The CFTC has proposed rules on the registration of swap dealers and major swap participants. The Dodd-Frank Act requires all swap dealers and major swap participants to be registered. It contains definitions of “swap dealer” and “major swap participant” but requires the CFTC to adopt rules that complete certain aspects of those definitions. Those rules will be separately proposed and adopted.

General Registration Provisions

Registration will not be required until the forthcoming CFTC rules further defining the “swap dealer” and “major swap participant” terms (referred to as the Definitional Rules) become effective. Under the proposed registration rules, however, starting April 15, 2011, persons who believe that they are swap dealers or major swap participants will be permitted (but not required) to register. Registration would only become mandatory once the Definitional Rules become effective.

The Dodd-Frank Act adds a new Section 4s to the Commodity Exchange Act (CEA), which requires registered swap dealers and major swap participants to meet specific requirements in the areas of capital and margin, reporting and recordkeeping, daily trading records, business conduct standards, documentation standards, trading duties, appointing a chief compliance officer, and, with respect to uncleared swaps, segregation of customer funds. Such requirements are referred to in the proposed rules as the Section 4s Requirements. The Section 4s Requirements will be specifically set forth in additional CFTC rulemakings.

Under the CFTC’s proposed rules, swap dealers and major swap participants would register on a provisional basis until such time as all of the CFTC rules implementing Section 4s Requirements become effective. Provisionally registered swap dealers and major swap participants would be immediately subject only to those Section 4s Requirement rules (if any) as are effective at the time they file their registration application, and they would be permitted to come into compliance with the remaining Section 4s Requirements as each of the separate rules for those requirements becomes effective. Once all of the rules implementing the Section 4s Requirements become effective, provisionally registered swap dealers and major swap participants who have come into compliance would become fully registered, and the need for provisional registration would cease. Persons registering after that time would immediately be fully registered and subject to all of the Section 4s Requirements.

Extraterritorial Reach

New Section 2(i) of the CEA, which was added by Section 722(d) of the Dodd-Frank Act, states that provisions of the CEA that were enacted by Title VII of the Dodd-Frank Act (which includes the definition of swap dealer, and the registration requirement) shall not apply to activities outside the United States unless those activities “have a direct and significant connection with activities in, or effect on, commerce of the United States,” or contravene rules or regulations the CFTC may promulgate to prevent evasion.

The CFTC must determine under which circumstances a person who engages in the activities set forth in new Section 1a(49) of the CEA (“swap dealing activities”) outside the U.S. shall be required to register as a swap dealer. By its terms, Section 2(i) sets a floor that must be met for the swap provisions of the CEA to apply abroad. Thus, a person whose swap dealing activity has no connection or effect of any kind, direct or indirect, whether through affiliates or otherwise, to U.S. commerce would not be required to register as a swap dealer. The CFTC also recognizes the role that considerations of international comity play in determining the proper scope of extraterritorial application of federal statutes.

The CFTC requests comment as to what level of swap dealing activity outside the U.S. would qualify as having a direct and significant connection with activities in or effect on commerce of the U.S., thereby requiring a person outside the U.S. to register as a swap dealer. In particular, in view of the global nature of the swap markets and the ability to transfer swap-related risks within affiliated groups, the CFTC requests comment on when swap dealing activity with or by non-U.S. affiliates of U.S. persons has a “direct and significant connection with activities in, or effect on” U.S. commerce for purposes of Section 2(i) of the CEA. For example, to what extent do persons outside the U.S. who engage in swap dealing activity with non-U.S. affiliates of U.S. persons (such as the non-U.S. subsidiary of a corporate parent headquartered in the U.S.) engage in swap dealing activity that has a direct and significant connection with activities in, or effect on, U.S. commerce?

Registration of major swap participants raises different jurisdictional issues, because the definition of major swap participant specifically focuses on the degree of risk that an entity’s swaps pose to U.S. counterparties and the U.S. market. Thus, the CFTC believes the analysis of whether a non-U.S. entity should register as a major swap participant would turn upon, among other things, swap positions with U.S. counterparties (including the use of a U.S. clearing agency or swap execution facility) or that involve U.S. mails or any means or instrumentality of interstate commerce. The CFTC requests comment on these interpretive issues.