On July 13, 2013, the Commodity Futures Trading Commission (the "CFTC") approved a second final exemptive order (the "Final Order") providing time-limited relief from certain cross-border applications of the swaps provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the CFTC’s regulations. The purpose of the Final Order is to facilitate an orderly transition to the new swaps regulatory regime with respect to cross-border activities. On July 17, 2013, the CFTC also issued final guidance1 (the "Cross-Border Guidance") with respect to such cross-border activities. The CFTC has recognized that the substituted compliance program under the Cross-Border Guidance could benefit from additional time. In order to provide market participants (both non-US and US) greater certainty regarding their obligations, the CFTC has issued time-limited relief and extended certain aspects of the relief granted under the January 7, 2012 final temporary exemptive order (the "January Order").2 The Final Order should be read in conjunction with the Cross-Border Guidance. We have discussed the Cross-Border Guidance in detail in a separate Client Alert.
The Final Order is effective from July 13, 2013 until December 21, 2013 (or such earlier date specified in the Final Order) and also requests comments on any issues that are not fully addressed in the Final Order. The comment period was open for 30 days.
Summary of Relief Granted Under the Final Order
The Final Order (1) extends the effectiveness of the definition of "US person" contained in the January Order, (2) phases-in the compliance requirements for non-US persons affiliated with a US person and guaranteed by US persons ("guaranteed affiliates")3 and non-US affiliate conduits of US persons ("affiliate conduits")4 by providing such entities relief from compliance with Transaction-Level Requirements for swaps with non-US persons and foreign branches of US swap dealers ("SDs") and major swap participants ("MSPs") until 75 days after the Cross-Border Guidance is published in the Federal Register (i.e., October 9, 2013), (3) allows non-US persons (whether or not guaranteed by a US person) to continue to apply the aggregation principles applied under the January Order until October 9, 2013 and (4) allows any non-US person (whether or not guaranteed by a US person) to exclude swaps with a non-US person or swaps with the foreign branch of a US person in its calculations of the aggregate gross notional amount of swaps for purposes of determining whether it exceeds the de minimis level of swap dealings (for SDs) or swap positions (for MSPs).
Phase-In of "US Person" Definition and Guaranteed Affiliates and Affiliate Conduits
The Final Order extends the application of the definition of "US person" contained in the January Order. A party may also continue to reasonably rely on its counterparty’s representation in determining whether the counterparty is a US person.5 From July 13, 2013 until October 9, 2013, a US person is defined as:
- A natural person who is a resident of the United States;
- A 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, in each case that is (A) organized or incorporated under the laws of a state or other jurisdiction in the United States or (B) for all such entities other than funds or collective investment vehicles, having its principal place of business in the United States;
- A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is primarily for foreign employees of such entity;
- An estate of a decedent who was a resident of the United States at the time of death, or a 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; or
- An 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 (i) through (iv) above.
Guaranteed affiliates and affiliate conduits of US persons do not need to comply with Transactional-Level Requirements relating to swaps with non-US persons and foreign branches of US SDs and MSPs until October 9, 2013.
Transitional Relief for SD and MSP Determinations
The Final Order provides transitional relief for market participants by extending certain temporary relief under the January Order with respect to SD and MSP determinations.
De minimis calculations. The Final Order extends the temporary relief provided in the January Order for a non-US person (regardless of whether such non-US person’s swap obligations are guaranteed by a US person (such person, a "Guaranteed US Person")) from the requirement that a person include all of its swaps in its calculation of the aggregate gross notional amount of swaps connected with determining whether it is engaged in more than a de minimis level of swap dealing (which takes into account the notional amount of swap dealing activity over the prior 12 months) or holds swap positions above any of the MSP thresholds (determined as of the end of each fiscal quarter). A non-US person (including a Guaranteed US Person) may exclude swaps where the counterparty is a non-US person or any swap where the counterparty is a foreign branch of a US person that is registered as an SD until October 9, 2013.
Aggregation. The Final Order also allows all non-US persons to apply the aggregation principles applied in the January Order until October 9, 2013. Under the transitional relief of the Final Order, in determining whether a non-US person is engaged in more than a de minimis level of swap dealing, a non-US person that is engaged in swap dealing activities with US persons as of December 21, 2012 is not required to include and may exclude and not consider the aggregate notional value of:
- Any swap dealing transactions of its US affiliates under common control;
- Any swap dealing transactions of its non-US affiliates under common control with other non-US persons; and
- If any of its affiliates under common control is registered as an SD, any swap dealing transaction of any of its non-US affiliates that (i) is engaged in swap dealing activities with US persons as of December 21, 2012 or (ii) is registered as an SD.
Transitional Relief for Swap Dealer Registration
A non-US person that was previously exempt from registration as an SD because of the temporary relief extended to such person under the January Order, but that is required to register because of changes to the US person definition or de minimis calculations under the Cross-Border Guidance, is not required to register as an SD until two months after the end of the month in which such person exceeds the de minimis threshold for SD registration. Such non-US persons would begin accounting for these swaps on October 9, 2013 (i.e., the date on which the 75-day relief period expires) and as a result would not be required to register until two months after the end of October.
Transitional Relief for Compliance With Entity- Level and Transaction-Level Requirements
The Final Order continues to provide some relief for Entity-Level Requirements6 and Transaction-Level Requirements7 for non-US SDs and non-US MSPs and foreign branches of US SDs and US MSPs. Such relief is summarized in the tables that follow. Note that the Final Order does not provide relief for US SDs/MSPs. Such US persons must comply with all the Entity-Level and Transactional-Level Requirements.
Table A below summarizes the application of Entity-Level Requirements to non-US SDs and non-US MSPs under the Final Order.
Click here to view table.
Table B below summarizes application of the Transaction-Level Requirements to non-US SDs/MSPs, foreign branches of US SDs/MSPs and Non-Registrants under the Final Order.
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Scope of the Relief of the Final Order
The time-limited relief provided in the Final Order: (A) does not affect, with respect to any swap within the scope of the Final Order, the applicability of any other CEA provision or CFTC regulation; (B) shall not limit the applicability of any CEA provision or CFTC regulation to any person, entity or transaction except as provided in the Final Order; (C) shall not affect the applicability of any provision of the CEA or CFTC regulations to futures contracts, or options on future contracts; and (D) shall not affect any effective or compliance date set forth in any Dodd-Frank Act rulemaking by the CFTC.
The Final Order also does not affect or eliminate the obligation of any party to comply with the conditions of the Inter-Affiliate Exemption where one of the counterparties is electing the Inter-Affiliate Exemption.