CFTC Issues Cross-Border Guidance On Swaps

The Commodity Futures Trading Commission (CFTC) has issued proposed “interpretive guidance” regarding the cross-border applications of swaps provisions of the Dodd-Frank Act.



The guidance, issued on Friday by the U.S. regulator, is intended to inject much-needed clarity into the extraterritorial scope of the Dodd-Frank Act on the activities of swap dealers and participants in execution, clearing and trade reporting.



“The areas where market participants need further clarity to finalize their design and build efforts relate to either interpretations or questions based on published rules, or pending final rules,” said Ryan Baccus, vice-president at Sapient Global Markets, a capital markets consultancy.



In line with the commitment from the G20 group of nations, much progress has been made to coordinate and harmonize international reform efforts, but the pace of reform varies among jurisdictions and disparities in regulations remain.



For example, the European Market Infrastructure Regulation (Emir) regulates over-the-counter derivatives, central counterparties and trade repositories, while the updated Markets in Financial Instruments Directive (MiFID II), consisting of both a directive and a regulation, covers trade execution.



The CFTC guidance describes how the agency will consider the application of clearing, trade execution and reporting and record keeping provision under Dodd-Frank to cross-border swaps involving counterparties that are not swap dealers or major swap participants.



The guidance also describes the policy and procedural framework under which the CFTC may permit compliance with a comparable regulatory requirement of a foreign jurisdiction as a substitute for compliance with Dodd-Frank.



Swap dealers, both individually and through the International Swaps and Derivatives Association, a trade body, have said that non-U.S. persons engaged in swap dealing activity directly with U.S. counterparties should be registered with the CFTC as swap dealers.



On the other hand, dealers say, swap dealing conducted outside the U.S. between non-U.S. persons is not sufficiently connected to the U.S. to warrant swap dealer registration.



Also, a non-U.S. person that limits its U.S. swap activity to U.S. persons that are registered as swap dealers should not have to register.



The guidance includes a tiered approach for requirements for overseas swap dealers. Some requirements would be considered entity-level, such as for capital, risk management and record keeping.



Such entity-level requirements would apply to all registered swap dealers, but, in certain circumstances, overseas swap dealers could comply with these requirements through substituted compliance.



Other requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution and sales practices.



Both entity-level and transaction-level requirements would apply to all registered swap dealers, but, in certain circumstances, overseas swap dealers could comply with these requirements through substituted compliance.