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
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
"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.
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
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
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
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.