An important deadline for adhering to the ISDA March 2013 DF Protocol (“DF Protocol 2.0”) is rapidly approaching. Some end-users have not yet adhered to DF Protocol 2.0 due to exemptions from certain CFTC requirements applicable to non-U.S. persons trading with foreign branches of U.S. swap dealers. These exemptions are set to expire on December 21, 2013. After December 21, 2013, any counterparty (including any non-U.S. affiliate of an end user) that has not adhered to DF Protocol 2.0 (or an equivalent swap trading agreement) may not be able to enter into swap transactions with a U.S. swap dealer or one of its foreign branches.
In July 2013, the CFTC published its final interpretive guidance relating to cross-border swap activities (the “Final Guidance”) and an exemptive order regarding compliance with certain swap regulations (the “Exemptive Order”). The CFTC’s Final Guidance sets forth the CFTC’s interpretation of the definition of “U.S. Person,” mandates “Entity-Level” requirements applicable to swap dealers and describes “Transactional-Level” requirements applicable to cross-border swap transactions. Transactional-Level requirements include the swap documentation rules relating to swap trading relationship documentation and portfolio reconciliation. The CFTC’s Exemptive Order applies timelines for U.S. swap dealers and their foreign branches to comply with the Entity-Level and Transactional-Level requirements, including the December 21, 2013, deadline, when entering into swap transactions with non-U.S Person counterparties.
In order to benefit from favorable tax and regulatory treatment, non-U.S. affiliates of end-users often execute their global FX hedging strategies by entering into swap transactions with foreign branches of U.S. swap dealers. To the extent that a non-U.S. affiliate of an end-user is not included in the CFTC’s definition of U.S. Person, it has had an exemption from complying with the swap documentation rules when trading with a foreign branch of a U.S. swap dealer. Given that the exemption from Transactional-Level requirements expires on December 21, 2013, and DF Protocol 2.0 is the primary method for market participants to comply with the swap documentation rules, end-users should consider the issues raised by the CFTC’s cross-border guidance and, if they have not already done so, adhere their non-U.S. affiliates to DF Protocol 2.0 as soon as possible.