CFTC Cross-Border Guidance Frequently Asked Questions

The Commission interprets the term “U.S. person” to include, but not be limited to:

• (i) any natural person who is a resident of the United States;
• (ii) any estate of a decedent who was a resident of the United States at the time of death;
• (iii) any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing (other than an entity described in prongs (iv) or (v), below) (a “legal entity”), in each case that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States;[1]
• (iv) any pension plan for the employees, officers or principals of a legal entity described in prong (iii), unless the pension plan is primarily for foreign employees of such entity;
• (v) any trust governed by the laws of a state or other jurisdiction in the United States, if a court within the United States is able to exercise primary supervision over the administration of the trust;
• (vi) any commodity pool, pooled account, investment fund, or other collective investment vehicle that is not described in prong (iii) and that is majority-owned[2] by one or more persons described in prong (i), (ii), (iii), (iv), or (v), except any commodity pool, pooled account, investment fund, or other collective investment vehicle that is publicly offered only to non-U.S. persons and not offered to U.S. persons;
• (vii) any legal entity (other than a limited liability company, limited liability partnership or similar entity where all of the owners of the entity have limited liability) that is directly or indirectly majority-owned by one or more persons described in prong (i), (ii), (iii), (iv), or (v) and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity;[3] and
• (viii) any individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in prong (i), (ii), (iii), (iv), (v), (vi), or (vii).

There may be situations where a person not fully described above is treated as a U.S. person by the Commission in view of the facts and circumstances, including (1) the strength of the connections between the person’s swap-related activities and U.S. commerce; (2) the extent to which such activities are conducted in the United States; (3) the importance of the United States (as compared to other jurisdictions where the person may be active) of regulating the person’s swap-related activities; (4) the likelihood that including the person within the interpretation of U.S. person could lead to regulatory conflicts; and (5) considerations of international comity.

A foreign branch of a U.S. swap dealer or U.S. major swap participant is: (1) subject to Regulation K, which is issued by the Federal Reserve Board, or the FDIC International Banking Regulation, or otherwise designated as a “foreign branch” by the U.S. bank’s primary regulator, (2) maintains accounts independently of the home office and of accounts of other foreign branches with the profit and loss accrued at each branch determined as a separate item for each foreign branch, and (3) subject to substantive regulation in banking or financing in the jurisdiction where it is located. 

Yes.  The Commission views the activities of a foreign branch as the activities of the principal entity and, therefore, a foreign branch of a U.S. person is a U.S. person.  Foreign branches of U.S. persons, however, may comply with Transaction-Level Requirements through substituted compliance, where appropriate, with respect to swaps with foreign counterparties and a foreign branch of another U.S. person. 

If all of the following factors apply, then a swap is considered to be with the foreign branch of a U.S. bank: (1) the employees negotiating and agreeing to the terms of the swap (or, if the swap is executed electronically, managing the execution of the swap), other than employees with functions that are solely clerical or ministerial, are located in such foreign branch or in another foreign branch of the U.S. bank; (2) the foreign branch or another foreign branch is the office through which the U.S. bank makes and receives payments and deliveries under the swap on behalf of the foreign branch pursuant to a master netting or similar trading agreement, and the documentation of the swap specifies that the office for the U.S. bank is such foreign branch; (3) the swap is entered into by such foreign branch in its normal course of business; (4) the swap is treated as a swap of the foreign branch for tax purposes; and (5) the swap is reflected in the local accounts of the foreign branch.

An affiliate conduit includes entities that function as a conduit or vehicle for U.S. persons conducting swap transactions with third-party counterparties.  The factors that are relevant to considering whether a non-U.S. person is an “affiliate conduit” include: (1) the non-U.S. person is a majority-owned affiliate of a U.S. person; (2) the non-U.S. person is controlling, controlled by, or under common control with the U.S. person; (3) the financial results of the non-U.S. person are included in the consolidated financial statements of the U.S. person; and (iv) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third-party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with its U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates.

A guarantee of a swap is a collateral promise by a guarantor to answer for the debt or obligation of a counterparty obligor under a swap.  The Guidance addresses the impact of the cross-border framework on a non-U.S. person that is an affiliate of a U.S. person and is guaranteed by a U.S. person.  For example, a guaranteed or conduit affiliate is expected to count all of its swap dealing transactions—whether with U.S. or non-U.S. counterparties—towards the de minimis threshold for swap dealer registration.  Further, whether or not an entity is guaranteed by a U.S. person affects the availability of substituted compliance.  See Substituted Compliance FAQs.

Entity-Level Requirements apply to a swap dealer or major swap participant as a whole.  The Entity-Level Requirements are divided into two categories.  The first category includes requirements related to: (1) capital adequacy, (2) chief compliance officer, (3) risk management, and (4) swap data recordkeeping.  The second category includes: (1) swap data repository reporting (“SDR Reporting”), (2) certain aspects of swap data recordkeeping related to complaints, marketing, and sales materials, and (3) physical commodity large swaps trader reporting (“Large Trader Reporting”). 

Transaction-Level Requirements apply to an individual swap transaction or trading relationship, or on a transaction-by-transaction basis.  The Transaction-Level Requirements are divided into two categories.  All of the Transaction-Level Requirements, except external business conduct standards, are in Category A: (1) required clearing and swap processing; (2) margining (and segregation) for uncleared swaps; (3) mandatory trade execution; (4) swap trading relationship documentation; (5) portfolio reconciliation and compression; (6) real-time public reporting; (7) trade confirmation; and (8) daily trading records.  External business conduct standards are in Category B.

Requirements under Title VII of the Dodd-Frank Act applicable to swap dealers and major swap participants (“MSPs”) apply to all registered swap dealers and MSPs, irrespective of where they are based.  In certain circumstances, however, the Commission permits a non-U.S. swap dealer, non-U.S. MSP, U.S. bank that is a swap dealer or MSP with respect to its foreign branches, or non-U.S. non-registrant that is a guaranteed or conduit affiliate, to substitute compliance with the requirements of the relevant home jurisdiction’s law and regulations (or in the case of foreign branches of a bank, the foreign location of the branch) instead of complying with otherwise applicable Entity-Level Requirements and/or Transaction-Level Requirements under Commission regulations. 

The Commission would have to find that such home jurisdiction’s requirements (or in the case of foreign branches of a bank, the foreign location of the branch) are comparable with and as comprehensive as the corollary area(s) of regulatory obligations encompassed by the Entity- and Transaction-Level Requirements.

Persons who may request a comparability determination include: (1) foreign regulators, (2) an individual non-U.S. entity, or group of non-U.S. entities; (3) a U.S. bank that is a swap dealer or major swap participant with respect to its foreign branches; or (4) a trade association, or other group, on behalf of similarly-situated entities.  Persons requesting a comparability determination may want to coordinate their application with other market participants and their home regulators to simplify and streamline the process.

During the CFTC open meeting to consider the Guidance on July 12, 2013, Commissioner O’Malia requested comments from Commission staff regarding the timeframe for making substituted compliance determinations.  In response, staff noted that it had received submissions from all six jurisdictions of registered swap dealers, including the European Union, Switzerland, Hong Kong, Australia, Canada, and Japan.  Commission staff stated that it is in the process of reviewing these submissions, developing an understanding of the regulations, guidelines, and laws of each jurisdiction, and consulting with market participants and regulators in each jurisdiction.  The Commission expects this process “will take a matter of months.”

Yes.  Following a comparability determination for a jurisdiction, it will apply for all entities or transactions in that jurisdiction to the extent provided in the determination, as approved by the Commission.

The Commission expects to enter into an appropriate MOU or similar arrangement with relevant foreign regulators in connection with its substituted compliance determinations.  In particular, the Commission and relevant foreign regulators will need to establish supervisory MOUs or other arrangements, providing for information sharing and cooperation in terms of supervising swap dealers and major swap participants.

No.  U.S. swap dealers and U.S. major swap participants are generally expected to comply in full with all of the Entity-Level Requirements and Transaction-Level Requirements without the availability of substituted compliance.

These entities are expected to comply in full with the Entity-Level Requirements without the availability of substituted compliance. 

In terms of Transaction-Level Requirements, a foreign branch of a U.S. swap dealer or major swap participants (“MSPs”) is expected to comply in full with Category A Transaction-Level Requirements where its counterparty is a U.S. person.  However, substituted compliance is generally available to a foreign branch of a U.S. bank with regard to Category A Transaction-Level Requirements where the counterparty to a swap transaction is a non-U.S. person or a foreign branch of a U.S. bank that is a swap dealer or MSP.  Lastly, a foreign branch of a U.S. bank must comply with the Category B Transaction-Level Requirements only if the counterparty to the swap is a U.S. person.

These firms are subject to all of the Entity-Level Requirements, but are eligible for substituted compliance in the following circumstances.  In terms of the first category of Entity-Level Requirements, these entities are eligible for substituted compliance.  With respect to SDR reporting (i.e. SDR Reporting and swap data recordkeeping related to complaints, marketing, and sales materials) in the second category of Entity-Level Requirements, these entities are eligible for substituted compliance solely with respect to swaps where the counterparty is a non-U.S. person that is not a guaranteed or conduit affiliate.  In terms of the other Entity-Level Requirements in the second category (i.e. swap data recordkeeping related to complaints, marketing, and sales materials), these entities are eligible for substituted compliance solely with respect to swaps where the counterparty is a non-U.S. person.  

In terms of Transaction-Level Requirements, the availability of substituted compliance depends in part on the type of counterparty to the swap transaction.  In a swap between a non-U.S. swap dealer or non-U.S. major swap participant and a U.S. person, the parties are required to comply with Category A Transaction-Level Requirements, and substituted compliance for Category A Transaction-Level Requirements generally is not available.  The Commission notes, however, that with respect to a swap executed anonymously between any non-U.S. person and a U.S. person on a registered DCM or SEF and cleared, the non-U.S. person is generally considered to have satisfied each of the eight Category A Transaction-Level Requirements as a result of being executed on a DCM or SEF.  In other words, neither party would have to take any further steps to comply with the Category A Transaction-Level Requirements in connection with such transaction.

In a swap between a non-U.S. swap dealer or non-U.S. major swap participant and a foreign branch of a U.S. bank that is a swap dealer or major swap participant, substituted compliance is available for Category A Transaction-Level Requirements.

In a swap between a non-U.S. swap dealer or non-U.S. major swap participant and a non-U.S. person that is guaranteed or conduit affiliate, the parties are required to comply with Category A Transaction-Level Requirements, but substituted compliance may be available.  Conversely, in a swap between a non-U.S. swap dealer or non-U.S. major swap participant and a non-U.S. person that is not guaranteed or conduit affiliate, the parties are not expected to comply with Category A Transaction-Level Requirements.

In terms of Category B Transaction-Level Requirements, where a swap is between a non-U.S. swap dealer or non-U.S. major swap participant and a U.S. person, the parties must comply with the Category B Transaction-Level Requirements.  These requirements, however, do not apply to a swap between such entities that is executed anonymously on a registered DCM or SEF and cleared.  Conversely, in terms of a swap between a non-U.S. swap dealer or non-U.S. major swap participant and a non-U.S. counterparty, the parties to the swap are not required to comply with Category B Transaction-Level Requirements. 

Several of the Commission regulations—including those related to required clearing, trade execution, real-time public reporting, large trader reporting, SDR reporting, and swap data recordkeeping (“Non-Registrant Requirements”)—apply to non-registrants. 

In terms of swaps between non-registrants where at least one is a U.S. person, the parties to the swap must comply with the Non-Registrant Requirements and substituted compliance is not available.  The Commission notes, however, that when a swap is executed anonymously on a registered DCM or SEF between two non-registrants and cleared by a registered DCO, and at least one of the counterparties to the swap is a U.S. person, neither party to the swap is required to comply with the Non-Registrant Requirements that would otherwise apply to the swap, with the exception of large trader reporting, SDR reporting, and swap data recordkeeping.

In terms of swaps between non-registrants that are both non-U.S. persons, the Non-Registrant Requirements are inapplicable, with the exception of the large trader reporting and recordkeeping requirements.  However, for a swap between two non-registrants that are not U.S. persons, and both counterparties to the swap are guaranteed or conduit affiliate, the Non-Registrant Requirements apply, though the parties are eligible for substituted compliance.  Lastly, with respect to swaps between two non-registrants, where neither or only one party is a guaranteed or conduit affiliate, the parties are generally not required to comply with the Non-Registrant Requirements.[4]

No.  Unlike the SEC’s cross-border proposal, the CFTC’s Guidance does not focus upon the impact of the cross-border framework on registered service providers.  Rather, the Guidance focuses upon the application of swaps provisions to various counterparties.  As a result, it is yet unclear how the Commission will handle issues involving, for example, the potential registration and regulation (if any) of foreign-based registered service providers.

In terms of a non-U.S. person’s registration threshold for swap dealing activity, if a non-U.S. person that is not guaranteed by a U.S. person enters into swaps anonymously on a registered DCM, SEF, or FBOT, and such swaps are cleared, the non-U.S. person generally is not required to count such swaps against its de minimis threshold. 

Further, as noted in the Substituted Compliance FAQs, entities may be considered to have satisfied certain swaps requirements by executing a swap anonymously on a registered DCM or SEF and clearing such swap.  For example, with respect to a swap executed anonymously between any non-U.S. person and a U.S. person on a registered DCM or SEF and cleared, the non-U.S. person is generally considered to have satisfied each of the eight Category A Transaction-Level Requirements as a result of being executed on a DCM or SEF.  In other words, neither party would have to take any further steps to comply with the Category A Transaction-Level Requirements in connection with such transaction.

SDR reporting and real-time public reporting are generally eligible for substituted compliance for certain entities, provided that that Commission has direct access (including electronic access) to the relevant swap data[5] that is stored at the foreign trade repository.  Direct access generally includes, at a minimum, real time, direct electronic access to the data and the absence of any legal impediments to the Commission’s access to the data.

The Commission states that it will, through staff no-action letters, extend appropriate time-limited transitional relief to certain European Union-regulated multilateral trading facilities (MTFs), in the event that the Commission’s trade execution requirement is triggered before March 15, 2014.  Such relief would be available through March 15th for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight.  Further, the Commission will consult with the European Commission to consider extending regulatory relief to European Union-regulated trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs.  Both parties will assess progress in January 2014.

On May 1, 2013, the SEC proposed rules and interpretive guidance for parties to cross-border security-based (“SB”) swap transactions, which include a proposed definition of the term “U.S. person” and address which regulatory requirements apply when a transaction occurs partially within and outside of the United States.  The proposed rules also discuss a substituted compliance framework for cross-border SB swap transactions in certain circumstances.

The SEC’s proposed cross-border approach differs from the CFTC’s Guidance in several significant ways.  For example, the SEC’s and the CFTC’s respective definitions of the term “U.S. person” differ and, notably, the SEC’s proposed rules include a discussion of the impact of the cross-border framework on registered service providers, such as SB swap clearing agencies, SB swap data repositories, and SB swap execution facilities.  The CFTC’s Guidance, on the other hand, focuses primarily on the impact of the cross-border framework on counterparties to a transaction with respect to Entity- and Transaction-Level Requirements.

The Commission states that the Guidance, “[u]nlike a binding rule,” is “a statement of the Commission’s general policy regarding cross-border swap activities and allows for flexibility in application to various situations.”  However, by issuing its cross-border framework through the form of interpretive guidance, the Commission has avoided subjecting its cross-border approach to the requirements of the Administrative Procedure Act, including the Commodity Exchange Act requirement that the Commission conduct a cost-benefit analysis. 

On July 12, 2013, the Commission approved a final exemptive order with respect to certain swap requirements (“Exemptive Order”), providing temporary conditional relief effective on July 13, 2013, which will expire on December 31, 2013 or such earlier date as specified in the Exemptive Order. 

Of note, the Exemptive Order permits market participants to continue applying the definition of the term “U.S. person” contained in a prior January exemptive order until 75 days after the Guidance is published in the Federal Register. 

With respect to Entity-Level Requirements, the Commission also provides that non-U.S. swap dealers and non-U.S. MSPs in Australia, Canada, the European Union, Hong Kong, Japan, or Switzerland may delay compliance with the majority of Entity-Level Requirements for which substituted compliance is permitted under the Guidance until the earlier of: (1) December 21, 2013, or (2) 30 days following the issuance of a substituted compliance determination for the relevant Entity-Level Requirement of the jurisdiction in which the non-U.S. swap dealer or MSP is established.

With respect to SDR Reporting requirements, however, non-U.S. swap dealers and non-U.S. MSPs in Australia, Canada, the European Union, Hong Kong, Japan, or Switzerland—which are not part of an affiliated group in which the ultimate parent entity is a U.S. SD, U.S. MSP, U.S. bank, U.S. financial holding company, or U.S. bank holding company—may delay compliance for swaps with non-U.S. counterparties until the earlier of: (1) December 21, 2013, or (2) 30 days following the issuance of a relevant substituted compliance determination, provided that, during the relief period, (1) such entities are in compliance with the swap data recordkeeping and reporting requirements of their home jurisdictions; or (2) where no swap data reporting requirements have been implemented in their home jurisdictions, such entities comply with the recordkeeping requirements of Commission Regulations 45.2, 45.6, 46.2, and 46.4.

With respect to Transaction-Level Requirements, generally, a non-U.S. swap dealer or non-U.S. MSP in Australia, Canada, the European Union, Hong Kong, Japan, or Switzerland may comply with any law and regulation of the jurisdiction in which it is established in lieu of complying with any Transaction-Level Requirement for which substituted compliance is possible under the Guidance until the earlier of: (1) December 21, 2013, or (2) 30 days following the issuance of a substituted compliance determination for the relevant regulatory requirement of the jurisdiction in which such entity is established. 

Similarly, a foreign branch of a U.S. swap dealer or MSP located in Australia, Canada, the European Union, Hong Kong, Japan, or Switzerland may generally comply with any law and regulations of the jurisdiction in which it is located in lieu of complying with any Transaction-Level Requirement for which substituted compliance is possible under the Guidance until the earlier of: (1) December 21, 2013, or (2) 30 days following the issuance of a substituted compliance determination for the relevant regulatory requirement.