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CFTC Closes Cross-border Swaps Compliance Loophole
Practical Law Legal Update 3-549-3868 (Approx. 4 pages)
CFTC Closes Cross-border Swaps Compliance Loophole
by Practical Law Finance
| Published on 19 Nov 2013 • USA (National/Federal) |
The CFTC's Division of Swap Dealer and Intermediary Oversight issued a staff advisory clarifying that swaps arranged, negotiated or executed by persons in the US must comply with CFTC transaction-level requirements if one of the parties to the swap is a swap dealer registered with the CFTC, regardless of the jurisdiction of organization or location of the counterparty.
On November 14, 2013, the CFTC's Division of Swap Dealer and Intermediary Oversight (DSIO) issued Advisory Guidance No. 13-69 (staff advisory), closing a loophole in the CFTC's July 2013 cross-border interpretive guidance by clarifying that swaps arranged, negotiated or executed by persons in the US must comply with final Dodd-Frank Title VII transaction-level requirements if one of the parties to the swap is a swap dealer (SD) registered with the CFTC, regardless of the jurisdiction of organization or location of the counterparty.
The staff advisory clarified that even if the swap is entered into between a non-US SD and a non-US counterparty and is booked in a non-US branch, if the non-US SD is registered with the CFTC and uses personnel or agents located in the US to arrange, negotiate or execute the swap, US transaction-level requirements apply. These transaction-level requirements include, among others:
- Swap clearing and exchange trading. Under final Title VII rules, swaps are not required to be traded on exchanges until specific swaps have been officially "made available to trade" (MAT) on a CFTC-registered swap exchange (a DCM or SEF). The first MAT determinations have been submitted to the CFTC for review, and are likely to go into effect in early 2014 (see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading under Title VII). Therefore, despite reports that banks have been avoiding US exchange-trading requirements based on the loophole, no swap is yet required to be exchange traded under Title VII.
- Swap margining and margin collateral segregation for uncleared swaps (see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules).
- Swap trading relationship documentation (which applies to all transactions with registered SDs and major swap participants) (see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank Internal Business Conduct (IBC) Rules: Documentation of Trading Relationships for Swap Dealers and Major Swap Participants).
For a complete list of transaction-level requirements, see Practice Note, The Dodd-Frank Act: Cross-border Application of Swaps Rules: Transaction-level Requirements.
DSIO also noted that transaction-level requirements are either inapplicable or eligible for substituted compliance for swaps between two non-US counterparties that are negotiated or arranged outside of the US, depending on whether the non-US parties are affiliates or affiliate conduits of a US person. For more information on substituted compliance, see Practice Note, The Dodd-Frank Act: Cross-border Application of Swaps Rules: "Substituted Compliance": Entity-level Requirements and Transaction-level Requirements.
DSIO issued the advisory guidance to close a loophole created by a footnote (Footnote 513) included in the CFTC's July 2013 cross-border interpretive guidance, even though Advisory Guidance 13-69 does not specifically mention the footnote. Many large US banks interpreted Footnote 513 to allow non-US SDs to utilize personnel or agents located in the US to negotiate or arrange swaps with foreign counterparties while avoiding certain US rules. While many brokers accepted the banks' position on the Footnote 513 loophole and have been entering into swaps that don't comply with US transaction-level requirements, another brokerage requested CFTC guidance on the issue. Presumably in response to that request, the DSIO has issued this guidance closing the Footnote 513 loophole.
The closure of the Footnote 513 loophole has been met with industry criticism in part because the release is in the form of a staff advisory from DSIO and explicitly states that the guidance does not necessarily represent the views of the CFTC as a whole, creating some confusion within the market.