Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants

Federal RegisterJan 8, 2020

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE84

Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is publishing for public comment a proposed rule (“Proposed Rule”) addressing the cross-border application of certain swap provisions of the Commodity Exchange Act (“CEA or “Act”), as added by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Specifically, the Proposed Rule addresses the cross-border application of the registration thresholds and certain requirements applicable to swap dealers (“SDs”) and major swap participants (“MSPs”), and establishes a formal process for requesting comparability determinations for such requirements from the Commission. The Commission is proposing a risk-based approach that, consistent with section 2(i) of the CEA, and with due consideration of international comity principles and the Commission's interest in focusing its authority on potential significant risks to the U.S. financial system, would advance the goals of the Dodd-Frank Act's swap reform, while fostering greater liquidity and competitive markets, promoting enhanced regulatory cooperation, and advancing the global harmonization of swap regulation.

DATES:

Comments must be received on or before March 9, 2020.

ADDRESSES:

You may submit comments, identified by RIN 3038-AE84, by any of the following methods:

•

CFTC Comments Portal: https://comments.cftc.gov.

Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form.

•

Mail:

Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

•

Hand Delivery/Courier:

Follow the same instructions as for Mail, above.

Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to

https://comments.cftc.gov.

You should submit only information that you wish to make available publicly. If you wish for the Commission to consider information that is exempt from disclosure under the Freedom of Information Act (“FOIA”),

a petition for confidential treatment of the exempt information may be submitted according to the procedures set forth in § 145.9 of the Commission's regulations.

5 U.S.C. 552.

17 CFR 145.9. Commission regulations referred to herein are found at 17 CFR chapter I.

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse, or remove any or all of your submission from

https://comments.cftc.gov

that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under FOIA.

FOR FURTHER INFORMATION CONTACT:

Joshua Sterling, Director, (202) 418-6056,

jsterling@cftc.gov;

Frank Fisanich, Chief Counsel, (202) 418-5949,

ffisanich@cftc.gov;

Amanda Olear, Associate Director, (202) 418-5283,

aolear@cftc.gov;

Rajal Patel, Associate Director, 202-418-5261,

rpatel@cftc.gov;

Lauren Bennett, Special Counsel, 202-418-5290,

lbennett@cftc.gov;

Jacob Chachkin, Special Counsel, (202) 418-5496,

jchachkin@cftc.gov;

Pamela Geraghty, Special Counsel, 202-418-5634,

pgeraghty@cftc.gov;

or Owen Kopon, Special Counsel,

okopon@cftc.gov,

202-418-5360, Division of Swap Dealer and Intermediary Oversight (“DSIO”), Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Statutory Authority and Prior Commission Action

B. Global Regulatory and Market Structure

C. Interpretation of CEA Section 2(i)

1. Statutory Analysis

2. Principles of International Comity

D. Proposed Rule

II. Key Definitions

A. U.S. Person, Non-U.S. Person, and United States

B. Guarantee

C. Significant Risk Subsidiary, Significant Subsidiary, Subsidiary, Parent Entity, and U.S. GAAP

1. Non-U.S. Persons With U.S. Parent Entities

2. Preliminary Definitions

3. Significant Risk Subsidiaries

4. Exclusions From the Definition of SRS

D. Foreign Branch and Swap Conducted Through a Foreign Branch

E. Swap Entity, U.S. Swap Entity, and Non-U.S. Swap Entity

F. U.S. Branch and Swap Conducted Through a U.S. Branch

G. Foreign-Based Swap and Foreign Counterparty

H. Request for Comment

III. Cross-Border Application of the Swap Dealer Registration Threshold

A. U.S. Persons

B. Non-U.S. Persons

1. Swaps by a Significant Risk Subsidiary

2. Swaps With a U.S. Person

3. Swaps Subject to a Guarantee

C. Aggregation Requirement

D. Certain Exchange-Traded and Cleared Swaps

E. Request for Comment

IV. Cross-Border Application of the Major Swap Participant Registration Tests

A. U.S. Persons

B. Non-U.S. Persons

1. Swaps by a Significant Risk Subsidiary

2. Swap Positions With a U.S. Person

3. Swap Positions Subject to a Guarantee

C. Attribution Requirement

D. Certain Exchange-Traded and Cleared Swaps

E. Request for Comment

V. ANE Transactions

A. Background and Proposed Approach

B. Request for Comment

VI. Proposed Exceptions From Group B and Group C Requirements, Substituted Compliance for Group A and Group B Requirements, and Comparability Determinations

A. Classification and Application of Certain Regulatory Requirements—Group A, Group B, and Group C Requirements

1. Group A Requirements

2. Group B Requirements

3. Group C Requirements

4. Request for Comment

B. Proposed Exceptions

1. Exchange-Traded Exception

2. Foreign Swap Group C Exception

3. Non-U.S. Swap Entity Group B Exception

4. Foreign Branch Group B Exception

5. Request for Comment

C. Substituted Compliance

1. Proposed Substituted Compliance Framework for the Group A Requirements

2. Proposed Substituted Compliance Framework for the Group B Requirements

3. Request for Comment

D. Comparability Determinations

1. Standard of Review

2. Eligibility Requirements

3. Submission Requirements

4. Request for Comment

VII. Recordkeeping

VIII. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost-Benefit Considerations

1. Assessment Costs

2. Cross-Border Application of the SD Registration Threshold

3. Cross-Border Application of the MSP Registration Thresholds

4. Monitoring Costs

5. Registration Costs

6. Programmatic Costs

7. Proposed Exceptions From Group B and Group C Requirements, Availability of Substituted Compliance, and Comparability Determinations

8. Recordkeeping

9. Section 15(a) Factors

10. Request for Comment

D. Antitrust Considerations

IX. Preamble Summary Tables

A. Table A—Cross-Border Application of the SD De Minimis Threshold

B. Table B—Cross-Border Application of the MSP Threshold

C. Table C—Cross-Border Application of the Group B Requirements in Consideration of Related Exceptions and Substituted Compliance

D. Table D—Cross-Border Application of the Group C Requirements in Consideration of Related Exceptions

I. Background

A. Statutory Authority and Prior Commission Action

In 2010, the Dodd-Frank Act

amended the CEA

to, among other things, establish a new regulatory framework for swaps. Added in the wake of the 2008 financial crisis, the Dodd-Frank Act was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system. Given the global nature of the swap market, the Dodd-Frank Act amended the CEA by adding section 2(i) to provide that the swap provisions of the CEA enacted by Title VII of the Dodd-Frank Act (“Title VII”), including any rule prescribed or regulation promulgated under the CEA, shall not apply to activities outside the United States (“U.S.”) unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States, or they contravene Commission rules or regulations as are necessary or appropriate to prevent evasion of the swap provisions of the CEA enacted under Title VII.

Public Law 111-203, 124 Stat. 1376 (2010).

7 U.S.C. 1

et seq.

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

In May 2012, the CFTC and Securities and Exchange Commission (“SEC”) jointly issued an adopting release that, among other things, further defined and provided registration thresholds for SDs and MSPs in § 1.3 of the CFTC's regulations (“Entities Rule”).

See

17 CFR 1.3, “Swap dealer” and “Major swap participant”; 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).

In July 2013, the Commission published interpretive guidance and a policy statement regarding the cross-border application of certain swap provisions of the CEA (“Guidance”).

The Guidance included the Commission's interpretation of the “direct and significant” prong of section 2(i) of the CEA.

In addition, the Guidance established a general, non-binding framework for the cross-border application of many substantive Dodd-Frank Act requirements, including registration and business conduct requirements for SDs and MSPs, as well as a process for making substituted compliance determinations. Given the complex and dynamic nature of the global swap market, the Guidance was intended as a flexible and efficient way to provide the Commission's views on cross-border issues raised by market participants, allowing the Commission to adapt in response to changes in the global regulatory and market landscape.

The Commission accordingly stated that it would review and modify its cross-border policies as the global swap market continued to evolve and consider codifying the cross-border application of the Dodd-Frank Act swap provisions in future rulemakings, as appropriate.

The Commission notes that, at the time that the Guidance was adopted, it was tasked with regulating a market that grew to a global scale without any meaningful regulation in the United States or overseas, and that the United States was the first of the G20 member countries to adopt most of the swap reforms agreed to at the G20 Pittsburgh Summit in 2009.

Developing a regulatory framework to fit that market necessarily requires adapting and responding to changes in the global market, including developments resulting from requirements imposed on market participants under the Dodd-Frank Act and the Commission's implementing regulations in the U.S., as well as those that have been imposed by non-U.S. regulatory authorities since the Guidance was issued.

See

Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26, 2013).

Id.

at 45297-301. The Commission is now restating this interpretation, as discussed in section I.C below.

Id.

at 45297 n.39.

See id.

See

G20 Leaders' Statement: The Pittsburgh Summit, A Framework for Strong, Sustainable, and Balanced Growth (Sep. 24-25, 2009), available at

https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.

On November 14, 2013, DSIO issued a staff advisory (“ANE Staff Advisory”) stating that a non-U.S. SD that regularly uses personnel or agents located in the United States to arrange, negotiate, or execute a swap with a non-U.S. person (“ANE Transactions”) would generally be required to comply with “Transaction-Level Requirements,” as the term was used in the Guidance (discussed in section VI.A).

On November 26, 2013, Commission staff issued certain no-action relief to non-U.S. SDs registered with the Commission from these requirements in connection with ANE Transactions (“ANE No-Action Relief”).

In January 2014, the Commission published a request for comment on all aspects of the ANE Staff Advisory (“ANE Request for Comment”).

See

CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (Nov. 14, 2013), available at

http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.

CFTC Staff Letter No. 13-71, No-Action Relief: Certain Transaction-Level Requirements for Non-U.S. Swap Dealers (Nov. 26, 2013), available at

https://www.cftc.gov/csl/13-71/download.

Commission staff subsequently extended this relief in CFTC Letter Nos. 14-01, 14-74, 14-140, 15-48, 16-64, and 17-36. All Commission staff letters are available at

https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.

Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States, 79 FR 1347, 1348-49 (Jan. 8, 2014).

In May 2016, the Commission issued a final rule on the cross-border application of the Commission's margin requirements for uncleared swaps (“Cross-Border Margin Rule”).

Among other things, the Cross-Border Margin Rule addressed the availability of substituted compliance by outlining the circumstances under which certain SDs and MSPs could satisfy the Commission's margin requirements for uncleared swaps by complying with comparable foreign margin requirements. The Cross-Border Margin Rule also established a framework by which the Commission would assess whether a foreign jurisdiction's margin requirements are comparable.

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the Margin Requirements, 81 FR 34818 (May 31, 2016).

In October 2016, the Commission proposed regulations regarding the cross-border application of certain requirements under the Dodd-Frank Act regulatory framework for SDs and MSPs (“2016 Proposal”).

The 2016 Proposal incorporated various aspects of the Cross-Border Margin Rule and addressed when U.S. and non-U.S. persons, such as foreign consolidated subsidiaries (“FCSs”) and non-U.S. persons whose swap obligations are guaranteed by a U.S. person, would be required to include swaps or swap positions in their SD or MSP registration threshold calculations, respectively.

The 2016 Proposal also addressed the extent to which SDs and MSPs would be required to comply with the Commission's business conduct standards governing their conduct with swap counterparties (“external business conduct standards”) in cross-border transactions.

In addition, the 2016 Proposal addressed ANE Transactions, including the types of activities that would constitute arranging, negotiating, and executing within the context of the 2016 Proposal, the treatment of such transactions with respect to the SD registration threshold, and the application of external business conduct standards with respect to such transactions.

Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 81 FR 71946 (proposed Oct. 18, 2016).

Id.

at 71947. As noted above, the SD and MSP registration thresholds are codified in the definitions of those terms at 17 CFR 1.3.

Id.

The Commission's external business conduct standards are codified in 17 CFR part 23, subpart H (17 CFR 23.400 through 23.451).

Id.

The Commission is today withdrawing the 2016 Proposal. The Proposed Rule reflects the Commission's current views on the matters addressed in the 2016 Proposal, which have evolved since the 2016 Proposal as a result of market and regulatory developments in the swap markets and in the interest of international comity, as discussed in this release.

B. Global Regulatory and Market Structure

The regulatory landscape is far different now than it was when the Dodd-Frank Act was enacted. Even when the CFTC published the Guidance in 2013, very few jurisdictions had made significant progress in implementing the global swap reforms to which the G20 leaders agreed at the Pittsburgh G20 Summit. Today, however, as a result of the cumulative implementation efforts by regulators throughout the world, significant progress has been made by regulators in the world's primary swap trading jurisdictions to implement the G20 commitments.

Since the enactment of the Dodd-Frank Act, regulators in a number of large developed markets have adopted regulatory regimes that are designed to mitigate systemic risks associated with a global swap market. Regulators have adopted rules regarding matters including central clearing, margin requirements for non-centrally cleared derivatives, and other risk mitigation requirements.

See, e.g.,

Financial Stability Board (“FSB”), OTC Derivatives Market Reforms: 2019 Progress Report on Implementation (Oct. 15, 2019) (“2019 FSB Progress Report”), available at

https://www.fsb.org/wp-content/uploads/P151019.pdf;

and FSB, Implementation and Effects of the G20 Financial Regulatory Reforms: Fourth Annual Report (Nov. 28, 2018), available at

http://www.fsb.org/wp-content/uploads/P281118-1.pdf.

For example, at the end of September 2019, 16 FSB member jurisdictions had comprehensive swap margin requirements in force.

See

2019 FSB Progress Report, at 2.

Many swaps involve at least one counterparty that is located in the United States or another jurisdiction that has adopted comprehensive swap regulations.

However, conflicting and duplicative requirements between U.S. and foreign regimes can contribute to potential market inefficiencies and regulatory arbitrage, as well as competitive disparities that undermine the relative positions of U.S. SDs and their counterparties. This may result in market fragmentation, which can lead to significant inefficiencies that result in additional costs to end-users. Market fragmentation can reduce the capacity of financial firms to serve both domestic and international customers.

The Proposed Rule has been designed to support a cross-border framework that promotes the integrity, resilience, and vibrancy of the swap market while furthering the important policy goals of the Dodd-Frank Act. In that regard, giving due regard to how market practices have evolved since the publication of the Guidance is an important consideration. As certain market participants may have adjusted their practices to take the Guidance into account, the Proposed Rule, if adopted, should cause limited additional costs and burdens for these market participants if it is adopted, while supporting the continued operation of markets that are much more comprehensively regulated than they were before the Dodd-Frank Act and the actions of governments worldwide taken in response to the Pittsburgh G20 Summit.

See, e.g.,

2019 FSB Progress Report; and Bank of International Settlements (“BIS”), Triennial Central Bank Survey of Foreign Exchange and Over-the-counter Derivatives Markets in 2019 (Sep. 16, 2019), available at

https://www.bis.org/statistics/rpfx19.htm.

See, e.g.,

Institute of International Finance, Addressing Market Fragmentation: The Need for Enhanced Global Regulatory Cooperation (Jan. 2019), available at

https://www.iif.com/Portals/0/Files/IIF%20FSB%20Fragmentation%20Report.pdf.

The approach described below is informed by the Commission's understanding of current market practices of global financial institutions under the Guidance. Driven by business and regulatory reasons, a financial group that is active in the swap market often operates in multiple market centers around the world and carries out swap activity with geographically-diverse counterparties using a number of different operational structures.

From discussions with market participants, the Commission understands that financial groups typically prefer to operate their swap dealing businesses and manage swap portfolios in the jurisdiction where the swaps and the underlying assets have the deepest and most liquid markets. In operating their swap dealing businesses in these market centers, financial groups seek to take advantage of expertise in products traded in those centers and obtain access to greater liquidity. These arrangements permit them to price products more efficiently and compete more effectively in the global swap market, including in jurisdictions different from the market center in which the swap is traded.

See

BIS, Committee on the Global Financial System, No. 46, The macrofinancial implications of alternative configurations for access to central counterparties in OTC derivatives markets, at 1 (Nov. 2011), available at

http://www.bis.org/publ/cgfs46.pdf

(stating that “[t]he configuration of access must take account of the globalised nature of the market, in which a significant proportion of OTC derivatives trading is undertaken across borders”).

In this sense, a global financial enterprise effectively operates as a single business, with a highly integrated network of business lines and services conducted through various branches or affiliated legal entities that are under the control of the parent entity.

Branches and affiliates in a global financial enterprise are highly interdependent, with separate entities in the group providing financial or credit support to each other, such as in the form of a guarantee or the ability to transfer risk

through inter-affiliate trades or other offsetting transactions. Even in the absence of an explicit arrangement or guarantee, a parent entity may, for reputational or other reasons, choose to assume the risk incurred by its affiliates, branches, or offices located overseas. Swaps are also traded by an entity in one jurisdiction, but booked and risk-managed by an affiliate in another jurisdiction. The Proposed Rule recognizes that these and similar arrangements among global financial enterprises create channels through which swap-related risks can have a direct and significant connection with activities in, or effect on, commerce of the United States.

The largest U.S. banks have thousands of affiliated global entities, as shown in data from the National Information Center (“NIC”), a repository of financial data and institutional characteristics of banks and other institutions for which the Federal Reserve Board has a supervisory, regulatory, or research interest.

See

NIC, available at

https://www.ffiec.gov/npw.

C. Interpretation of CEA Section 2(i)

The Commission's interpretation of CEA section 2(i) in this release mirrors the approach that the Commission took in the Guidance. However, in light of the passage of time since the publication of the Guidance, the Commission is restating its interpretation of section 2(i) of the CEA with the Proposed Rule.

CEA section 2(i) provides that the swap provisions of Title VII shall not apply to activities outside the United States unless those activities—

• have a direct and significant connection with activities in, or effect on, commerce of the United States; or

• contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of the CEA that was enacted by the Dodd-Frank Act.

The Commission believes that section 2(i) provides it express authority over swap activities outside the United States when certain conditions are met, but it does not require the Commission to extend its reach to the outer bounds of that authorization. Rather, in exercising its authority with respect to swap activities outside the United States, the Commission will be guided by international comity principles and will focus its authority on potential significant risks to the U.S. financial system.

1. Statutory Analysis

In interpreting the phrase “direct and significant,” the Commission has examined the plain language of the statutory provision, similar language in other statutes with cross-border application, and the legislative history of section 2(i).

The statutory language in CEA section 2(i) is structured similarly to the statutory language in the Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”),

which provides the standard for the cross-border application of the Sherman Antitrust Act (“Sherman Act”).

The FTAIA, like CEA section 2(i), excludes certain non-U.S. commercial transactions from the reach of U.S. law. Specifically, the FTAIA provides that the antitrust provisions of the Sherman Act shall not apply to anti-competitive conduct involving trade or commerce with foreign nations.

However, like paragraph (1) of CEA section 2(i), the FTAIA also creates exceptions to the general exclusionary rule and thus brings back within antitrust coverage any conduct that: (1) Has a direct, substantial, and reasonably foreseeable effect on U.S. commerce;

and (2) such effect gives rise to a Sherman Act claim.

F. Hoffman-LaRoche, Ltd.

Empagran S.A.,

the U.S. Supreme Court stated that “this technical language initially lays down a general rule placing

all

(nonimport) activity involving foreign commerce outside the Sherman Act's reach. It then brings such conduct back within the Sherman Act's reach

provided that

the conduct

both

(1) sufficiently affects American commerce,

i.e.,

it has a `direct, substantial, and reasonably foreseeable effect' on American domestic, import, or (certain) export commerce,

and

(2) has an effect of a kind that antitrust law considers harmful,

i.e.,

the `effect' must `giv[e] rise to a [Sherman Act] claim.' ”

15 U.S.C. 6a.

15 U.S.C. 1-7.

15 U.S.C. 6a.

15 U.S.C. 6a(1).

15 U.S.C. 6a(2).

542 U.S. 155, 162 (2004) (emphasis in original).

It is appropriate, therefore, to read section 2(i) of the CEA as a clear expression of congressional intent that the swap provisions of Title VII of the Dodd-Frank Act apply to activities beyond the borders of the United States when certain circumstances are present.

These circumstances include, pursuant to paragraph (1) of section 2(i), when activities outside the United States meet the statutory test of having a “direct and significant connection with activities in, or effect on,” U.S. commerce.

SIFMA

CFTC,

67 F.Supp.3d 373, 425-26 (D.D.C. 2014) (“The plain text of this provision `clearly expresse[s]' Congress's `affirmative intention' to give extraterritorial effect to Title VII's statutory requirements, as well as to the Title VII rules or regulations prescribed by the CFTC, whenever the provision's jurisdictional nexus is satisfied.”).

See also

SEC Cross-Border Rule, 79 FR at 47303-13.

See

17 CFR 23.160(a)(10).

See also

Cross-Border Margin Rule, 81 FR at 34821-24.

(1) A natural person resident in the United States;

Proposed § 23.23(a)(22)(i)(

(2) A partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States;

Proposed § 23.23(a)(22)(i)(

(3) An account (whether discretionary or non-discretionary) of a U.S. person;

Proposed § 23.23(a)(22)(i)(

(4) An estate of a decedent who was a resident of the United States at the time of death.

Proposed § 23.23(a)(22)(i)(

The Commission believes that this definition offers a clear, objective basis for determining which individuals or entities should be identified as U.S. persons for purposes of the swap requirements addressed by the Proposed Rule. Specifically, the various prongs, as discussed in more detail below, are intended to identify persons whose activities have a significant nexus to the United States by virtue of their organization or domicile in the United States. In addition, harmonizing with the definition in the SEC Cross-Border Rule is not only consistent with section 2(i) of the CEA,

but is expected to reduce undue compliance costs for market participants. As discussed below, the Commission is also of the view that the “U.S. person” definition in the Cross-Border Margin Rule would largely encompass the same universe of persons as the definition used in the SEC Cross-Border Rule and the Proposed Rule.

Harmonizing the Commission's definition of “U.S. person” with the definition in the SEC Cross-Border Rule also is consistent with the dictate in section 712(a)(7) of the Dodd-Frank Act that the CFTC and SEC “treat functionally or economically similar” SDs, MSPs, security-based swap dealers, and major security-based swap participants “in a similar manner.” Dodd Frank Act, Public Law 111-203, section 712(a)(7)(A); 15 U.S.C. 8307(a)(7)(A).

See

Cross-Border Margin Rule, 81 FR at 34824 (“The Commission notes that, as discussed in the proposed rule, the Final Rule defines `U.S. person' in a manner that is substantially similar to the definition used by the SEC in the context of cross-border regulation of security-based swaps.”) As noted below, the Commission also requests comment on whether it should instead adopt the “U.S. person” definition in the Cross-Border Margin Rule.

Proposed § 23.23(a)(22)(i) identifies certain persons as a “U.S. person” by virtue of their domicile or organization within the United States. The Commission has traditionally looked to where a legal entity is organized or incorporated (or in the case of a natural person, where he or she resides) to determine whether it is a U.S. person.

In the Commission's view, these persons—by virtue of their decision to organize or locate in the United States and because they are likely to have significant financial and legal relationships in the United States—are appropriately included within the definition of “U.S. person.”

See id.

at 34823.

See also

17 CFR 4.7(a)(1)(iv) (defining “Non-United States person” for purposes of part 4 of the Commission regulations relating to commodity pool operators).

More specifically, proposed §§ 23.23(a)(22)(i)(

) and (

) generally incorporate a “territorial” concept of a U.S. person. That is, these are natural persons and legal entities that are physically located or incorporated within U.S. territory, and thus are subject to the Commission's jurisdiction. Further, the Commission would generally consider swap activities where such persons are counterparties, as a class and in the aggregate, as satisfying the “direct and significant” test under CEA section 2(i). Consistent with the “U.S. person” definition in the Cross-Border Margin Rule

and the SEC Cross-Border Rule,

the definition encompasses both foreign and domestic branches of an entity. As discussed below, a branch does not have a legal identity apart from its principal entity.

See

17 CFR 23.160(a)(10)(iii) (U.S. person includes a corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of entity similar to any of the foregoing (other than an entity described in paragraph (a)(10)(iv) or (v) of this section) (a legal entity), in each case that is organized or incorporated under the laws of the United States or that has its principal place of business in the United States,

including any branch of such legal entity

) (emphasis added).

See

SEC Cross-Border Rule, 79 FR at 47308 (“[T]he final definition determines a legal person's status at the entity level and thus applies to the entire legal person, including any foreign operations that are part of the U.S. legal person. Consistent with this approach, a foreign branch, agency, or office of a U.S. person is treated as part of a U.S. person, as it lacks the legal independence to be considered a non-U.S. person for purposes of Title VII even if its head office is physically located within the United States.”).

In addition, the Commission is of the view that proposed § 23.23(a)(22)(i)(

) subsumes the pension fund prong of the “U.S. person” definition in the Cross-Border Margin Rule.

Specifically, § 23.23(a)(22)(i)(

) would also include in the definition of the term “U.S. person” pension plans for the employees, officers, or principals of a legal entity described in § 23.23(a)(22)(i)(

). Although the SEC Cross-Border Rule directly addresses pension funds only in the context of international financial institutions, discussed below, the Commission believes it is important to clarify that pension funds in other contexts could meet the requirements of proposed § 23.23(a)(22)(i)(

See

17 CFR 23.160(a)(10)(iv).

Finally, the Commission is of the view that proposed § 23.23(a)(22)(i)(

) subsumes the trust prong of the “U.S. person” definition in the Cross-Border

Margin Rule.

With respect to trusts addressed in proposed § 23.23(a)(22)(i)(

), the Commission expects that its approach would be consistent with the manner in which trusts are treated for other purposes under the law. The Commission has 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 would generally be reasonable to treat the trust as a U.S. person for purposes of the Proposed Rule. Another relevant element in this regard would be whether a court within the United States is able to exercise primary supervision over the administration of the trust. The Commission expects that this aspect of the definition would generally align the treatment of the trust for purposes of the Proposed Rule with how the trust is treated for other legal purposes. For example, the Commission expects that if a person could bring suit against the trustee for breach of fiduciary duty in a U.S. court (and, as noted above, the trust is governed by U.S. law), then treating the trust as a U.S. person would generally be consistent with its treatment for other purposes.

See

17 CFR 23.160(a)(10)(v).

As noted in the Cross-Border Margin Rule,

and consistent with the SEC

definition of “U.S. person,” proposed § 23.23(a)(22)(ii) provides that the principal place of business means the location from which the officers, partners, or managers of the legal person primarily direct, control, and coordinate the activities of the legal person. With the exception of externally managed entities, as discussed below, the Commission is of the view that for most entities, the location of these officers, partners, or managers generally would correspond to the location of the person's headquarters or main office. However, the Commission believes that a definition that focuses exclusively on whether a legal person is organized, incorporated, or established in the United States could encourage some entities to move their place of incorporation to a non-U.S. jurisdiction to avoid complying with the relevant Dodd-Frank Act requirements, while maintaining their principal place of business—and therefore, risks arising from their swap transactions—in the United States. Moreover, a “U.S. person” definition that does not include a “principal place of business” element could result in certain entities falling outside the scope of the relevant Dodd-Frank Act-related requirements, even though the nature of their legal and financial relationships in the United States is, as a general matter, indistinguishable from that of entities incorporated, organized, or established in the United States. Therefore, the Commission is of the view that it is appropriate to treat such entities as U.S. persons for purposes of the Proposed Rule.

Cross-Border Margin Rule, 81 FR at 34823.

17 CFR 240.3a71-3(a)(4)(ii).

See

SEC Cross-Border Rule, 79 FR at 47309.

However, determining the principal place of business of a collective investment vehicle (“CIV”), such as an investment fund or commodity pool, may require consideration of additional factors beyond those applicable to operating companies. The Commission is of the view that with respect to an externally managed investment vehicle, this location is the office from which the manager of the vehicle primarily directs, controls, and coordinates the investment activities of the vehicle.

This interpretation is consistent with the Supreme Court's decision in

Hertz Corp.

Friend,

which described a corporation's principal place of business, for purposes of diversity jurisdiction, as the “place where the corporation's high level officers direct, control, and coordinate the corporation's activities.”

In the case of a CIV, the senior personnel that direct, control, and coordinate a CIV's activities are generally not the named directors or officers of the CIV, but rather persons employed by the CIV's investment advisor or promoter, or in the case of a commodity pool, its commodity pool operator. Therefore, consistent with the SEC Cross-Border Rule,

when a primary manager is responsible for directing, controlling, and coordinating the overall activity of a CIV, the CIV's principal place of business under the proposed rule would be the location from which the manager carries out those responsibilities.

Proposed § 23.23(a)(22)(ii).

See

559 U.S. 77, 80 (2010); Cross-Border Margin Rule, 81 FR at 34823.

See

SEC Cross-Border Rule, 79 FR at 47310-11.

The Commission notes that under the Cross-Border Margin Rule,

the Commission would generally consider the principal place of business of a CIV to be in the United States if the senior personnel responsible for either: (1) The formation and promotion of the CIV; or (2) the implementation of the CIV's investment strategy are located in the United States, depending on the facts and circumstances that are relevant to determining the center of direction, control, and coordination of the CIV. Although the second prong of that discussion is consistent with the approach discussed above, the Commission does not believe that activities such as formation of the CIV, absent an ongoing role by the person performing those activities in directing, controlling, and coordinating the investment activities of the CIV, generally will be as indicative of activities, financial and legal relationships, and risks within the United States of the type that Title VII is intended to address as the location of a CIV manager.

See

Cross-Border Margin Rule, 81 FR at 34823. This is also generally consistent with the views expressed in the Guidance.

See

Guidance, 78 FR at 45309-12.

With respect to proposed § 23.23(a)(22)(i)(

), the Commission believes that the swaps of a decedent's estate should generally be treated the same as the swaps entered into by the decedent during their life.

If the decedent was a party to any swaps at the time of death, then those swaps should generally continue to be treated in the same way after the decedent's death, at which time the swaps would most likely pass to the decedent's estate. Also, the Commission expects that this prong will be predictable and straightforward 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.

The Commission expects that relatively few estates would enter into swaps, and those that do would likely do so for hedging purposes.

Proposed § 23.23(a)(22)(i)(

) is intended to ensure that persons described in prongs (

), (

), and (

) of the definition would be treated as U.S. persons even if they use discretionary or non-discretionary accounts to enter into swaps, irrespective of whether the person at which the account is held or maintained is a U.S. person. Consistent with the Cross-Border Margin Rule, the Commission is of the view that this prong would apply for individual or joint accounts.

See

17 CFR 23.160(a)(10)(vii).

Unlike the Cross-Border Margin Rule, the proposed definition of “U.S. person” would not include certain legal entities that are owned by one or more U.S. person(s) and for which such person(s) bear unlimited responsibility for the obligations and liabilities of the legal entity (“unlimited U.S. responsibility prong”).

This prong was

designed to capture persons that could give rise to risk to the U.S. financial system in the same manner as with non-U.S. persons whose swap transactions are subject to explicit financial support arrangements from U.S. persons. Rather than including this prong in its “U.S. person” definition, the SEC took the view that when a non-U.S. person's counterparty has recourse to a U.S. person for the performance of the non-U.S. person's obligations under a security-based swap by virtue of the U.S. person's unlimited responsibility for the non-U.S. person, the non-U.S. person would be required to include the security-based swap in its security-based swap dealer (if it is a dealing security-based swap) and major security-based swap participant threshold calculations as a guarantee.

However, as discussed in the Cross-Border Margin Rule, the Commission does not view the unlimited U.S. responsibility prong as equivalent to a U.S. guarantee because a guarantee does not necessarily provide for unlimited responsibility for the obligations and liabilities of the guaranteed entity in the same sense that the owner of an unlimited liability corporation bears such unlimited liability.

See

17 CFR 23.160(a)(10)(vi); Cross-Border Margin Rule, 81 FR at 34823-24. The Guidance

included a similar concept in the definition of the term “U.S. person.” However, the definition contained in the Guidance would generally characterize a legal entity as a U.S. person if the entity were “directly or indirectly majority-owned” by one or more persons falling within the term “U.S. person” and such U.S. person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity.

See

Guidance, 78 FR at 45312-13 (discussing the unlimited U.S. responsibility prong for purposes of the Guidance).

See

SEC Cross-Border Rule, 79 FR at 47308 n.255, 47316-17.

See

Cross-Border Margin Rule, 81 FR at 34823 n.60.

The Commission is declining at this time to revisit its interpretation of “guarantee,” discussed below, and is not including an “unlimited U.S. responsibility prong” in the “U.S. person” definition in the Proposed Rule. The Commission is of the view that the corporate structure that this prong is designed to capture is not one that is commonly in use in the marketplace. As noted below, the Commission requests comments on whether this understanding is correct, and if not, whether the Commission should add this prong to the proposed “U.S. person” definition or reassess its proposed interpretation of a “guarantee.” In addition, the Commission notes that the treatment of the unlimited U.S. liability prong in the Proposed Rule would not impact an entity's obligations with respect to the Cross-Border Margin Rule. To the extent that entities are considered U.S. persons for purposes of the Cross-Border Margin Rule as a result of the unlimited U.S. liability prong, the Commission believes that the different purpose of the registration-related rules justifies this potentially different treatment.

The proposed “U.S. person” definition is generally consistent with the “U.S. person” interpretation set forth in the Guidance, with certain exceptions.

As noted above,

100

the Cross-Border Margin Rule and the Guidance incorporated a version of the unlimited U.S. responsibility prong in the U.S. person definition. In addition, consistent with the definition of “U.S. person” in the Cross-Border Margin Rule

101

and the SEC Cross-Border Rule,

102

the proposed definition does not include a commodity pool, pooled account, investment fund, or other CIV that is majority-owned by one or more U.S. persons.

103

Similar to the SEC, the Commission is of the view that including majority-owned CIVs within the definition of “U.S. person” for the purposes of the Proposed Rule would be likely to cause more CIVs to incur additional programmatic costs associated with the relevant Title VII requirements and ongoing assessments, while not significantly increasing programmatic benefits given that the composition of a CIV's beneficial owners is not likely to have significant bearing on the degree of risk that the CIV's swap activity poses to the U.S. financial system.

104

Although many of these CIVs have U.S. participants that could be adversely impacted in the event of a counterparty default, systemic risk concerns are mitigated to the extent these collective investment vehicles would be subject to margin requirements in foreign jurisdictions. In addition, the exposure of participants to losses in CIVs is typically limited to their investment amount, and it is unlikely that a participant in a CIV would make counterparties whole in the event of a default.

105

Further, the Commission continues to believe that identifying and tracking a CIV's beneficial ownership may pose a significant challenge in certain circumstances (

e.g.,

fund-of-funds or master-feeder structures).

106

Therefore, although the U.S. participants in such CIVs may be adversely impacted in the event of a counterparty default, the Commission believes that, on balance, the majority-ownership test should not be included in the proposed definition of U.S. person. Note that a CIV fitting within the majority U.S. ownership prong may also be a U.S. person within the scope of § 23.23(a)(22)(i)(

) of the Proposed Rule (entities organized or having a principal place of business in the United States). As the Commission clarified in the Cross-Border Margin Rule, whether a pool, fund, or other CIV is publicly offered only to non-U.S. persons and not offered to U.S. persons would not be relevant in determining whether it falls within the scope of the proposed U.S. person definition.

107

See

Guidance, 78 FR at 45308-17 (setting forth the interpretation of “U.S. person” for purposes of the Guidance).

100

See supra

note 96.

101

See

Cross-Border Margin Rule, 81 FR at 34824.

102

See

SEC Cross-Border Rule, 79 FR at 47311, 47337.

103

See

Guidance, 78 FR at 45313-14 (discussing the U.S. majority-ownership prong for purposes of the Guidance and interpreting “majority-owned” in this context to mean the beneficial ownership of more than 50 percent of the equity or voting interests in the collective investment vehicle).

104

See

SEC Cross-Border Rule, 79 FR at 47337.

105

See id.

at 47311.

106

See

Cross-Border Margin Rule, 81 FR at 34824.

107

See id.

at 81 FR at 34824 n.62.

Unlike the non-exhaustive “U.S. person” definition provided in the Guidance, the proposed definition of “U.S. person” is limited to persons enumerated in the rule, consistent with the Cross-Border Margin Rule and the SEC Cross-Border Rule.

108

The Commission believes that the proposed prongs discussed above would capture those persons with sufficient jurisdictional nexus to the financial system and commerce in the United States that they should be categorized as “U.S. persons” pursuant to the Proposed Rule.

108

See

Cross-Border Margin Rule, 81 FR at 34824; Guidance, 78 FR at 45316 (discussing the inclusion of the prefatory phrase “include, but not be limited to” in the interpretation of “U.S. person” in the Guidance).

Further, in consideration of the discretionary and appropriate exercise of international comity-based doctrines, proposed § 23.23(a)(22)(iii) states that the term “U.S. person” would not include international financial institutions, as defined below. Specifically, consistent with the SEC's definition,

109

the term U.S. person would not include the International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies and pension plans, and any other similar international organizations, their agencies, and pension plans. The Commission believes that although foreign entities are not necessarily immune from U.S. jurisdiction for commercial activities undertaken with

U.S. counterparties or in U.S. markets, the sovereign or international status of such international financial institutions that themselves participate in the swap markets in a commercial manner is relevant in determining whether such entities should be treated as U.S. persons, regardless of whether any of the prongs of the proposed definition would apply.

110

There is nothing in the text or history of the swap-related provisions of Title VII to suggest that Congress intended to deviate from the traditions of the international system by including such international financial institutions within the definitions of the term “U.S. person.”

111

109

17 CFR 240.3a71-3(a)(4)(iii).

110

See, e.g.,

Entities Rule, 77 FR at 30692-93 (discussing the application of the “swap dealer” and “major swap participant” definitions to foreign governments, foreign central banks, and international financial institutions). The Commission also notes that a similar approach was taken in the Guidance. Guidance, 78 FR at 45353 n.531 (“Where the counterparty to a non-U.S. swap dealer or non-U.S. MSP is an international financial institution such as the World Bank, the Commission also generally would not expect the parties to the swap to comply with the Category A Transaction-Level Requirements, even if the principal place of business of the international financial institution were located in the United States. . . . Even though some or all of these international financial institutions may have their principal place of business in the United States, the Commission would generally not consider the application of the Category A Transaction-Level Requirements to be warranted, for the reasons of the traditions of the international system discussed in the [Entities Rule].”).

111

To the contrary, section 752(a) of the Dodd-Frank Act requires the CFTC to consult and coordinate with other regulators on the establishment of consistent international standards with respect to the regulation (including fees) of swaps and swap entities.

Consistent with the Entities Rule and the Guidance, the Commission is of the view that the term “international financial institutions” includes the “international financial institutions” that are defined in 22 U.S.C. 262r(c)(2) and institutions defined as “multilateral development banks” in the European Union's regulation on “OTC derivatives, central counterparties and trade repositories.”

112

Reference to 22 U.S.C. 262r(c)(2) and the European Union definition is consistent with Commission precedent in the Entities Rule.

113

The Commission continues to believe that both of those definitions identify many of the entities for which discretionary and appropriate exercise of international comity-based doctrines is appropriate with respect to the “U.S. person” definition.

114

The Commission is of the view that this prong would also include institutions identified in CFTC Staff Letters 17-34

115

and 18-13.

116

In CFTC Staff Letter 17-34, Commission staff provided relief from CFTC margin requirements to swaps between SDs and the European Stability Mechanism (“ESM”),

117

and in CFTC Staff Letter 18-13, Commission staff identified the North American Development Bank (“NADB”) as an additional entity that should be considered an international financial institution for purposes of applying the SD and MSP definitions.

118

Interpreting the definition to include the two entities identified in CFTC Staff Letters 17-34 and 18-13 is consistent with the discretionary and appropriate exercise of international comity because the status of both entities is similar to that of the other international financial institutions identified in the Entities Rule. Consistent with the SEC definition of “U.S. person,” the Proposed Rule lists specific international financial institutions but also provides a catch-all for “any other similar international organizations, their agencies, and pension plans.” The Commission believes that the catch-all provision would extend to any of the specific entities discussed above that are not explicitly listed in the Proposed Rule.

112

Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC Derivative Transactions, Central Counterparties and Trade Repositories, Article 1(5(a)) (July 4, 2012), available at

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648

. Article 1(5(a)) references Section 4.2 of Part 1 of Annex VI to Directive 2006/48/EC, available at

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0048

113

Entities Rule, 77 FR at 30692, n.1180. Additionally, the Commission notes that the Guidance referenced the Entities Rule's interpretation as well. Guidance, 78 FR at 45353 n.531.

114

The definitions overlap but together include the following: The International Monetary Fund, International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, International Development Association, International Finance Corporation, Multilateral Investment Guarantee Agency, African Development Bank, African Development Fund, Asian Development Bank, Inter-American Development Bank, Bank for Economic Cooperation and Development in the Middle East and North Africa, Inter-American Investment Corporation, Council of Europe Development Bank, Nordic Investment Bank, Caribbean Development Bank, European Investment Bank and European Investment Fund. Note that the International Bank for Reconstruction and Development, the International Development Association, the International Finance Corporation, and the Multilateral Investment Guarantee Agency are parts of the World Bank Group.

115

See

CFTC Staff Letter No. 17-34, Commission Regulations 23.150-159, 161: No-Action Position with Respect to Uncleared Swaps with the European Stability Mechanism (Jul, 24, 2017), available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf

See also

CFTC Staff Letter No. 19-22, Commission Regulations 23.150-159, 23.161: Revised No-Action Position with Respect to Uncleared Swaps with the European Stability Mechanism (Oct. 16, 2019), available at

https://www.cftc.gov/csl/19-22/download

116

See

CFTC Staff Letter No. 18-13, No-Action Position: Relief for Certain Non-U.S. Persons from Including Swaps with International Financial Institutions in Determining Swap Dealer and Major Swap Participant Status (May 16, 2018), available at

https://www.cftc.gov/sites/default/files/csl/pdfs/18/18-13.pdf

117

See

CFTC Staff Letter No. 17-34. In addition, in October 2019, the Commission approved a proposal to exclude ESM from the definition of “financial end user” in § 23.151, which, if adopted, would have the effect of excluding swaps between certain SDs and ESM from the Commission's uncleared swap margin requirements.

See

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 56392 (Oct. 22, 2019).

118

See

CFTC Staff Letter 18-13.

See also

CFTC Staff Letter 17-59 (Nov. 17, 2017) (providing no-action relief to NADB from the swap clearing requirement of section 2(h)(1) of the CEA), available at

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/17-59.pdf

As described above, the Commission is of the view that the proposed “U.S. person” definition is largely similar to the definition in the Cross-Border Margin Rule. Specifically, the Commission believes that any person designated as a “U.S. person” under the Proposed Rule would also be designated as such under the Cross-Border Margin Rule. Therefore, the Commission believes any inconsistencies do not raise significant concerns regarding the practical application of the “U.S. person” definitions. Further, the Commission believes that having a definition that is harmonized with the SEC allows for more efficient application of the definitions by market participants, including entities that may engage in dealing activity with respect to both swaps and security-based swaps. Therefore, the Commission may also consider amending the “U.S. person” definition in the Cross-Border Margin Rule in the future. However, to provide certainty to market participants, proposed § 23.23(a)(22)(iv) would permit reliance, until December 31, 2025, on any U.S. person-related representations that were obtained to comply with the Cross-Border Margin Rule. This time-limited relief is appropriate so that market participants do not have to immediately obtain new representations from their counterparties. The Commission also believes that any person designated as a “U.S. person” under the Proposed Rule would also be a “U.S. person” under the Guidance definition, since the Proposed Rule's definition is narrower in scope. Therefore, the Commission is of the view that market participants would also be able to rely on representations previously obtained using the “U.S. person” definition in the Guidance.

The term “non-U.S. person” would be defined to mean any person that is not a U.S. person.

119

Further, the Proposed Rule would define “United States” and “U.S.” as the United States of America,

its territories and possessions, any State of the United States, and the District of Columbia.

120

119

Proposed § 23.23(a)(9).

120

Proposed § 23.23(a)(19).

B. Guarantee

Under the Proposed Rule, consistent with the Cross-Border Margin Rule,

121

a “guarantee” would mean an arrangement, pursuant to which one party to a swap has rights of recourse against a guarantor, with respect to its counterparty's obligations under the swap.

122

For these purposes, a party to a swap has rights of recourse against a guarantor if the party has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from the guarantor with respect to its counterparty's obligations under the swap. Also, the term “guarantee” would encompass any arrangement pursuant to which the guarantor itself has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from any other guarantor with respect to the counterparty's obligations under the swap.

121

See

17 CFR 23.160(a)(2). However, in contrast with the Cross-Border Margin Rule, the application of the proposed definition of “guarantee” would not be limited to uncleared swaps.

122

Proposed § 23.23(a)(8).

Consistent with the Cross-Border Margin Rule, the proposed term “guarantee” would apply regardless of whether such right of recourse is conditioned upon the non-U.S. person's insolvency or failure to meet its obligations under the relevant swap, and regardless of whether the counterparty seeking to enforce the guarantee is required to make a demand for payment or performance from the non-U.S. person before proceeding against the U.S. guarantor.

123

The terms of the guarantee need not necessarily be included within the swap documentation or even otherwise reduced to writing (so long as legally enforceable rights are created under the laws of the relevant jurisdiction), provided that a swap counterparty has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments from, or otherwise collect from, the U.S. person in connection with the non-U.S. person's obligations under the swap. For purposes of the Proposed Rule, the Commission would generally consider swap activities involving guarantees from U.S. persons to satisfy the “direct and significant” test under CEA section 2(i).

123

See

17 CFR 23.160(a)(2); Cross-Border Margin Rule, 81 FR at 34825.

The proposed term “guarantee” would also encompass any arrangement pursuant to which the counterparty to the swap has rights of recourse, regardless of the form of the arrangement, against at least one U.S. person (either individually, jointly, and/or severally with others) for the non-U.S. person's obligations under the swap.

124

This addresses concerns that swaps could be structured such that they would not have to count toward a non-U.S. person's de minimis threshold calculation. For example, consider a swap between two non-U.S. persons (“Party A” and “Party B”), where Party B's obligations to Party A under the swap are guaranteed by a non-U.S. affiliate (“Party C”), and where Party C's obligations under the guarantee are further guaranteed by a U.S. parent entity (“Parent D”). The proposed definition of “guarantee” would deem a guarantee to exist between Party B and Parent D with respect to Party B's obligations under the swap with Party A.

125

124

See

Cross-Border Margin Rule, 81 FR at 34825.

125

See id.

This example is included for illustrative purposes only and is not intended to cover all examples of swaps that could be affected by the Proposed Rule, if adopted.

Further, the Commission's proposed definition of guarantee would not be affected by whether the U.S. guarantor is an affiliate of the non-U.S. person because, in each case, regardless of affiliation, the swap counterparty has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments from, or otherwise collect from, the U.S. person in connection with the non-U.S. person's obligations.

The Commission also notes that the proposed “guarantee” definition would not apply when a non-U.S. person has a right to be compensated by a U.S. person with respect to the non-U.S. person's own obligations under the swap. For example, consider a swap between two non-U.S. persons (“Party E” and “Party F”), where Party E enters into a back-to-back swap with a U.S. person (“Party G”), or enters into an agreement with Party G to be compensated for any payments made by Party E under the swap in return for passing along any payments received. In such an arrangement, a guarantee would not exist because Party F would not have a right to collect payments from Party G with respect to Party E's obligations under the swap (assuming no other agreements exist).

As with the Cross-Border Margin Rule, the definition of “guarantee” in the Proposed Rule is narrower in scope than the one used in the Guidance.

126

Under the Guidance, the Commission advised that it would interpret the term “guarantee” generally to include not only traditional guarantees of payment or performance of the related swaps, but also other formal arrangements that, in view of all the facts and circumstances, support the non-U.S. person's ability to pay or perform its swap obligations. The Commission stated that it believed that it was necessary to interpret the term “guarantee” to include the different financial arrangements and structures that transfer risk directly back to the United States.

127

The Commission is aware that many other types of financial arrangements or support, other than a guarantee as defined in the Proposed Rule, may be provided by a U.S. person to a non-U.S. person (

e.g.,

keepwells and liquidity puts, certain types of indemnity agreements, master trust agreements, liability or loss transfer or sharing agreements). The Commission understands that these other financial arrangements or support transfer risk directly back to the U.S. financial system, with possible significant adverse effects, in a manner similar to a guarantee with a direct recourse to a U.S. person. However, the Commission believes that a narrower definition of guarantee than that in the Guidance would achieve a more workable framework for non-U.S. persons, particularly because this definition of “guarantee” would be consistent with the Cross-Border Margin Rule, and therefore would not require a separate independent assessment, without undermining the protection of U.S. persons and the U.S. financial system. The Commission recognizes that the proposed definition of “guarantee” could, if adopted, lead to certain entities counting fewer swaps towards their de minimis threshold as compared to the definition in the Guidance. However, the Commission believes that concerns arising from fewer swaps being counted could be mitigated to the extent such non-U.S. person meets the definition of a “significant risk subsidiary,” and thus, as discussed below, would potentially still need to count certain swaps or swap positions toward its SD or MSP registration threshold. In this way, non-U.S. persons receiving support from a U.S. person and representing some measure of material risk to the U.S. financial system would be captured. The Commission thus believes that the Proposed Rule would achieve the dual goals of protecting the U.S. markets

while promoting a workable cross-border framework.

126

See id.

at 34824.

127

Guidance, 78 FR at 45320.

For discussion purposes in this release, a non-U.S. person would be considered a “Guaranteed Entity” with respect to swaps that are guaranteed by a U.S. person. A non-U.S. person may be a Guaranteed Entity with respect to swaps with certain counterparties because the non-U.S. person's swaps with those counterparties are guaranteed, but would not be a Guaranteed Entity with respect to swaps with other counterparties if the non-U.S. person's swaps with the other counterparties are not guaranteed by a U.S. person. In other words, depending on the nature of the trading relationship, a single entity could be a Guaranteed Entity with respect to some of its swaps, but not others. This release uses the term “Other Non-U.S. Person” to refer to a non-U.S. person that is neither a Guaranteed Entity nor a significant risk subsidiary. Depending on an entity's corporate structure and financial relationships, a single entity could be both, for example, a Guaranteed Entity and an Other Non-U.S. Person.

C. Significant Risk Subsidiary, Significant Subsidiary, Subsidiary, Parent Entity, and U.S. GAAP

In the Proposed Rule, the Commission is proposing a new category of person termed a significant risk subsidiary (“SRS”). A non-U.S. person would be considered an SRS if: (1) The non-U.S. person is a “significant subsidiary” of an “ultimate U.S. parent entity,” as those terms are proposed to be defined; (2) the “ultimate U.S. parent entity” has more than $50 billion in global consolidated assets, as determined in accordance with U.S. GAAP at the end of the most recently completed fiscal year; and (3) the non-U.S. person is not subject to either: (a) Consolidated supervision and regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) as a subsidiary of a U.S. bank holding company (“BHC”); or (b) capital standards and oversight by the non-U.S. person's home country regulator that are consistent with the Basel Committee on Banking Supervision's “International Regulatory Framework for Banks” (“Basel III”) and margin requirements for uncleared swaps in a jurisdiction for which the Commission has issued a comparability determination (“CFTC Margin Determination”) with respect to uncleared swap margin requirements.

128

If an entity is determined to be an SRS, the Commission proposes to apply certain regulations, including the SD and MSP registration threshold calculations, to the entity in the same manner as a U.S. person.

128

Proposed § 23.23(a)(11)-(14) and (18).

1. Non-U.S. Persons With U.S. Parent Entities

In addition to the U.S. persons described above in section II.A, the Commission understands that U.S. persons may organize the operations of their businesses through the use of one or more subsidiaries that are organized and operated outside the United States. Through consolidation, non-U.S. subsidiaries of U.S. persons may permit U.S. persons to accrue risk through the swap activities of their non-U.S. subsidiaries that, in aggregate, may have a significant effect on the U.S. financial system. Therefore, the Commission believes that consolidated non-U.S. subsidiaries of U.S. persons may appropriately be subject to Commission regulation due to their direct and significant relationship to their U.S. parent entities. Thus, the Commission believes that consolidated non-U.S. subsidiaries of U.S. parent entities present a greater supervisory interest to the CFTC, relative to Other Non-U.S. Persons. Moreover, because U.S. persons have regulatory obligations under the CEA that Other Non-U.S. Persons may not have, the Commission also believes that consolidated non-U.S. subsidiaries of U.S. parent entities present a greater supervisory interest to the CFTC relative to Other Non-U.S. Persons due to the Commission's interest in preventing the evasion of obligations under the CEA.

Pursuant to the consolidation requirements of U.S. GAAP, the financial statements of a U.S. parent entity reflect the financial position and results of operations of that parent entity, together with the network of branches and subsidiaries in which the U.S. parent entity has a controlling interest, including non-U.S. subsidiaries, which is an indication of connection and potential risk to the U.S. parent entity. Consolidation under U.S. GAAP is predicated on the financial control of the reporting entity. Therefore, an entity within a financial group that is consolidated with its parent entity for accounting purposes in accordance with U.S. GAAP is subject to the financial control of that parent entity. By virtue of consolidation then, a non-U.S. subsidiary's swap activity creates direct risk to the U.S. parent. That is, as a result of consolidation and financial control, the financial position, operating results, and statement of cash flows of a non-U.S. subsidiary are included in the financial statements of its U.S. parent and therefore affect the financial condition, risk profile, and market value of the parent. Because of that relationship, risks taken by a non-U.S. subsidiary can have a direct effect on the U.S. parent entity. Furthermore, a non-U.S. subsidiary's counterparties may generally look to both the subsidiary and its U.S. parent for fulfillment of the subsidiary's obligations under a swap, even without any explicit guarantee. In many cases, the Commission believes that counterparties would not enter into the transaction with the subsidiary (or would not do so on the same terms), and the subsidiary would not be able to engage in a swap business, absent this close relationship with a parent entity. In addition, the Commission notes that a non-U.S. subsidiary may enter into offsetting swaps or other arrangements with its U.S. parent entity or other affiliate(s) to transfer the risks and benefits of swaps with non-U.S. persons to its U.S. affiliates, which could also lead to risk for the U.S. parent entity. Because such swap activities may have a direct impact on the financial position, risk profile, and market value of a U.S. parent entity, they can lead to spill-over effects on the U.S. financial system.

However, the Commission preliminarily believes the principles of international comity counsel against applying its swap regulations to all non-U.S. subsidiaries of U.S. parent entities. Rather, the Commission believes that it is consistent with such principles to apply a risk-based approach to determining which of such entities should be required to comply with the Commission's swap requirements. The Commission believes that its approach in the Proposed Rule makes that determination in a manner that accounts for the risk that non-U.S. subsidiaries may pose to the U.S. financial system and the ability of large global entities to efficiently operate outside the United States.

The Commission's risk-based approach is embodied in the proposed definition of an SRS. SRSs are entities whose obligations under swaps may not be guaranteed by U.S. persons, but which nonetheless raise particular supervisory concerns in the United States due to the possible negative impact on their ultimate U.S. parent entities and thus the U.S. financial system.

2. Preliminary Definitions

For purposes of the SRS definition, the term “subsidiary” would mean a subsidiary of a specified person that is an affiliate controlled by such person directly, or indirectly through one or

more intermediaries.

129

For purposes of this definition, an affiliate of, or a person affiliated with, a specific person would be a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. The term “control,” including controlling, controlled by, and under common control with, would mean 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 shares, by contract, or otherwise.

130

These proposed definitions of subsidiary and control are substantially similar to the definitions found in SEC regulation S-X. Further, under the Proposed Rule, the term “parent entity” would mean any entity in a consolidated group that has one or more subsidiaries in which the entity has a controlling interest, in accordance with U.S. GAAP.

131

U.S. GAAP is defined in the Proposed Rule as U.S. generally accepted accounting principles.

132

129

Proposed § 23.23(a)(14).

130

Proposed § 23.23(a)(1).

131

Proposed § 23.23(a)(11).

132

Proposed § 23.23(a)(21).

Notably, a U.S. parent entity for purposes of the definition of SRS need not be a non-U.S. subsidiary's ultimate parent entity. The SRS definition would encompass U.S. parent entities that may be intermediate entities in a consolidated corporate family with an ultimate parent entity located outside the U.S. To differentiate between multiple possible U.S. parent entities, the Proposed Rule defines an “ultimate U.S. parent entity” for purposes of the significant subsidiary test. A non-U.S. person's “ultimate U.S. parent entity” would be the U.S. parent entity that is not a subsidiary of any other U.S. parent entity.

133

Risk of a non-U.S. subsidiary that flows to its U.S. parent entity may not flow back out of the U.S. to a non-U.S. ultimate or intermediate parent entity. Because the risk may ultimately stop in the United States, it is appropriate for the Commission to base its SRS definition on whether a non-U.S. person has any U.S. parent entity, subject to certain risk-based thresholds.

133

Proposed § 23.23(a)(18).

3. Significant Risk Subsidiaries

In addition to the definitions discussed above, whether an entity would be considered an SRS depends on the size of its ultimate U.S. parent entity, the significance of the subsidiary to its ultimate U.S. parent entity, and the regulatory oversight of its ultimate U.S. parent entity or the regulatory oversight of the non-U.S. subsidiary in the jurisdiction in which it is regulated.

Under the Proposed Rule, the ultimate U.S. parent entity must exceed a $50 billion consolidated asset threshold. The Commission is proposing the $50 billion threshold in order to balance the Commission's interest in adequately overseeing those non-U.S. persons that may have a significant impact on their ultimate U.S. parent entity and, by extension, the U.S. financial system, with its interest in avoiding unnecessary burdens on those non-U.S. persons that would not have such an impact. The $50 billion threshold has been used in other contexts as a measure of large, complex institutions that may have systemic impacts on the U.S. financial system. For example, the Financial Stability Oversight Council (“FSOC”) initially used a $50 billion total consolidated assets quantitative test as one threshold to apply to nonbank financial entities when assessing risks to U.S. financial stability.

134

The Commission preliminarily believes that the $50 billion threshold provides an appropriate measure to limit the burden of the SRS definition to only those entities whose ultimate U.S. parent entity may pose a systemic risk to the U.S. financial system.

134

See

Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, Financial Stability Oversight Council, 77 FR 21637, 21643, 21661 (Apr. 2012). FSOC recently voted to remove the existing stage 1 quantitative metrics that included, among other metrics, the $50 billion threshold, because the metrics generated confusion among firms and members of the public and because they were not compatible with FSOC's new activities based approach to addressing risk to financial stability.

See

Authority to Require Supervision and Regulation of certain Nonbank Financial Companies (Dec. 4, 2019), available at

https://home.treasury.gov/system/files/261/Interpretive-Guidance-on-Nonbank-Financial-Company-Determinations.pdf

. However, the Commission preliminarily believes that the $50 billion total consolidated threshold remains an appropriate and workable measure to identify those ultimate U.S. parent entities that may have a significant impact on the U.S. financial system.

In addition, before a non-U.S. subsidiary of an ultimate U.S. parent entity that meets the $50 billion consolidated asset threshold would be an SRS, the subsidiary would need to constitute a significant part of its ultimate U.S. parent entity. This concept of a “significant subsidiary” borrows from the SEC's definition of “significant subsidiary” in Regulation S-X, as well as the Federal Reserve Board in its financial statement filing requirements for foreign subsidiaries of U.S. banking organizations.

135

The Commission believes it is appropriate to focus on only those subsidiaries that are significant to their ultimate U.S. parent entities, in order to capture those subsidiaries that have a significant impact on their large ultimate U.S. parent entities. In order to provide certainty to market participants as to what constitutes a significant subsidiary, the Proposed Rule includes a set of quantitative significance tests. Although not identical, the Commission notes that the SEC includes similar revenue and asset significance tests in its definition of significant subsidiary in Regulation S-X.

136

The Commission believes that, in this case, in order to determine whether a subsidiary meets such significance, it is appropriate to measure the significance of a subsidiary's equity capital, revenue, and assets relative to its ultimate U.S. parent entity.

135

ee e.g.,

Instructions for Preparation of Financial Statements of Foreign Subsidiaries of U.S. Banking Organizations FR 2314 and FR 2314S, at GEN-2 (Sept. 2016), available at

https://www.federalreserve.gov/reportforms/forms/FR_2314--FR_2314S20190331_i.pdf

(“FR 2314 and FR 2314S Instructions”) (identifying equity capital significance test applicable to subsidiaries).

See also

SEC rule 210.1-02(w), 17 CFR 210.1-02(w) (identifying asset and income significance tests applicable in definition of significant subsidiaries).

136

17 CFR 210.1-02(w)(1)-(3) (setting out a ten percent significance threshold with respect to total assets and income).

Under the Proposed Rule, the term “significant subsidiary” would mean a subsidiary, including its subsidiaries, where: (1) The three year rolling average of the subsidiary's equity capital is equal to or greater than five percent of the three year rolling average of its ultimate U.S. parent entity's consolidated equity capital, as determined in accordance with U.S. GAAP at the end of the most recently completed fiscal year (the “equity capital significance test”); (2) the three year rolling average of the subsidiary's revenue is equal to or greater than ten percent of the three year rolling average of its ultimate U.S. parent entity's consolidated revenue, as determined in accordance with U.S. GAAP at the end of the most recently completed fiscal year (the “revenue significance test”); or (3) the three year rolling average of the subsidiary's assets are equal to or greater than ten percent of the three year rolling average of its ultimate U.S. parent entity's consolidated assets, as determined in accordance with U.S. GAAP at the end of the most recently completed fiscal year (the “asset significance test”). For the proposed equity capital significance test, equity capital would include perpetual

preferred stock, common stock, capital surplus, retained earnings, accumulated other comprehensive income and other equity capital components and should be calculated in accordance with U.S. GAAP.

The Proposed Rule would cause an entity to be a significant subsidiary only if it passes at least one of these significance tests. The Commission preliminarily believes that the equity capital test is an appropriate measure of a subsidiary's significance to its ultimate U.S. parent entity and notes its use in the context of financial statement reporting of foreign subsidiaries.

137

The Commission also preliminarily believes that if a subsidiary constitutes more than ten percent of its ultimate U.S. parent entity's assets or revenue, it is of significant importance to its ultimate U.S. parent entity such that swap activity by the subsidiary may have a material impact on its ultimate U.S. parent entity and, consequently, the U.S. financial system. The Commission is proposing to use a three year rolling average throughout its proposed significance tests in order to mitigate the potential for an entity to frequently change from being deemed a significant subsidiary and not being deemed a significant subsidiary based on fluctuations in its share of equity capital, revenue, or assets of its ultimate U.S. parent entity. The Commission preliminarily believes that if a subsidiary satisfies any one of the three significance tests proposed here, then it is of sufficient significance to its ultimate U.S. parent entity, which under proposed § 23.23(a)(12) has consolidated assets of more than $50 billion, to warrant the application of requirements addressed by the Proposed Rule if such subsidiary otherwise meets the definition of SRS.

137

FR 2314 and FR 2314S Instructions, at Gen-2.

4. Exclusions From the Definition of SRS

As indicated above, under the Proposed Rule, a non-U.S. person would not be an SRS to the extent the entity is subject to prudential regulation as a subsidiary of a U.S. BHC or is subject to comparable capital and margin standards. An entity that meets either of those two exceptions, in the Commission's preliminary view, would be subject to a level of regulatory oversight that is sufficiently comparable to the Dodd-Frank Act swap regime with respect to prudential oversight. Non-U.S. subsidiaries that are part of BHCs are already subject to consolidated supervision and regulation by the Federal Reserve Board,

138

including with respect to capital and risk management requirements, and therefore their swap activity poses less risk to the financial position and risk profile of the ultimate U.S. parent entity, and thus less risk to the U.S. financial system than the swap activity of a non-U.S. subsidiary of an ultimate U.S. parent entity that is a not a BHC. In this case, the Commission preliminarily believes deference to the foreign regulatory regime would be appropriate because the swap activity is occurring within an organization that is under the umbrella of U.S. prudential regulation with certain regulatory protections already in place.

139

138

ee e.g.,

Board of Governors of the Federal Reserve System, Bank Holding Company Supervision Manual, section 2100.0.1 Foreign Operations of U.S. Banking Organizations, available at

https://www.federalreserve.gov/publications/files/bhc.pdf

(“The Federal Reserve has broad discretionary powers to regulate the foreign activities of member banks and bank holding companies (BHCs) so that, in financing U.S. trade and investments abroad, these U.S. banking organizations can be competitive with institutions of the host country without compromising the safety and soundness of their U.S. operations.”); FR 2314 and FR 2314S Instructions, at GEN 2.

139

Proposed § 23.23(a)(12)(i).

Similarly, in the case of entities that are subject to capital standards and oversight by their home country regulators that are consistent with Basel III and subject to a CFTC Margin Determination, the Commission preliminarily believes that it is appropriate for the Commission to defer to the home country regulator.

140

For purposes of determining whether proposed § 23.23(a)(12)(ii) would apply, the Commission intends for persons to independently assess whether they reside in a jurisdiction that has capital standards that are consistent with Basel III.

141

In such cases where entities are subject to capital standards and oversight by their home country regulators that are consistent with Basel III and subject to a CFTC Margin Determination, the Commission preliminarily believes that the potential risk that the entity might pose to the U.S. financial system would be adequately addressed through these capital and margin requirements. Further, such an approach is consistent with the Commission's desire to show deference to non-U.S. regulators whose requirements are comparable to the CFTC's requirements. For margin purposes, the Commission has issued a number of determinations that entities can look to in order to determine if they satisfy this aspect of the exception.

142

For capital standards and oversight consistent with Basel III, entities should look to whether the BIS has determined the jurisdiction is in compliance as of the relevant Basel Committee on Banking Supervision deadline set forth in its most recent progress report.

143

The Commission preliminarily believes that it is appropriate to except these entities from the definition of SRS, in large part, because the swaps entered into by such entities are already subject to significant regulation, either by the Federal Reserve Board or by the entity's home country.

140

Proposed § 23.23(a)(12)(ii).

141

Discussion regarding the Basel framework is available at

https://www.bis.org/bcbs/basel3.htm

142

See

Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 63376 (Sep. 15, 2016); Comparability Determination for the European Union: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 82 FR 48394 (Oct. 13, 2017) (“Margin Comparability Determination for the European Union”); Amendment to Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12074 (Apr. 1, 2019); and Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12908 (Apr. 3, 2019). Further, on April 5, 2019, DSIO and the Division of Market Oversight issued a letter jointly to provide time-limited no-action relief in connection with, among other things, the Margin Comparability Determination for the European Union, in order to account for the anticipated withdrawal of the United Kingdom from the European Union.

See

CFTC Staff Letter 19-08, No-Action Relief in Connection With Certain Previously Granted Commission Determinations and Exemptions, in Order to Account for the Anticipated Withdrawal of the United Kingdom From the European Union (Apr. 5, 2019), available at

https://www.cftc.gov/csl/19-08/download

143

The most current report was issued in October 2019. Basel Committee on Banking Supervision, Seventeenth progress report on adoption of the Basel regulatory framework (October 2019), available at

https://www.bis.org/bcbs/publ/d478.pdf

. Current and historical reports are available at

https://www.bis.org/bcbs/implementation/rcap_reports.htm?m=3%7C14%7C656%7C59

As noted above, if a non-U.S. subsidiary of an ultimate U.S. parent entity does not fall into either of the exceptions in proposed §§ 23.23(a)(12)(i)-(ii), the Proposed Rule would classify the subsidiary as a SRS only if its ultimate U.S. parent entity has more than $50 billion in global consolidated assets and if the subsidiary meets the definition of a significant subsidiary, set forth in proposed § 23.23(a)(13).

The Commission is requesting comment below on the proposed definitions discussed in this section.

D. Foreign Branch and Swap Conducted Through a Foreign Branch

Under the Proposed Rule, the term “foreign branch” would mean an office of a U.S. person that is a bank that: (1)

Is located outside the United States; (2) operates for valid business reasons; (3) maintains accounts independently of the home office and of the accounts of other foreign branches, with the profit or loss accrued at each branch determined as a separate item for each foreign branch; and (4) is engaged in the business of banking or finance and is subject to substantive regulation in banking or financing in the jurisdiction where it is located.

144

Proposed § 23.23(a)(2).

The Commission believes that the factors listed in the proposed definition are appropriate for determining when an entity would be considered a foreign branch for purposes of the Proposed Rule.

145

The requirement that the foreign branch be located outside of the United States is consistent with the stated goal of identifying certain swap activity that is not conducted within the United States. The requirements that the foreign branch maintain accounts independent of the U.S. entity, operate for valid business reasons, and be engaged in the business of banking or finance and be subject to substantive banking or financing regulation in its non-U.S. jurisdiction are also intended to prevent evasion of the Dodd-Frank Act requirements.

146

In particular, these requirements address the concern that an entity would set up operations outside the United States in a jurisdiction without substantive banking or financial regulation to evade Dodd-Frank Act requirements and CFTC regulations.

147

The Commission notes that this proposed definition incorporates concepts from the Federal Reserve Board's Regulation K,

148

the FDIC International Banking Regulation,

149

and the Office of the Comptroller of the Currency's “foreign branch” definition.

150

145

As discussed below in sections III.B.2 and IV.B.2, the Proposed Rule would not require an Other Non-U.S. Person to count toward its de minimis threshold calculations swaps conducted through a foreign branch of a registered U.S. SD.

146

The Commission notes that national banks operating foreign branches are required under section 25 of the Federal Reserve Act (“FRA”) to conduct the accounts of each foreign branch independently of the accounts of other foreign branches established by it and of its home office, and are required at the end of each fiscal period to transfer to its general ledger the profit or loss accrued at each branch as a separate item. 12 U.S.C. 604. The FRA is codified at 12 U.S.C. 221

et seq.

147

As discussed below, the Commission is concerned that the material terms of a swap would be negotiated or agreed to by employees of the U.S. bank that are located in the United States and then be routed to a foreign branch so that the swap would be treated as a swap with the foreign branch for purposes of the SD and MSP registration thresholds or for purposes of certain regulatory requirements applicable to registered SDs or MSPs.

148

Regulation K is a regulation issued by the Board of Governors of the Federal Reserve (“Federal Reserve Board”) under the authority of the FRA; the Bank Holding Company Act of 1956 (“BHC Act”) (12 U.S.C. 1841

et seq.

); and the International Banking Act of 1978 (“IBA”) (12 U.S.C. 3101

et seq.

). Regulation K sets forth rules governing the international and foreign activities of U.S. banking organizations, including procedures for establishing foreign branches to engage in international banking. 12 CFR part 211. Under Regulation K, a “foreign branch” is defined as “an office of an organization (other than a representative office) that is located outside the country in which the organization is legally established and at which a banking or financing business is conducted.” 12 CFR 211.2(k).

149

12 CFR part 347 is a regulation issued by the Federal Deposit Insurance Corporation under the authority of the Federal Deposit Insurance Act (12 U.S.C. 1828(d)(2)), which sets forth rules governing the operation of foreign branches of insured state nonmember banks (“FDIC International Banking Regulation”). Under 12 CFR 347.102(j), a “foreign branch” is defined as an office or place of business located outside the United States, its territories, Puerto Rico, Guam, American Samoa, the Trust Territory of the Pacific Islands, or the Virgin Islands, at which banking operations are conducted, but does not include a representative office.

150

12 CFR 28.2 (defining “foreign branch” as an office of a national bank (other than a representative office) that is located outside the United States at which banking or financing business is conducted).

The proposed definition of “foreign branch” is also consistent with the SEC's approach, which, for purposes of security-based swap dealer regulation, defined foreign branch as any branch of a U.S. bank that: (1) Is located outside the United States; (2) operates for valid business reasons; and (3) is engaged in the business of banking and is subject to substantive banking regulation in the jurisdiction where located.

151

The Commission's intention is to ensure that the definition provides sufficient clarity as to what constitutes a “foreign branch”—specifically, an office outside of the U.S. that has independent accounts from the home office and other branches—while striving for greater regulatory harmony with the SEC.

152

151

See

17 CFR 240.3a71-3(a)(2).

152

The Commission also notes that the factors listed in the Proposed Rule are similar to the approach described in the Guidance, which stated that the foreign branch of a U.S. swap entity is an entity that is: (1) Subject to Regulation K or the FDIC International Banking Regulation, or otherwise designated as a “foreign branch” by the U.S. bank's primary regulator; (2) maintains accounts independently of the home office and of the accounts of other foreign branches with the profit or loss accrued at each branch determined as a separate item for each foreign branch; and (3) subject to substantive regulation in banking or financing in the jurisdiction where it is located.

See

Guidance, 78 FR at 45329.

The Commission notes that a foreign branch would not include an affiliate of a U.S. bank that is incorporated or organized as a separate legal entity.

153

For similar reasons, the Commission declines in the Proposed Rule to recognize foreign branches of U.S. persons separately from their U.S. principal for purposes of registration.

154

That is, if the foreign branch engages in swap activity in excess of the relevant SD or MSP registration thresholds, as discussed further below, the U.S. person would be required to register, and the registration would encompass the foreign branch. However, upon consideration of principles of international comity and the factors set forth in the Restatement, rather than broadly excluding foreign branches from the U.S. person definition, the Commission is proposing to calibrate the requirements for counting certain swaps entered into through a foreign branch, as described in sections III.B.2 and IV.B.2, and proposing to calibrate the requirements otherwise applicable to foreign branches of a registered U.S. SD, as discussed in section VI. Among the benefits, as discussed below, would be to enable foreign branches of U.S. banks to have greater access to foreign markets.

153

This is similar to the approach described in the Guidance.

See

Guidance, 78 FR at 45328-29.

154

This is similar to the approach described in the Guidance.

See id.

at 45315, 45328-29.

Under the Proposed Rule, the term “swap conducted through a foreign branch” would mean a swap entered into by a foreign branch where: (1) The foreign branch or another foreign branch is the office through which the U.S. person makes and receives payments and deliveries under the swap pursuant to a master netting or similar trading agreement, and the documentation of the swap specifies that the office for the U.S. person is such foreign branch; (2) the swap is entered into by such foreign branch in its normal course of business; and (3) the swap is reflected in the local accounts of the foreign branch.

155

Proposed § 23.23(a)(16).

The Commission believes that this definition identifies the type of swap activity for which the foreign branch performs key dealing functions outside the United States. Because a foreign branch of a U.S. bank is not a separate legal entity, the first prong of the definition clarifies that the foreign branch must be the office of the U.S. bank through which payments and deliveries under the swap must be made. This approach is consistent with the standard ISDA Master Agreement, which requires that each party specify an “office” for each swap, which is where a party “books” a swap and/or the office through which the party makes and receives payments and deliveries.

156

The ISDA Master Agreement defines “office” as a branch or office of a party, which may be such party's head or home office.

See

2002 ISDA Master Agreement, available at

https://www.isda.org/book/2002-isda-master-agreement-english/library.

The second prong of the definition (whether the swap is entered into by such foreign branch in the normal course of business) is intended as an anti-evasion measure to prevent a U.S. bank from simply routing swaps for booking in a foreign branch so that the swap would be treated as a swap conducted through a foreign branch for purposes of the SD and MSP registration thresholds or for purposes of certain regulatory requirements applicable to registered SDs or MSPs. To satisfy this prong, it must be the normal course of business for employees located in the branch (or another foreign branch of the U.S. bank) to enter into the type of swap in question. The Commission preliminarily believes that this requirement would not prevent personnel of the U.S. bank located in the U.S. from participating in the negotiation or execution of the swap so long the swaps that are booked in the foreign branch are primarily entered into by personnel located in the branch (or another foreign branch of the U.S. bank).

With respect to the third prong, the Commission believes that where a swap is with the foreign branch of a U.S. bank, it generally would be reflected in the foreign branch's accounts.

157

This proposed definition is generally consistent with the definition under the Guidance.

See

Guidance, 78 FR at 45330. However, the Commission notes that the proposed definition of “foreign branch” does not include the requirement that the employees negotiating and agreeing to the terms of the swap (or, if the swap is executed electronically, managing the execution of the swap), other than employees with functions that are solely clerical or ministerial, be located in such foreign branch or in another foreign branch of the U.S. bank. The Commission is of the view that, as discussed above, the second prong of the proposed definition addresses this issue.

E. Swap Entity, U.S. Swap Entity, and Non-U.S. Swap Entity

Under the Proposed Rule, the term “swap entity” would mean a person that is registered with the Commission as a SD or MSP pursuant to the CEA.

158

In addition, the Commission is proposing to define “U.S. swap entity” as a swap entity that is a U.S. person,

159

and “non-U.S. swap entity” as a swap entity that is not a U.S swap entity.

160

158

Proposed § 23.23(a)(15).

159

Proposed § 23.23(a)(23).

160

Proposed § 23.23(a)(10).

F. U.S. Branch and Swap Conducted Through a U.S. Branch

Under the Proposed Rule, the term “U.S. branch” would mean a branch or agency of a non-U.S. banking organization where such branch or agency: (1) Is located in the United States; (2) maintains accounts independently of the home office and other U.S. branches, with the profit or loss accrued at each branch determined as a separate item for each U.S. branch; and (3) engages in the business of banking and is subject to substantive banking regulation in the state or district where located.

161

The term “swap conducted through a U.S. branch” would mean a swap entered into by a U.S. branch where: (1) The U.S. branch is the office through which the non-U.S. person makes and receives payments and deliveries under the swap pursuant to a master netting or similar trading agreement, and the documentation of the swap specifies that the office for the non-U.S. person is such U.S. branch; or (2) the swap is reflected in the local accounts of the U.S. branch.

162

161

Proposed § 23.23(a)(20).

162

Proposed § 23.23(a)(17).

Similar to how the terms “foreign branch” and “conducted through a foreign branch” are used under the Proposed Rule to identify swap activity of U.S. entities that is taking place outside the United States and, thus, may be eligible for certain relief from the Commission's requirements under the Proposed Rule, these definitions would be used to identify swap activity that the Commission believes should be considered to take place in the United States and, thus, remain subject to the Commission's requirements addressed in the Proposed Rule, as discussed below with respect to the definitions of “foreign-based swap” and “foreign counterparty.” In particular, these proposed definitions are intended to address the concern that an entity would operate outside the United States to evade Dodd-Frank Act requirements and CFTC regulations for a swap while still benefiting from the swap taking place in the United States. The Commission preliminarily believes that the requirements listed in the proposed definitions are appropriate to identify swaps of a non-U.S. banking organization operating through a foreign branch in the United States that should remain subject to Commission requirements addressed in the Proposed Rule.

Consistent with the Commission's proposed approach to foreign branches, a U.S. branch of a non-U.S. banking organization would not include a U.S. affiliate of the organization that is incorporated or organized as a separate legal entity. Also consistent with this approach, the Commission declines in the Proposed Rule to recognize U.S. branches of non-U.S. banking organization separately from their non-U.S. principal for purposes of registration.

G. Foreign-Based Swap and Foreign Counterparty

Under the Proposed Rule, the term “foreign-based swap” would mean: (1) A swap by a non-U.S. swap entity, except for a swap conducted through a U.S. branch; or (2) a swap conducted through a foreign branch.

163

The term “foreign counterparty” would mean: (1) A non-U.S. person, except with respect to a swap conducted through a U.S. branch of that non-U.S. person; or (2) a foreign branch where it enters into a swap in a manner that satisfies the definition of a swap conducted through a foreign branch.

164

Together with the proposed defined terms “foreign branch,” “swap conducted through a foreign branch,” “U.S. branch,” and “swap conducted through a U.S. branch” discussed above, these terms would be used to determine which swaps the Commission considers to be foreign swaps of non-U.S. swap entities and foreign branches of U.S. swap entities for which certain relief from Commission requirements would be available under the Proposed Rule, and which swaps should be treated as domestic swaps not eligible for such relief. The Commission is proposing to limit the types of swaps that are eligible for relief, consistent with section 2(i) of the CEA, to address its concern that swaps that demonstrate sufficient indicia of being domestic remain subject to the Commission's requirements addressed by the Proposed Rule, notwithstanding that the swap is entered into by a non-U.S. swap entity or a foreign branch of a U.S. swap entity. Otherwise, the Commission is concerned that an entity or branch might simply be established outside of the United Stated to evade Dodd-Frank Act requirements and CFTC regulations.

163

Proposed § 23.23(a)(4).

164

Proposed § 23.23(a)(3).

As the Commission has previously stated, it has a strong supervisory interest in regulating swap activities that occur in the United States.

165

In addition, consistent with section 2(i) of the CEA, the Commission believes that foreign swaps of non-U.S. swap entities and foreign branches of U.S. swap entities should be eligible for relief from certain of the Commission's requirements. Accordingly, certain portions of the Commission's proposed substituted compliance regime, as well as its proposed exceptions from certain requirements in CFTC regulations (each discussed below in section VI), are

designed to be limited to certain foreign swaps of non-U.S. swap entities and foreign branches of U.S. swap entities that the Commission believes should be treated as occurring outside the United States. Specifically, these provisions are applicable only to a swap by a non-U.S. swap entity, except for a swap conducted through a U.S. branch, and a swap conducted through a foreign branch such that it would satisfy the definition of a “foreign-based swap” above. They are not applicable to swaps of non-U.S. swap entities that are conducted through a U.S. branch of that swap entity, and swaps of foreign branches of U.S. swap entities where the foreign branch does not enter into the swaps in a manner that satisfies the definition of a swap conducted through a foreign branch, because, in the Commission's view, the entrance into a swap by a U.S. swap entity (through its foreign branch) or a U.S. branch of a non-U.S. swap entity under these circumstances, demonstrates sufficient indicia of being a domestic swap to be treated as such for purposes of the Proposed Rule.

166

Similarly, in certain cases, the availability of a proposed exception or substituted compliance for a swap would depend on whether the counterparty to such a swap qualifies as a “foreign counterparty” under the Proposed Rule. The Commission is proposing this requirement to ensure that foreign-based swaps of swap entities in which their counterparties demonstrate sufficient indicia of being domestic and, thus, trigger the Commission's supervisory interest in domestic swaps, continue to be subject to the Commission requirements addressed in the Proposed Rule.

165

See

Guidance, 78 FR at 45350, n.513.

166

The Commission notes that the Guidance took a similar approach with respect to U.S. branches of non-U.S. SDs or MSPs, stating that they would be subject to the transaction-level requirements (discussed in section VI.A below), without substituted compliance.

Id.

The Commission also notes that its approach in the Proposed Rule for U.S. branches of non-U.S. swap entities is parallel to the Commission's approach in the Proposed Rule to provide certain exceptions from Commission requirements or substituted compliance for transactions of foreign branches of U.S. swap entities to take into account the supervisory interest of local regulators, as discussed below in section VI.

H. Request for Comment

The Commission invites comment on all aspects of the Proposed Rule, including each of the definitions discussed above, and specifically requests comments on the following questions. Please explain your responses and provide alternatives to the relevant portions of the Proposed Rule, where applicable.

(1) The “U.S. person” definition the Commission is proposing here aligns with the definition of that term adopted by the SEC in the context of its cross-border swap regulations. Should the Commission instead adopt the U.S. person definition used in its Cross-Border Margin Rule? Alternatively, should the Commission instead harmonize the “U.S. person” definition in the Proposed Rule to the interpretation of U.S. person included in the Guidance?

(2) Is it appropriate, as proposed, that commodity pools, pooled accounts, investment funds, or other CIVs that are majority-owned by U.S. persons not be included in the proposed definition of “U.S. person”? Would a majority of such funds or CIVs be subject to margin requirements of foreign jurisdictions? Is it accurate to assume that the exposure of investors to losses in CIVs is generally capped at their investment amount? Does tracking a CIV's beneficial ownership pose challenges in certain circumstances?

(3) When determining the principal place of business for a CIV, should the Commission consider including as a factor whether the senior personnel responsible for the formation and promotion of the CIV are located in the United States, similar to the approach in the Cross-Border Margin Rule?

167

See

Cross-Border Margin Rule, 81 FR at 34823.

(4) Should the Commission include an unlimited U.S. responsibility prong in the definition of “U.S. person”? If not, should the Commission revise its interpretation of “guarantee” in a manner consistent with the SEC to ensure that persons that would otherwise be considered U.S. persons pursuant to the unlimited U.S. responsibility prong would nonetheless be considered entities with guarantees from a U.S. person? Are there any persons that would be captured under the unlimited U.S. responsibility prong?

(5) Should the “U.S. person” definition include a catch-all provision? What types of entities would be expected to fall under such a provision?

(6) Should the Commission consider providing an exemption from the “U.S. person” definition for pension plans organized in the U.S. that are primarily for the benefit of the foreign employees of U.S.-based entities, consistent with the Cross-Border Margin Rule's “U.S. person” definition?

168

See

17 CFR 23.260(a)(10)(iv).

(7) Should the catch-all provision for international financial institutions be restricted to organizations in which the U.S. government is a shareholder?

(8) Does the proposed SRS definition appropriately capture persons that raise greater supervisory concerns relative to Other Non-U.S. Persons whose swap obligations are not guaranteed by a U.S. person? If not, how should the definition be revised? Is $50 billion an appropriate threshold to determine when an ultimate U.S. parent entity may have a significant impact on the U.S. financial system?

(9) Should the Commission consider alternative or additional tests for whether a person would be a significant subsidiary or an SRS? Would an alternate approach to the use of a three year rolling average throughout the proposed significance tests more effectively mitigate the risk of an entity frequently varying between being a significant subsidiary and not being a significant subsidiary?

(10) Should the exclusion set out in proposed § 23.23(a)(12)(i) include any entity that is subject to consolidated supervision and regulation by the Federal Reserve Board rather than being limited to subsidiaries of BHCs (for example, intermediate holding companies of foreign banking organizations that are subject to supervision by the Federal Reserve Board)?

(11) Does the proposed definition of ultimate U.S. parent entity adequately account for affiliated entity structures with multiple U.S. parent entities? Are there situations where the proposed ultimate U.S. parent entity definition would result in more than one ultimate U.S. person entity being identified?

(12) Are the proposed tests for compliance with Basel III capital standards and compliance with margin requirements in a comparable jurisdiction appropriate? What are alternative ways for a person to confirm it is compliant with Basel III capital standards?

(13) In the interests of harmonizing with the SEC, should the Commission use the concept of “conduit affiliate,” as in 17 CFR 240.3a71-3(a)(1), instead of the concept of SRS?

169

Or should the

Commission address both conduit affiliates and SRSs in its cross-border rules?

169

The Commission notes that the Guidance included the concept of a “conduit affiliate.” Although the Commission did not define the concept of a “conduit affiliate” it did identify certain factors it believed were relevant to the determination of whether an entity would be considered a conduit affiliate of a U.S. person.

See

Guidance, 78 FR at 45359. The Commission, in this Proposed Rule, is not separately including the concept of a “conduit affiliate” because the concerns posed by a conduit affiliate are intended

to be addressed through the proposed definition and treatment of SRSs.

(14) Should the definition of “foreign branch” include the requirement that the branch be “subject to substantive regulation in banking or financing in the jurisdiction where it is located,” given that the definition of “foreign branch” under Regulation K does not contain such a requirement? Similarly, should the definition of “U.S. branch” include the requirement that the branch be “subject to substantive banking regulation in the state or district where located”?

(15) Should the definitions of “foreign branch” and “swap conducted through a foreign branch” be further harmonized with the definition of “foreign branch” by the SEC in rule 3a71-3(a)(2) under the Exchange Act and the definition of “transaction conducted through a foreign branch” by the SEC in rule 3a71-3(a)(3) under the Securities Exchange Act?

170

Should the Commission instead use the definitions of those terms in the Guidance?

171

The Commission proposes that a swap will be deemed to be entered into by such foreign branch in the normal course of business if swaps of the type in question are primarily, but not exclusively, entered into by personnel located in the branch (or another foreign branch of the U.S. bank). Should the Commission instead stipulate that a swap will be considered to be “entered into by such foreign branch in the normal course of business” only if personnel located in the U.S. do not participate in the negotiation or execution of such swap? Should the Commission instead take an alternative approach? If so, what should it be?

170

The SEC defined the term “foreign branch” in Exchange Act rule 3a71-3(a)(2), 17 CFR 240.3a71- 3(a)(2), to mean any branch of a U.S. bank if: (1) The branch is located outside the United States; (2) the branch operates for valid business reasons; and (3) the branch is engaged in the business of banking and is subject to substantive banking regulation in the jurisdiction where located. The SEC defined the term “transaction conducted through a foreign branch” in Exchange Act rule 3a71-3(a)(3), 17 CFR 240.3a71-3(a)(3), to mean a security-based swap transaction that is arranged, negotiated, and executed by a U.S. person through a foreign branch of such U.S. person if: (1) The foreign branch is the counterparty to such security-based swap transaction; and (2) the security-based swap transaction is arranged, negotiated, and executed on behalf of the foreign branch solely by persons located outside the United States.

See also

SEC Cross-Border Rule, 79 FR 47278.

171

See

Guidance, 78 FR at 45328-31 (discussing that scope of the term “foreign branch” and the Commission's consideration of whether a swap with a foreign branch of a U.S. bank by a non-U.S. person should count toward the non-U.S. person's de minimis threshold calculation).

(16) Should the definitions of “foreign branch” and “U.S. branch” be restricted to entities engaged in the business of banking and/or finance and subject to substantive regulation in banking and/or finance? If not, what other types of entities should be considered branches?

(17) Are the definitions of “U.S. branch” and “swap conducted through a U.S. branch” effective to appropriately capture transactions that should be considered to be domestic rather than foreign, such that they are ineligible for certain exceptions from the group B and group C requirements and substituted compliance for the group B requirements (discussed in section VI below)? If not, what changes should be made to the definitions?

(18) Are the definitions of “foreign-based swap,” “foreign branch,” “foreign counterparty,” and “swap conducted through a foreign branch” effective to appropriately capture transactions that should be considered to be foreign rather than domestic, such that they are eligible for certain exceptions from the group B and group C requirements and substituted compliance for the group B requirements (discussed in section VI below)? If not, what changes should be made to the definitions?

III. Cross-Border Application of the Swap Dealer Registration Threshold

CEA section 1a(49) defines the term “swap dealer” to include any person that: (1) Holds itself out as a dealer in swaps; (2) makes a market in swaps; (3) regularly enters into swaps with counterparties as an ordinary course of business for its own account; or (4) engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in swaps (collectively referred to as “swap dealing,” “swap dealing activity,” or “dealing activity”).

172

The statute also requires the Commission to promulgate regulations to establish factors with respect to the making of a determination to exempt from designation as an SD an entity engaged in a de minimis quantity of swap dealing.

173

172

7 U.S.C. 1a(49)(A). In general, a person that satisfies any one of these prongs is deemed to be engaged in swap dealing activity.

173

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

In accordance with CEA section 1a(49), the Commission issued the Entities Rule,

174

which, among other things, further defined the term “swap dealer” and excluded from designation as an SD any entity that engages in a de minimis quantity of swap dealing with or on behalf of its customers.

175

Specifically, the definition of “swap dealer” in § 1.3 provides that a person shall not be deemed to be an SD as a result of its swap dealing activity involving counterparties unless, during the preceding 12 months, the aggregate gross notional amount of the swap positions connected with those dealing activities exceeds the de minimis threshold.

176

Paragraph (4) of that definition further requires that, in determining whether its swap dealing activity exceeds the de minimis threshold, a person must include the aggregate gross notional value of the swaps connected with the dealing activities of its affiliates under common control.

177

For purposes of the Proposed Rule, the Commission construes “affiliates under common control” by reference to the Entities Rule, which defined 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.

178

Accordingly, any reference in the Proposed Rule to “affiliates under common control” with a person would include affiliates that are controlling, controlled by, or under common control with such person.

174

Entities Rule, 77 FR 30596.

175

See

17 CFR 1.3, Swap dealer, paragraph (4); Entities Rule, 77 FR 30596.

176

See

17 CFR 1.3, Swap dealer, paragraph (4)(i)(A). The de minimis threshold is set at $8 billion, except with regard to swaps with special entities for which the threshold is $25 million.

See

De Minimis Exception to the Swap Dealer Definition, 83 FR 56666 (Nov. 13, 2018).

177

See

17 CFR 1.3, Swap dealer, paragraph (4)(i)(A).

178

See

Entities Rule, 77 FR at 30631 n.437.

The Commission is now proposing rules to address how the de minimis threshold should apply to the cross-border swap dealing transactions of U.S. and non-U.S. persons. Specifically, the Proposed Rule identifies when a potential SD's cross-border dealing activities should be included in its de minimis threshold calculation and when they may properly be excluded. As discussed below, whether a potential SD would include a particular swap in its de minimis threshold calculation would depend on how the entity is classified (

e.g.,

U.S. person, SRS, etc.) and, in some cases, the jurisdiction in which a non-U.S. person is regulated.

A. U.S. Persons

Under the Proposed Rule, consistent with the Guidance,

179

a U.S. person would include all of its swap dealing transactions in its de minimis threshold

calculation without exception.

180

As discussed in section II.A above, the term “U.S. person” would encompass a person that, by virtue of being domiciled, organized, or having its principal place of business in the United States, raises the concerns intended to be addressed by the Dodd-Frank Act, regardless of the U.S. person status of its counterparty. In addition, a person's status as a U.S. person would be determined at the entity level and, thus, a U.S. person would include the swap dealing activity of operations that are part of the same legal person, including those of its foreign branches. Therefore, a U.S. person would include in its SD de minimis threshold calculation dealing swaps entered into by a foreign branch of the U.S. person.

181

179

See

Guidance, 78 FR at 45326.

180

Proposed § 23.23(b)(1).

181

The Commission notes that this approach mirrors the SEC's approach in its cross-border rule.

See

17 CFR 240.3a71-3(b)(1)(i); SEC Cross-Border Rule, 79 FR at 47302, 47371.

B. Non-U.S. Persons

Under the Proposed Rule, whether a non-U.S. person would need to include a swap in its de minimis threshold calculation would depend on the non-U.S. person's status, the status of its counterparty, and, in some cases, the jurisdiction in which the non-U.S. person is regulated. Specifically, the Proposed Rule would require a person that is a Guaranteed Entity or an SRS to count all of its dealing swaps towards the de minimis threshold.

182

In addition, an Other Non-U.S. Person would be required to count dealing swaps with a U.S. person toward its de minimis threshold calculation, except for swaps conducted through a foreign branch of a registered SD.

183

Further, subject to certain exceptions, the Proposed Rule would require an Other Non-U.S. Person to count dealing swaps toward its de minimis threshold calculation if the counterparty to such swaps is a Guaranteed Entity.

182

As discussed in section II.B above, for purposes of this release and ease of reading, a non-U.S. person whose obligations under the swaps are subject to a guarantee by a U.S. person is being referred to as a “Guaranteed Entity.” A non-U.S. person may be a Guaranteed Entity with respect to swaps with certain counterparties, but not be deemed a Guaranteed Entity with respect to swaps with other counterparties. Also, a non-U.S. person could be a Guaranteed Entity or an Other Non-U.S. Person, depending on the specific swap.

183

This release uses the phrase “through a foreign branch” to describe swaps that are entered into by a foreign branch and which meet the definition of “swap conducted through a foreign branch.” As stated, the Commission is proposing that “swap conducted through a foreign branch” would mean a swap entered into by a foreign branch where: (1) The foreign branch or another foreign branch is the office through which the U.S. person makes and receives payments and deliveries under the swap pursuant to a master netting or similar trading agreement, and the documentation of the swap specifies that the office for the U.S. person is such foreign branch; (2) the swap is entered into by such foreign branch in its normal course of business; and (3) the swap is reflected in the local accounts of the foreign branch.

1. Swaps by a Significant Risk Subsidiary

Under the Proposed Rule, an SRS would include all of its dealing swaps in its de minimis threshold calculation without exception.

184

As discussed in section II.C above, the proposed definition of SRS encompasses a person that, by virtue of being a significant subsidiary of a U.S. person, and not being subject to prudential supervision as a subsidiary of a BHC or subject to comparable capital and margin rules, raises the concerns intended to be addressed by the Dodd-Frank Act requirements addressed by the Proposed Rule, regardless of the U.S. person status of its counterparty.

184

Proposed § 23.23(b)(1).

The Commission believes that treating an SRS differently from a U.S. person could create a substantial regulatory loophole, incentivizing U.S. persons to conduct their dealing business with non-U.S. persons through significant non-U.S. subsidiaries to avoid application of the Dodd-Frank Act SD requirements. Allowing swaps entered into by SRSs, which have the potential to impact the ultimate U.S. parent entity and U.S. commerce, to be treated differently depending on

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