Foreign commodity-based swap traders can avoid registering as swap dealers (SD) and major swap participants (MSP) with the US Commodity Futures Trading Commission (CFTC) following the Commission’s proposed guidance.
Published on June 29, the guidance calls for a substitute compliance program for foreign companies trading more than a de minimis amount in swaps either guaranteed by a US person or entered into with non-US affiliate conduits. Swaps between foreign branches of US swap dealers and non-US persons also qualify for substitute compliance.
Substitute compliance would allow these swaps traders to forgo burdensome CFTC rules like the position limits, external business conduct rules and disclosure requirements already finalised. Foreign companies will qualify for this assuming they already comply with similar requirements in their own jurisdictions.
The CFTC is also set to decide a foreign swap trader’s substitute compliance applicability on a rule-by-rule basis, at the angst of Commissioners Scott O’Malia and Jill Sommers.
“There are certainly strong arguments and precedent in support of a broader principle-based approach,” said Doron Ezickson, a partner with Cadwalader Wickersham & Taft.
In determining the comparability of foreign compliance requirements, the CFTC would consider the scope, objectives and comprehensiveness of requirements along with the foreign regulator’s supervisory compliance program and its ability to support and enforce such program, according to the Commission’s June 29 release.
“If companies are forced to abide by multiple sets of rules on the same transaction, because the regulators don’t agree that their respective regulations are comparable, there will be either additional costs or reduced liquidity,” Ezickson said.
Under the guidance, non-US persons are not required to register as an SD with the CFTC based on their investment in swaps with other non-US persons or foreign branches of US SDs. The activities of US affiliates are excluded from the de minimis threshold calculation, alleviating some earlier concern that multiple entities would have to register for the same transactions.
For those swap traders that do exceed the de minimis SD and MSP registration levels, requirements are waived for transactions with non-US persons.
A US person is defined in the guidance as someone who engages in swap activities or transactions involving one or more such person (that) has relevant effect on US commerce.
Torys partner Glen Johnson thinks more clarity is needed regarding the definition of US person, specifically what is meant by having a principal base of business in the US. According to Johnson, another area of uncertainty is the provision on conduits – whether the swap activities of foreign subsidiaries will be aggregated towards a US parent.
Foreign-based swaps traders that do not already comply with rules comparable to those of the CFTC are expected to register as SDs and MSPs and comply with the CFTC’s rules. Johnson expects this type of foreign compliance to lay the framework for swaps rulemaking initiatives in foreign jurisdictions, specifically Canada.
“I think it will ultimately get resolved through a combination of regulatory dialogue between the CFTC and Canadian counterparts or by the Canadian regime being developed so as to be in compliance with the US requirements,” Johnson said.
Commissioner Scott O’Malia is among those who think the CFTC’s cross-border swaps guidelines are an overreach of the regulator’s authority.
By issuing guidance rather than a rule, the Commission is not held to the same cost-benefit analysis standard. The CFTC did, however, request comments on the guidance.
The guidance is open for comment for 45 days after publication in the federal register.