The US Securities & Exchange Commission (SEC) and Commodity
Futures Trading Commission
(CFTC) earlier this month defined how the term swap would
be treated under Dodd-Frank rules. The jointly-finalised
definitions start the swap compliance countdown, but some
entities still don’t know whether they are
required to comply.
Foreign-based companies with US subsidiaries and vice versa
might have to do some guesswork to avoid violating a
registration deadline scheduled for 60 days after publication
of the rules in the federal register. It all depends on when
the regulators finalise guidance on the cross-border
application of swap rules.
The CFTC proposed
guidance allows for substitute compliance programs with
foreign regulators that have comparable requirements. The SEC
has not yet proposed such guidance, and it is unclear whether
either regulator will issue final guidance before the swap
dealer (SD) and major swap participant (MSP) registration
requirements become effective.
"It’s affecting people’s ability
to make decisions about how to organise their business," Robert
Pickel, chief executive officer of the International Swaps and
Derivatives Association (ISDA) said.
"I think everybody fully understands if they are going to
engage in business in the US with a US person, they are going
to need to register some entity with the CFTC (or SEC) as a
swap dealer," added Pickel.
A problem arises in the definition of US person, though.
Lawyers told IFLR the CFTC’s proposed
interpretation of US person, found on page 16 of the proposed
guidance, is vague regarding what counts as a principal place
of business in the US.
Foreign-based swap traders that could qualify as a US person
have expressed some concern over a possibility that non-US
related operations could become exposed to US oversight.
"Even if their parent corporate is in Germany or France [for
example], I think they’re concerned about the
effort embedded in the guidance on the registration of US-based
swap dealers as a springboard to regulate aspects of the
business back in France or Germany," Pickel said.
Some foreign swap traders might not think doing business in
the US is worth the cost of registration and exposure to US
regulatory oversight, Pickel added. "We think
that’s a bad result."
The definition of swap follows a number of new requirements
for entities qualifying as SDs and MSPs. SDs and MSPs will
have to register with either the SEC or CFTC depending on their
activities. They will also have to record and report
information on interest rate and credit swaps on a real-time
basis in accordance with rules on internal and external
business conduct standards.
"It was heartening to hear the chairman recognised there would
be challenges in the implementation [of Dodd-Frank swap rules].
We hope the CFTC adheres to its pledge to work with market
patricipants to ensure a smooth transition," Diana Preston,
vice president and senior counsel at the American Bankers'
Another highly publicised requirement caps investment in
commodities in an attempt to curb high prices thought by the
CFTC to result from over-speculation. The ISDA and the
Securities Industry and Financial Markets Association filed
suit in an effort to vacate the position limits rule late last
year. The case against the CFTC is still pending before the US
District Court for the District of Columbia.
"It’s important at this time to take action, one
way or another, on the case," Pickel said.
The final rule lists transactions that do not qualify as a
swap or security-based swap: insurance contracts, certain
consumer and commercial transactions, loan participations and
forward contracts in nonfinancial commodities will not be
regulated by the new swap rules.
One derivatives lawyer who preferred to remain anonymous
supported the Commission’s decision to exclude
forward contracts in nonfinancial commodities from the
definition of swap.
"That I think is a very helpful recognition from the
standpoint of the market place," he said. "If you negotiate a
contract that allows accelerating the delivery date, or
delaying the delivery date, adjusting the volumes, the fact you
have those options shouldn’t change the commercial
nature of the agreement."
In addition to defining swap, the CFTC released a final rule
exempting end-users with less than $10 billion in assets from
complying with a requirement that swap trades be approved by
independent clearing houses.
The US Treasury Secretary has not yet determined whether
foreign exchange forwards and foreign exchange swaps will be
regulated as swaps. Even if they are not defined as swaps by
the Treasury, as expected, they would still be subject to swap
reporting requirements according to the CFTC’s
"People would be very surprised to learn simple foreign
exchange forwards and swaps are still swaps for all purposes,
which I think would be a problem for the market," the
derivatives lawyer said. "It will be a little awkward if they
don’t do it before this rule goes into