The U.S. Commodity Futures Trading Commission ("CFTC") and  Securities and Exchange Commission ("SEC") have issued joint rules and interpretations clarifying the scope of key definitions of certain derivatives products, as required under Title VII of the Dodd-Frank Act.  These definitions are required to be finalised in order for the full implementation of the Dodd-Frank regulatory regime relating to the over-the-counter swaps markets to proceed.

The long-awaited rules and interpretations further define the terms "swap", "security-based swap" and "security-based swap agreement".   The interpretations also cover the scope of "mixed swaps" which are regulated by both agencies, which both the CFTC and SEC believe to be a narrow category, and records requirements for "security-based swap agreements".

Additional rules are to be adopted by the CFTC to address potential evasion of Title VII.  In particular, rules will be adopted to ensure that transactions that are willfully structured to evade the provisions of Title VII governing the regulation of swaps will be caught by the regime.

The issue of these definitional rules is a significant milestone in the establishment of the Dodd-Frank regulatory regime for derivatives, as the dates for compliance with many other rules under the Dodd-Frank regime are dependent on the date of adoption of these definitional rules.

The definitional rules become effective 60 days after their publication in the U.S. Federal Register.   The date of publication is not certain, but it is expected to occur shortly.

Compliance dates under Dodd-Frank Rules

When the definitional rules become effective, those entities subject to the Dodd-Frank regulatory scheme relating to derivatives will be required to comply with many new requirements from the relevant compliance dates. 

In the case of many CFTC rules, the compliance date  is the date on which the definitional rules become effective.  The rules to which this compliance date applies include the following for swap dealers and major swap participants:

  • registration as a swap dealer or major swap participant for those entities that fall within the relevant definitions and are not otherwise exempt
  • swap data recordkeeping, SDR reporting and real-time public reporting for interest rate swaps and credit swaps
  • internal business conduct standards.

For the purpose of certain interim relief and exemptions under the Securities Act 1933 and other legislation, the compliance date for the final rules further defining the terms "security-based swap" will be 180 days after the publication in the Federal Register.

We note that in order to facilitate implementation of Dodd-Frank rulemakings, ISDA is launching a series of protocols starting with the ISDA August 2012 Dodd-Frank Protocol.  The purpose of the ISDA initiative is to develop a standard set of amendments to update existing swap relationship documentation for Dodd-Frank compliance purposes.

Compliance by non-U.S. persons

The CFTC has also recently published its proposed interpretative guidance on the cross-border application of certain swap provisions of the Commodity Exchange Act.   The CFTC guidance is currently open for public comment until 26 August 2012.

The guidance includes a definition of "U.S. person", and sets out the level of swap dealing activity of a  non-U.S. person with U.S. persons that will trigger a requirement to register as a Swap Dealer.  There is also guidance on the level of swap positions of non-U.S. persons that will trigger a requirement to register as a Major Swap Participant.

The guidance also sets out proposed relief with respect to "entity level" and "transaction level" requirements for non-U.S. Swaps Dealers and Major Swap Participants with respect to cross-border activities.  In particular, compliance may in some cases be through "substituted compliance", by compliance with comparable regulations in the entity's home jurisdiction where the CFTC  determines that such regulations are comparable with Dodd-Frank requirements.

The CFTC has also issued a proposed exemptive order, which will allow some non-U.S. Swaps Dealers and Major Swap Participants to defer compliance until July, 2013 with some of the "entity level" and "transaction level" requirements for activities with non-U.S. persons, subject to specified conditions.  These conditions include registration once the de minimis thresholds are exceeded.  However there is no provision for deferred compliance with transaction-level requirements when transacting with U.S. counterparties. 

Please refer to our Client Alert via the attached link for more detailed information regarding the CFTC's Interpretative Guidance and proposed Exemptive Order.

The SEC has not indicated what approach it will take on these cross-border issues.