On June 29, the Commodity Futures Trading Commission proposed a rule that is intended to clarify the extent to which covered swap entities must comply with CFTC’s margin rules for uncleared swaps in cross-border transactions. The proposed rule expands on the general margin rules for uncleared swaps of covered swap entities (i.e., registered swap dealers and major swap participants) that were previously proposed by the CFTC under the mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rule would apply to covered swap entities that are not subject to margin requirements from the banking regulators or the Securities and Exchange Commission. The comment period will be open for 60 days after the rule has been published in the Federal Register.
Under the proposed rule, a non-US covered swap entity (CSE) must apply the same margin rules for uncleared swaps as a US CSE if the obligations of the non-US CSE are guaranteed by a US person or if the non-US CSE is a “Foreign Consolidated Subsidiary”, which is a non-US covered swap entity in which a US person has a controlling financial interest such that the results of the non-US CSE are included in the U.S. person’s consolidated financial statements. Uncleared swaps between a non-US covered swap entity and a non-U.S. counterparty will be excluded from the US margin rules if neither party’s obligations under the relevant swap are guaranteed by a US person and neither party is a US branch of a non-US covered swap entity, a Foreign Consolidated Subsidiary or a non-dealer counterparty consolidated into the financials of a US parent.
The proposed rule includes procedures for requesting determinations from the CFTC that the rules of another jurisdiction are comparable to the US margin rules. The procedures use a comparability standard that is “outcome-based.” Substituted compliance would allow a US CSE dealing with certain non-US counterparties to comply with comparable margin requirements with respect to margin it posts post, but not the margin it collects.
The rule also defines the term “guarantee” and notes that “the terms of the guarantee need not necessarily be included in the swap documentation or even otherwise reduced to writing” as long as legally enforceable rights are created under the laws of the relevant jurisdiction. The definition of US person in the proposed rule differs from the interpretation of that term in the CFTC cross-border guidance in that it does not include a foreign fund that is majority–owned by US persons. The new definitions under the proposed rule would be used only for purposes of the margin rules, in which case they will primarily affect CSEs. However, if the new definitions come to be used more generally in the CFTC’s swap regulations, they could have significant impact for non-dealers as well.