The CFTC voted to adopt new rules to address the cross-border application of a number of swaps requirements; the CFTC took related actions to withdraw prior "ANE" guidance (issuing a related new no-action letter) and amended a previous order exempting certain SEFs from registration.

The vote was 3-2, with Commissioners Rostin Behnam and Dan Berkovitz dissenting. As previously covered, in December 2019 the CFTC voted to propose new cross-border rules addressing the registration thresholds and other requirements concerning swap dealers ("SDs") and major swap participants ("MSPs"). The final rule supersedes the 2013 guidance the CFTC published regarding the cross-border application of its SD regulations.

Highlights of the Final Rule

The final rule addresses a number of cross-border issues surrounding SDs and MSPs, including:

  • harmonizing the CFTC's definition of "U.S. Person" with the SEC definition for the purposes of security-based swap activities, and the CFTC's definition under the cross-border margin rules;
  • defining key terms such as "guaranteed entity" and "significant risk subsidiary" ("SRS"), consistent with the risk-based approach the CFTC has taken regarding cross-border application of its swap rules;
  • clearly excluding from regulatory requirements so-called "ANE" transactions (i.e., those transactions between two non-U.S. persons that are "arranged, negotiated or executed" by U.S. personnel);
  • establishing new requirements for when non-U.S. persons must count their swap transactions for purposes of determining whether registration is required with the CFTC;
  • creating both a formal process for requesting comparability determinations for CFTC requirements and a standard of review that the CFTC will use for such determinations;
  • providing for substituted compliance with certain regulatory requirements applicable to SDs; and
  • instituting several exceptions from certain CFTC regulations governing SDs (e.g., risk management requirements, swap data recordkeeping, swap trading relationship documentation, external business conduct requirements, etc.) for non-U.S. SDs and the foreign branches of a U.S. SD.

The final rule will go into effect 60 days after publication in the Federal Register, and the amended order is effective immediately.

ANE Transactions No-Action Letters.

The CFTC withdrew prior CFTC Letters 13-69 and 17-36, which adopted and stayed CFTC guidance that stated that certain CFTC swaps-related requirements applied to "ANE" transactions. In addition, CFTC staff issued new no-action letter 20-21, which provides relief from "transaction-level" requirements for ANE transactions, to the extent such requirements are not addressed by final rule.

SEF Exemption.

The CFTC unanimously approved an amended order (the original order was issued in December 2017) that (i) exempts 16 additional EU-authorized trading facilities from the need to register as SEFs with the CFTC and (ii) clarifies the application of the order to U.K.-based trading facilities during the Brexit transition.

A Cadwalader memorandum on the final rule is forthcoming.

Commentary

With this rulemaking, the CFTC does away with its prior "guidance." That guidance was effectively a rule adopted without complying with required legal procedures. See, e.g., CFTC Commissioner O'Malia Dissents from CFTC Cross-Border Guidance Statement (with Lofchie Comment). Though the substance of the new rule is materially superior to the substance of the guidance, it is no less significant that the agency's prior legal aggressiveness was rescinded. Regulatory agencies do not stand on firm ethical ground in demanding that the regulated not play fast and loose, if the regulators do not themselves feel bound.

Commentary

As far as agency open meetings over audio-only conferencing go, the consideration for whether to adopt the cross-border rule was about as lively as things can get, particularly when it came to the back and forth between Commissioners Quintenz and Berkovitz. But without downplaying the overall significance of the rules and the simple fact of their adoption (more than 10 years - 10 years! - after the statute came to be), the changes made to the status quo by the adoption of the rules are relatively small.

The approach to "U.S. person" is largely the same as the cross-border guidance and very similar to what was done under the CFTC margin rules. Clarifications of terms like "guaranty" are helpful but unlikely to result in a significant shift in practice. The substituted compliance changes will have an impact, but in broad strokes are similar in policy outcomes to the cross-border guidance. Even as to the "ANE" debate (one which is philosophically interesting and the distinction from the SEC is notable), the CFTC decision simply continues what has applied in practice (perhaps under face of a regulatory cloud) for the last 7+ years.

Of course, even these subtle distinctions (and the less subtle changes - such as the new category of "significant risk subsidiaries") can be important to particular market participants, and a more detailed Cadwalader memorandum on the new rules will be made available soon.

Primary Sources

  1. CFTC Press Release: CFTC Approves Final Cross-Border Swaps Rule and an Exempt SEF Amendment Order at July 23 Open Meeting
  2. CFTC Statement, Heath P. Tarbert: Support of Final Cross-Border Swap Rule
  3. CFTC Statement, Brian Quintenz: Regarding the Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to SDs and MSPs - Final Rule
  4. CFTC Statement, Rostin Behnam: Dissenting Statement regarding the Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to SDs and MSPs - Final Rule
  5. CFTC Statement, Dan M. Berkovitz: Dissenting Statement on the Final Rule for Cross-Border Swap Activity of Swap Dealers and Major Swap Participants
  6. CFTC Statement, Dawn D. Stump: Regarding Final Rule - Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants
  7. CFTC Statement, Heath P. Tarbert: Support of Amendment to CFTC's 5h(g) Order for the European Union
  8. CFTC Statement, Brian Quintenz: Regarding the Amendment to the Commission's Order Exempting EU Swap Trading Facilities from SEF Registration
  9. Federal Register: Sunshine Act Meetings

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