Almost two years ago, in November 2013, CFTC staff issued a cryptic 2-page Advisory stating that swaps between a non-US swap dealer and a non-US person, even if they are booked outside the United States, are subject to certain “Transaction-Level Requirements” adopted by the CFTC in implementing the Dodd-Frank derivatives reforms, if the non-US swap dealer arranged, negotiated, or executed such swaps through personnel or agents located in the United States. Transaction-Level Requirements include, for example, clearing and trade execution mandates, swap trading relationship documentation requirements, portfolio reconciliation and compression requirements, and others.
The reaction was adverse, immediate, and intense. Market participants objected, in part, on the basis that this significant policy decision was nowhere stated in the cross-border interpretive guidance for swaps that the CFTC had issued just four months earlier.
As a result of this opposition, the CFTC quickly requested public comment on the issue, and staff issued “no-action” relief promising not to enforce the Advisory until January 14, 2014. When the issue remained unresolved, CFTC staff subsequently extended this no-action relief three times – first to September 15, 2014; then to December 31, 2014; and then to September 30, 2015.
Now, apparently with no decision yet in sight, CFTC staff has extended the no-action relief once again – this time for a full year, to September 30, 2016. In a separate statement, Commissioner Christopher Giancarlo urged the CFTC to permanently withdraw the Advisory, stating: “When a regulatory action needs five delays, I think we all can admit that it is just not workable and should be scrapped.”
Meanwhile, as the CFTC wrestles with this issue for swaps, the SEC in April 2015 proposed cross-border rules for security-based swap activity in the United States. The SEC proposed, among other things, that:
- A non-US company that uses personnel located in the United States to arrange, negotiate or execute a security-based swap in connection with its dealing activity must include that transaction in determining whether it must register as a security-based swap dealer; and
- External business conduct (i.e., sales practice) standards, as well as regulatory reporting and public dissemination obligations (but not clearing or trade execution mandates), apply to a non-US security-based swap dealer’s transactions if they are arranged, negotiated, or executed by its personnel located in a US branch or office.