The Commodity Futures Trading Commission (the “CFTC”) adopted final rules under the Commodity Exchange Act (the “CEA”) that established the process for the registration of swap dealers (“SDs”) and major swap participants (“MSPs”, and collectively with SDs, “Swaps Entities”) and the timing of the Swaps Entity registration requirements. The CFTC adopted these regulations in accordance with section 4s of the CEA, which was recently added to the CEA by the Dodd-Frank Wall Street Reform and Consumer Protection Act. These final rules are based in large part on the CFTC’s registration regulations proposed on November 23, 2010, and have become effective as of March 19, 2012. Please note that the full scope of the regulatory requirements for Swaps Entities is not yet settled as we are still awaiting final rules that provide definitions of SDs and MSPs and key regulatory requirements applicable to Swaps Entities under Section 4s of the CEA, which will include, among other matters, capital and margin requirements (collectively, the “Section 4s Requirements”).
Registration of Swap Dealers and Major Swap Participants
Section 4(s) of the CEA provides that neither an SD nor an MSP may act as such unless it is registered as an SD or an MSP, respectively, with the CFTC. Registration will be required by the latest date the final rules further defining Swaps Entities and the term “swap” become effective. In the meantime, the CFTC permits applicants to begin the registration process provisionally to avoid scrambling to meet the approaching registration deadlines. Those market participants that expect to qualify as Swaps Entities will be able to provisionally register with the National Futures Association (“NFA”) and demonstrate compliance with a number of the new requirements applicable to Swaps Entities on a rolling basis as they become effective. The provisional registration will be granted upon filing of the application and documentation demonstrating compliance or the ability to comply with the Section 4s Requirements in effect on such date – and not upon NFA’s review and approval of the documentation. On and after the date on which NFA confirms that the applicant for registration as a Swaps Entity has demonstrated its initial compliance with the applicable requirements the provisional registration of the applicant shall cease and the applicant shall be registered as an SD or an MSP, as the case may be. If the application is determined by NFA to be deficient, NFA will notify the applicant that its application is deficient, whereupon the applicant must withdraw its registration application, it must not engage in any new activity as an SD or an MSP, and the applicant shall cease to be provisionally registered if it does not cure such deficiencies within 90 days after notice.
To apply for registration as a Swaps Entity, and to apply for membership in NFA, an SD or an MSP will need to file Form 7-R electronically with NFA. As of today, Form 7-R requires a Swaps Entity applicant to disclose the following information with respect to the applicant:
- name, address and entity type;
- intent to engage in the CFTC-regulated swap transactions;
- membership in any U.S. exchanges;
- location of business records (and, with respect to foreign applicants, a U.S. location where records will be available for the CFTC and NFA inspection);
- any non-U.S. financial regulators and self-regulatory organizations that have regulated the applicant in the previous five years;
- criminal, regulatory and disciplinary histories;
- any previous bankruptcy proceedings; and
- contact information.
Filing a Form 7-R authorizes the CFTC to conduct on-site inspections of the applicant. The applicant would also be required to file a Form 8-R on behalf of each of its principals and associated persons along with a fingerprint card, which NFA uses to conduct background checks and determine whether principals and associated persons are subject to a statutory disqualification. As of today, Form 8-R requires each Swaps Entity applicant to disclose the following information with respect to each of its principals and associated persons:
- name and address;
- criminal, regulatory and disciplinary histories; and
- past residential, employment and education history.
Swaps Entities would be required to review and update their NFA registration forms and any information provided to the CFTC annually. Swaps Entities will be required to correct any deficiencies or inaccuracies in their registration materials and update their filed registration materials on an annual basis as determined by NFA. Swaps Entities may seek confidential treatment of documentation submitted to demonstrate compliance with the Section 4s Requirements.
Regulations regarding an “associated person” of Swap Dealers and Major Swap Participants
An associated person of an SD or an MSP is any employee of a Swaps Entity engaged in the solicitation or acceptance of swaps or the supervision of any person or persons so engaged. Such term has typically referred to a salesperson of an applicant. Although an associated person is required to file a Form 8-R, there is no requirement for associated persons of Swaps Entities to register with the CFTC. Nevertheless, a Swaps Entity may not permit any individual associated person who is a natural person “to effect or be involved in effecting swaps” on behalf of the Swaps Entity if he is subject to a statutory disqualification under the CEA. Persons are subject to a statutory disqualification if they (i) have been refused registration within five years preceding the filing of the provisional application, or had their registration suspended (and the period of such suspension has not expired), or revoked; (ii) are permanently or temporarily enjoined by a court or regulatory order from acting in any registered capacity under the CEA or securities regulation; (iii) have been convicted of any felony that involves embezzlement, fraud, theft, bribery or misappropriation of funds in connection with any commodities or securities transactions within ten years preceding the filing of the provisional application or at any time thereafter; or (iv) have violated (or aided and abetted in violation of) any provision of the CEA or certain other U.S. federal statutes, where such violation involves embezzlement, fraud, theft, bribery or misappropriation of funds.
Each Swaps Entity will be responsible for ensuring that none of its associated persons is subject to a statutory disqualification and will be required to certify to this effect in the Form 7-R. Similarly, NFA may deny registration to a Swaps Entity if any of its principals is subject to a statutory disqualification.
The CFTC addressed in the rule only the process for registration and did not expressly address the extraterritorial scope of the SD and MSP registration requirements.
 Please note that the CFTC delegated its authority to administer the registration process to the National Futures Association pursuant to Performance of Registration Functions by National Futures Association With Respect To Swap Dealers and Major Swap Participants (Delegation of Authority Order), 77 Fed. Reg. 2708 (Jan. 19, 2012).
The Working Group will continue to monitor any developments and provide timely coverage at Weil’s Financial Regulatory Reform Center. If you are interested in discussing this or other regulatory developments, please contact Working Group members Eric J. Peterman (212-310-8373 or firstname.lastname@example.org) or Heath P. Tarbert (202-682-7177 or email@example.com).