The CFTC Division of Swap Dealer and Intermediary Oversight, Division of Clearing and Risk, and the Division of Market Oversight (collectively, the "Divisions") extended previous no-action relief to non-U.S. swap dealers from certain "transaction-level" requirements applicable to swaps under the Commodity Exchange Act and the CFTC rules.

As set forth in CFTC cross-border guidance, "transaction-level" requirements include requirements for clearing and swap processing, margin and segregation for uncleared swaps, trade execution, swap trading relationship documentation, portfolio reconciliation and compression, public trade reporting, trade confirmation, and trade records.

The relief provided by the Divisions applies to swap dealers ("SDs") who are non-U.S. persons and enter into transactions with other non-U.S. persons (other than "guaranteed affiliates" or "conduit affiliates") using personnel or agents in the United States to "arrange, negotiate, or execute" the transactions (referred to in the letter as "Covered Transactions"). In accordance with previous letters (CFTC Staff Letter Nos. 13-71, 14-01, 14-74, 14-140 and 15-48), the Divisions stated that they will not recommend enforcement action against non-U.S. SDs (whether or not the SDs are affiliated with U.S. persons) for failure to comply with the following requirements in connection with Covered Transactions:

  • transaction-level requirements for Covered Transactions other than those made with other non-U.S. SDs; and
  • transaction-level requirements (other than those in Regulations 23.503 ("Portfolio compression") and 23.504 ("Swap trading relationship documentation")) for Covered Transactions with other non-U.S. SDs.

The relief was granted notwithstanding the possibility that the transactions may have been "arranged, negotiated or executed" by personnel in the United States. The no-action relief was extended until the effective date of any CFTC action that addresses whether particular transaction-level requirements are applicable to transactions entered into by non-U.S. SDs.

Commentary / Nihal Patel

Today's action is the sixth extension of this particular no-action relief. Mercifully, this time, the CFTC saved the market the pain of another pending deadline while waiting for relief to be extended. (In the past, the relief was generally extended for roughly nine months at a time.) Instead, the CFTC tied the expiration of the relief to the effectiveness of any CFTC action to address whether a particular transaction-level requirement applies to a Covered Transaction.1

What remains to be seen is how the CFTC will address the issue. At this time, the CFTC has proposed to address only one aspect of how its transaction-level requirements will apply to Covered Transactions. In a CFTC proposal from October of last year, compliance with only the anti-fraud and fair dealing aspects of the external business conduct requirements (CFTC Reg. 23.401, et seq.) would be required for Covered Transactions.2 The CFTC proposal is in contrast to the approach the SEC took in its rules for security-based swaps. Under Exchange Act Rule 3a71-3(c), all of the SEC external business conduct requirements will apply to ANE Transactions.3

Given the change in administration and leadership at the two agencies since these respective rulemaking actions, it remains to be seen whether these rules will be harmonized or otherwise revised. Recently, new SEC Chair Jay Clayton said that coordination between the SEC and CFTC on swap regulation is " essential."4 In addition, the version of the Financial CHOICE Act passed in the House contains a provision (Section 871) that would require the SEC and CFTC to conduct a review of all rules adopted under Title VII and, where there are inconsistencies, to "resolve" such inconsistencies.

Policymakers have yet to make clear what they think of ANE Transactions (see, note 1 below) and whether the U.S. regulatory scheme should apply to them.5 Today's action may be a sign that it's time to grab a lawn chair.

Footnotes

1 The CFTC letter uses the term "Covered Transactions," though many market participants have come to refer to these as "arrange, negotiate or execute" transactions (or "ANE Transactions").

2 See here for further detail and commentary on that proposal.

3 See here for further detail and commentary on the adoption of that rule.

4 With that said, the SEC also omitted any swap rulemaking from its most recent regulatory agenda.

5 There is also another significant wild card. Five of the combined ten commissioner positions at the two agencies are unfilled, and another CFTC commissioner (Sharon Bowen) announced her intention to depart.

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