On July 23, 2020, the Commodity Futures Trading Commission (the "CFTC"), in a 3 to 2 vote, finalized rules (the "Final Rules") that superseded certain aspects of the CFTC's previous policy with respect to the cross-border application of swaps regulations under Commodity Exchange Act ("CEA") Section 2(i), as set forth in the guidance published by the CFTC in July 2013 (the "2013 Guidance").1

More specifically, the Final Rules, largely consistent with the preceding notice of proposed rulemaking ("Proposed Rules"),2 classify swap market participants (e.g., U.S. person, guaranteed entity, significant risk subsidiary, foreign branch, U.S. branch), address which cross-border or extraterritorial swaps or swap positions a person would need to consider when determining whether it needs to register with the CFTC as a swap dealer ("SD") or major swap participant ("MSP" and, together with SDs,

"Swap Entities"), categorize certain swaps requirements applicable to Swap Entities for purposes of how they apply to cross-border or extraterritorial swaps transactions, and create a framework for the CFTC to permit Swap Entities to substitute compliance with comparable foreign requirements.

The Final Rules address most, but not all, of the requirements applicable to Swap Entities under Title VII of the Dodd-Frank Act. The unaddressed requirements include: mandatory clearing, mandatory trade execution, real-time public reporting, swap data repository reporting, large trader reporting, margin for uncleared swaps, capital, and financial records and reporting. Several of these requirements (mandatory clearing, mandatory trade execution, real-time public reporting, swap data repository reporting, large trader reporting) remain subject to the 2013 Guidance. The remaining requirements have been addressed by other CFTC rulemakings, including a capital rule that the CFTC finalized the day before it adopted the Final Rules. In part to address these gaps, contemporaneously with adopting the Final Rules, the CFTC adopted a policy statement and issued a staff noaction letter3 to provide relief to non-U.S. SDs from mandatory clearing, mandatory trade execution and real-time reporting for certain transactions with non-U.S. counterparties that are arranged, negotiated or executed on behalf of non-U.S. SDs by U.S.-located personnel or agents ("ANE Transactions"). This no-action letter supersedes prior staff guidance published in November 2013 ("Advisory 13-69")4 and related no-action relief.5 Outside of this area, however, and depending on what further actions the CFTC takes over the course of the next year (if any), market participants will need to apply different cross-border frameworks to their swap activities corresponding to different CFTC rules.

OVERVIEW OF THE FINAL RULES

Since July 2013, the cross-border application of the CFTC's swaps rules has been governed by the 2013 Guidance, a policy statement that, unlike a formal rule, was not legally binding on the CFTC or market participants. Prior to adoption of the Final Rules, the CFTC had frequently sought to revisit the 2013 Guidance, including in a white paper published by former Chairman J. Christopher Giancarlo in 2018,6 and previously in a rule proposal issued in late 2016 under then-Chairman Timothy Massad (the "2016 Proposal").7 As noted above, the Final Rules supersede most aspects of the 2013 Guidance, but not with respect to mandatory clearing, mandatory trade execution, real-time public reporting, swap data repository reporting, or large trader reporting requirements.

The key elements of the Final Rules are as follows:

Key Definitions. The Final Rules eliminate the concept of a "conduit affiliate" from the 2013 Guidance and replace it with a new class of entity defined as a "significant risk subsidiary" ("SRS") The Final Rules also clarify and streamline a number of key definitions from the 2013 Guidance, such as "U.S. person" and

"guarantee," mostly to harmonize with later CFTC and Securities and Exchange Commission ("SEC") rules. The Final Rules also, for the first time, introduce new definitions relating to U.S. branches of non-U.S. banks. In addition, until December 31, 2027, the Final Rules will permit continued reliance on "U.S. person" and "guarantee" representations pursuant to the 2013 Guidance or the CFTC's uncleared margin requirements ("Cross-Border Margin Rules")8 that a Swap Entity received prior to the Final Rules' effective date.

Registration Thresholds. The Final Rules largely codify the 2013 Guidance with respect to which crossborder swaps transactions and positions a person would need to consider when determining whether it needs to register as a Swap Entity with the CFTC, subject to conforming changes appropriate to reflect the revised definitions noted above.

ANE Transactions. The CFTC will not apply the swaps-related requirements addressed in the Final Rules to ANE Transactions, so long as neither non-U.S. counterparty is a significant risk subsidiary or a non-U.S. person guaranteed by a U.S. person (a "Guaranteed Entity"). As noted above, the CFTC also issued a policy statement and staff no-action relief addressing the treatment of ANE Transactions for purposes of mandatory clearing, mandatory trade execution, and real-time public reporting requirements.

Categorization of Swap Entity Requirements. The Final Rules categorize certain of the entity-level and transaction-level requirements from the 2013 Guidance into Group A, B, or C requirements. Again, here the Final Rules mostly codify the 2013 Guidance, except for: (a) clarifying the treatment of certain ancillary recordkeeping rules; and (b) grouping elective initial margin segregation rules with external business conduct rules.

Application of Swap Entity Requirements. The Final Rules mostly codify the treatment of Swap Entity requirements under the 2013 Guidance, except for: (a) modifying the so-called "emerging market" exception for foreign branches of U.S. Swap Entities so that it applies more flexibly to branches not eligible for substituted compliance but does not apply to swaps with other Swap Entities; (b) expanding the extent to which daily trading records, trade confirmation, portfolio reconciliation and compression, and trading relationship documentation rules apply to a Swap Entity that is a Guaranteed Entity, subject to an exception modeled on the modified foreign branch "emerging market" exception; (c) treating SRS Swap Entities like Swap Entities that are Guaranteed Entities; and (d) modifying the treatment of swaps booked to the U.S. branch of a non-U.S. Swap Entity, which are subject to a hybrid between the treatment of U.S. and non-U.S. Swap Entities.

Recordkeeping. The Final Rules require Swap Entities to create a record of their compliance with the Final Rules and to retain such records.

Compliance Date and Transition Issues. The effective date and compliance date for the Final Rules will be 60 days and 365 days after the date of publication in the Federal Register, respectively. Market participants are permitted to rely on the exceptions to the Group B or C requirements following the effective date of the Final Rules, provided that they comply with the Final Rules' recordkeeping requirements. Otherwise, swaps entered into prior to the Final Rules' compliance date will not be subject to the Final Rules.

Footnotes

1 Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013).

2 Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to [SDs] and [MSPs], 85 FR 952 (Jan. 8, 2020).

3 CFTC No-Action Letter No. 20-21 (July 23, 2020).

4 CFTC Staff Advisory No. 13-69 (Nov. 14, 2013).

5 See, e.g., CFTC No-Action Letter No. 17-36 (July 25, 2017). clearygottlieb.com

6 CFTC Chairman J. Christopher Giancarlo, "Cross Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-US Regulation" (Oct. 1, 2018), available at: https://www.cftc.gov/sites/default/files/2018- 10/Whitepaper_CBSR100118_0.pdf. Our Alert Memorandum regarding this white paper can be found at https://www.clearygottlieb.com/-/media/files/alert-memos-2018/cftc-chairman-proposes-crossborder-swaps-regulationversion.pdf.

7 Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to [SDs] and [MSPs], 81 Fed. Reg. 71946 (Oct. 18, 2016).

8 Margin Requirements for Uncleared Swaps for [SDs] and [MSPs]—Cross-Border Application of the Margin Requirements, 81 Fed. Reg. 34818 (May 31, 2016).

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Originally published 29 July, 2020

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