CFTC Issues Notice of Proposed Exemptive Order Regarding Compliance with Swap Regulations under Dodd-Frank

in Commodity Futures Trading Commission, Derivatives, Securities and Exchange Commission

By Hyun K. Kim

The Commodity Futures Trading Commission (the “CFTC”) recently issued a notice of proposed exemptive order (the “Proposed Order”) regarding compliance with certain swap regulations under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  The Proposed Order was published in the Federal Register on July 12, 2012.  The comment period for the Proposed Order expired on August 13, 2012.

Proposed Exemptive Relief for Non-U.S. Swap Dealers (“SDs”) & Non-U.S. Major Swap Participants (“MSPs”)

1. Entity-Level Requirements

The CFTC proposed to grant temporary exemptive relief to non-U.S. SDs and non-U.S. MSPs to allow them more time before having to comply with certain Dodd-Frank requirements (the “Entity-Level Requirements”)[1] that apply generally to all registered SDs/MSPs across all of their swaps regardless of whether their counterparties or swaps are located in or outside the U.S.  The proposed exemptive relief, however, does not extend to the Entity-Level Requirements relating to the SDR Reporting and Large Trader Reporting, and thus non-U.S. SDs/MSPs would still be required to comply with the SDR reporting and Large Trader Reporting requirements for all their swaps entered into with U.S. person[2] counterparties upon the respective compliance dates of those requirements.  Non-U.S. SDs/MSPs that are not affiliates or subsidiaries of a U.S. SD, however, would be allowed to delay their compliance with the SDR Reporting requirement for their swaps entered into with non-U.S. person counterparties during the pendency of the Proposed Order.

2. Transaction-Level Requirements

Some of the Dodd-Frank requirements (the “Transaction-Level Requirements”)[3] apply to individual swap transactions rather than the swap entities.  The Proposed Order would allow non-U.S. SDs/MSPs, but only with respect to their swaps entered into with non-U.S. person counterparties, to comply with only those Transaction-Level Requirements that may be required in their home jurisdiction.  Non-U.S. SDs/MSPs still need to comply with all Transaction-Level Requirements with respect to their swaps entered into with U.S. person counterparties.

3. Conditions to Relief

The Proposed Order requires non-U.S. SDs/MSPs seeking temporary exemptive relief from complying with the Dodd-Frank requirements to satisfy the following conditions: (1) the non-U.S. person required to register as an SD or MSP must apply to register as such by the effective date of the registration requirement; and (2) the non-U.S. person must, within 60 days of applying for registration as an SD or MSP, submit to the National Futures Association (“NFA”) a compliance plan laying out how it plans to comply with all applicable Dodd-Frank requirements upon the effective date of the CFTC’s proposed interpretive guidance and policy statement on the cross-border application of the Dodd-Frank requirements (the “Guidance”).[4] Such compliance plan must provide whether the non-U.S. SD/MSP plans to comply with each of the Entity-Level Requirements and the Transaction-Level Requirements then in effect or the applicable requirements in its home jurisdiction instead (such alternative compliance with the requirements in the home jurisdiction referred to as “substituted compliance”), and in the case of the latter, describe such home jurisdiction requirements.  As the CFTC adopts new regulations, the CFTC expects the non-U.S. SD/MSP will need to update its compliance plan as necessary and submit the updated plan to NFA. 

4. Effective Date & Expiration of Proposed Exemptive Relief

The exemptive relief proposed under the Proposed Order would become effective on the date on which non-U.S. SDs/MSPs are required to apply for registration with the CFTC and expire on July 12, 2013.

Proposed Exemptive Relief for U.S. SDs & U.S. MSPs

1. Entity-Level Requirements

Under the Proposed Order, U.S. SDs/MSPs may postpone complying with the Entity-Level Requirements from the date on which they must apply for registration until January 1, 2013, except for such Entity-Level Requirements as SDR reporting, Large Trader Reporting, and swap data recordkeeping requirements.  U.S. SDs/MSPs seeking this temporary relief need not submit a compliance plan.

2. Transaction-Level Requirements

Foreign branches of U.S. SDs/MSPs may comply with only those Transaction-Level Requirements that may be required in the location of such foreign branches for their swaps entered into with non-U.S. person counterparties, provided that they submit a compliance plan as described above.  The proposed relief for foreign branches of U.S. SDs/MSPs would become effective on the date on which U.S. SDs/MSPs are required to apply for registration with the CFTC and expire on July 12, 2013.

No Exemptive Relief for Non-U.S. Persons That Are Not SDs or MSPs for Their Swaps with U.S. Person Counterparties

Non-U.S. persons that are neither SDs nor MSPs are not subject to the Entity-Level Requirements.  As for the Transaction-Level Requirements, the Proposed Order does not grant any exemptive relief for them, and therefore they still need to comply with all applicable Transaction-Level Requirements with respect to their swaps entered into with U.S. person counterparties.

CFTC’s Anti-Fraud & Anti-Manipulation Enforcement Authority

The CFTC emphasized that the Proposed Order reserves the CFTC’s anti-fraud and anti-manipulation enforcement authority.


[1] These requirements relate to: (i) capital adequacy; (ii) chief compliance officer; (iii) risk management; (iv) swap data recordkeeping; (v) swap data repository reporting (“SDR Reporting”); and (vi) physical commodity swaps reporting (“Large Trader Reporting”).

[2] For the definition of “U.S. person,” please see “CFTC Issues Proposed Interpretive Guidance and Policy Statement on the Cross-Border Application of Swaps Provisions under Dodd-Frank” [Include a hyperlink for the article once published]

[3] These requirements relate to: (i) clearing and swap processing; (ii) margin and segregation for uncleared swaps; (iii) trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards.

[4] The Guidance is currently in proposed form and has not been finalized.  Thus its effective date is not known.  If the Guidance is not finalized prior to the date that is 60 days from the non-U.S. person’s submission of an SD/MSP registration application, it would be unclear what Dodd-Frank requirements would then be applicable to the non-U.S. person and, therefore, what the non-U.S. person’s compliance plan should address.

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