# Final Exemptive Order Regarding Compliance With Certain Swap Regulations

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2012-31736

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 7, 2013
- **Citation:** 78 FR 858

## Text

COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
RIN 3038-AD85
Final Exemptive Order Regarding Compliance With Certain Swap Regulations

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final order.

SUMMARY:

On July 12, 2012, the Commodity Futures Trading Commission (“Commission” or “CFTC”) published for public comment, pursuant to section 4(c) of the Commodity Exchange Act (“CEA”), a proposed order (“Proposed Order”) that

would grant market participants temporary conditional relief from certain provisions of the CEA, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Dodd-Frank”), and the Commission also published its proposed interpretive guidance and policy statement (“Proposed Guidance”) regarding the cross-border application of the swap provisions of the CEA as added by Title VII of the Dodd-Frank Act. The Commission has determined to finalize the Proposed Order, with certain modifications and clarifications to address public comments. Under this final order (“Final Order”), a non-U.S. person that registers as a swap dealer (“SD”) or major swap participant (“MSP”) may delay compliance with certain entity-level requirements of the CEA (and Commission regulations promulgated thereunder), and non-U.S. SDs and MSPs and foreign branches of U.S. SDs and MSPs may delay compliance with certain transaction-level requirements of the CEA (and Commission regulations promulgated thereunder), subject to specified conditions. In addition, the Commission is separately proposing further guidance on certain specific aspects of the Proposed Guidance (“Further Proposed Guidance”).

DATES:

The Final Order is effective on December 21, 2012 and will expire on July 12, 2013.

FOR FURTHER INFORMATION CONTACT:

Carlene S. Kim, Deputy General Counsel, (202) 418-5613,
ckim@cftc.gov,
Terry Arbit, Deputy General Counsel, (202) 418-5357,
tarbit@cftc.gov,
Mark Fajfar, Assistant General Counsel, (202) 418-6636,
mfajfar@cftc.gov,
Office of General Counsel; Gary Barnett, Director, Division of Swap Dealer and Intermediary Oversight, (202) 418-5977,
gbarnett@cftc.gov;
Jacqueline H. Mesa, Director, Office of International Affairs, (202) 418-5386,
jmesa@cftc.gov;
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Act,
1

which amended the CEA
2

to establish a new regulatory framework for swaps. The legislation was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and comprehensive regulation of SDs and MSPs; (2) imposing clearing and trade execution requirements on standardized derivative products; (3) creating rigorous recordkeeping and data reporting regimes with respect to swaps, including real-time public reporting; and (4) enhancing the Commission's rulemaking and enforcement authorities over all registered entities, intermediaries, and swap counterparties subject to the Commission's oversight. Section 722(d) of the Dodd-Frank Act also amended the CEA to add section 2(i), which provides that the swap provisions of the CEA apply to cross-border activities when certain conditions are met, namely, when such activities have a “direct and significant connection with activities in, or effect on, commerce of the United States” or when they contravene Commission rulemaking.
3

1

See
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).

2
7 U.S.C. 1
et seq.
(amended 2010).

3
7 U.S.C. 2(i)

In the two years since its enactment, the Commission has finalized 41 rules to implement Title VII of the Dodd-Frank Act. The finalized rules include those promulgated under CEA section 4s,
4

which address registration of SDs and MSPs and other substantive requirements applicable to SDs and MSPs. Notably, many section 4s requirements applicable to SDs and MSPs are tied to the date on which a person is required to register, unless a later compliance date is specified.
5

A number of other rules specifically applicable to SDs and MSPs have been proposed but not finalized.
6

4
7 U.S.C 6s.

5
Examples of section 4s implementing rules that become effective for SDs and MSPs at the time of their registration include requirements relating to swap data reporting (Commission regulation 23.204) and conflicts of interest (Commission regulation 23.605(c)-(d)). The chief compliance officer requirement (Commission regulations 3.1 and 3.3) is an example of those rules that have specific compliance dates. The compliance dates are summarized on the Compliance Dates page of the Commission's Web site. (
http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm
).

6
These include rules under CEA section 4s(e), 7 U.S.C. 6s(e) (governing capital and margin requirements for SDs and MSPs).

Further, the Commission published for public comment the Proposed Guidance,
7

which set forth the manner in which it proposed to interpret section 2(i) of the CEA as it applies to the requirements under the Dodd-Frank Act and the Commission's regulations promulgated thereunder regarding cross-border swap activities. Specifically, in the Proposed Guidance, the Commission described the general manner in which it proposed to consider: (1) Whether a non-U.S. person's swap dealing activities are sufficient to require registration as a “swap dealer”,
8

as further defined in a joint release adopted by the Commission and the Securities and Exchange Commission (“SEC”) (collectively, the “Commissions”);
9

(2) whether a non-U.S. person's swap positions are sufficient to require registration as a “major swap participant,”
10

as further defined in the Final Entities Rules; and (3) the treatment of foreign branches, agencies, affiliates, and subsidiaries of U.S. SDs and of U.S. branches of non-U.S. SDs. The Proposed Guidance also generally described the policy and procedural framework under which the Commission may permit compliance with a comparable regulatory requirement of a foreign jurisdiction to substitute for compliance with the requirements of the CEA. Last, the Proposed Guidance set forth the manner in which the Commission proposed to interpret section 2(i) of the CEA as it applies to the clearing, trading, and certain reporting requirements under the Dodd-Frank Act with respect to swaps between counterparties that are not SDs or MSPs.

7
“Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act,” 77 FR 41214, Jul. 12, 2012.

8
7 U.S.C. 1a(49).

9

See
“Further Definition of ‘Swap Dealer,’ ‘Security-Based Swap Dealer,’ ‘Major Swap Participant,’ ‘Major Security-Based Swap Participant’ and ‘Eligible Contract Participant,’ ” 77 FR 30596, May 23, 2012 (“Final Entities Rules”).

10
7 U.S.C. 1a(33).

Contemporaneously with the Proposed Guidance, the Commission published the Proposed Order pursuant to section 4(c) of the CEA,
11

in order to foster an orderly transition to the new swaps regulatory regime and to provide market participants greater certainty regarding their obligations with respect to cross-border swap activities during the pendency of the Proposed Order. The Proposed Order would grant temporary relief from certain swap provisions of Title VII of the Dodd-Frank Act.

11
“Exemptive Order Regarding Compliance With Certain Swap Regulations,” 77 FR 41110 Jul. 12, 2012.

The public comment periods on the Proposed Order and the Proposed Guidance ended on August 13, 2012 and August 27, 2012, respectively. The Commission received approximately 26 letters on the Proposed Order and approximately 288 letters on the Proposed Guidance from a variety of market participants and other interested

parties, including major U.S. and non-U.S. banks and financial institutions that conduct global swaps business, trade associations, clearing organizations, law firms (representing international banks and dealers), individual citizens, and foreign regulators.
12

The Commission staff also held numerous meetings and discussions with various market participants, domestic bank regulators, and other interested parties to discuss the Proposed Order and the Proposed Guidance.
13

12
Some of the commenters submitted a single comment letter addressing both the Proposed Order and the Proposed Guidance. The comment letters submitted in response to the Proposed Order and Proposed Guidance may be found on the Commission's Web site at
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234.

Approximately 200 individuals submitted substantially identical letters to the effect that oversight of the $700 trillion global derivatives market is the key to meaningful reform. The letters stated that because the market is inherently global, risks can be transferred around the world with the touch of a button. Further, according to these letters, loopholes in the Proposed Guidance could allow foreign affiliates of Wall Street banks to escape regulation. Lastly, the letters requested that the Proposed Guidance be strengthened to ensure that the Dodd-Frank derivatives protections will directly apply to the full global activities of all important participants in the U.S. derivatives markets.

13
The records of these meetings and communications can be found on the Commission's Web site at:
http://cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.

Further, the Commission staff closely consulted with the staff of the SEC in an effort to increase understanding of each other's regulatory approaches and to harmonize the cross-border approaches of the two agencies to the greatest extent possible, consistent with their respective statutory mandates.
14

The Commission expects that this consultative process will continue as each agency works towards implementing its respective cross-border policy.

14
In addition to differences in the applicable statutory provisions, there are also differences in the markets and products overseen by each agency, which may lead to divergent approaches to cross-border activities.

The Commission also recognizes the critical role of international cooperation and coordination in the regulation of derivatives in the highly interconnected global market, where risks are transmitted across national borders and market participants operate in multiple jurisdictions. Close cooperative relationships and coordination with other jurisdictions take on even greater importance given that, prior to the recent reforms, the swaps market has largely operated without regulatory oversight and many jurisdictions are in differing stages of implementing their regulatory reform. To this end, the Commission staff has actively engaged in discussions with their foreign counterparts in an effort to better understand and develop a more harmonized cross-border regulatory framework. The Commission expects that these discussions will continue as it finalizes the cross-border interpretive guidance and as other jurisdictions develop their own regulatory requirements for derivatives.
15

15
This is one aspect of the Commission's on-going bilateral and multilateral efforts to promote international coordination of regulatory reform. The Commission staff is engaged in consultations with Europe, Japan, Hong Kong, Singapore, Switzerland, Canada, Australia, Brazil, and Mexico on derivatives reform. In addition, the Commission staff is participating in several standard-setting initiatives, co-chairs the IOSCO Task Force on OTC Derivatives, and has created an informal working group of derivatives regulators to discuss implementation of derivatives reform.
See also
Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-border OTC Derivatives Market, included in CFTC Press Release 6439-12, Dec. 4, 2012.

The Commission has determined not to take further action on the Proposed Guidance at this time. The Commission believes it will be beneficial to have further consultations with other domestic and international regulators in an effort to harmonize cross-border regulatory approaches prior to taking action with respect to the Proposed Guidance. The Commission also believes that further consideration of public comments, including the comments that may be received on the Further Proposed Guidance regarding the Commission's interpretation of the term “U.S. person,” and its guidance regarding aggregation for purposes of SD registration, will be helpful to the Commission in issuing final interpretive guidance.

Nonetheless, the Commission has determined to issue the Final Order as a time-limited exemptive order that is substantially similar to the Proposed Order, except for the addition of provisions regarding registration and certain modifications and clarifications addressing public comments. Recently, the Commission staff granted time-limited, no-action relief to promote continuity in the application of Dodd-Frank requirements and facilitate the transition to those requirements by enabling swap market participants to apply a uniform and readily ascertainable standard regarding which swaps must be included in the calculations under the SD and MSP definitions.
16

The Final Order continues that process and furthers the same purposes.
17

16

See
CFTC Division of Swap Dealer and Intermediary Oversight, Re: Time-Limited No-Action Relief: Swaps Only With Certain Persons to be Included in Calculation of Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception and Calculation of Whether a Person is a Major Swap Participant, No-Action Letter No. 12-22, Oct. 12, 2012 (“CFTC Letter No. 12-22”).

17
The Commission intends that the Final Order is in addition to any no-action relief issued or to be issued by the Commission staff. Unless specifically provided in any letter providing no-action relief, the Final Order does not limit the availability of any no-action relief.

In preparing the Final Order, the Commission has attempted to be responsive to commenters' concerns and recommendations, so that market practices will not be unnecessarily disrupted during the transition to the new swap regulatory regime. At the same time, the Commission also recognizes the importance of the new SD and MSP regulatory scheme to the Dodd-Frank swap reforms and, therefore, is mindful that its implementation should not be subject to undue delay. The Commission believes that the Final Order strikes the proper balance between promoting an orderly transition to the new regulatory regime, while appropriately tailoring relief to ensure that the Commission can responsibly discharge its statutory duties.

This release is organized in seven sections. Section II provides a brief overview of the Commission's exemptive authority under section 4(c) of the CEA and the Proposed Order; Section III provides a summary of the comments received on the Proposed Order and the Commission determinations regarding the Final Order; Section IV provides the Commission's findings pursuant to CEA section 4(c); Section V addresses the Paperwork Reduction Act; Section VI discusses cost benefit considerations; and Section VII contains the Final Order.

II. Commission's Exemptive Authority and Proposed Order

A. Section 4(c) of the CEA

Section 4(c)(1) of the CEA authorizes the Commission to “promote responsible economic or financial innovation and fair competition” by exempting any transaction or class of transaction from any of the provisions of the CEA (subject to certain exceptions) where the Commission determines that the exemption would be consistent with the public interest and the purposes of the CEA.
18

Under section 4(c)(2) of the CEA, the Commission may not grant exemptive relief unless it determines that: (1) The exemption is appropriate

for the transaction and consistent with the public interest; (2) the exemption is consistent with the purposes of the CEA; (3) the transaction will be entered into solely between “appropriate persons”; and (4) the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory responsibilities under the CEA.
19

In enacting section 4(c), Congress noted that the purpose of the provision is to give the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.
20

18
CEA section 4(c)(1), 7 U.S.C. 6(c)(1).

19
CEA section 4(c)(2), 7 U.S.C. 6(c)(2).

20
House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213.

B. Proposed Order

Under the Proposed Order, the Commission would allow non-U.S. SDs and MSPs to delay compliance with certain Entity-Level Requirements of the Dodd-Frank Act (and the Commission's regulations thereunder), subject to specified conditions described therein.
21

An exception to the foregoing relief from the Entity-Level Requirements related to the swap data repository (“SDR”) reporting requirement
22

and part 20 of the Commission's regulations relating to large-trader reporting (“LTR”). Specifically, non-U.S. SDs and MSPs would be required to comply with the SDR reporting and LTR requirements for all swaps with U.S. counterparties upon their compliance date. Further, for swaps with non-U.S. counterparties, the Commission proposed that only those non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a U.S.-based SD would be permitted to delay compliance with the SDR reporting and LTR requirements.

21
The “Entity-Level Requirements” and “Transaction-Level Requirements” for purposes of the Proposed Order were the same as those defined for purposes of the Final Order.
See
section II.D.1., below.

22

See
7 U.S.C. 2(a)(13)(G). The Commission believes that the data reported to, and collected by, SDRs will be important to its ability to effectively monitor and address the risk exposures of individual market participants (including SDs and MSPs) and the concentration of risk within the swaps market more generally.

With respect to U.S. SDs and MSPs, the Commission proposed to permit such registrants
23

to delay compliance with certain Entity-Level Requirements through January 1, 2013. This relief with respect to Entity-Level Requirements, however, would not extend to swap data recordkeeping, SDR reporting or LTR requirements. That is, U.S. SDs and MSPs would be required to comply with the swap data recordkeeping, SDR reporting and LTR requirements for all swaps.

23
For purposes of the Final Order, the term “registrant” means a registered SD or MSP.

The Commission also proposed to grant, with respect to certain Transaction-Level Requirements of the Dodd-Frank Act (and the Commission's regulations thereunder), temporary relief to non-U.S. SDs and MSPs, as well as foreign branches of U.S. SDs and MSPs, for swaps with a non-U.S. counterparty so that they may comply only with the regulations as may be required in the home jurisdiction of the non-U.S. registrant (or in the case of a foreign branch of a U.S. registrant, the foreign location of the branch).
24

With respect to swaps with any U.S. counterparty, however, these registrants (as well as foreign branches of U.S. SDs and MSPs) would be required to comply with all applicable Transaction-Level Requirements that are in effect. Finally, the Commission did not propose exemptive relief for swaps between market participants that are neither SDs nor MSPs.

24
Under the Proposed Guidance, a foreign branch of a U.S. person would be deemed a U.S. person. Accordingly, swaps entered into between a foreign branch of a U.S. person and another foreign branch of a U.S. person would be subject to the Transaction-Level Requirements.

The proposed temporary exemptive relief for non-U.S. registrants (and foreign branches of U.S. registrants with respect to Transaction-Level Requirements) would become effective on the compliance date for registration and expire 12 months following the publication of the Proposed Order in the
Federal Register
(
i.e.,
July 12, 2013). In the Proposed Order, the Commission also stated that, in the interest of promoting an orderly transition to the new swap regulatory regime, it intends to consider extending the effectiveness of the exemptive relief at its expiration based on, among other things, whether and when substituted compliance with foreign regulatory requirements for non-U.S. persons is available.

A non-U.S. registrant seeking relief under the Proposed Order would have to satisfy certain conditions. First, a non-U.S. person that is required to register as an SD or MSP would have to apply to become registered as such when registration is required. Second, within 60 days of applying for registration, a non-U.S. registrant would have to submit to the National Futures Association (“NFA”) a compliance plan addressing how it plans to comply, in good faith, with all applicable requirements under the CEA and related rules and regulations upon the effective date of final cross-border interpretive guidance.

The Commission further noted that the proposed relief would neither: (1) Limit the applicability of any CEA provision or Commission regulation to any person, entity or transaction except as provided in the Proposed Order; nor (2) affect any effective date or compliance date set out in any specific Dodd-Frank Act rulemaking by the Commission.

III. Comments on the Proposed Order and Commission Determinations

A. Comments Generally

Many commenters expressed general support for the Proposed Order but urged the Commission to broaden the scope of the relief to give market participants adequate time to implement necessary operational and compliance changes and to reflect the fact that certain key aspects of the Proposed Guidance (particularly those relating to registration determinations) were not yet final as of the date of the comments.
25

Many of the commenters supporting temporary exemptive relief also suggested specific modifications or clarifications of the Proposed Order concerning the scope and/or timing of the exemptive relief.
26

25

See e.g.,
Letters from Security Industry and Financial Markets Association (“SIFMA”) (Aug. 13, 2012); Institute of International Bankers (“IIB”) (Aug. 9, 2012); Cleary Gottlieb Steen & Hamilton LLP (“Cleary”) (Aug. 16, 2012); and Futures Options Association (“FOA”) (Aug. 13, 2012). Some of the commenters expressly stated that the Commission should finalize the exemptive relief as promptly as possible.
See e.g.,
IIB Letter at 1 and Cleary Letter at 3. For example, IIB stated that the proposed relief should be modified to address “unrealistic and unwarranted” compliance burdens related to the Proposed Guidance and certain aspects of the Commission regulations adopted to date. IIB Letter (Aug. 9, 2012) at 2. Accordingly, IIB requested limited interim relief from certain aspects of the Commission's registration and definitional rules (in particular, the aggregation requirement for purposes of the de minimis calculation).
Id.
at 3-7. Similarly, The Clearing House Association LLC (“The Clearing House”) expressed concerns that the proposed relief will be “ultimately ineffective” in accomplishing its objectives if concepts from the Proposed Guidance are required to be applied before they are finalized, and requested exemption from those rules or concepts that are not yet finalized. The Clearing House (Aug. 13, 2012) at 2.

26

See, e.g.,
SIFMA (Aug. 13, 2012), at 3, 5-6, 10-13, A-50; Lloyds Banking Group (“Lloyds”) (Aug. 13, 2012) at 1-2; IIB (Aug. 9, 2012), at 5; Canadian Bankers Association (Aug. 13, 2012), at 2; Credit Suisse (Aug. 27, 2012), at 7; Cleary (Aug. 16, 2012), at 4; Deutsche Bank AG (“Deutsche Bank”) (Aug. 13, 2012), at 3, 7; Societe Generale (Aug. 8, 2012), at 2.

On the other hand, other commenters—namely, public interest groups such as Americans for Financial Reform (“AFR”) and Public Citizen's Congress Watch—expressed concerns

about delaying the implementation of the Dodd-Frank Act to overseas activities.
27

AFR stated that the Proposed Order would significantly extend the period where markets lack critical protections against derivatives risks and expressed concern about taxpayer exposure to foreign banks, particularly “foreign affiliates of U.S. banks whose liabilities are guaranteed (implicitly or explicitly) by the parent company.”
28

Similarly, Public Citizen's Congress Watch expressed the concern that the Proposed Order would unnecessarily delay compliance with most entity requirements and transaction requirements for foreign subsidiaries and affiliates of U.S. financial institutions and for U.S. subsidiaries and affiliates of foreign banks, further prolonging exposure of U.S. taxpayers to unnecessary systemic risks.
29

27

See
AFR (Aug. 13, 2012), at 1-4. AFR stated that, while it recognized the complexities and challenges the industry faces, “the large swap entities designated under the Dodd-Frank Act have been aware of the general contours of these requirements for several years, and there have already been significant delays in implementation.” AFR Letter at 2. Public Citizen's Congress Watch expressed concerns that delayed compliance would unnecessarily prolong American taxpayers' exposure to the systemic risks of U.S. institutions and interests.
See
Public Citizen's Congress Watch (submitted by Professor I. Michael Greenberger) (“Public Citizen's Congress Watch”) (Aug. 14, 2012) at 1-13.

28
AFR (Aug. 13, 2012) at 2.

29

See
Public Citizen's Congress Watch (Aug. 14, 2012) at 1-2.

B. Definition of “U.S. Person”

Although at this time the Commission is not making any determinations as to the scope of the final interpretive guidance, the Commission believes that the comments received on the definition of U.S. person set forth in the Proposed Guidance are nonetheless relevant and helpful in determining the appropriate scope of exemptive relief in the Final Order. Taken together, these comments generally support, as an interim measure, the approach taken by the Commission staff in CFTC Letter No. 12-22 regarding the initial scope of the application of the CEA to swaps activities. Accordingly, in light of the Commission's experience to date with CFTC Letter No. 12-22 and these comments, it is taking a similar approach to the definition of U.S. person to that set forth in the staff no-action letter and supported by many commenters.

To be clear, the Commission wishes to emphasize that the discussion here is not, and should not be construed as, an indication of, or a limitation on, the definition of the term “U.S. person” that the Commission may adopt in final cross-border interpretive guidance. As discussed further below, the Commission is seeking further comment on this issue. However, the Commission is aware that the terms “U.S. person” and “non-U.S. person” are commonly used in the discussion of these issues. For ease of reference, therefore, this release and the Final Order use the term “U.S. person” to refer to a person that is described by the criteria discussed below, and the term “non-U.S. person” to refer to any other person.
30

30
A number of commenters voiced concerns regarding potential expansion of the term “U.S. person” that they thought could result from the prefatory phrase “includes, but is not limited to” that appeared in the Proposed Guidance. These commenters requested that the Commission affirmatively state that non-U.S. persons are any persons that do not meet the definition of “U.S. person.”
See
SIFMA (Aug. 27, 2012) at A-15; IIB (Aug. 27, 2012) at 11-12; European Commission (“EC”) (Aug. 24, 2012) at 1-2; and Australian Bankers Association Inc. (“Australian Bankers”) (Aug. 27, 2012) at 4.

1. Proposed Definition in the Proposed Guidance

Under the Proposed Guidance, the term “U.S. person” would be defined by reference to the extent to which swap activities or transactions involving one or more such persons have the relevant connection with activities in, or effect on, U.S. commerce.
31

As proposed, the term “U.S. person” would encompass both: (1) Persons (or classes of persons) located within the United States; as well as (2) persons that may be domiciled or operating outside the United States, but whose swap activities have a “direct and significant connection with activities in, or effect on, commerce of the United States” within the meaning of CEA section 2(i).
32

That is, the term “U.S. person” identifies those persons whose swap activities—either individually or in the aggregate—satisfy the jurisdictional nexus under section 2(i) of the CEA.

31

See
Proposed Guidance, 77 FR at 41218.

32
Specifically, as set forth in the Proposed Guidance, the definition of the term “U.S. person” would include, but not be limited to:

(i) Any natural person who is a resident of the United States;

(ii) 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, in each case that is either (A) organized or incorporated under the laws of the United States or having its principal place of business in the United States (legal entity) or (B) in which the direct or indirect owners thereof are responsible for the liabilities of such entity and one or more of such owners is a U.S. person;

(iii) Any individual account (discretionary or not) where the beneficial owner is a U.S. person;

(iv) Any commodity pool, pooled account or collective investment vehicle (whether or not it is organized or incorporated in the United States) of which a majority ownership is held, directly or indirectly, by a U.S. person(s);

(v) Any commodity pool, pooled account or collective investment vehicle the operator of which would be required to register as a commodity pool operator under the CEA;

(vi) A pension plan for the employees, officers or principals of a legal entity with its principal place of business inside the United States; and

(vii) An estate or trust, the income of which is subject to U.S. income tax regardless of source.

Under the proposal, a “U.S. person” would include a foreign branch of a U.S. person; on the other hand, a non-U.S. affiliate or subsidiary guaranteed by a U.S. person would not be deemed a “U.S. person.”

2. Comments

In general, commenters stated that the proposed “U.S. person” definition presented significant interpretive issues and implementation challenges.
33

The commenters contended that it would be difficult to determine U.S. person status because the proposed definition was, they said, overly broad, contained ambiguities, and would require collection of information not readily accessible at this time. The commenters, therefore, urged the Commission to provide market participants with sufficient time to implement a final definition of the term “U.S. person” and to reconsider the proposed definition in favor of “a simpler, more easily applied” definition of “U.S. person.”
34

33

See
SIFMA (Aug. 27, 2012) at 5; Societe Generale (Aug. 8, 2012) at 4; IIB (Aug. 27, 2012), at 4-14; Deutsche Bank (Aug. 27, 2012), at 1-4; Goldman Sachs Group, Inc. (“Goldman”) (Aug. 27, 2012), at 3; The Hong Kong Association of Banks (“Hong Kong Banks”) (Aug. 27, 2012), at 4; Australian Bankers (Aug. 27, 2012) at 4.

34

See
SIFMA (August 27, 2012) at A-10.

A number of commenters requested that the Commission adopt an interim definition of “U.S. person” that would allow firms to rely on their existing systems and classifications and avoid the need to develop systems to achieve temporary compliance with standards that may change when a definition of the term “U.S. person” is finalized.
35

IIB explained that applying any definition of “U.S. person” that departs from status based on residence or jurisdiction of organization, and in some cases principal place of business, will require time to implement relevant documentation conventions and diligence procedures.
36

IIB, therefore, requested that the Commission implement a phased-in interim approach to the “U.S. person” definition that would encompass, in general, (1) a natural person who is a U.S. resident; and (2) a corporate entity

that is organized or incorporated under the laws of the United States or has its place of business in the United States.
37

35

See e.g.,
Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27, 2012) at A-8-A9; IIB (Aug. 9, 2012) at 4; Deutsche Bank (Aug. 13, 2012) at 2; State Street Corporation (“State Street”) (Aug. 27, 2012) at 2; and Goldman (Aug. 27. 2012) at 3.

36

See
IIB (Aug. 9, 2012) at 4.

37

Id.
For purposes of IIB's suggested definition, a foreign branch of a U.S. SD would be considered a non-U.S. person. IIB added that it believed that the Commission should adopt a final definition of “U.S. person” that is consistent with IIB's proposed interim definition.

SIFMA also urged the Commission to phase in the “U.S. person” definition, citing the implementation difficulties identified by IIB. Specifically, SIFMA recommended that the Commission allow market participants to apply an interim definition of “U.S. person” until 90 days after the final definition of “U.S. person” is published.
38

SIFMA stated that its interim definition—which was identical to IIB's interim definition—should identify “core” U.S. persons and allow its members to phase in compliance with the Dodd-Frank requirements without building new systems that might have to be changed when a final definition is adopted.

38

See
SIFMA (Aug. 25, 2012) at A-8.

3. Commission Determination on Definition of “U.S. Person”

The Commission finds merit in the comments suggesting that it should adopt a phased approach to cross-border activities. The Commission understands, from the comments, that market participants may need additional time to assess their businesses in light of the Final Order and to institute necessary changes to their systems and operations. Therefore, for purposes of the Final Order, the Commission will apply a definition of the term “U.S. person” based upon the counterparty criteria set forth in CFTC Letter No. 12-22
39

with certain modifications as described below. With respect to the other issues raised by commenters regarding the definition of “U.S. person,” the Commission believes that further public comment and consideration during the effectiveness of the Final Order will be helpful.

39
The counterparty criteria set forth in CFTC Letter No. 12-22 are:

(i) A natural person who is a resident of the United States;

(ii) A 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, in each case that is organized or incorporated under the laws of the United States;

(iii) A pension plan for the employees, officers, or principals of a legal entity described in (ii) above, unless the pension plan is exclusively for foreign employees of such entity;

(iv) An estate or trust, the income of which is subject to U.S. income tax, regardless of source; or

(v) An individual account (discretionary or not) where the beneficial owner is a person described in (i) through (iv) above.

For purposes of the Final Order, the Commission will treat as a “U.S. person” any person identified by the following five criteria:
40

40
The Commission understands that persons may currently be relying upon the counterparty criteria set forth in CFTC Letter No. 12-22. Thus, until December 31, 2012, persons may continue to apply those criteria for purposes of the Final Order. In effect, until December 31, 2012, a person may apply either the counterparty criteria in CFTC Letter No. 12-22, or the definition set forth herein for purposes of the Final Order. Beginning on January 1, 2013 (
i.e.,
following the expiration of CFTC Letter No. 12-22), a person must apply the definition set forth in the Final Order for purposes of swaps entered into on or after that date.

(i) A natural person who is a resident of the United States;

(ii) A 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, in each case that is (A) organized or incorporated under the laws of a state or other jurisdiction in the United States or (B) effective as of April 1, 2013 for all such entities other than funds or collective investment vehicles, having its principal place of business in the United States;

(iii) A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is primarily for foreign employees of such entity;

(iv) An estate of a decedent who was a resident of the United States at the time of death, or a 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; or

(v) An 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 (i) through (iv) above.

The modifications made by the Commission to the counterparty criteria set forth in CFTC Letter No. 12-22 relate to (1) the location of an entity's principal place of business, (2) the treatment of pension plans for foreign employees, (3) the treatment of estates and trusts, and (4) the treatment of joint accounts.
41

41
Also, the Commission is clarifying that language in the second counterparty criterion in CFTC Letter No. 12-22 referring to an entity “incorporated under the laws of the United States” includes an entity incorporated under the laws of a state or other jurisdiction in the United States.

First, regarding the location of an entity's principal place of business, the Commission considered that the second counterparty criterion in CFTC Letter No. 12-22 is generally intended to cover legal entities that are physically located or incorporated within U.S. territory. For purposes of the Final Order, the Commission believes it is appropriate to treat as a “U.S. person” a legal entity that is not incorporated in the United States but that nonetheless has its “principal place of business” in the United States.
42

The Commission believes that it is appropriate to consider an entity that is organized outside the United States but nonetheless has its “principal place of business” within the United States in the same manner as an entity organized or incorporated under the laws of the United States, because the center of direction, control and coordination of its business activities is located in the United States.
43

However, the Commission understands from commenters that market participants will need a short period of time to implement the treatment of entities with a principal place of business in the United States as “U.S. persons.”
44

Therefore, the Commission will not treat

entities incorporated or organized outside the United States and with a principal place of business in the United States as U.S. persons until April 1, 2013 (
i.e.,
approximately 90 days after effectiveness of the Final Order). The Commission also understands from commenters that the application of the principal place of business element may be complex for funds and collective investment vehicles and require further guidance in this regard; therefore, at this time for purposes of the Final Order, the Commission has determined that this element will not apply to funds or collective investment vehicles.
45

42
For purposes of the Final Order, the Commission will construe the term “principal place of business” as referring to the single place where a corporation's officers direct, control, and coordinate the corporation's activities. Typically, the principal place of business will be where the corporation maintains its headquarters.
See Hertz
v
Friend,
559 U.S. __, 130 S.Ct. 1181, 1192, 175 L.Ed. 2d 1029 (2010) (“[I]n practice [a company's principal place of business] should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control and coordination,
i.e.,
the ‘nerve center' ”).

43
Commenters supported inclusion of the principal place of business element in the interim definition.
See
Cleary (Aug. 16, 2012) at 6 (“the Firms respectfully request that the Commission adopt an interim ‘U.S. person' definition based on factors such as residence, place of organization or incorporation and principal place of business”);
see also
IIB (Aug. 27, 2012) at 13 (suggested definition of “U.S. person” that includes “Any corporation, partnership, limited liability company, business or other trust, association, joint stock company or any form of enterprise similar to the foregoing (other than a collective investment vehicle, employee benefit plan, estate or trust) that is organized or incorporated under the laws of the United States or having its principal place of business in the United States.”); SIFMA (Aug. 13, 2012) at 4 (“The Commission should include as part of the Final Exemptive Order a workable, uniform definition of U.S. person for this transitional time period* * *. For most [of our members] this would consist of Any natural person who is a resident of the U.S.; and Any corporation, partnership, LLC, business or other trust, association, joint-stock company, fund, or any form of enterprise similar to any of the foregoing that is organized or incorporated under the laws of the United States or has its principal place of business in the United States* * *. [S]uch a definition would allow most of our members to identify those counterparties that are U.S. persons during the Interim Period without the necessity of building new, interim systems that might have to be changed when a Final Definition is adopted.”).

44

See, e.g.,
SIFMA (Aug. 25, 2012) at A-8 (suggesting 90-day period to transition to definition including principal place of business element).

45

See, e.g.,
Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012 at 6-7. The Commission is separately proposing further guidance regarding the treatment of funds and other collective investment vehicles for purposes of the definition of the term “U.S. person.”

Second, regarding the treatment of pension plans, the Commission is refining the third counterparty criterion in CFTC Letter No. 12-22 to indicate that a pension plan that is “primarily” (rather than exclusively) for the foreign employees of an entity is also a “U.S. person” for purposes of the Final Order.
46

46
In a letter to the Commissioners dated November 30, 2012 requesting transition relief under Title VII of the Dodd-Frank Act, the Futures Industry Association (“FIA”), IIB and SIFMA suggested that this criterion be modified to replace the word “exclusively” with “primarily.”
See
joint letter from FIA, IIB and SIFMA (Nov. 30, 2012) at 14, fn. 14.

Third, regarding the treatment of estates and trusts, the Commission is refining the fourth counterparty criterion in CFTC Letter No. 12-22 so that the treatment of an estate or trust for purposes of this relief does not depend on whether the income of the estate or trust is subject to U.S. income tax.
47

The Commission understands that whether income is subject to U.S. tax can depend on a variety of factors, including the source of the income, which may not be relevant for purposes of the Dodd-Frank Act. Accordingly, for purposes of the Final Order, the Commission is of the view that an estate should be treated as a “U.S. person” if the decedent was a resident of the United States at the time of death, and a trust should be treated as a “U.S. person” if it is governed by the law of a state or other jurisdiction in the United States and a court within the United States is able to exercise primary supervision over the administration of the trust.

47

See, e.g.,
IIB Letter (Aug. 27, 2012) at 12 (market participants do not typically identify an estate's or trust's regulatory status on the basis of its tax status);
see also
joint letter from FIA, IIB and SIFMA at 14, fn. 14 (suggesting that the fourth criterion from CFTC Letter No. 12-22 be limited to estates and trusts organized under the laws of the United States).

The Commission believes that this approach is appropriate in view of how estates and trusts use swaps, and is consistent with how they are treated for other purposes under law. For estates, if the decedent was a party to any swaps at the time of death, then those swaps would continue to be treated in the same way after the decedent's death, when the swaps would most likely pass to the decedent's estate. Also, this test will be predictable and easy to apply for natural persons planning for how their swaps will be treated after death, for executors and administrators of estates, and for the swap counterparties to natural persons and estates.

With respect to trusts, the Commission considered that each trust is governed by the laws of a particular jurisdiction, which may depend on steps taken when the trust was created or other circumstances surrounding the trust. The Commission believes that if a trust is governed by U.S. law (
i.e.,
the law of a state or other jurisdiction in the United States), then it is reasonable to treat the trust as a U.S. person for purposes of the Final Order. The definition also requires that a court within the United States be able to exercise primary supervision over the administration of the trust.
48

Including this element of the definition will ensure that the treatment of the trust for purposes of the Final Order will be in line with how the trust is treated for other legal purposes.

48
The Commission is aware that one element of the test applied by the Internal Revenue Service to determine if a trust is a U.S. person for tax purposes depends on whether a court within the United States is able to exercise primary supervision over the administration of the trust.
See
26 CFR 301.7701-7(a)(1)(ii). However, the Commission does not intend to formally adopt the Internal Revenue Service test for this purpose.

Finally, regarding the treatment of joint accounts, the Commission is refining the fifth counterparty criterion in CFTC Letter No. 12-22 to include not only individual accounts where the beneficial owner is a person described in the preceding counterparty criteria, but also joint accounts where any of the beneficial owners is such a person.

Due Diligence.
As described above, many commenters said that the information necessary to accurately assess the status of their counterparties as U.S. persons may not be available, or may be available only through overly burdensome due diligence. For this reason, these commenters requested that the Commission allow for reasonable reliance on counterparty representations as to their “U.S. person” status.
49

49
For example, SIFMA stated that a swap counterparty should be responsible for determining its own U.S.-person status but in the alternative, recommended that the Commission allow for reasonable reliance on counterparty representations.
See
SIFMA (Aug. 27, 2012) at A-16-18. SIFMA and Cleary further pointed out that the Commission has accepted reasonable reliance on counterparty representations in the context of the external business conduct rules.
See
SIFMA/AMG (Aug. 27, 2012) at 4-5; and Cleary (Aug. 16, 2012) at 6.

The Commission agrees with the commenters that a party to a swap, in order to rely upon the exemptive relief provided in the Final Order, should be able to reasonably rely on its counterparty's representation in determining whether the counterparty is a “U.S. person.” In this context, the Commission interprets the “reasonable” standard to mean that a party to a swap should conduct reasonable due diligence on its counterparties, with what is reasonable in a particular situation to depend on the relevant facts and circumstances. The Commission notes that under its external business conduct rules, an SD or MSP generally meets its due diligence obligations if it reasonably relies on counterparty representations, absent indications to the contrary.
50

Similarly here, the Commission believes that allowing for reasonable reliance on counterparty representations provides for an objective standard and avoids subjective evaluations. This, in turn, facilitates a more consistent and foreseeable determination of whether a person is a “U.S. person” for purposes of relying on temporary exemptive relief.

50

See
77 FR 9734, Feb. 17, 2012. Consistent with the “reasonable reliance” standard in the external business conduct rules, an SD or MSP may rely on the written representations of a counterparty in performing its due diligence. However, an SD or MSP cannot rely on a written representation and continue to claim the exemptive relief if it has information that would cause a reasonable person to question the accuracy of the representation. In other words, an SD or MSP cannot ignore red flags when relying on written representations in performing its due diligence. Further, if agreed to by the counterparty, the written representations may be included in counterparty relationship documentation. However, an SD or MSP may only rely on such representations in the counterparty relationship documentation if the counterparty agrees to timely update any material changes to the representations. In addition, the Commission expects SDs and MSPs to review the written representations on a periodic basis to ensure that they remain appropriate for their intended purpose.

Finally, the Commission confirms that this definition of “U.S. person” applies only for purposes of the Final Order. Further, the Commission confirms that the definition of “U.S. person” applies only to Commission regulations promulgated under Title VII's swap provisions. Thus, for example, it would

not apply to the CEA provisions (and Commission regulations promulgated thereunder) relating to the futures markets.

Foreign Branch of U.S. Person.
The Commission views as a “U.S. person” the foreign branch of a U.S. person. As the Commission explained in the Proposed Guidance, a branch does not have a legal identity separate from that of its principal entity. In this respect, the Commission notes that branches are neither separately incorporated nor separately capitalized and, more generally, the rights and obligations of a branch are the rights and obligations of its principal entity (and vice versa). Under these circumstances, the Commission views the activities of a foreign branch as the activities of the principal entity.
51

51
In the Proposed Guidance, the Commission asked whether a foreign branch of a U.S. SD should be defined as a “U.S. person.” Some commenters recommended that a foreign branch of a U.S. SD be excluded from the definition of “U.S. person.” Sullivan & Cromwell on behalf of Bank of America, Citigroup, and J.P. Morgan (“S&C”) argued that a foreign branch should not be considered a U.S. person solely on the basis that it is a part of a U.S. bank.
See
S&C (Aug. 13, 2012) at 6-7. Citigroup Inc. (“Citi”) recommended that the Commission define a foreign branch of a U.S. SD as a non-U.S. person, so long as the branch remains subject to Entity-Level Requirements and obtains substituted compliance for Transaction-Level Requirements for transactions with non-U.S. persons.
See
Citi (Aug. 27, 2012) at 2-4. In Citi's view, this would address comments by the foreign branch's non-U.S. clients that they would have to register as SDs or MSPs, while assuring that such non-U.S. clients' swaps with the foreign branch are covered by the Transaction-Level Requirements or substituted compliance.
See also
State Street (Aug. 27, 2012) at 3; and IIB (Aug. 27, 2012) at 8.

Accordingly, the Commission declines to recognize foreign branches of U.S. persons separately from their U.S. principals for purposes of the Dodd-Frank swap provisions, including registration and Entity-Level and Transaction-Level Requirements. Therefore, if a foreign branch were to be an SD or MSP, as discussed further below, its U.S. principal would be required to register, and that registration would encompass the foreign branch. Based on the same rationale, the Dodd-Frank Act fully applies to a swap between a foreign branch of a U.S. person and a foreign branch of another U.S. person. Nevertheless, for purposes of the Final Order, as discussed further below, foreign branches of U.S. persons may comply only with transaction-level requirements as may be required in the location of the foreign branch with respect to swaps with foreign counterparties. Further, non-U.S. persons may exclude swaps with foreign branches of registered SDs for purposes of determining whether they have exceeded the de minimis level of swap dealing activity under the SD definition. Finally, for purposes of the Final Order, as further discussed below, the Transaction-Level Requirements will not apply to a swap transaction between foreign branches of U.S. SDs or foreign branches of U.S. MSPs. The Commission believes that it is appropriate to extend the foregoing relief on a temporary basis while the Commission continues to consider, and works with foreign regulators regarding, the treatment of foreign branches of U.S. registrants.

C. Registration

1. Timing of Registration for All Prospective SDs and MSPs

i. Comments

The Proposed Order did not include any delay in the timing of the registration requirement for either U.S. or non-U.S. prospective registrants. A number of commenters urged the Commission to delay registration of SDs and MSPs.
52

Some of these commenters noted that final regulatory determinations essential to the implementation of Commission regulations are either still in proposed form or have only recently been finalized.
53

As a result, commenters said, firms will need additional time to assess whether they will be required to register as an SD or MSP and the consequences of doing so.
54

52

See e.g.,
SIFMA (Aug. 13, 2012) at 3, 5; IIB (Aug. 9, 2012) at 5; Societe Generale (Aug. 9, 2012) at 2, Citi (Aug. 13, 2012) at 2; Goldman (Aug. 27, 2012) at 8-9; and Lloyds (Aug. 13, 2012) at 1-2.

53

See e.g.,
Goldman (Aug. 27, 2012) at 9 (citing the Commission's proposed rule on the treatment of inter-affiliate transactions for purposes of mandatory clearing and the anticipated Commission action on the status of guarantees of swaps); Societe Generale (Aug. 9, 2012) at 2; and IIB (Aug. 9, 2012) at 2.

54
Without such relief, commenters are concerned that they will be required to register based on requirements that are subject to change at a later date.
See
Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27, 2012) at A1-8; IIB (Aug. 9, 2012) at 4-5).

SIFMA recommended a delay of at least 90 days following the publication of final interpretive guidance;
55

Societe Generale recommended delaying registration at least until the Proposed Guidance has been finalized.
56

Cleary recommended a delay of at least 90 days after a final exemptive order is issued, explaining that firms will need additional time to assess and comply with the determinations therein.
57

Lloyds suggested that registration be delayed for non-U.S. SDs for at least 12 months after the publication of final guidance, with computation of the de minimis threshold starting from that date.
58

55

See also
Goldman (Aug. 27, 2012) at 9.

56

See
Societe Generale (Aug. 9, 2012) at 2.

57

See
Cleary (Aug. 16, 2012) at 4. IIB suggested a delay until a “reasonable” period after the final exemptive order is issued.
See
IIB (Aug. 9, 2012) at 9. IIB also noted that this is particularly important for non-U.S. firms that are required to coordinate their registration plans with their home country regulators.

58

See
Lloyds (Aug. 13, 2012) at 1-2.

ii. Commission Determination on Timing of Registration

Throughout the Dodd-Frank rulemaking process, the Commission consistently has strived to strike the proper balance between the need to implement the new regulatory framework for swaps without undue delay, and the need to minimize disruption and hardships for market participants. Consistent with that goal, the Commission has taken steps to provide greater certainty to market participants regarding registration determinations and their compliance obligations. The Commission is also mindful that more than two years have passed since the Dodd-Frank Act—a comprehensive reform of the swaps market—was enacted as a direct response to the financial crisis of 2008. A central element of this reform is the registration and regulation of SDs and MSPs. For example, registered SDs and MSPs are required to clear swaps with certain counterparties, are subject to detailed reporting and recordkeeping requirements and must comply (when final) with new capital and margin requirements—all of which are designed to enhance market transparency and protections against systemic risk.

In the Commission's view, any further delay in the registration of SDs and MSPs would effectively postpone Dodd-Frank's comprehensive new regulatory regime for swaps, frustrating the congressional mandate embodied in the Dodd-Frank Act. Further, given the global nature of the swaps market, an SD or MSP—whether operating in or outside the United States—plays an important role in the U.S. swaps market. Under these circumstances, the Commission believes that a further delay in the compliance date for registration as an SD or MSP would adversely affect the Commission's ability to discharge its responsibilities under the CEA and would be contrary to the public interest. Therefore, the Commission declines to delay the registration requirement for non-U.S. SDs and MSPs.

However, the Commission believes it is appropriate to provide targeted, time-limited exemptive relief with respect to the swap dealing transactions to be

included in the de minimis threshold calculation that applies for purposes of the SD definition. The Commission expects that this step, and the other relief provided in the Final Order, will substantially address commenters' concerns regarding the complexity of implementing the swap requirements for the interim period during which the Final Order is in effect.

2. Scope of Transactions To Be Included in Registration Calculations

The Commission has adopted final rules and interpretive guidance implementing the statutory definitions of the terms “swap dealer” and “major swap participant” in CEA sections 1a(49) and 1a(33).
59

The Final Entities Rules delineate the activities that cause a person to be an SD and the level of swap positions that cause a person to be an MSP. In addition, the Commission has adopted rules concerning the statutory exceptions from the definition of an SD, including the de minimis exception.
60

Commission regulation 1.3(ggg)(4) sets forth a de minimis threshold of swap dealing, which takes into account the notional amount of a person's swap dealing activity over the prior 12 months.
61

When a person engages in swap dealing transactions above that threshold, the person meets the SD definition in section 1a(49) of the CEA.
62

Commission regulations 1.3(jjj)(1) and 1.3(lll)(1) set forth swap position thresholds for the MSP definition in Commission regulation 1.3(hhh). When a person holds swap positions above those thresholds, such person meets the MSP definition in section 1a(39) of the CEA.

59
7 U.S.C. 1a(49) and 1a(33).
See
Final Entities Rules.

60
Section 1a(49)(D) of the CEA (7 U.S.C. 1a(49)(D)) provides that “[t]he Commission shall exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers. The Commission shall promulgate regulations to establish factors with respect to the making of this determination to exempt.” This provision is implemented in Commission regulation 1.3(ggg)(4).

61
As used in this release, the meaning of the term “swap dealing” is consistent with that used in the Final Entities Rules.

62
Under Commission regulation 3.10(a)(1)(v)(C) and Commission regulation 23.21, a person is required to register as an SD when, on or after October 12, 2012, the person falls within the definition of an SD. However, the rule defining “swap dealer” includes a de minimis threshold so that an entity is not an SD if it, together with the entities controlling, controlled by, and under common control with it, engages in swap dealing activity during the prior 12 months in an aggregate gross notional amount of less than the specified thresholds. The rule further specifies that swap dealing activity engaged in before the effective date of both the “swap dealer” and “swap” definition rules (
i.e.,
before October 12, 2012) does not count toward the de minimis threshold. The rule also provides that an entity that exceeds the de minimis threshold must register as an SD two months after the end of the month in which it exceeds the threshold.
See
Commission regulation 1.3(ggg)(4).

i. Proposed Guidance

In the Proposed Guidance, the Commission addressed the general manner in which a person's overseas swap dealing activities or positions may require registration as an SD or MSP, respectively. Specifically, under the Proposed Guidance, a non-U.S. person whose swap dealing transactions with U.S. persons exceed the de minimis threshold would be required to register as an SD.
63

Likewise, under the Proposed Guidance, a non-U.S. person who holds swap positions with U.S. counterparties that are above the specified MSP thresholds would be required to register as an MSP.
64

In determining whether a non-U.S. person is engaged in more than a de minimis level of swap dealing, the Proposed Guidance would include the notional value of any swap transactions between such non-U.S. person (or any of its non-U.S. affiliates under common control) and a U.S. person, other than foreign branches of registered SDs.
65

Following a similar rationale, the Proposed Guidance stated that in calculating whether a non-U.S. person meets an MSP threshold, the non-U.S. person would include the notional value of any swaps entered into between such non-U.S. person and a U.S. person.
66

63

See
Proposed Guidance, 77 FR at 41218-41219.

64

Id.
CFTC Letter 12-22 applied a similar approach for both SD and MSP purposes.

65
Proposed Guidance, 77 FR at 41218-41220. Further, where the potential non-U.S. SD's swap obligations are guaranteed by a U.S. person, the non-U.S. person would be required to register with the Commission as an SD when the aggregate notional value of its swap dealing activities (along with the swap dealing activities of its non-U.S. affiliates that are under common control and also guaranteed by a U.S. person) with U.S. persons and non-U.S. persons exceeds the de minimis threshold. Additionally, the Proposed Guidance clarified that a non-U.S. person without a guarantee from a U.S. person would not be required to register as an SD if it does not engage in swap dealing with U.S. persons as part of “a regular business” with U.S. persons, even if the non-U.S. person engages in dealing with non-U.S. persons.

66

Id.
at 41221. The Proposed Guidance also provided that if the non-U.S. person's swaps are guaranteed by a U.S. person, then such swaps will be attributed to the U.S. guarantor and not the potential non-U.S. MSP. Further, the non-U.S. person would be required to include in its MSP calculation any swaps between another non-U.S. person and a U.S. person if the potential non-U.S. MSP guarantees the obligations of the other non-U.S. person thereunder.

In general, commenters did not raise concerns or objections to the Commission's interpretation that non-U.S. persons who engage in more than a de minimis level of swap dealing with U.S. persons would be required to register as SDs.
67

A number of commenters argued, however, that a non-U.S. person should not be required to register as an SD solely by reason of its swap obligations being guaranteed by a U.S. person.
68

SIFMA stated that the “connection between a non-U.S. swap dealing entity and its U.S. guarantor creates too tenuous a nexus to justify registration on the basis of this relationship alone.”
69

Other commenters raised various other issues with respect to the treatment of guarantees.
70

67
One commenter, Japanese Bankers Association, stated that the cross-border application of Dodd-Frank is overbroad because it would capture even hedging transactions of a non-U.S. SD with a U.S. SD that is making a market. The definition of “dealing activity” is ambiguous, this commenter asserted, and might require the non-U.S. SD to register.
See
Japanese Bankers Association (“Japanese Banks”) (Aug. 27, 2012) at 1.

68

See e.g.,
Goldman (Aug. 27, 2012) at 5; ISDA (Aug. 10, 2012) at 12 (in the typical case, an intra-group guarantee allocates risks and activities within the corporate group and is not a dealing activity of the non-U.S. person); Commercial Energy Working Group (“CEWG”) (submitted by Sutherland Asbill) (Aug. 27, 2012), at 6-7 (Proposed Guidance should not include swap guarantees for aggregation purposes because it is contrary to the Final Entities Rules; jurisdiction should not be extended to transactions between two non-U.S. persons if the swap obligations of one party are guaranteed by a U.S. person because U.S. jurisdiction in these circumstances is not supported by law or existing international conventions).

69

See
SIFMA (Aug. 27, 2012) at A-29. As an alternative, SIFMA posited that only guarantees by a U.S. person for which there is a material likelihood of payment by the U.S. guarantor should be counted towards the de minimis calculation. To implement this recommendation, SIFMA suggested that the Commission establish a standard for determining that the likelihood of payment is remote, such as a comparison of the aggregate contingent liability of the U.S. person guarantor to the net equity of that guarantor.
Id.
at A-29—A-30.

70

See
Goldman (Aug 27, 2012) at 5 (inconsistent to require SD registration solely on the basis of guarantees by a U.S. parent, absent any showing of a “direct and significant” jurisdictional nexus; concerns can be addressed through anti-evasion authority).
See also
CEWG (Aug. 27, 2012) at 7 (because there is no legal basis under CEA section 2(i) for asserting jurisdiction based on a guaranty, Commission should clarify that a non-U.S. person is not subject to Commission regulation, even where a U.S. person guarantees either counterparty); The Hong Kong Association of Banks (“HKAB”) (Aug. 27, 2012) at 8 (swaps between non-U.S. persons should be excluded from the de minimis determination regardless of whether a counterparty is guaranteed); ISDA (Aug. 10, 2012) at 12 (focus should be on whether a U.S. guarantor of a non-U.S. person should register); Investment Industry Association of Canada (“IIAC”) (Aug. 27, 2012) at 6 (seeking confirmation that indirect holding company ownership alone does not constitute a guarantee); and JP Morgan (Aug. 27, 2012) at 10 (term “guarantee” should not include keepwells and liquidity puts that do not create the same third-party rights and may be unenforceable by third parties).
But see contra
AFR (June 14, 2012) at 2 (failure to include guaranteed affiliates as U.S. persons and to capture the “large grey area” between explicit and informal guarantees creates opportunities to escape Dodd-Frank regulations by

shifting business overseas; Commission should clarify that it will “follow through on properly implementing these principles and will not enable a `race to the bottom' in which incentives are created for derivatives affiliates of global banks that are able to relocate to areas of lax regulation to take advantage of an inadequate ‘substituted compliance' regime.”).

ii. Commission Determination on Exemptive Relief Regarding Registration

Registration Thresholds for Non-U.S. Persons.
As noted above, the Commission is not, at this time, taking action on the Proposed Guidance. Under CEA sections 1a(49) and 1a(33) and Commission regulations 1.3(ggg)(4) and 1.3(hhh),
71

a person is required to take account of the notional amount of all of its swap dealing activity over the prior 12 months for purposes of the SD determination, and all of its swap positions for purposes of the MSP determination. These CEA provisions and the Commission's regulations apply to activities within the United States and, as provided in section 2(i), to certain activities outside the United States.

71
7 U.S.C. 1a(49) and 1a(33).
See
Final Entities Rules.

However, while the Commission continues to consider the comments on its Proposed Guidance regarding section 2(i), the Commission believes it appropriate to provide, under the Final Order, relief for non-U.S. persons (regardless of whether the non-U.S. persons' swap obligations are guaranteed by U.S. persons) from the requirement that a person include all its swaps in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity for SD purposes or in its calculations for MSP purposes. On the other hand, the Commission believes that it is not appropriate to provide a non-U.S. person with relief from the registration requirement when the aggregate level of its swap dealing with U.S. persons, as that term is defined above, exceeds the de minimis level of swap dealing, or when the level of its swap positions with U.S. persons, again as that term is defined above, exceeds one of the MSP thresholds. In the Commission's view, such relief from the registration requirement is inappropriate when a level of swap activities that is substantial enough to require registration as an SD or an MSP when conducted by a U.S. person, is conducted by a non-U.S. person with U.S. persons as counterparties.

Therefore, the Final Order provides that a non-U.S. person (regardless of whether the non-U.S. persons' swap obligations are guaranteed by U.S. persons) does not need to include in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity for purposes of Commission regulation 1.3(ggg)(4) or in its calculation of whether it is an MSP for purposes of Commission regulation 1.3(hhh), any swaps where the counterparty is a non-U.S. person.

Exclusion for Swaps with Foreign Branches of U.S. Swap Dealers.
The Proposed Guidance would exclude from a non-U.S. person's de minimis threshold calculation its swap transactions with foreign branches of U.S. SDs. This exclusion was intended to allow non-U.S. persons to continue their swap activities with foreign branches of U.S. SDs without exceeding the de minimis threshold, thereby triggering a requirement to register as an SD.

In CFTC Letter 12-22, the Commission staff noted that because the proposed exclusion would be limited to registered U.S. SDs and many of the persons who expect to register as U.S. SDs may not do so until December 31, 2012, or later, market participants had expressed concern that a non-U.S. person could be required after October 12, 2012, to begin counting toward the de minimis threshold any swap dealing transactions with a foreign branch of any person that may meet the definition of “U.S. person” and that is not yet registered (and consequently be required to register as an SD) even though many U.S. persons with foreign branches intend to register as SDs later in 2012 or in early 2013.
72

The Commission staff noted that this potential outcome would not be consistent with the scope of relief intended to be provided in the Proposed Guidance.
73

72
Similarly, if a non-U.S. person must include swaps with such foreign branches in its calculation of whether it is within the definition of MSP in Commission regulation 1.3(hhh), it could be required to register with the Commission in that capacity. Although the Proposed Guidance did not provide for a similar exclusion with respect to the consideration of a non-U.S. person's swaps with foreign branches of U.S. SDs with respect to determining whether the non-U.S. person must register as an MSP, some commenters requested that the Commission provide a similar exclusion.
See
SIFMA (Aug. 27, 2012) at 9, A-28, A-29; Citi (Aug. 27, 2012) at 2-3.

73
Commenters, such as Goldman, argued that the rationale for this exclusion is equally applicable to non-U.S. persons that are banks or broker-dealers when dealing with U.S. SDs that do not conduct overseas business through foreign branches. Absent a similar interpretation in these circumstances, they argued, U.S. SDs would be at a competitive disadvantage vis-à-vis foreign branches of U.S. SDs since non-U.S. persons will limit their dealing activities to foreign branches of U.S. SDs.
See
Goldman (Aug. 27, 2012) at 5-6. The Commission does not believe that it would be appropriate for a non-U.S. person to exclude from the de minimis calculation swap dealing transactions with U.S. SDs (other than their foreign branches). By way of comparison, however, for purposes of the Final Order, a swap that a non-U.S. person enters into with a non-U.S. affiliate of a U.S. SD (whether guaranteed by a U.S. person or not) is not a swap with a U.S. person and, thus, need not be counted towards the de minimis calculation. The Commission proposed to interpret section 2(i) so as to exclude swap dealing transactions with a foreign branch of a U.S. SD in order to avoid the otherwise potential result that foreign entities would cease doing swap dealing business with foreign branches of U.S. SDs in order to avoid SD status, while continuing to do business with foreign affiliates of U.S. SDs located in the same jurisdiction. The Commission does not believe relief should be provided in a manner that would lead to such disparate treatment of entities located outside the United States,
i.e.,
foreign branches and foreign affiliates of U.S. SDs that are located in the same jurisdiction but that happen to bear a different legal structure. Similar considerations of potentially discriminatory results do not apply, however, with respect to swaps directly with U.S. SDs. Such U.S. SDs are different in kind from a foreign affiliate of a U.S. SD, and the rationale for the foreign branch exclusion is inapposite in these circumstances.

The Commission believes it appropriate to provide, in this Final Order, the scope of relief afforded in CFTC Letter No. 12-22 while it considers action on the Proposed Guidance. Accordingly, for purposes of the Final Order, swap transactions by a non-U.S. person with a foreign branch of a registered U.S. SD, or with a foreign branch of a U.S. person that is not yet registered as a U.S. SD but that does intend to register as such when required, are not required to be included in the calculations for SD and MSP registration purposes.

Therefore, the Final Order provides that a non-U.S. person does not need to include in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity for purposes of Commission regulation 1.3(ggg)(4) or in its calculation of whether it is an MSP for purposes of Commission regulation 1.3(hhh), any swap where the counterparty is a foreign branch of a U.S. person that is registered as an SD or that represents that it intends to register with the Commission as an SD by March 31, 2013.
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74
The representation of the intention to register with the Commission as a swap dealer need not be obtained prior to execution of a swap.

Aggregation for the De Minimis Calculation.
Commission regulation 1.3(ggg)(4) requires that a person include, in determining whether its swap dealing activities exceed the de minimis threshold, the aggregate notional value of swap dealing transactions entered by its affiliates under common control. Additionally, under the Proposed Guidance, a non-U.S. person, in determining whether its swap dealing transactions exceed the de minimis threshold, would include the

aggregate notional value of swap dealing transactions entered into by its non-U.S. affiliates under common control but would not include the aggregate notional value of swap dealing transactions entered into by its U.S. affiliates.

Numerous comments on the Proposed Guidance discussed considerations relating to when the swap dealing activities of affiliates should be aggregated for purposes of determining if a non-U.S. person is required to register as an SD. The Commission is considering these comments, and intends to address them in preparing final guidance on this issue. However, the Commission believes it is appropriate to provide, in the Final Order, temporary relief from the requirement in Commission regulation 1.3(ggg)(4) to include the swap dealing activities of certain affiliates in the de minimis calculation.

For purposes of the Final Order, the Commission believes that a non-U.S. person that is engaged in swap dealing activities with U.S. persons as of the effective date of the Final Order should not be required to include, in its determination of whether it exceeds the de minimis threshold, the swap dealing transactions of any of its U.S. affiliates.
75

In addition, the Commission believes it is appropriate that if the non-U.S. person is an affiliate of a person that is registered as an SD, it should not be required to include, in its determination of whether it exceeds the de minimis threshold, the swap dealing transactions of any of its non-U.S. affiliates that engage in swap dealing activities, so long as each such excluded affiliate is either (i) engaged in swap dealing activities with U.S. persons as of the effective date of the Final Order or (ii) registered as an SD.
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75
For this purpose, the Commission construes “affiliates” to include persons under common control as stated in the Final Entities Rules with respect to the term “swap dealer,” which defines control as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.”
See
Final Entities Rules, 77 FR at 30631, fn. 437.

76
The Commission notes that, in any case, the swap dealing transactions of a non-U.S. person's non-U.S. affiliates that may have to be included in the de minimis determination are the transactions between the non-U.S. affiliates and U.S. person counterparties. In no case would swap dealing transactions between the non-U.S. person's non-U.S. affiliates and other non-U.S. person counterparties need to be included in the determination.

Where at least one of the entities in the affiliated group registers as an SD, the Commission believes that during the transition period covered by the Final Order, it is not necessary to aggregate the swap dealing transactions of the various affiliates, even if the aggregate amount of such swap dealing transactions among all the unregistered non-U.S. affiliates is above the de minimis threshold. Thus, where at least one of the entities in the affiliated group registers as an SD, another entity in the affiliated group would have to register as an SD only if its own swap dealing transactions with U.S. persons, considered individually, were above the de minimis threshold.
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77
The Commission wishes to make clear that relief from the registration requirement is not available to any person or entity that engages in swap dealing transactions with U.S. persons above the de minimis threshold. The discussion in this section relates only to whether and when non-U.S. persons must aggregate their own swap dealing transactions with the swap dealing of their non-U.S. affiliates.

As noted above, however, this limited transitional relief is not applicable if a non-U.S. affiliate begins to engage in swap dealing transactions with U.S. persons after the effective date of the Final Order. The Commission believes that this limitation is appropriate for the relatively short time period that the Final Order will be in effect, in order to prevent evasion and abuse of this relief. Without this limitation, new non-U.S. affiliates could be created simply in order to engage in further swap dealing activity with U.S. persons. Moreover, most commenters were clear that limited transitional relief from the aggregation requirement is necessary with respect to their existing swap dealing activities, but is not necessary in order to expand their swap dealing activities in the short term.
78

78

See, e.g.,
Cleary (Aug 16, 2012) at 5-6; SIFMA (Aug 13, 2012) at 4-5.

Central Booking Entity.
In the event an entity operates a “central booking system” where swaps are booked into a single legal entity, whether or not such entity is a counterparty to the swap, the Proposed Guidance stated that the entity that books the swaps would be subject to any applicable SD registration requirement, as if it had entered into such swaps directly, regardless of whether such entity is a U.S. person or whether the booking entity is a counterparty to a swap (has booked the swap directly) or has booked a swap indirectly by way of a back-to-back swap or other arrangement with an affiliate. The Commission noted that a non-U.S. affiliate or subsidiary may also be required to register as an SD if it independently meets the definition of an SD.
79

A number of commenters sought clarification of the Commission's interpretation with respect to the central booking model.
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79
Section 1.3 (ggg)(3) of the Commission's regulations permits a person to apply for a limited purpose designation based on a particular type, class, or category of a swap, or to a particular business unit within an entity.
See
Commission regulation 1.3(ggg)(3); Final Entities Rules, 77 FR at 30645-46. Cleary urged the Commission to recognize limited designation for non-agricultural firms. Specifically, it argued that limited designation should be available to an entity that registers as a firm, and not merely a branch, division, or office.
See
Cleary (Aug. 16, 2012) at 14. Regarding the two points raised by Cleary, the Commission clarifies that a limited designation is available to any registrant that can demonstrate its ability to comply with applicable requirements; it is not limited to only agricultural firms, and it could be available to an entity that registers as a firm. The Commission believes that further relief at this time regarding limited designations is not justified under the criteria of CEA section 4(c). As noted in the Final Entities Rules, the Commission believes that limited designation is appropriately addressed on a case-by case basis in the context of individual applications for registration.
See
Final Entities Rules, 77 FR at 30646 (“Any particular limited purpose application will be analyzed in light of the unique circumstances presented by the applicant.”).

80

See e.g.,
Goldman (Aug. 27, 2012) at 6-7; Credit Suisse (Aug. 27, 2012) at 9; IIB (Aug. 27, 2012) at 26 (stating that, although it is not entirely clear, in a central booking arrangement under which a non-U.S. person dealing in swaps with other non-U.S. persons “books” those swaps to a U.S. affiliate (which either directly becomes a party to the swap or indirectly enters a back-to-back arrangement), the Proposed Guidance could be interpreted as requiring the non-U.S. affiliate to separately register as an SD if its activities with non-U.S. persons meet the definition of an SD); and Lloyd's (Aug. 24, 2012) at 2-3 (requesting clarification as to whether or not non-U.S. institutions (not acting as principal to swaps with U.S. persons) employing central booking models, would be required to register as SDs when they centrally manage market risk for swaps with an affiliated non-U.S. SD and other non-U.S. related swaps activities).

In this situation, the Commission clarifies that a non-U.S. person should not be required to include in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity for purposes of Commission regulation 1.3(ggg)(4), any swap to which it is not a party because the swap is entered into by an affiliated central booking entity.

Summary.
For purposes of the transitional relief under this Final Order, in determining whether a non-U.S. person is engaged in more than a de minimis level of swap dealing
81

or

holds swap positions above any of the MSP thresholds, the non-U.S. person—whether guaranteed or not by a U.S. person—may exclude and not consider the aggregate notional value of:

81
Cleary and SIFMA have asked the Commission to confirm that swap activities that are limited to unwinding “legacy” swap portfolios do not constitute swap dealing.
See
Cleary (Aug. 16, 2012) at 11-12; SIFMA (Aug. 27, 2012) at A-31.
See also
The Clearing House (Aug. 13, 2012) at 11. In a related vein, IIB requested that the Proposed Order be modified to allow certain less active “Transition Affiliates” additional time to transfer swap positions to their principal swap dealing affiliate,
see
IIB (Aug. 9, 2012) at 7, and Cleary separately asked the Commission to consider whether the aggregation rule should apply to non-U.S. affiliates whose swap dealing activity is already subject to local regulation by a G-20 supervisor,
see
Cleary (Aug. 16, 2012) at 9-10. In general, the Commission previously concluded that bright-line tests and

categorical exclusions from the term “swap dealer” based on the general nature of a person's business are unwarranted.
See
Final Entities Rules, 77 FR at 30615. The Commission believes that this approach is equally appropriate here, with regard to the exemptive relief requested in the cross-border context. As noted above, the Commission believes that registration of non-U.S. persons that are within the definition of the term “swap dealer” is a key element of the Dodd-Frank swaps reforms. Therefore the Commission believes, at this time, that blanket relief in this area along the lines suggested by commenters is not in the public interest, and that the determination of whether particular activities constitute swap dealing or otherwise bring a person within the definition of the term “swap dealer,” should proceed along the lines that the Commission adopted in the Final Entities Rules. Under these circumstances, the Commission has determined that it would be inappropriate to provide further relief in this regard under CEA section 4(c). However, the Commission does not intend to preclude its staff from considering appropriate relief in this regard on a case-by-case basis.

• Any swap where the counterparty is a non-U.S. person; and

• Any swap where the counterparty is a foreign branch of a U.S. person that is registered as an SD or that represents that it intends to register with the Commission as an SD by March 31, 2013; and

• For purposes of SD registration only, any swap to which it is not a party because the swap is entered into by an affiliated central booking entity.

Further, for purposes of the transitional relief under this Final Order, in determining whether a non-U.S. person is engaged in more than a de minimis level of swap dealing, the non-U.S. person may exclude and not consider the aggregate notional value of:
82

82
As noted above, this further relief is available only where the non-U.S. person is engaged in swap dealing activities with U.S. persons as of the effective date of the Final Order.

• Any swap dealing transaction of its U.S. affiliates under common control; and

• If any of its affiliates under common control is registered as an SD, any swap dealing transaction of any of its non-U.S. affiliates that (i) is engaged in swap dealing activities with U.S. persons as of the effective date of the Final Order or (ii) is registered as an SD.
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83
The foregoing summary is based on the term “U.S. person” as it is defined above.

D. Entity-Level and Transaction-Level Requirements

1. Categorization of Entity- and Transaction-Level Requirements

Title VII of the Dodd-Frank Act establishes a comprehensive new regulatory framework for SDs and MSPs. This framework is an important element of the “improve[d] financial architecture” that Congress established in the Dodd-Frank Act to reduce systemic risk and enhance market transparency.
84

Among other things, a registered SD or MSP must comport with certain statutory requirements (and regulations the Commission may promulgate thereunder) governing risk management, internal and external business conduct standards, and reporting. Further, U.S. SDs and MSPs, once registered, are required to comply with all of the requirements applicable to SDs and MSPs for all their swaps, not just the swaps that make them an SD or MSP.

84
S. Rep. No. 111-176, at 228 (2010).

For purposes of the Proposed Order, the Dodd-Frank swap provisions were divided into two categories: (1) Entity-Level Requirements, which apply to all the firm's activities or transactions; and (2) Transactional-Level Requirements, which apply on a transaction-by-transaction basis. For purposes of the Final Order, the Commission will apply the Entity-Level and Transaction-Level Requirements as proposed.
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85
To date, the Commission has not adopted final rules relating to the Entity-Level Requirement of capital adequacy, nor the Transaction-Level Requirements of margining (and segregation) for uncleared swaps, and trade execution.
See
sections 2(h)(8), 4s(e) and 4s(l) of the CEA, 7 U.S.C. 2(h)(8), 6s(e) and 6s(l). No exemptive relief is necessary with respect to Requirements that are not yet in effect and, therefore, the Final Order does not apply to these Requirements. In the event that final rules with respect to any of these Requirements that are issued by the Commission come into effect prior to the expiration of this Final Order, the Commission will consider extending the Final Order to such Requirements at that time. For further details regarding the Entity-Level Requirements and the Transaction-Level Requirements,
see
the appendices to the Proposed Order.

The Entity-Level Requirements consist of: (1) Capital adequacy; (2) chief compliance officer; (3) risk management; (4) swap data recordkeeping; (5) SDR reporting; and (6) LTR.
86

The Entity-Level Requirements apply to registered SDs and MSPs across all their swaps without distinctions as to the counterparty or the location of the swap.
87

86
Specifically, the Entity-Level Requirements are those set forth in Commission regulations 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, 23.607, 23.608 and 23.609 and parts 20, 45 and 46.

87
IIB and The Clearing House noted that the Proposed Order did not address Commission regulation 1.31, which sets forth certain recordkeeping obligations that apply to all books and records required to be kept under the Commission's regulations.
See
IIB (Aug. 9, 2012) at 10; and The Clearing House (Aug. 16, 2012) at 14. In the Proposed Order, the Commission proposed generally that recordkeeping requirements would be Entity-Level Requirements but did not explicitly list Commission regulation 1.31 as an Entity-Level Requirement. The Commission clarifies that for purposes of the Final Order, Commission regulation 1.31 is an Entity-Level Requirement and, therefore, subject to the exemptive relief under the Final Order

The Transaction-Level Requirements consist of: (1) Clearing and swap processing; (2) margining and segregation for uncleared swaps; (3) trade execution; (4) swap trading relationship documentation; (5) portfolio reconciliation and compression; (6) real-time public reporting; (7) trade confirmation; (8) daily trading records; and (9) external business conduct standards.
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88
Specifically, the Transaction-Level Requirements are those set forth in CEA section 2(h)(8) and Commission regulations 23.202, 23.400 to 23.451, 23.501, 23.502, 23.503, 23.504(a), 23.504(b)(1), (b)(2), (b)(3) and (b)(4), 23.506 and 23.610 and part 43. The Proposed Guidance placed one of the Transaction-Level Requirements—external business conduct standards—into a “Subcategory B,” as distinguished from the remaining Transaction-Level Requirements in “Subcategory A.” This distinction is not relevant for purposes of the Final Order, in which all Transaction-Level Requirements are provided the same exemptive relief.

The Commission intends to consider any reclassification of Entity-Level and Transaction-Level requirements, including for the reasons raised by various commenters, in connection with further guidance on cross-border issues. As described below, however, the Commission has considered issues raised by commenters regarding the scope of the proposed exemptive relief from such Requirements—apart from their ultimate classification.

2. General Comments on the Proposed Order

In response to the Proposed Order, a number of commenters addressed the proposed exemptive relief from the Entity-Level and Transaction-Level Requirements. The Clearing House stated that appropriate phase-in relief requires the Commission to “provide greater flexibility” with respect to the application of the Dodd-Frank requirements to overseas operations and non-U.S. counterparties.
89

Several other commenters—including IIB, Citigroup and Cleary—recommended that the Commission either delay the compliance date for certain requirements or expand the scope of relief (particularly as to transactions with non-U.S. counterparties) to address certain compliance and operational burdens associated with applying the Dodd-Frank requirements to

transactions outside the United States.
90

These comments and the Commission determinations in response thereto are discussed below.

89

See
The Clearing House (Aug. 13, 2012) at 13-14. To that end, The Clearing House recommended that certain rules currently categorized as entity-level be changed to transaction-level.

90

See e.g.,
IIB (Aug. 13, 2012) at 9-10, Cleary (Aug. 16, 2012) at 14-16; and Citigroup (Aug. 13, 2012) at 4.

3. SDR Reporting (Part 45 and Part 46) and LTR Requirements

i. Comments

As discussed above, in the Proposed Order, the Commission proposed to allow non-U.S. SDs and MSPs to delay compliance with Entity-Level Requirements subject to specified conditions—except for the Entity-Level Requirements of SDR reporting and LTR requirements. Under the Proposed Order, non-U.S. SDs and MSPs would be required to comply with SDR reporting and LTR requirements for all swaps with U.S. counterparties upon their compliance date. And, with respect to swaps with non-U.S. counterparties, the Commission proposed that only those non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a U.S.-based SD would be permitted to delay compliance with the SDR reporting and LTR requirements. The Commission is adopting this temporary exemptive relief generally as proposed, with certain modifications in response to comments received.

Some commenters requested an extension of the compliance date for SDR reporting and LTR requirements. IIB stated that due to the “expansive” proposed aggregation rule and ambiguities in the proposed U.S. person definition, non-U.S. registrants may not have their systems ready to report their U.S.-facing swaps, which they expect to be relatively few in number.
91

As an initial step, IIB requested that the Commission further extend the compliance date for SDR reporting and LTR requirements with respect to swaps between non-U.S. registrants and other non-U.S. counterparties (including foreign branches of U.S. persons) under the exemptive relief, pending final interpretive guidance and for a “reasonable” time thereafter.
92

Similarly, cleary stated that compliance with part 45 swap data reporting requirements would require U.S. operations overseas (
i.e.,
affiliates and foreign branches) to develop new reporting infrastructures, which requires additional time for implementation. It requested that registrants be permitted to comply with SDR reporting with non-U.S. counterparties by reporting to the Global Trade Repository (“GTR”).
93

91

See
IIB (Aug. 13, 2012) at 10.

92

Id.
IIB also said that there may be jurisdictions that restrict the disclosure of even swaps with U.S. persons, and additional relief may be necessary for those jurisdictions.

93

See
Cleary (Aug. 16, 2012) at 15-16.

Other commenters requested broader relief from the reporting requirements. SIFMA argued that non-U.S. registrants should be relieved from complying with SDR reporting for all of their swaps.
94

SIFMA explained that because the proposed reporting relief is not available for swaps with U.S. counterparties, non-U.S. registrants are effectively required to comply with the full extent of SDR reporting and LTR requirements upon the effectiveness of the rules, nullifying the benefit of any transition period. Therefore, SIFMA urged that the proposed relief for non-U.S. registrants should apply to swaps with all counterparties.

94

See
SIFMA (Aug. 13, 2012) at 8-9.

The Clearing House stated that potential registrants—whether U.S. or non-U.S. and irrespective of affiliation or branch status—should not be required to apply SDR reporting rules or LTR requirements to transactions with non-U.S. counterparties.
95

It explained that for swaps with non-U.S. counterparties, these rules are transaction-specific and further, the cost of developing the necessary reporting infrastructure during the exemptive period would create disadvantages vis-à-vis those potential registrants for which delayed implementation of these requirements would be granted under the Final Order. The Clearing House, like IIB, also cited the fact that under the Proposed Guidance, many non-U.S. entities may be unexpectedly required to register as SDs but lack the operational infrastructure to comply with the reporting requirements.

95

See
The Clearing House (Aug. 13, 2012) at 13-14. This commenter also stated that where the foreign jurisdiction lacks any parallel transaction-level rules, the registrant should not be required to apply any Dodd-Frank Transaction-Level Requirements with respect to any swap with a non-U.S. counterparty. For jurisdictions with transaction-level requirements, all registrants should be allowed to comply with the local requirements during the exemptive period.

Several commenters also requested additional time for compliance with part 46 reporting of historical and transition swaps. For example, Citi stated that data for many historical swaps is not available in the format necessary, and that many of the relevant swaps have expired or were terminated.
96

SIFMA said that allowing additional time for compliance would not materially hinder the Commission's ability to assess systemic risk.
97

SIFMA requested that the Commission delay for all market participants part 46 historical swap reporting for a particular counterparty and asset class until 120 days after SDR reporting under part 45 is effective for that reporting counterparty and asset class in order to alleviate the difficulties associated with compliance with both reporting requirements.

96

See
Citi (Aug. 13, 2012) at 9.

97

See
SIFMA (Aug. 13, 2012) at 11.

Finally, as noted above, the Proposed Order stated that the exemptive relief for SDR reporting and LTR requirements for non-U.S. registrants in their swaps with non-U.S. counterparties would not extend to non-U.S. registrants that are affiliates or subsidiaries of U.S. registrants. A number of commenters, including Deutsche Bank, recommended that the Commission eliminate the term “affiliate” and exempt non-U.S. registrants from reporting swaps with non-U.S. counterparties, except where the non-U.S. registrant is a direct subsidiary of a U.S. registrant.
98

Commenters expressed the concern that this proposed exemptive relief from SDR reporting and LTR requirements was too narrow in that it would not extend to a non-U.S. registrant by virtue of its affiliation with a U.S. SD under the common ownership of a non-U.S. person that is neither an SD nor an MSP.
99

98

See
Deutsche Bank (Aug. 13, 2012) at 3;
see also
Cleary (Aug. 16, 2012) at 14-15.

99

See id.

ii. Commission Determination on SDR Reporting and LTR Requirements

SDR reporting is a fundamental component of Dodd-Frank's objective to reduce risk, increase transparency, and promote market integrity within the financial system generally, and the swaps market in particular.
100

SDR reporting achieves the statutory objectives of transparency and enhanced price discovery by, among other things, requiring that market participants report swap transaction and pricing data to an SDR. SDR reporting also serves as a valuable regulatory tool. In particular, timely reporting of comprehensive swap transaction data to SDRs will be important to the Commission's ability to effectively monitor and address the risk exposures of individual market participants (including SDs and MSPs) and the concentration of risk within the swaps market more generally. Similarly, LTR enables the Commission to promptly and efficiently identify significant traders and collect data on their trading activity so that the Commission can reconstruct market events, conduct investigations, and bring enforcement actions as

appropriate. In short, SDR reporting and LTR requirements are vital to ensuring that the Commission has a comprehensive and accurate picture of market activities in order to fulfill its regulatory mandate, including systemic risk mitigation, market monitoring, and market abuse prevention.

100

See
7 U.S.C. 2(a)(13)(G).

The Commission notes that Commission staff has recently granted no-action relief with respect to certain of these reporting requirements. In CFTC Letter No. 12-32, Commission staff provided time-limited no-action relief to SDs “from certain requirements of the Commission's swap data reporting rules, in order to allow for a common monthly compliance date for swap dealers newly falling within the scope of these rules, and to extend the compliance date for reporting historical swap transaction data pursuant to Part 46 of the Commission's regulations.”
101

In CFTC Letter No. 12-39, Commission staff granted time-limited no-action relief to reporting parties from certain reporting requirements in part 43 and part 45 with respect to bespoke or complex products.
102

The no-action relief granted in these letters is available to both U.S. and non-U.S. persons who may be subject to these reporting obligations.

101
CFTC Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight, Time-Limited No-Action Relief for Swap Dealers from Certain Swap Data Reporting Requirements of Part 43, Part 45, and Part 46 of the Commission's Regulations, No-Action Letter No. 12-32, dated Nov. 19, 2012.

102
CFTC Division of Market Oversight, Time-Limited No-Action Relief for Bespoke or Complex Swaps from Certain Swap Data Reporting Requirements of Parts 43 and 45 of the Commission's Regulations, No-Action Letter No. 12-39, dated Nov. 19, 2012.

The Commission believes that it is necessary to implement these reporting requirements as expeditiously as possible, and in a manner intended to achieve their underlying statutory objectives. Therefore, in light of the relief provided by the Commission staff, the Commission has determined that it would not further the public interest or the purposes of the CEA to further delay compliance with the SDR reporting or LTR requirements for non-U.S. registrants. For similar reasons, the Commission has determined to not extend exemptive relief from the SDR reporting or LTR requirements to U.S. registrants for their transactions with non-U.S. counterparties. Thus, the Commission has determined not to provide relief under CEA section 4(c) in this regard.

Finally, the Commission is clarifying its proposal that only those non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a U.S.-based SD would be permitted to delay compliance with the SDR reporting and LTR requirements with respect to swaps with non-U.S. counterparties. As explained in the preamble of the Proposed Order, this condition was intended to limit the relief to non-U.S. registrants that are not “part of a U.S-based affiliated group.”
103

Accordingly, in response to comments received, the Commission is clarifying that the relief from the SDR reporting and LTR requirements is reserved for swaps with non-U.S. counterparties that are entered into by non-U.S. registrants that are not part of an affiliated group in which the ultimate parent entity is a U.S. registrant, bank, financial holding company, or bank holding company.
104

The Commission believes that this modification strikes the appropriate balance between facilitating such non-U.S. registrants' phasing in of their reporting obligations and achieving the critical statutory and regulatory objectives of the SDR reporting and LTR requirements as discussed above. Therefore, the Commission has determined that this provision of the Final Order, as modified, is consistent with the public interest and the purposes of the CEA and, therefore, is appropriate for temporary exemptive relief pursuant to CEA section 4(c).

103
77 FR at 41112.

104
Accordingly, swaps with non-U.S. counterparties that are entered into by non-U.S. registrants that are part of an affiliated group in which the ultimate parent entity is a U.S. registrant, bank, financial holding company, or bank holding company, are subject to the SDR reporting and LTR requirements.

4. Privacy and Confidentiality Laws

i. Comments

A number of commenters, both market participants and foreign regulators, stated that certain Dodd-Frank requirements—namely, SDR reporting and LTR requirements, and U.S. regulators' access to books and records—may conflict with local privacy and data protection laws.
105

They further noted that potential solutions to such blocking statutes, such as mutual assistance agreements and/or client consents, may be available but will require time to implement. Certain commenters, including UBS, Citi, and Societe Generale, specifically requested that compliance with the reporting requirements for non-U.S. persons with non-U.S. counterparties, including foreign branches of U.S. persons, be delayed pending final interpretive guidance (and for a reasonable time thereafter). As an alternative, SIFMA suggested that at least during the term of the exemptive relief, all market participants (including futures commission merchants) should be permitted to mask client information from any reporting requirements, including SDR reporting and LTR, where the failure to do so would violate applicable foreign laws and regulations.

105

See e.g.,
SIFMA (Aug. 13, 2012) at 14; Citi (Aug. 13, 2012) at 7; UBS AG (“UBS”) (June 13, 2012) at 1; IIB (Aug. 9, 2012) at 10; Societe Generale (Aug. 9, 2012) at 8; ISDA (Aug. 10, 2012) at 7; Swiss Financial Market Supervisory Authority (“FINMA”) (July 16, 2012) at 2; Hong Kong Banks (Aug. 27, 2012) at 2-3.

ii. Commission Determination on Privacy and Confidentiality Laws

The Commission believes that, given the importance of the subject reporting requirements to market transparency and integrity, it is critical to apply these requirements to all registered SDs and MSPs.
106

However, the Commission recognizes the potential challenges that non-U.S. firms may face in jurisdictions with conflicting privacy and confidentiality laws. As a result of these challenges, the Commission staff recently granted time-limited no-action relief from provisions of parts 20, 45, and 46 of the Commission's regulations that require the reporting of certain information revealing the identity of a counterparty or affiliated group where reporting such information would violate the privacy laws of a non-U.S. jurisdiction.
107

In light of the

Commission staff's decision to provide no-action relief with respect to this issue, the Commission has determined that it would not further the public interest or the purposes of the CEA to grant further relief with respect to the reporting requirements solely on the basis of potentially conflicting privacy and data protection laws. Therefore, the Commission declines to provide relief under CEA section 4(c) in this regard.

106

See also
the discussion of the importance of SDR reporting in section III.D.3.ii., above

107

See
CFTC Division of Market Oversight, Re: Time-Limited No-Action Relief for Part 20 Reporting Entities Regarding Identifying Information and Time-Limited No-Action Relief for Part 45 and Part 46 Reporting Counterparties Regarding Legal Entity Identifiers, Other Enumerated Identifiers, or Other Identifying Terms, No-Action Letter No.12-46, Dec. 7, 2012. Further, in response to comments, the Commission is revising Form 7-R. This is the Commission form that a firm uses to apply for registration with the Commission. By signing Form 7-R, the firm makes a set of certifications, acknowledgments and undertakings. In addition, if the applicant is a foreign firm, the firm agrees to provide its books and records for inspection by the Commission, NFA, or the U.S. Department of Justice (“DOJ”) upon request and in a specified manner. Included is a statement that the foreign firm is not subject to any blocking, privacy or secrecy laws, and that failure to provide the books and records in the manner specified could result in enforcement action, denial or revocation of registration, or other consequences.

Certain foreign firms that will be required to register with the Commission as SDs by a date certain may be subject to blocking, privacy, or secrecy laws in their home jurisdictions that could limit or prevent production by those firms of their books and records in accordance with the procedures they would be agreeing to by signing Form 7-R. In order to permit these firms to register as required by U.S. law, without violating their home country laws, the Commission is making the terms of the agreement in Form 7-R that a firm

produce its books and records upon request of the Commission, NFA, or DOJ, subject to the provisions of any applicable blocking, privacy or secrecy laws.
See
Form 7-R at page 42, which may be found on NFA's Web site at
http://www.nfa.futures.org/NFA-registration/templates-and-forms/Form7-R-entire.pdf.

Similarly, the Commission views its access to a registrant's books and records as a fundamental regulatory tool necessary to properly monitor and examine the registrant's compliance with the CEA. Consistent with existing practice, the Commission intends to exercise its right to access a registrant's books and records and maintain its right to examine a registrant, regardless of the registrant's location.
108

In this regard, the Commission believes that mutual cooperation with other regulators is equally important to achieve the effective and efficient supervision of cross-border activities. In recognition of the importance of such mutual cooperation, the Commission will endeavor to achieve an understanding with each relevant regulator and memorialize such understanding in a supervisory arrangement. In the Commission's view, this is a balanced and flexible approach that will ensure that the agency has access to information critical to fulfilling its statutory responsibilities, but achieved in a manner designed to ensure continuing cooperative relationships with its counterparts overseas.

108
Under Commission regulation 23.603(i), a registered SD or MSP must make all records required to be maintained in accordance with Commission regulation 1.31 available promptly upon request to representatives of the Commission. Under the Final Order, the Commission reserves this right to access records held by registered SDs and MSPs, regardless of the registrant's location.

5. Exemptive Relief for U.S. Swap Dealers

i. Comments

The Proposed Order would permit non-U.S. registrants and foreign branches of U.S. registrants to delay compliance with Transaction-Level Requirements with respect to swaps with non-U.S. persons.
109

The relief would not be available to U.S. SDs (with the exception of foreign branches). SIFMA requested that the Commission extend the relief from compliance with the Entity-Level Requirements (including SDR reporting) to U.S. registrants transacting with non-U.S. persons since it will be difficult, if not impossible, to collect the counterparty information that is necessary to effect compliance with certain of these requirements.
110

SIFMA also supported granting U.S. SDs relief from swap data recordkeeping and internal conflicts requirements for swaps with non-U.S. persons.
111

ISDA similarly argued that the rationale for exemptive relief applies equally to a U.S. SD transacting directly with non-U.S. persons.
112

Cleary raised concerns about the disparate treatment extended to U.S. SDs and non-U.S.-SDs under the Proposed Order in respect to Transaction-Level Requirements as applied to transactions with non-U.S. persons.
113

Cleary requested that in the interim, for the duration of the exemptive relief, the Commission should exempt all SDs from Transaction-Level Requirements for transactions with non-U.S. persons.

109
The Proposed Order provided that non-U.S. registrants may comply with Transaction-Level Requirements for transactions with non-U.S. counterparties only as required by the home jurisdiction (or in the case of foreign branches of a U.S. registrant, the foreign location of the branch). Cleary requested that compliance with the host jurisdiction also be permitted.
See
Cleary (Aug. 16, 2012) at 16. In response, the Commission is clarifying the Final Order to allow the non-U.S. registrant (or branch of a U.S. registrant) to comply with only the applicable requirements of the local jurisdiction.

110

See
SIFMA (Aug. 13, 2012) at 10 (arguing that, otherwise, U.S. SDs would be at a competitive disadvantage and that U.S. SDs face the same operational difficulties as non-U.S. SDs when transacting in the U.S. with non-U.S. counterparties).

111

Id.
at 9.

112

See
ISDA (Aug. 10, 2012) at 7 (“in the interest of competitive parity between U.S. and non-U.S. entities, ISDA recommends that the Commission align the domestic and extraterritorial compliance dates of all requirements”).

113

See
Cleary (Aug. 16, 2012) at 11 (“during the exemption's phase-in period * * * the CFTC should ensure competitive parity by exempting all [SDs] from transaction-level requirements in connection with transactions with non-U.S. counterparties”).

ii. Commission Determination on Relief for U.S. Swap Dealers

The Commission believes that extension of this relief to U.S. SDs' activities would not only be contrary to the directive in CEA section 2(i), but also detrimental to the Commission's strong supervisory interests in swap activities occurring inside the United States. Nevertheless, the Commission has carefully considered the potential consequences of disparate treatment of U.S. and non-U.S. registrants and, where possible, has attempted to minimize the disparity between these registrants. A notable example of this is the relief from the Transactional-Level Requirements, which applies equally to both non-U.S. persons and the overseas operations of U.S. persons (
i.e.,
foreign branches or non-U.S. affiliates).

In the Commission's view, it would be contrary to the public interest and the purposes of the CEA to address commenters' concerns about regulatory disparity by diminishing the regulatory requirements that apply to swap activities inside the United States. Rather, the Commission believes that this issue is more appropriately addressed by working closely with its overseas counterparts, including continued participation in international groups to adopt and enforce robust and consistent standards across jurisdictions.
114

114
Where appropriate, however, the Commission has provided relief to both U.S. and non-U.S. registrants. For example, the Commission recently approved interim final rules for SDs and MSPs that would otherwise be required to comply with certain business conduct and documentation requirements in provisions of subpart F, subpart H, and subpart I to part 23 of the Commission's Regulations. Specifically, the compliance date for Commission regulations 23.502 and 23.504 is deferred until July 1, 2013. Additionally, the compliance date for Commission regulations 23.201(b)(3)(ii); 23.402; 23.401(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and (c); 23.440; 23.450; and 23.505 is deferred until May 1, 2013. The compliance dates for all other provisions of subpart F, subpart H, and subpart I of part 23 remain unchanged.
See
Business Conduct and Documentation Requirements for Swap Dealers and Major Swap Participants, Interim Final Rules, Dec. 18, 2012, available at
http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister121812.pdf.

6. Relief for Transactions Involving Non-Registrants

i. Comments

As noted above, the Proposed Order would not extend relief to swap counterparties that are neither SDs nor MSPs. Certain commenters, such as SIFMA and Deutsche Bank, asserted that this would lead to an anomalous result. By way of illustration, they noted that a swap between a non-U.S. person and a foreign branch of an SD would be exempt from applicable Transaction-Level Requirements, but a swap between the same non-U.S. person and a foreign branch of a U.S. bank that is not a registered SD would not be eligible for the relief.
115

They asked that the Commission extend exemptive relief to non-U.S. persons who enter into swaps with foreign branches of U.S. persons, regardless of whether the U.S. person is a registered SD or MSP.

115

See
SIFMA (Aug. 13, 2012) at 12; Deutsche Bank (Aug. 13, 2012) at 3-4 (citing SDR reporting as an example of such disparities).

ii. Commission Determination on Transactions Involving Non-Registrants

The Commission believes that it would not be appropriate to extend temporary exemptive relief to swaps by a non-U.S. person with a foreign branch of a U.S. person that is not a registrant. As explained above, in crafting the scope of relief to be granted under CEA section 4(c), the Commission carefully balanced the need to implement the Dodd-Frank swap provisions as expeditiously as possible and the need to mitigate undue disruptions to market practices. Consistent with that objective, the Commission's determination to exclude swaps between non-U.S. persons and foreign branches of U.S. registrants from certain requirements was based on the fact that the U.S. registrant (of which the foreign branch is an integral part, not a separate entity) would be subject to various prudential requirements as part of the overall requirements applicable to registrants. In the Commission's view, these requirements provide a sufficient level of regulatory safeguards with respect to the U.S. registrants to allow for temporary relief from the Transactional-Level Requirements with respect to the foreign branches of those U.S. registrants.

In contrast, where the foreign branch is not part of a U.S. registrant, the Dodd-Frank requirements applicable to that foreign branch are greatly reduced and may, in some cases, be absent. Accordingly, the Commission believes that it would not further the public interest to grant relief from applicable Transaction-Level Requirements with respect to foreign branches of other classes of U.S. persons, and therefore declines to issue such exemptive relief u

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2012-31736. Public record. Not legal advice.