevant home jurisdiction’s law and regulations in lieu of the CFTC’s regulations.40 The below sections regarding entity- and transaction-level requirements describe the circumstances under which substituted compliance is available, subject to such comparability determinations.

Any person potentially eligible for substituted compliance, as well as trade associations on behalf of a group of such persons and foreign regulators, may petition the CFTC for a substituted compliance determination. Once a comparability determination is made for a jurisdiction, it will apply for all entities or transactions in that jurisdiction, unless the CFTC’s determination provides otherwise. The CFTC expects that an applicant would notify it of any material changes to information submitted in support of a comparability determination. The CFTC will also periodically re-evaluate its comparability determination.41

Entity-Level Requirements

Entity-level requirements are the rules that the CFTC considers as applicable to the entity as a whole, rather than a specific transaction. This categorization is somewhat misleading, however, in that it includes requirements that the CFTC considers important to its oversight role even if they do not relate to the entity as a whole. The Final Guidance divides entity-level requirements into two categories:

  • Category 1: capital adequacy; Chief Compliance Officer requirements; risk management; and swap data recordkeeping requirements (other than those related to complaints, marketing and sales materials); and
  • Category 2: SDR reporting; swap data recordkeeping requirements related to complaints, marketing and sales materials; and large trader reporting.42

Under the Final Guidance, US SDs and MSPs, including any foreign branches of such entities, must comply with all entity-level requirements for all transactions, including those with non-US persons. Non-US SDs and MSPs, however, will be eligible for substituted compliance with regard to Category 1 entity-level requirements for all swaps, and would be eligible for substituted compliance with regard to Category 2 entity-level requirements in certain circumstances. The text of the Final Guidance is not clear, but it appears that substituted compliance for Category 2 entity-level requirements is available as follows:

  •  Non-US SDs and MSPs are only eligible for substituted compliance for SDR reporting when transacting with non-US persons that are neither guaranteed by a US person nor Conduit Affiliates. However, substituted compliance for SDR reporting requirements will only be available if the CFTC has direct access to the non-US trade repository to which swaps data is reported, and only if the format of the data is sufficiently comparable to that in the US;43
  • Non-US SDs and MSPs are eligible for substituted compliance for recordkeeping requirements regarding complaints, marketing and sales materials for all swaps with non-US persons; and
  •  Substituted compliance is not available for large trader reporting requirements under any circumstances.44

Transaction-Level Requirements

Transaction-level requirements are those that apply on a transaction-by-transaction basis, and generally relate to risk mitigation and market transparency. As with entity-level requirements, transaction-level requirements are split into two categories:

  • Category A: required clearing and swap processing; margining and segregation requirements for uncleared swaps; trade execution; swap trading relationship documentation; portfolio reconciliation and compression; real-time public reporting; trade confirmation; and daily trading records; and
  •  Category B: external business conduct standards.45

The Final Guidance implements an approach to transaction-level requirements similar to that in the Proposed Guidance. One notable distinction, however, is that it is irrelevant under the Final Guidance whether or not a swap is booked by personnel in the US (except to the extent this is a factor in determining whether a swap was legitimately booked in a foreign branch of a US bank).

A detailed table illustrating an entity’s responsibilities to comply with transaction-level requirements is included below, but notable aspects of these rules include the following:

  • Foreign branches of US banks that are SDs or MSPs will be eligible for substituted compliance with regard to Category A transaction-level requirements for swaps with non-US persons.46 Category B transaction-level requirements will not apply to such swaps.47
  • Non-US SDs and MSPs must comply with Category A transaction-level requirements (but not Category B requirements) for swaps with non-US persons that are guaranteed by a US person or are Conduit Affiliates, but substituted compliance may be available.48 Non-US SDs and MSPs need only comply with Category B transaction-level requirements for swaps with US persons.49
  • A US branch of a non-US SD or MSP would be subject to transaction-level requirements in the same manner as a US SD or MSP. According to the CFTC, while such US branch would not be a US person, the CFTC has a strong supervisory interest in regulating dealing activities that occur in the US.50
  • Cleared swaps that are executed anonymously on a SEF, DCM or FBOT and where one of the counterparties is a non-US person will be deemed to have satisfied any applicable transaction-level requirements.51

An additional nuance to the guidance, especially as it relates to Conduit Affiliates, is the adoption of the Inter-Affiliate Exemption after the publication of the Proposed Guidance. The Final Guidance in a number of places acknowledges the Inter-Affiliate Exemption and suggests that entities that are in compliance with that can continue to rely on it with respect to outward-facing swaps. However, the Final Guidance does not appear to have fully integrated the discussion of the Inter-Affiliate Exemption with the discussion of the treatment of Conduit Affiliates.

Click here to view table.

Requirements Applicable to Non-Registered Entities

The Final Guidance also sets forth the instances in which CFTC rules would apply to a cross-border swap where neither of the counterparties is registered as an SD or MSP. In general, these requirements will apply when one of the counterparties is a US person. However, two non-US, non-registered persons entering into a swap would also be subject to CFTC rules if they are both either guaranteed by a US person or are Conduit Affiliates (although substituted compliance may be available).52 Additionally, note that the only CFTC requirements that would apply if neither counterparty to a swap is an SD or MSP are those relating to: (i) required clearing; (ii) trade execution; (iii) real-time reporting; (iv) SDR reporting; (v) swap data recordkeeping; and (vi) large trader reporting.53 The CFTC has indicated that large trader reporting requirements could apply to a swap between two non-US persons if such persons have reportable positions. As described above, no substituted compliance would be available for such requirements.54

Impact on SDs and MSPs

Non-US SDs and MSPs

The changes in the definition of US person will require that non-US SDs and MSPs re-evaluate whether they are transacting with US persons, especially in the context of funds. Transaction-level requirements that did not apply to transactions with such counterparties while the Previous Exemptive Order was in place, including clearing and documentation requirements, will now apply to them as US persons. In addition, as the various aspects of the Exemptive Order expire, non-US SDs and MSPs will be required to comply with CFTC regulations such as mandatory clearing and SDR reporting for swaps with Guaranteed Affiliates or Conduit Affiliates. For these reasons, non-US SDs and MSPs may need to obtain new representations from their non-US counterparties on a going-forward basis.

A core theme running through the Final Guidance, the Exemptive Order, the Path Forward statement and the no-action relief that was granted on July 11, 2013 is the need to reconcile US and foreign regulation relating to swaps. Foreign regulations are beginning to take effect, but the process of determining whether, and to what extent, substituted compliance will be permitted is just beginning. Moreover, substituted compliance is not available for all US regulations. Given some of the approaches in the Final Guidance, it appears that non-US SDs and MSPs will have a longer period ahead of navigating multiple sets of regulatory requirements.

Foreign Branches of US SDs and MSPs

Under the Exemptive Order, foreign branches of US SDs and MSPs are only required to comply with transaction-level requirements when they are dealing with US persons, or as otherwise required by the branch’s local jurisdiction. As the Exemptive Order expires, however, foreign branches of US SDs and MSPs will be required to comply with transaction-level requirements for all swaps, although substituted compliance may be available for swaps with non-US persons and other foreign branches. Entity-level requirements will apply in all circumstances, however, as the CFTC views a foreign branch of a US person as part of the US person and not a separate legal entity.

US Branches of Foreign SDs and MSPs

The Proposed Guidance failed to answer a critical question for foreign banks: how their US branches were to be treated. The Final Guidance provides a definitive answer. Although the US branches of foreign banks are non-US persons, they are required to comply with all US regulations as if they were US persons, applying the same interest of the local regulator (in this case, the CFTC) as has been used to justify allowing substituted compliance for foreign branches of US banks.55

Impact on Banks and Other Dealers Below the De Minimis Threshold

Dealers currently below the de minimis threshold will need to re-evaluate whether their swap counterparties are US persons once the Exemptive Order expires. Such dealers may be required to register as SDs. Additionally, dealers will have to adapt to the new approach to affiliate aggregation under the Final Guidance for purposes of the de minimis thresholds.

Impact on Funds and Collective Investment Vehicles

As noted above, funds and collective investment vehicles, including those that qualify as commodity pools, will face several changes under the Final Guidance. First, many funds that currently qualify as non-US persons will likely become US persons as the definition is expanded to include funds with their principal place of business in the US and those that are majority-owned by other US persons.56 Counterparties may require new representations as a result, so funds and collective investment vehicles will likely need to re-evaluate whether or not they qualify as US persons.

Impact on Trading Venues, Including SEFs, DCMs and FBOTs

The Final Guidance states in several places that cleared swaps executed anonymously on a SEF, DCM or FBOT will not be subject to transaction-level requirements. Specifically, such swaps between (i) any non-US person and a US person would be deemed to satisfy Category A transaction-level requirements; (ii) a non-US SD and a US person would be deemed to satisfy Category B transaction-level requirements; and (iii) two non-registrants would be deemed to satisfy all applicable CFTC requirements.57

Additionally, the CFTC stated in the Final Guidance that it will extend no-action relief to certain EU-regulated multilateral trading facilities (MTFs) in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.58 It is not clear whether or not this forthcoming relief will permit parties to cross-border swaps to execute swaps that are not subject to mandatory clearing and trade execution on an MTF, however, since the Final Guidance appears to condition this relief on the existence of the “trade execution requirement.”

Notably, the Final Guidance also states that swaps executed on an FBOT will satisfy the clearing and trade execution requirements, to the extent they are applicable.59

Impact on Inter-affiliate Transactions

As discussed above, the CFTC previously issued a rule exempting certain inter-affiliate swaps from the CFTC’s mandatory clearing requirements provided that, among other things, each entity in the affiliated group that enters into “outward-facing” swaps subject to the CFTC’s clearing mandate clears such swap or satisfies one of several exemptions.60 One such exemption is for outward-facing swaps that comply with the CFTC’s end-user exception from mandatory clearing. The Final Guidance provides that this outward-facing clearing requirement will be satisfied if: (i) neither party to such swap is located in a foreign jurisdiction for which the CFTC has issued a substituted compliance determination (since, in that case, the parties could rely on a different exemption); (ii) the eligible affiliate counterparty is not a financial entity as provided in section 2(h)(7)(A)(i) of the CEA; and (iii) the eligible affiliate counterparty enters into the swap to hedge or mitigate commercial risk.61 Additionally, if the eligible affiliate counterparty is a public company, it must obtain approval to enter into uncleared swaps from the company’s board or governing body.62

Conclusion

The Final Guidance provides the CFTC’s latest interpretation of the cross-border application of its rules under the Dodd-Frank Act, and the Exemptive Order provides market participants with approximately three to six months to adapt to this interpretation. Market participants must determine whether or not they or their counterparties are US persons under the Final Guidance and amend their policies and procedures and trading strategies as soon as possible to comply with these releases.