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

Federal RegisterSep 14, 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:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is adopting a final rule (“Final 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”). The Final 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 Final Rule adopts a risk-based approach that, consistent with the applicable section 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, advances the goals of the Dodd-Frank Act's swap reforms, while fostering greater liquidity and competitive markets, promoting enhanced regulatory cooperation, and improving the global harmonization of swap regulation.

DATES:

The Final Rule is effective November 13, 2020. Specific compliance dates are set forth in the Final Rule.

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, Deputy 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;

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. Proposed Rule and Brief Summary of Comments Received

C. Global Regulatory and Market Structure

D. Interpretation of CEA Section 2(i)

1. Proposed Rule and Discussion of Comments

2. Final Interpretation

E. Final Rule

II. Key Definitions

A. Reliance on Representations—Generally

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

1. Generally

2. Prongs

3. Principal Place of Business

4. Exception for International Financial Institutions

5. Reliance on Prior Representations

6. Other

C. Guarantee

1. Proposed Rule

2. Summary of Comments

3. Final Rule

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

1. Proposed Rule

2. Summary of Comments

3. Final Rule and Commission Response

E. Foreign Branch and Swap Conducted Through a Foreign Branch

1. Proposed Rule

2. Summary of Comments

3. Final Rule and Commission Response

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

G. U.S. Branch

H. Swap Conducted Through a U.S. Branch

1. Proposed Rule

2. Summary of Comments

3. Final Rule—Swap Booked in a U.S. Branch

I. Foreign-Based Swap and Foreign Counterparty

1. Proposed Rule

2. Summary of Comments

3. Final Rule

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. Guaranteed Swaps

C. Aggregation Requirement

D. Certain Exchange-Traded and Cleared Swaps

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. Guaranteed Swap Positions

C. Attribution Requirement

D. Certain Exchange-Traded and Cleared Swaps

V. ANE Transactions

A. Background and Proposed Approach

B. Summary of Comments

C. Commission Determination

VI. 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

B. Exceptions From Group B and Group C Requirements

1. Proposed Exceptions, Generally

2. Exchange-Traded Exception

3. Foreign Swap Group C Exception

4. Limited Foreign Branch Group B Exception

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

C. Substituted Compliance

1. Proposed Rule

2. Summary of Comments

3. Final Rule

D. Comparability Determinations

1. Standard of Review

2. Supervision of Swap Entities Relying on Substituted Compliance

3. Effect on Existing Comparability Determinations

4. Eligibility Requirements

5. Submission Requirements

VII. Recordkeeping

VIII. Other Comments

IX. Compliance Dates and Transition Issues

A. Summary of Comments

B. Commission Determination

X. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost-Benefit Considerations

1. Benefits

2. Assessment Costs

3. Cross-Border Application of the SD Registration Threshold

4. Cross-Border Application of the MSP Registration Thresholds

5. Monitoring Costs

6. Registration Costs

7. Programmatic Costs

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

9. Recordkeeping

10. Alternatives Considered

11. Section 15(a) Factors

D. Antitrust Laws

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

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 to be 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.

At the time that it adopted the Guidance, the Commission was tasked with regulating a market that grew to a global scale without any meaningful regulation in the United States or overseas, and the United States was the first member country of the Group of 20 (“G20”) 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 45297-45301. The Commission is now restating this interpretation, as discussed in section I.D.2

infra.

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 V.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.

All Commission staff letters are available at

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

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.

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 assesses 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).

2016 Proposal, 81 FR at 71947.

B. Proposed Rule and Brief Summary of Comments Received

In January 2020, the Commission published a notice of proposed rulemaking (“Proposed Rule”), which proposed to: (1) Address the cross-border application of the registration thresholds and certain requirements applicable to SDs and MSPs; and (2) establish a formal process for requesting comparability determinations for such requirements from the Commission.

In the Proposed Rule, the Commission also withdrew the 2016 Proposal, stating that the Proposed Rule reflected the Commission's current views on the matters addressed in the 2016 Proposal, which had evolved since the 2016 Proposal as a result of market and regulatory developments in the swap markets and in the interest of international comity.

The Commission requested comments generally on all aspects of the Proposed Rule and on many specific questions.

Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 FR 952 (proposed Jan. 8, 2020).

Id.

at 954.

The Commission received 18 relevant comment letters.

Though AFR and IATP did not support the Commission adopting the Proposed Rule in its entirety, most commenters were supportive of the Proposed Rule, generally, or supportive of specific elements of the Proposed Rule. However, many of these commenters suggested modifications to portions of the Proposed Rule, which are discussed in the relevant sections discussing the Final Rule below. In addition, several commenters requested Commission action beyond the scope of the Proposed Rule.

Further, IIB/SIFMA requested that the Commission re-visit in the Final Rule the applicability of the Commission's cross-border uncleared swap margin requirements that were addressed in the Cross-Border Margin Rule. The Commission addressed those requirements in the Cross-Border Margin Rule, did not propose modifying them in the Proposed Rule, and therefore is not making any changes to the Cross-Border Margin Rule in this Final Rule.

The Commission received comments from Alternative Investment Management Association (“AIMA”); Americans for Financial Reform Education Fund (“AFR”); Associated Foreign Exchange, Inc. & GPS Capital Markets, Inc. (“AFEX/GPS”); Chris Barnard (“Barnard”); Better Markets, Inc. (“Better Markets”); BGC Partners & Tradition America Holdings, Inc. (“BGC/Tradition”); Chatham Financial (“Chatham”); Citadel (“Citadel”); Commercial Energy Working Group (“Working Group”); Credit Suisse (“CS”); Futures Industry Association (“FIA”); Japan Financial Markets Council & International Bankers Association of Japan (“JFMC/IBAJ”); Institute for Agriculture and Trade Policy (“IATP”); Institute of International Bankers & Securities Industry and Financial Markets Association (“IIB/SIFMA”); International Swaps and Derivatives Association (“ISDA”); Japanese Bankers Association (“JBA”); Japan Securities Clearing Corporation (“JSCC”); and State Street Corporation (“State Street”). The Commission also received letters from PT Arba Sinar Jaya, Robert Ware (UIUC), and William Harrington that were not relevant to the Proposed Rule. All comments on the Proposed Rule are available at

https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3067.

See infra

section VIII for a discussion of these comments.

C. Global Regulatory and Market Structure

As noted in the Proposed Rule, the regulatory landscape is far different now than it was when the Dodd-Frank Act was enacted in 2010.

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 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. These regimes include central clearing requirements, margin requirements for non-centrally cleared derivatives, and other risk mitigation requirements.

Proposed Rule, 85 FR at 954-955.

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;

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.

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 and other market participants. Market fragmentation can also reduce the capacity of financial firms to serve both domestic and international customers.

The Final Rule supports 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, it is important to consider how market practices have evolved since the publication of the Guidance. As certain market participants may have conformed their practices to the Guidance, the Final Rule will ideally cause limited additional costs and burdens for these market participants, 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; 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. For 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.

Financial groups often prefer to operate their swap dealing businesses and manage their 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 located overseas. Swaps are also traded by an entity in one jurisdiction, but booked and risk-managed by an affiliate in another jurisdiction. The Final 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.

D. Interpretation of CEA Section 2(i)

1. Proposed Rule and Discussion of Comments

The Proposed Rule set forth the Commission's interpretation of CEA section 2(i), which mirrored the approach that the Commission took in the Guidance.

Several commenters provided their views on the Commission's interpretation of CEA section 2(i). Better Markets agreed with the Commission's description of the Commission's authority to regulate swaps activities outside of the United States, recognizing that CEA section 2(i)'s mandatory exclusion of only certain, limited non-U.S. activities (

i.e.,

those that do not have a direct and significant connection with activities in, or effect on, U.S. commerce) evidences clear congressional intent to preserve jurisdiction with respect to others. Better Markets stated its belief that this reflects an intent to ensure U.S. law broadly applies to non-U.S. activities having requisite U.S. connections or effects. Better Markets argued, however, that the Commission does not have the discretion to determine whether and when to apply U.S. regulatory requirements based on vague principles of international comity, stating that the Commission has not cited a legally valid basis for its repeated reliance on international comity, where it simultaneously acknowledges direct and significant risks to the U.S. financial system.

BGC/Tradition supported the Commission's analysis related to CEA section 2(i) and what constitutes “direct and significant.” Specifically, BGC/Tradition agreed that the appropriate approach is “to apply the swap provisions of the CEA to activities outside the United States that have either: (1) A direct and significant effect on U.S. commerce; or, in the alternative, (2) a direct and significant connection with activities in U.S. commerce, and through such connection present the type of risks to the U.S. financial system and markets that Title VII directed the Commission to address.”

IIB/SIFMA discussed the Commission's interpretation of “direct” in CEA section 2(i) and argued that the Commission should have followed Supreme Court precedent interpreting the “direct effect” test found in the Foreign Sovereign Immunities Act of 1976, which the Court has interpreted to be satisfied only by conduct abroad that has “an immediate consequence” in the United States.

IIB/SIFMA argued that a case cited by the Commission as a factor in its interpretation, the Seventh Circuit

en banc

decision in

Minn-Chem, Inc.

Agrium, Inc.,

was based on considerations that are relevant to the Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”),

—but

not

section 2(i)—namely that (a) because the FTAIA includes the word “foreseeable” along with “direct,” the word “direct” should be interpreted as part of an integrated phrase that includes “foreseeable” effects, and (b) the FTAIA already addresses foreign conduct that has an immediate consequence in the United States through its separate provision for import commerce.

But, IIB/SIFMA argued, CEA section 2(i) does not include the word “foreseeable,” nor does it include any other provisions addressing foreign conduct that have an immediate consequence within the United States, so the

Minn-Chem

Court's reasoning does not support the Commission's decision to discount the Supreme Court's interpretation of the word “direct” in

Weltover.

See Republic of Argentina

Weltover,

504 U.S. 607, 618 (1992).

15 U.S.C. 6a.

See Minn-Chem, Inc.

Agrium, Inc.,

683 F.3d 845, 857 (7th Cir. 2012).

IATP argued that the Commission did not provide a sufficient “international comity” argument to justify deviating from the plain meaning of “direct,” nor a sufficient argument to rely on FTAIA case law to interpret “direct.” IATP stated its belief that the Commission's reliance on cross-border anti-trust trade law to interpret its statutory authority under CEA section 2(i) is an inconsistent and unreliable foundation for a rule that proposes no measures to prevent or discipline SDs' unreasonable restraint of trade. IATP recommended that the Commission abandon its “restatement” of its CEA section 2(i) authority and rely on a plain reading of CEA section 2(i).

In response to Better Markets' contention that the Commission does not have the discretion to determine whether and when to apply U.S. regulatory requirements based on principles of international comity where it simultaneously acknowledges direct and significant risks to the U.S. financial system, the Commission has followed the Restatement of Foreign Relations law in striving to minimize conflicts with the laws of other jurisdictions while seeking, pursuant to CEA section 2(i), to apply the swaps requirements of Title VII to activities outside the United States that have a direct and significant connection with activities in, or effect on, U.S. commerce. The Commission has determined that the rule appropriately accounts for these competing interests, ensuring that the Commission can discharge its responsibilities to protect the U.S. markets, market participants, and financial system, consistent with international comity, as set forth in the Restatement.

With respect to IIB/SIFMA's contention that the Commission erred in its interpretation of the meaning of “direct” in CEA section 2(i), IIB/SIFMA incorrectly asserted that the

Commission relied on the Seventh Circuit

en banc

decision in

Minn-Chem, Inc.

Agrium, Inc.

Rather, the Commission was clear that its interpretation of CEA section 2(i) is not reliant on the reasoning of any individual judicial decision, but instead is drawn from a holistic understanding of both the statutory text

and

legal analysis applied by courts to analogous statutes and circumstances, specifically noting that the Commission's interpretation of CEA section 2(i) is not solely dependent on one's view of the Seventh Circuit's

Minn-Chem

decision,

but informed by its overall understanding of the relevant legal principles.

See

Proposed Rule, 85 FR at 956.

Finally, the Commission disagrees with IATP's advice that the Commission should abandon its interpretation of CEA section 2(i) and proceed with a “plain reading” of the statute. The Commission believes that IATP's assertion that the extraterritorial provisions of FTAIA and the case law construing such provisions are not relevant to CEA section 2(i) because the rule is not concerned with the regulation of anti-competitive behavior misconstrues the use that the Commission's interpretation has made of the Federal case law construing the meaning of the word “direct” in CEA section 2(i).

See infra

notes 41-51, and accompanying text.

2. Final Interpretation

In light of the foregoing, the Commission is restating its interpretation of section 2(i) of the CEA with its adoption of the Final Rule in substantially the same form as appeared in 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.

(i) 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 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

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 (“CPOs”)).

103

Proposed Rule, 85 FR at 959.

(i) § 23.23(a)(23)(i)(A) and (B)

Paragraphs (i)(A) and (B) of the “U.S. person” definition generally incorporate a “territorial” concept of a U.S. person.

104

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 generally considers 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

105

and the SEC Cross-Border Rule,

106

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.

107

104

Id.

105

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).

106

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.”).

107

See

Proposed Rule, 85 FR at 959.

The first prong of the proposed definition stated that a natural person resident in the United States would be considered a U.S. person. No comments were received regarding the first prong of the “U.S. person” definition and the Commission is adopting it as proposed.

108

Final § 23.23(a)(23)(i)(A).

The second prong of the proposed definition stated that 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 would be considered a U.S. person. In the Proposed Rule, the Commission stated that the second prong of the definition would subsume the pension fund and trust prongs of the “U.S. person” definition in the Cross-Border Margin Rule.

109

No comments were received regarding this aspect of the Proposed Rule and the Commission is adopting it as proposed.

110

109

Proposed Rule, 85 FR at 959-60.

See

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

110

Final § 23.23(a)(23)(i)(B).

Specifically, the Commission is of the view that, as adopted, § 23.23(a)(23)(i)(B) includes 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)(23)(i)(B), which is a separate prong in the Cross-Border Margin Rule.

111

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 § 23.23(a)(23)(i)(B).

112

111

See

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

112

Proposed Rule, 85 FR at 959.

Additionally, § 23.23(a)(23)(i)(B) subsumes the trust prong of the “U.S. person” definition in the Cross-Border Margin Rule.

113

With respect to trusts addressed in § 23.23(a)(23)(i)(B), the Commission expects that its approach is 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 is generally reasonable to treat the trust as a U.S. person for purposes of the Final Rule. Another relevant element in this regard is 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 generally aligns the treatment of the trust for purposes of the Final 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 is generally consistent with its treatment for other purposes.

114

113

See

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

114

Proposed Rule, 85 FR at 959-60.

(ii) § 23.23(a)(23)(i)(D)

Under the fourth prong of the proposed definition, an estate of a decedent who was a resident of the United States at the time of death would be included in the definition of “U.S. person.” No comments were received regarding this aspect of the Proposed Rule and the Commission is adopting it as proposed.

115

With respect to § 23.23(a)(23)(i)(D), 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.

116

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.

115

Final § 23.23(a)(23)(i)(D).

116

Proposed Rule, 85 FR at 960.

(iii) § 23.23(a)(23)(i)(C)

The third prong of the definition, the “account” prong, was proposed to ensure that persons described in prongs (A), (B), and (D) 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.

117

Consistent with the Cross-Border Margin Rule, the Commission stated that this prong would apply for individual or joint accounts.

118

IIB/SIFMA recommended that, consistent with the SEC, the Commission clarify that under the “account” prong of the definition, an account's U.S. person status should depend on whether any U.S.-person owner of the account actually incurs obligations under the swap in question.

117

Id.

118

Id. See

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

The Commission is adopting this aspect of the U.S. person definition as proposed, with a clarification.

119

In response to the IIB/SIFMA comment, the Commission is clarifying that an account's U.S. person status depends on whether any U.S. person owner of the account actually incurs obligations under the swap in question. Consistent with the SEC Cross-Border Rule, where an account is owned by both U.S. persons and non-U.S. persons, the U.S.-person status of the account, as a general matter, turns on whether any U.S.-person owner of the account incurs obligations under the swap.

120

Neither the status of the fiduciary or other person managing the account, nor the discretionary or non-discretionary nature of the account, nor the status of the person at which the account is held or maintained, are relevant in determining the account's U.S.-person status.

119

Final § 23.23(a)(23)(i)(C).

120

See

SEC Cross-Border Rule, 79 FR at 47312.

(iv) Exclusion of Unlimited U.S. Responsibility Prong

Unlike the Cross-Border Margin Rule, the proposed definition of “U.S. person” did 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).

121

The Commission invited comment on whether it should include an unlimited U.S. responsibility prong in the definition of “U.S. person,” and if not, whether it should revise its interpretation of “guarantee” in a manner consistent with the SEC such that persons that would have been considered U.S. persons pursuant to an unlimited U.S. responsibility prong would instead be considered entities with guarantees from a U.S. person.

122

121

Proposed Rule, 85 FR at 961.

See

17 CFR 23.160(a)(10)(vi); Cross-Border Margin Rule, 81 FR at 34823-34824.

See also

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

122

Proposed Rule, 85 FR at 969.

Chatham and IIB/SIFMA agreed that the Commission should not include an unlimited U.S. responsibility prong in the “U.S. Person” definition, noting that

the persons that would be captured under the prong are corporate structures that are not commonly in use in the marketplace (

e.g.,

unlimited liability corporations, general partnerships, and sole proprietorships). IIB/SIFMA added that to the extent a firm uses this structure, the Commission can sufficiently address the resulting risks to the United States by treating the firm as having a guarantee from a U.S. person, as the SEC does.

The Commission is adopting as proposed a definition of “U.S. person” that does not include an unlimited U.S. responsibility prong. Although this corporate structure may exist in some limited form, the Commission does not believe that justifies the cost of classification as a “U.S. person.” 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.

123

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.

124

Therefore, as discussed below with respect to the definition of “guarantee,” the Commission is clarifying that 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 will be considered as having a guarantee from a U.S. person, similar to the approach in the SEC Cross-Border Rule. The CFTC's anti-evasion rules address concerns that persons may structure transactions to avoid classification as a U.S. person.

125

123

Id.

at 960-961.

124

SEC Cross-Border Rule, 79 FR at 47308 n.255, 47316-47317.

125

See

17 CFR 1.6.

The treatment of the unlimited U.S. liability prong in the Final Rule does not affect 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.

126

Proposed Rule, 85 FR at 961.

(v) Exclusion of Collective Investment Vehicle Prong

Consistent with the definition of “U.S. person” in the Cross-Border Margin Rule and the SEC Cross-Border Rule, the proposed definition did not include a commodity pool, pooled account, investment fund, or other CIV that is majority-owned by one or more U.S. persons.

127

This prong was included in the Guidance definition. The Commission invited comment on whether it is appropriate that commodity pools, pooled accounts, investment funds, or other CIVs that are majority-owned by U.S. persons would not be included in the proposed definition of “U.S. person.”

128

127

Id. See

Cross-Border Margin Rule, 81 FR at 34824; SEC Cross-Border Rule, 79 FR at 47311, 47337.

128

Proposed Rule, 85 FR at 969.

AIMA, Chatham, IIB/SIFMA, JFMC/IBAJ,

129

JBA, and State Street supported not including this prong in the “U.S. person” definition. They generally noted that there are practical difficulties in tracking the beneficial ownership in CIVs, and therefore, including a CIV prong would increase the complexity of the “U.S. person” definition. AIMA stated that this could necessitate conservative assumptions being made to avoid the risk of breaching regulatory requirements that depend on the status of investors in the vehicle. JBA noted that non-U.S. persons may choose not to enter into transactions with CIVs in which U.S. persons are involved to avoid the practical burdens of identifying and tracking the beneficial ownership of funds in real-time and the excessive cost arising from the registration threshold calculations. JFMC/IBAJ elaborated that ownership composition can change throughout the life of the vehicle due to redemptions and additional investments.

129

JFMC/IBAJ also requested that conforming amendments be made to the “U.S. person” definition under the Cross-Border Margin Rule. However, this comment is outside of the scope of the Final Rule.

AIMA, Chatham, and State Street also noted that there are limited benefits to including a requirement to “look-through” non-U.S. CIVs to identify and track U.S. beneficial owners of such vehicles. AIMA stated that it is reasonable to assume that the potential investment losses to which U.S. investors in CIVs are exposed are limited to their initial capital investment. Chatham stated that the composition of a CIV's beneficial owners is not likely to have a significant bearing on the degree of risk that the CIV's swap activity poses to the U.S. financial system, noting that CIVs organized or having a principal place of business in the U.S. would be under the Commission's authority, and majority-owned CIVs may be subject to margin requirements in foreign jurisdictions.

AIMA added that the definition of “U.S. person” in the Guidance is problematic for certain funds managed by investment managers because they are subject to European rules on clearing, margining, and risk mitigation.

After consideration of the comments, and consistent with the definition of “U.S. person” in the Cross-Border Margin Rule and the SEC Cross-Border Rule, the Commission is adopting as proposed a “U.S. person” definition that does not include a commodity pool, pooled account, investment fund, or other CIV that is majority-owned by one or more U.S. persons.

130

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 Final Rule would likely 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.

131

Although many of these CIVs have U.S. participants that could be adversely affected in the event of a counterparty default, systemic risk concerns are mitigated to the extent these CIVs are 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.

132

Further, the Commission continues to believe that identifying and tracking a CIV's beneficial ownership may pose a significant challenge, particularly in certain circumstances such as fund-of-funds or master-feeder structures.

133

Therefore, although the U.S. participants in such CIVs may be adversely affected in the event of a counterparty default, the Commission has determined that the majority-

ownership test should not be included in the definition of “U.S. person.”

130

See

Cross-Border Margin Rule, 81 FR at 34824; SEC Cross-Border Rule, 79 FR at 47311, 47337.

131

Proposed Rule, 85 FR at 961.

See

SEC Cross-Border Rule, 79 FR at 47337.

132

Proposed Rule, 85 FR at 961; SEC Cross-Border Rule, 79 FR at 47311.

133

See

Cross-Border Margin Rule, 81 FR at 34824.

A CIV fitting within the majority U.S. ownership prong may also be a U.S. person within the scope of § 23.23(a)(23)(i)(B) of the Final 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 is not relevant in determining whether it falls within the scope of the “U.S. person” definition.

134

Id.

at 34824 n.62.

(vi) Exclusion of Catch-All Prong

Unlike the non-exhaustive “U.S. person” definition provided in the Guidance,

135

the Commission proposed that the definition of “U.S. person” be limited to persons enumerated in the rule, consistent with the Cross-Border Margin Rule and the SEC Cross-Border Rule.

136

The Commission invited comment on whether the “U.S. person” definition should include a catch-all provision.

137

135

See

Guidance, 78 FR at 45316.

136

Proposed Rule, 85 FR at 961.

See

17 CFR 23.160(a)(10); 17 CFR 240.3a71-3(a)(4); Cross-Border Margin Rule, 81 FR at 34824.

137

Proposed Rule, 85 FR at 969.

AFEX/GPS, Chatham, IIB/SIFMA, and JBA supported elimination of the “include, but not limited to” language from the Guidance. AFEX/GPS stated that this approach should help facilitate compliance with Commission rules. Chatham stated that the catch-all prong works against the core purposes of the cross-border rules, to enhance regulatory cooperation and transparency. IIB/SIFMA stated that market participants have lacked any practical way to delineate the scope of that catch-all phrase, leading to legal uncertainty. JBA stated that the provision is difficult to interpret and leads to uncertainty, and potentially reduced transactions by market participants, leading to increased bifurcation in the market.

The Commission is adopting this aspect of the “U.S. person” definition as proposed.

138

Unlike the non-exhaustive “U.S. person” definition provided in the Guidance, the 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.

139

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

140

138

Id.

at 961.

139

See

17 CFR 23.160(a)(10); 17 CFR 240.3a71-3(a)(4); 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).

140

Proposed Rule, 85 FR at 961.

3. Principal Place of Business

The Commission proposed to define “principal place of business” as the location from which the officers, partners, or managers of the legal person primarily direct, control, and coordinate the activities of the legal person, consistent with the SEC definition of “U.S. person.”

141

Additionally, with respect to a CIV, the Proposed Rule stated that this location is the office from which the manager of the CIV primarily directs, controls, and coordinates the investment activities of the CIV, and noted 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 would not 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.

142

The Commission invited comment on whether, when determining the principal place of business for a CIV, the Commission should 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.

143

141

Proposed § 23.23(a)(22)(ii); Proposed Rule, 85 FR at 960, 1003.

See

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

142

Proposed Rule, 85 FR at 960.

143

Id.

at 969.

AIMA supported the proposed definition of “principal place of business” and stated that there are more relevant indicia of U.S. nexus than the activities of forming and promoting a CIV, such as the location of staff who control the investment activities of the CIV. Similarly, IIB/SIFMA supported adopting the SEC's “principal place of business” test for CIVs because it better captures business reality by focusing more on investment strategy rather than the location of promoters who do not have an ongoing responsibility for the vehicle.

The Commission is adopting the “principal place of business” aspect of the “U.S. person” definition as proposed.

144

As noted in the Cross-Border Margin Rule,

145

and consistent with the SEC definition of “U.S. person,”

146

§ 23.23(a)(23)(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 corresponds 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 Final Rule.

147

144

Final § 23.23(a)(23)(ii).

145

Cross-Border Margin Rule, 81 FR at 34823.

146

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

147

See

Proposed Rule, 85 FR at 960; SEC Cross-Border Rule, 79 FR at 47309.

However, determining the principal place of business of a CIV, such as an investment fund or commodity pool, may require consideration of additional factors beyond those applicable to operating companies.

148

The Commission interprets that, for 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.

149

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.”

150

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 CPO. Therefore, consistent with the SEC Cross-Border Rule,

151

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 Final Rule is the location from which the manager carries out those responsibilities.

148

Proposed Rule, 85 FR at 960.

149

Final § 23.23(a)(23)(ii).

150

559 U.S. 77, 80 (2010).

See

Proposed Rule, 85 FR at 960; Cross-Border Margin Rule, 81 FR at 34823.

151

See

SEC Cross-Border Rule, 79 FR at 47310-47311.

Under the Cross-Border Margin Rule,

152

the Commission generally considers 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 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.

153

The Commission may also consider amending the “U.S. person” definition in the Cross-Border Margin Rule in the future.

152

Cross-Border Margin Rule, 81 FR at 34823.

153

Proposed Rule, 85 FR at 960.

4. Exception for International Financial Institutions

The Commission proposed that, in consideration of the discretionary and appropriate exercise of international comity-based doctrines, the term “U.S. person” would not include certain multilateral and other international financial institutions.

154

Proposed § 23.23(a)(22)(iii); Proposed Rule, 85 FR at 961-962, 1003.

IIB/SIFMA supported the proposed exception for certain international financial institutions, noting that the Commission has routinely recognized the special status afforded these institutions under the traditions of the international system by effectively treating them as non-U.S. persons for most purposes, and it is therefore appropriate for the Commission to codify this treatment through this exception. IIB/SIFMA also stated that the catch-all for “similar international organizations” appropriately addresses the international comity considerations that underlie this exception.

The Commission is adopting this aspect of the “U.S. person” definition as proposed, with a technical modification as discussed below.

155

Consistent with the SEC's definition,

156

the term “U.S. person” does 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, and their agencies and pension plans. The Commission believes that although such 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 definition apply.

157

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.”

155

Final § 23.23(a)(23)(iii).

156

See

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

157

Proposed Rule, 85 FR at 961-962.

See, e.g.,

Entities Rule, 77 FR at 30692-30693 (discussing the application of the “swap dealer” and “major swap participant” definitions to foreign governments, foreign central banks, and international financial institutions).

See also

Guidance, 78 FR at 45353 n.531.

Consistent with the Entities Rule and the Guidance, the Commission interprets the term “international financial institutions” to include 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.”

158

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

159

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.

160

This prong also includes institutions identified in CFTC Staff Letters 17-34

161

and 18-13.

162

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

163

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.

164

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 Final Rule lists specific international financial institutions but also provides a catch-all for “any other similar international organizations, and their agencies and pension plans.” As a technical edit, the Commission notes that the catch-all for international financial institutions in the Final Rule now includes “and” in the clause “

and

their agencies and pension plans.” The catch-all provision extends to any of the entities discussed above that are not explicitly listed in the Final Rule.

165

158

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.

159

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

160

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.

161

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.

162

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.

163

See

CFTC Staff Letter No. 17-34. In addition, in May 2020, the Commission adopted an amendment to § 23.151 to exclude ESM from the definition of “financial end user,” which will 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, 85 FR 27674 (May 11, 2020).

164

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.

165

Proposed Rule, 85 FR at 962.

5. Reliance on Prior Representations

As noted above in section II.A, the Final Rule states that a person may rely on a written representation from its counterparty that the counterparty does or does not satisfy the criteria for one or more of the definitions, unless such person knows or has reason to know that the representation is not accurate.

166

Final § 23.23(a).

Further, with respect to the “U.S. person” definition, to provide certainty to market participants, the Commission proposed to permit reliance, until December 31, 2025, on any U.S. person-related representations that were obtained to comply with the Cross-Border Margin Rule.

167

The Commission also stated that any person designated as a “U.S. person” under the Proposed Rule would also be a “U.S. person” under the Guidance, and therefore, market participants would also be able to rely on representations previously obtained under the “U.S. person” definition in the Guidance.

168

167

Proposed § 23.23(a)(22)(iv); Proposed Rule, 85 FR at 962, 1003.

168

Proposed Rule, 85 FR at 962.

IIB/SIFMA and State Street recommended that the reliance on U.S. person representations made with respect to the Cross-Border Margin Rule should be permitted on a permanent basis. State Street asserted that permanent relief raises no new policy considerations, eliminates a “cliff effect” in 2025, and eliminates the potential need for market participants to seek Commission extension of the 2025 deadline should circumstances arise where seeking new representations is impractical or unduly burdensome. Additionally, IIB/SIFMA, ISDA, JFMC/IBAJ, and State Street stated that reliance should explicitly be permitted with respect to representations made pursuant to the Guidance. JFMC/IBAJ stated that this would be appropriate given the compliance burdens associated with obtaining representations. State Street noted that the Commission would increase clarity and market efficiency by explicitly providing for Guidance-related representations in final rule text.

In response to these comments, the Commission notes that it proposed temporary reliance on prior representations in the Proposed Rule because it assumed that SDs and MSPs somewhat routinely amend swap trading relationship documentation and thus updated representations based on the proposed U.S. person definition could be obtained in the course of these routine amendments. Permitting temporary reliance to facilitate this method of updating representations is less burdensome and more cost efficient than requiring all affected SDs and MSPs to update representations within a relatively brief compliance period. The Commission has determined that permanent reliance on representations obtained under the Guidance or the Cross-Border Margin Rule would be contrary to good recordkeeping practices, particularly for dormant relationships, which require updated representations within a set time period. Additionally, there are a variety of circumstances that routinely lead SDs and MSPs to amend counterparty trading relationship documentation, such as address changes, payment detail updates, ISDA definition changes, and LIBOR amendments.

To relieve concerns that the December 31, 2025 deadline is burdensome, the Commission is adopting an approximately seven year time limit, until December 31, 2027, for reliance on “U.S. person” representations made pursuant to the Cross-Border Margin Rule, instead of the five year limit that was proposed.

169

Thus, for those counterparties for whom a person has already obtained U.S. person-related representations under the Cross-Border Margin Rule, U.S. person-related representations under the Final Rule will only be required from those counterparties with whom swaps are entered after December 31, 2027. Nevertheless, best practice is to obtain updated representations as soon as practicable.

169

Final § 23.23(a)(23)(iv).

In addition, the Commission has adjusted the rule text of § 23.23(a)(23)(iv) to clarify that reliance is only permitted for representations obtained prior to the effective date of the Final Rule.

170

Persons should not be permitted to rely on representations obtained pursuant to the Cross-Border Margin Rule after the effective date of the Final Rule when such persons could have also obtained representations pursuant to the Final Rule contemporaneously therewith.

170

Final § 23.23(a)(23)(iv)(A).

The Commission reiterates that it believes that any person designated as a “U.S. person” under the Final Rule is also a “U.S. person” under the Guidance definition, as the Final Rule's definition is narrower in scope. Therefore, the Commission is of the view that market participants may also rely on representations previously obtained using the “U.S. person” definition in the Guidance.

171

A representation obtained under the Guidance should not be relied on permanently, and new representations should be obtained as soon as practicable, but in the Commission's view it would not be appropriate to rely on representations under the Guidance after the December 31, 2027 deadline for similar representations made under the Cross-Border Margin Rule. Thus, for those counterparties for whom a person has already obtained U.S. person-related representations under the Guidance, U.S. person-related representations under the Final Rule will only be required from those counterparties with whom swaps are entered after December 31, 2027.

171

Proposed Rule, 85 FR at 962.

In response to commenters, the Commission has determined to add rule text permitting reliance on representations obtained under the Guidance.

172

as set forth in the Guidance. Adding rule text permitting reliance on representations obtained under the Guidance recognizes, and should reduce, the practical burdens of compliance with the Final Rule by enhancing regulatory certainty.

172

Final § 23.23(a)(23)(iv)(B).

Finally, the rule text of § 23.23(a)(23)(iv)(B) clarifies that reliance is only permitted for representations obtained prior to the effective date of the Final Rule. As with U.S. person-related representations obtained pursuant to the Cross-Border Margin Rule, persons should not be permitted to rely on representations obtained pursuant to the Guidance after the effective date of the Final Rule when such persons could have also obtained representations pursuant to the Final Rule contemporaneously therewith.

6. Other

The Commission considers the following comments in connection with the proposed “U.S. person” definition beyond the scope of this rulemaking and is not addressing them in the Final Rule. However, the Commission takes these comments under advisement for any relevant future Commission action.

AIMA encouraged the CFTC to use the proposed “U.S. person” definition universally across all Title VII requirements and the CEA, including in part 4 for CPOs, commodity pools, and commodity trading advisors (“CTAs”). CS encouraged further harmonization of the “U.S. person” definition, to the extent possible, within the context of SD activity, including the CFTC's capital and margin rules. IIB/SIFMA recommended making conforming changes to the “U.S. person” definition under the Cross-Border Margin Rule to avoid the confusion that will arise from using different definitions of the same term in a single, comprehensive regulatory regime. Finally, JFMC/IBAJ and JSCC requested that the Commission specify that the “U.S. person” definition would also apply to, and supersede, the definition referenced in the CFTC's Orders of Exemption from Registration granted to the Japan Securities Clearing Corporation.

173

See

Amended Order of Exemption from Registration issued for JSCC (May 15, 2017), available at

https://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf.

C. Guarantee

1. Proposed Rule

The Commission proposed defining “guarantee” as 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.

174

For these purposes, a party to a swap would have 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.

174

Proposed § 23.23(a)(8); Proposed Rule, 85 FR at 963-64, 1002-03.

2. Summary of Comments

In general, AFEX/GPS, Chatham, IIB/SIFMA, and JFMC/IBAJ supported the proposed “guarantee” definition, while AFR, Barnard, and Better Markets opposed the proposed definition.

AFEX/GPS, Chatham, and JFMC/IBAJ supported the consistency of the proposed definition with the definition in the Cross-Border Margin Rule. JFMC/IBAJ also supported the consistency with the SEC Cross-Border Rule. AFEX/GPS and Chatham noted that the consistency would make the definition more workable.

AFEX/GPS stated that using the broad and vague definition of guarantee in the Guidance, which includes consideration of “facts and circumstances” and a non-exclusive list of examples, would not be appropriate, while the proposed definition would be objective and should facilitate compliance without sacrificing concerns about systemic risk flowing back to the United States. Chatham stated that the proposed definition would provide greater legal certainty around what is considered to be a guarantee and focuses the Commission's authority on potential significant risks to the U.S. financial system. IIB/SIFMA noted that the proposed definition would promote legal certainty by establishing a clearer test for when a non-U.S. person is considered to have financial support from a U.S. person, eliminating coverage of certain risk-shifting arrangements (

e.g.,

keepwells and liquidity puts) that do not provide a non-U.S. person's counterparty with recourse against a U.S. guarantor. IIB/SIFMA added that to the extent a firm uses the unlimited U.S. responsibility structure (discussed in section II.B.2.iv above), the Commission could sufficiently address the resulting risks to the United States by treating the firm as having a guarantee from a U.S. person, as the SEC does, rather than considering such an entity a U.S. person. JFMC/IBAJ stated that the definition under the Guidance introduced compliance challenges to market participants globally, including difficulties in confirming or obtaining representations from counterparties regarding whether certain arrangements, particularly purely internal arrangements within a counterparty's corporate group, constituted a “guarantee.” JFMC/IBAJ also supported the clarification that a non-U.S. person would be considered a “guaranteed entity,” as described below, only with respect to swaps that are guaranteed by a U.S. person.

ISDA, IIB/SIFMA, JFMC/IBAJ, and State Street also recommended that the Commission permit reliance on guarantee-related representations received pursuant to the Cross-Border Margin Rule and Guidance, analogous to the Proposed Rule and related comments with respect to the “U.S. person” definition, discussed above. IIB/SIFMA and State Street stated that such reliance should not be time limited.

AFR asserted that the narrower definition of guarantee, as compared to the Guidance, would permit numerous informal or even formal forms of guarantees between U.S. parent corporations and their subsidiaries to escape the definition. Barnard stated that the narrower definition would allow significant risk to be transferred back to the U.S. financial system over time. Barnard noted that economic implications are just as important as legal considerations, as confirmed and intended by CEA section 2(i)(1). Similarly, Better Markets recommended that the Commission revise its proposed definition of “guarantee” to include all forms of U.S. financial support used to facilitate dealing through non-U.S. affiliates because financial arrangements posing potential risks to U.S. persons and the U.S. financial system include more than solely contractual guarantees contained in swap trading relationship documentation between non-U.S. counterparties.

Better Markets added that a narrower definition of “guarantee” would elevate form over substance and have possible significant adverse effects on the U.S. financial system. Better Markets did not agree that a definition posing possible significant adverse effects on the U.S. financial system nevertheless should be adopted, merely because the proposed “guarantee” definition mirrors the definition in the Cross-Border Margin

Rule and therefore would not demand “a separate independent assessment.” Better Markets asserted that it is neither a valid statutory purpose nor a benefit that outweighs, or even reasonably approximates, its costs. Better Markets added that CEA section 5(b) and related provisions make clear that the CFTC's core statutory policy objectives are to protect the safety and soundness of SDs, prevent disruptions to the integrity of derivatives markets, ensure the financial integrity of swaps transactions and the avoidance of systemic risk, and preserve the stability of the U.S. financial system.

Better Markets also stated that the CFTC's use of the margin-related “guarantee” definition is not appropriate. Its view was that margin requirements on uncleared swaps are market and credit risk mitigants that are imposed on specific portfolios of derivatives with specific counterparties, while the proposed definition would address broader systemic risk reduction and other policy objectives, including statutory concerns about the evasion of U.S. law through legal entity booking strategies. Further, Better Markets asserted that the narrower definition would increase risks to U.S. persons, because the definition would result in fewer swaps transactions being treated as “guaranteed,” opening a loophole for dealing conducted through unregistered affiliates of U.S. banks that nevertheless benefit from direct U.S. financial support.

3. Final Rule

After carefully considering the comments received, the Commission is adopting the definition of “guarantee” as proposed, with certain modifications and clarifications as discussed below.

175

Final § 23.23(a)(9).

Consistent with the Cross-Border Margin Rule, the term “guarantee” applies regardless of whether the 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.

176

The terms of the guarantee need not necessarily be included within the swap documentation or even otherwise reduced to writing, provided that, under the laws of the relevant jurisdiction, 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 Final Rule, the Commission generally considers swap activities involving guarantees from U.S. persons to satisfy the “direct and significant” test under CEA section 2(i).

177

176

Proposed Rule, 85 FR at 963-64.

See

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

177

Proposed Rule, 85 FR at 963.

However, in contrast to the Cross-Border Margin Rule and the Proposed Rule, but consistent with the recommendation by IIB/SIFMA, the Commission is interpreting “guarantee” in a manner similar to the SEC, specifically with respect to the unlimited U.S. responsibility prong. Similar to the SEC, 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 swap by virtue of the U.S. person's unlimited responsibility for the non-U.S. person, such an arrangement is considered a guarantee, and as discussed in sections III.B.3.i and IV.B.3.i below, the non-U.S. person is required to include the swap in its SD and MSP threshold calculations, respectively.

178

As noted above, the Commission is not including the unlimited U.S. responsibility prong in the “U.S. person” definition, but interprets such relationships as guarantees to ensure they are appropriately covered by the Final Rule.

178

See

SEC Cross-Border Rule, 79 FR at 47316-47317, 47344.

The term “guarantee” also encompasses 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. This addresses concerns that swaps could be structured such that they would not count toward a non-U.S. person's threshold calculations. 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 definition of “guarantee” deems a guarantee to exist between Party B and Parent D with respect to Party B's obligations under the swap with Party A.

179

Proposed Rule, 85 FR at 963.

See

Cross-Border Margin Rule, 81 FR at 34825.

The Commission's definition of guarantee is not affected by whether the U.S. guarantor is an affiliate of the non-U.S. person because, 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.

Also, the “guarantee” definition does 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 does not exist because Party F does 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).

180

Proposed Rule, 85 FR at 963.

See

Cross-Border Margin Rule, 81 FR at 34825.

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

181

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.

182

The Commission is aware that many other types of financial arrangements or support, other than a guarantee as defined in the Final 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 adverse effects, in a manner similar to a guarantee with a

direct recourse to a U.S. person. However, the Commission has determined that a narrower definition of guarantee than that in the Guidance achieves a more workable framework for non-U.S. persons, particularly because the Final Rule's definition of “guarantee” is consistent with the Cross-Border Margin Rule, and therefore does not require a separate independent assessment, without undermining the protection of U.S. persons and the U.S. financial system. The Commission is sympathetic to comments regarding, and is independently aware of, the difficulty in confirming or obtaining representations from counterparties regarding whether certain arrangements, particularly purely internal arrangements within a counterparty's corporate group, constitute a “guarantee.” However, such difficulty does not extend to classifying as guarantees arrangements that provide a non-U.S. person's counterparty with recourse to a U.S. person for the performance of the non-U.S. person's obligations under a swap.

181

See

Cross-Border Margin Rule, 81 FR at 34824.

182

Guidance, 78 FR at 45320.

A broad definition of guarantee, as recommended by AFR, Barnard, and Better Markets, would make it difficult for certain entities to determine whether their counterparty is guaranteed or not. General consistency with the Cross-Border Margin Rule definition means no additional burden for market participants. Additionally, though the definition of “guarantee” in the Guidance was broader, having a specific standard in a rule is preferable to an open-ended interpretation. The Commission recognizes that the definition of “guarantee” could lead to certain entities counting fewer swaps towards their SD or MSP thresholds or qualify additional counterparties for exceptions to certain regulatory requirements as compared to the definition in the Guidance. However, such concerns could be mitigated to the extent such non-U.S. persons meet the definition of a “significant risk subsidiary,” and thus, as discussed below, are required to count certain swaps or swap positions toward their SD or MSP registration thresholds. In this way, non-U.S. persons receiving support from a U.S. person and representing a significant risk to the U.S. financial system are captured by the Final Rule. Accordingly, the Final Rule achieves the dual goals of protecting the U.S. markets and promoting a workable cross-border framework.

In response to comments, the Commission is adopting language in the “guarantee” definition that is parallel to the language for “U.S. persons,” allowing persons to rely on counterparty representations with respect to a counterparty's “guarantee” status obtained pursuant to the Cross-Border Margin Rule. As discussed above, permitting temporary reliance to facilitate this method of updating representations is less burdensome and more cost efficient than requiring all affected SDs to update representations within a relatively brief compliance period. However, permanent reliance on representations obtained under the Guidance or the Cross-Border Margin Rule would be inconsistent with good recordkeeping practices, particularly for dormant relationships, thus, the Commission has determined to require an updated representation within a set time period. The Commission is thus adopting an approximately seven year time limit, until December 31, 2027, on counterparty representations with respect to a counterparty's “guarantee” status obtained pursuant to the Cross-Border Margin Rule, the same as is permitted for reliance on the “U.S. person” representations. Thus, for those counterparties for whom a person has already obtained guarantee-related representations under the Cross-Border Margin Rule, guarantee-related representations under the Final Rule will only be required from those counterparties with whom swaps are entered after December 31, 2027. Nevertheless, best practice is to obtain updated representations as soon as practicable.

In addition, the Commission has adjusted the rule text of § 23.23(a)(9) to clarify that reliance is only permitted for representations obtained prior to the effective date of the Final Rule.

183

Final § 23.23(a)(9)(i).

The Commission believes that any “guarantee” related representation received under the Guidance definition would also apply under the Final Rule, as the Final Rule's definition is generally narrower in scope. Therefore, the Commission is of the view that market participants may also rely on representations previously obtained using the “guarantee” definition in the Guidance.

184

Nevertheless, a representation obtained under the Guidance should not be relied on permanently and should be obtained as soon as practicable, but in the Commission's view it would not be appropriate to rely on representations under the Guidance after the December 31, 2027 deadline for similar representations made under the Cross-Border Margin Rule. Thus, for those counterparties for whom a person has already obtained guarantee-related representations under the Guidance, guarantee-related representations under the Final Rule will only be required from those counterparties with whom swaps are entered after December 31, 2027.

184

An SD or MSP may not rely on a representation obtained for purposes of the Guidance that a counterparty's swaps are not guaranteed by a U.S. person if the SD or MSP has classified the counterparty as a U.S. person under the unlimited U.S. responsibility prong of the U.S. person definition in the Guidance.

In response to commenters, the Commission has determined to add rule text permitting reliance on representations obtained under the Guidance.

185

The Commission understands that while the Guidance is non-binding, many market participants have chosen to develop policies and practices that take into account the views expressed therein, including expending time and resources to classify counterparties in accordance with the interpretation of the term “guarantee” as set forth in the Guidance. Adding rule text permitting reliance on representations obtained under the Guidance recognizes, and should reduce, the practical burdens of compliance with the Final Rule by enhancing regulatory certainty.

185

Final § 23.23(a)(9)(ii).

Finally, the rule text of § 23.23(a)(9)(ii) clarifies that reliance is only permitted for representations obtained prior to the effective date of the Final Rule. As with guarantee-related representations obtained pursuant to the Cross-Border Margin Rule, persons should not be permitted to rely on representations obtained pursuant to the Guidance after the effective date of the Final Rule when such persons could have also obtained representations pursuant to the Final Rule contemporaneously therewith.

For ease of understanding, the discussion in this release uses the term “Guaranteed Entity” to refer to a non-U.S. person whose swaps are guaranteed by a U.S. person, but only with respect to the swaps that are so guaranteed. Thus, a non-U.S. person may be a Guaranteed Entity with respect to its 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 its

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.

Additionally, 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 (as defined below).

186

Depending on an entity's corporate structure and financial relationships, a single entity could be both a Guaranteed Entity and a significant risk subsidiary and, as noted above, it may be a Guaranteed Entity for certain of its swaps and an Other Non-U.S. Person for others.

186

Note that an Other Non-U.S. Person can include a registered SD or MSP.

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

1. Proposed Rule

The Commission proposed a new category of entity termed a significant risk subsidiary (“SRS”). Under the Proposed Rule, 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 were 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. generally accepted accounting principles (“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.

187

If an entity is determined to be an SRS, the Commission proposed to apply certain regulations to the entity in the same manner as a U.S. person in some instances, for example in the application of the SD and MSP registration threshold calculations, and in the same manner as a Guaranteed Entity in other instances, for example in the application of group B and C requirements.

187

Proposed Rule, 85 FR at 964-968.

With respect to conduit affiliates, the Guidance included a discussion of factors that would be taken into account when determining whether an entity was a conduit affiliate of a U.S. person. The Proposed Rule stated that this concept was not being included in the proposed regulations because the concerns posed by a conduit affiliate were intended to be addressed through the proposed definition and regulation of SRSs.

2. Summary of Comments

In the Proposed Rule, the Commission asked whether it should use the concept of a conduit affiliate, as was done in the Guidance, in order to harmonize with the SEC.

188

AEFX/GPS, Chatham, JFMC/IBAJ, and IIB/SIFMA all stated that they prefer the SRS entity definition to the use of the conduit affiliate concept from the Guidance. AFEX/GPS, Chatham, and IIB/SIFMA stated that the objective criteria in the SRS definition are preferable to the conduit affiliate concept in the Guidance, which is more difficult to apply. JFMC/IBAJ and IIB/SIFMA also commented that the SRS definition is an improvement over the FCS concept previously proposed in the 2016 Proposal because the SRS definition excludes those subsidiaries that are not significant to their parent entities. Better Markets stated that the proposed SRS definition does not address the avoidance and evasion risks addressed by the conduit affiliate concept in the Guidance. IATP suggested that the previously proposed FCS concept be retained in place of the SRS definition. JBA stated that market participants have already assessed, under the Guidance, whether their activities are subject to the swap rules based on the attributes of their counterparties and requiring them to re-assess will create significant burdens on market participants. ISDA suggested that with respect to SRSs, entities should be permitted to rely on counterparty representations pertaining to conduit affiliates as described in the Guidance.

188

Proposed Rule, 85 FR at 969-970.

CS and IIB/SIFMA stated that the exclusion for subsidiaries of BHCs in the SRS definition should be expanded to include those entities that are subsidiaries of intermediate holding companies (“IHCs”). These commenters noted that IHCs are subject to prudential regulation, including Basel III capital requirements, stress testing, liquidity, and risk management requirements.

JFMC/IBAJ and IIB/SIFMA suggested that accounting consolidation does not create a sufficient jurisdictional nexus to the United States because there is no requirement that the U.S. entity be directly liable for the foreign subsidiary's swaps. These commenters stated that if the SRS definition is nevertheless retained then the proposed significance tests should also be retained. IIB/SIFMA and the Working Group stated that the definition of ultimate U.S. parent entity should be limited to those groups of entities where the top-tier ultimate parent company is a U.S. person.

With respect to the exception in § 23.23(a)(13)(i) for subsidiaries of BHCs, AFR and Better Markets stated that the Commission should eliminate this exception because deference to the prudential regulators in this way is not justified. AFR noted the failure of prudential supervision of banks to adequately address derivatives markets risks prior to the 2008 financial crisis. IATP, AFR, and Barnard stated that the broad exemptions would exclude almost all foreign subsidiaries of U.S. companies and be a significant reduction in the application of the Commission's swap regulations. Better Markets stated that the Commission does not have the discretion to determine whether and when to apply U.S. regulatory requirements based on principles of international comity when there is a direct and significant risk to U.S. BHCs and the U.S. financial system.

Better Markets suggested that if the SRS definition is retained then there should be two additional significance tests added to those in § 23.23(a)(14). This commenter proposed that if an entity were to meet a risk transfer test, measuring the notional amount of swaps that are back-to-backed with U.S. entities, or a risk acceptance test, measuring the trading activity of the subsidiary over a three month time period, then the entity would be considered a significant subsidiary.

The Working Group suggested that the proposed SRS definition should be modified to limit the applicability to only those entities that qualify as financial entities because the systemic risk associated with non-financial entities is mitigated because their activities primarily take place outside of the financial system. The Working Group agreed with the Commission's proposal to exclude from the SRS definition those entities that are subject to oversight by the non-U.S. person's home country regulator and capital

standards consistent with Basel III. However, the commenter added that to the extent a regulator has exempted a particular type of entity from capital requirements otherwise consistent with Basel III, the CFTC should defer to such exemption and consider such entity as subject to comparable capital requirements.

3. Final Rule and Commission Response

The Commission is adopting the SRS definition as proposed, with two modifications as discussed below. First, the Final Rule adds IHCs to the exclusion in § 23.23(a)(13)(i) for those companies that are subject to consolidated supervision and regulation by the Federal Reserve Board. Second, with respect to the carve-out in § 23.23(a)(13)(ii), the Final Rule makes a clarifying revision to the margin requirements aspect of that provision.

(i) Non-U.S. Persons With U.S. Parent Entities

As discussed in the Proposed Rule, in addition to the U.S. persons described above in section II.B, 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.

189

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. This risk, in the aggregate, may have a significant effect on the U.S. financial system. Therefore, the Commission may subject consolidated non-U.S. subsidiaries of U.S. persons to Commission regulation due to their direct and significant relationship to their U.S. parent entities. Further, 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.

190

Moreover, because U.S. persons have regulatory obligations under the CEA that Other Non-U.S. Persons may not have, 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.

189

Proposed Rule, 85 FR at 964.

190

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 an SRS.

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.

191

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, 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, 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 effect 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.

191

Proposed Rule, 85 FR at 964.

IIB/SIFMA and JFMC/IBAJ stated that there is no legal basis to apply swap regulations based on accounting consolidation. The Commission continues to believe, as it stated in its Cross-Border Margin Rule, by virtue of an entity having its financial statements consolidated with those of its U.S. ultimate parent, the financial position, operating results, and statement of cash flows of the entity are included in the financial statements of its U.S. ultimate parent entity and therefore affect the financial position, risk profile, and market value of the U.S. ultimate parent. Because of the entity's direct relationship with, and the possible negative effect of its swap activities on, its U.S. ultimate parent entity and the U.S. financial system, the entity raises greater supervisory concern in the United States relative to other non-U.S. swap entities.

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Accordingly, it is appropriate to apply certain swap regulations to certain entities that have financial statements consolidated with U.S. parent entities.

192

See

Cross-Border Margin Rule, 81 FR at 34827.

However, the principles of international comity militate against applying the Commission's swap regulations to all non-U.S. subsidiaries of U.S. parent entities. Rather, 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's approach in the Final Rule, as discussed further below with respect to the exclusion for subsidiaries of BHCs and IHCs, 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 operate efficiently outside the United States. The Commission's risk-based approach is embodied in the definition of an SRS, which, as discussed above, captures entities whose obligations under swaps may not be guaranteed by U.S. persons, but nonetheless raise particular supervisory concerns in the United States due to the possible negative effect on their ultimate U.S. parent entities and thus the U.S. financial system.

(ii) Preliminary Definitions

For purposes of the SRS definition, the term “subsidiary” means an affiliate of a person controlled by such person directly, or indirectly through one or more intermediaries.

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The definition of “subsidiary” has been revised in the Final Rule for clarity. For purposes of this definition, an affiliate of, or a person affiliated with, a specific person is 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.

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In the Final Rule, the definition of “affiliate” has been moved out of the definition of “subsidiary” and into its own definition for added clarity, since the term “affiliate” is relevant for other provisions of the Final Rule, as

discussed in this release. The term “control,” including controlling, controlled by, and under common control with, means 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.

195

The definition of “control” is also relevant to other provisions of the Final Rule, as discussed in this release. The definitions of subsidiary, affiliate, and control are substantially similar to the definitions found in SEC Regulation S-X.

196

Further, under the Final Rule, the term “parent entity” means 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.

197

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

198

193

Final § 23.23(a)(15).

194

Final § 23.23(a)(1).

195

Final § 23.23(a)(2).

196

See

17 CFR 210.1-02. Regulation S-X generally covers the form and content requirements for financial statements.

197

Final § 23.23(a)(12).

198

Final § 23.23(a)(22).

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 encompasses 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 Final 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” is the U.S. parent entity that is not a subsidiary of any other U.S. parent entity.

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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, the Commission is basing the SRS definition on whether a non-U.S. person has any U.S. parent entity, subject to certain risk-based thresholds.

199

Final § 23.23(a)(19).

IIB/SIFMA and the Working Group stated that the SRS definition should be limited to subsidiaries that have a “top-tier” U.S. person parent entity, rather than including subsidiaries that have a U.S. parent entity that may not be the ultimate parent entity. The Commission is i

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