No-action relief for non-U.S. persons that are neither guaranteed affiliates nor conduit affiliates of a U.S. person from the requirement to count swaps with international financial institutions towards the de minimis...

Summary: No-action relief for non-U.S. persons that are neither guaranteed affiliates nor conduit affiliates of a U.S. person from the requirement to count swaps with international financial institutions towards the de minimis thresholds for the swap dealer and major swap participant definitions.

Division of Swap Dealer and

Intermediary Oversight

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Matthew B. Kulkin

Director

CFTC Letter No. 18-13

No-Action

May 16, 2018

Division of Swap Dealer and Intermediary Oversight

Re:

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

Ladies and Gentlemen:

This letter is in response to a request1 received by the Division of Swap Dealer and Intermediary

Oversight (“DSIO”) of the Commodity Futures Trading Commission (“Commission”) from

ABN AMRO Bank N.V. (the “Requestor”) for a position of no-action if the Requestor does not

include one or more swaps entered into with certain international financial institutions (as de-

fined below, “IFIs”) in determining whether it is (i) deemed to be a swap dealer (“SD”) pursuant

to the criteria set forth in the Commission’s definition of “swap dealer;”2 or (ii) a major swap

participant (“MSP”) pursuant to the criteria set forth in the Commission’s definition of “major

swap participant.”3

I.

Regulatory Background

A.

Swap Dealer and Major Swap Participant Definitions

In accordance with the definition of “swap dealer” in section 1a(49)(D) of the Commodity Ex-

change Act (“CEA”)4 the Commission has excepted from designation as an SD any entity that

1 Letter dated January 25, 2018, from ABN AMRO Bank N.V. to Matthew B. Kulkin, Director, DSIO.

2 See subparagraph (4) of the definition of “swap dealer” in 17 CFR § 1.3

accordance with the definition of “swap dealer” in section 1a(49)(D) of the Commodity Ex-

change Act (“CEA”)4 the Commission has excepted from designation as an SD any entity that

1 Letter dated January 25, 2018, from ABN AMRO Bank N.V. to Matthew B. Kulkin, Director, DSIO.

2 See subparagraph (4) of the definition of “swap dealer” in 17 CFR § 1.3. See also Further Definition of

“Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap

Participant,” and “Eligible Contract Participant,” 77 FR 30596, 30626-35 (May 23, 2012) (hereinafter

“Entity Definitions Rulemaking”).

3 See the definition of “major swap participant” in 17 CFR § 1.3.

4 7 USC § 1 et seq.

No-Action Position for Non-U.S. Persons Engaging in Swaps with IFIs

Page 2

engages in a de minimis quantity of swap dealing with or on behalf of its customers.5 Specifical-

ly, subparagraph (4) of the definition of “swap dealer” in Commission regulation 1.3 provides

that a person shall not be deemed to be an SD until its aggregate gross notional amount of swaps

connected with swap dealing activity, during the preceding 12 months, exceeds the de minimis

threshold.6 Such Commission regulation further requires that, in determining whether its swap

dealing activity exceeds the de minimis threshold, a person must include the aggregate notional

value of the swap positions connected with the dealing activities of its affiliates under common

control.7

Section 1a(33) of the CEA defines ‘‘major swap participant’’ to include persons that are not SDs

but that nevertheless pose a high degree of risk to the U.S

t, in determining whether its swap

dealing activity exceeds the de minimis threshold, a person must include the aggregate notional

value of the swap positions connected with the dealing activities of its affiliates under common

control.7

Section 1a(33) of the CEA defines ‘‘major swap participant’’ to include persons that are not SDs

but that nevertheless pose a high degree of risk to the U.S. financial system by virtue of the

‘‘substantial’’ nature of their swap positions.8 In accordance with section 1a(33)(B) of the CEA

the Commission adopted rules further defining ‘‘major swap participant’’ and providing that a

person would not be deemed an MSP unless its swap positions exceed one of several thresholds.9

The thresholds were designed to take into account default related credit risk, the risk of multiple

market participants failing close in time, and the risk posed by a market participant’s swap posi-

tions on an aggregate level.10 The Commission also adopted interpretive guidance that, for pur-

poses of the MSP analysis, an entity’s swap positions would be attributable to a parent, other af-

filiate, or guarantor to the extent that the counterparty has recourse to the parent, other affiliate,

or guarantor and the parent or guarantor is not subject to capital regulation by the Commission,

SEC, or a prudential regulator.11

5 See 7 U.S.C. 1a(49)(D) (directing the Commission to establish a de minimis exception from the SD defi-

nition). See also subparagraph (4) of the definition of “swap dealer” in 17 CFR § 1.3; Entities Definitions

Rulemaking, 77 FR at 30626-35.

6 See subparagraph (4)(i)(A) of the definition of “swap dealer” in 17 CFR § 1.3. See also subparagraph (6)

of the definition of “swap dealer” in 17 CFR § 1.3 (identifying swaps that are not considered in determining

whether a person is a swap dealer).

7 See subparagraph (4)(i)(A) of the definition of “swap dealer” in 17 CFR § 1.3.

8 See 7 U.S.C

ties Definitions

Rulemaking, 77 FR at 30626-35.

6 See subparagraph (4)(i)(A) of the definition of “swap dealer” in 17 CFR § 1.3. See also subparagraph (6)

of the definition of “swap dealer” in 17 CFR § 1.3 (identifying swaps that are not considered in determining

whether a person is a swap dealer).

7 See subparagraph (4)(i)(A) of the definition of “swap dealer” in 17 CFR § 1.3.

8 See 7 U.S.C. 1a(33)(A) (defining ‘‘major swap participant’’ to mean any person who is not an SD and ei-

ther (i) maintains a substantial position in swaps for any of the major swap categories, subject to certain

exclusions; (ii) whose outstanding swaps create substantial counterparty exposure that could have serious

effects on the U.S. financial system; or (iii) is a highly leveraged financial entity that is not subject to pru-

dential capital requirements and that maintains a substantial position in swaps for any of the major swap

categories.)

9 See definitions of “major swap participant,” “substantial position,” “hedging or mitigating commercial

risk,” “substantial counterparty exposure,” and “financial entity; highly leveraged” in 17 CFR § 1.3.

10 See Entity Definitions Rulemaking, 77 FR at 30666 (discussing the guiding principles behind the Com-

mission’s definition of ‘‘substantial position’’ in 17 CFR 1.3); id. at 30683 (noting that the Commission’s

definition of ‘‘substantial counterparty exposure’’ in 17 CFR 1.3 is founded on similar principles as its def-

inition of ‘‘substantial position’’).

11 Id. at 30689.

” in 17 CFR § 1.3.

10 See Entity Definitions Rulemaking, 77 FR at 30666 (discussing the guiding principles behind the Com-

mission’s definition of ‘‘substantial position’’ in 17 CFR 1.3); id. at 30683 (noting that the Commission’s

definition of ‘‘substantial counterparty exposure’’ in 17 CFR 1.3 is founded on similar principles as its def-

inition of ‘‘substantial position’’).

11 Id. at 30689.

No-Action Position for Non-U.S. Persons Engaging in Swaps with IFIs

Page 3

B.

Application of SD and MSP Registration Thresholds to Cross-Border Trans-

actions

In 2013, the Commission issued a general statement of policy regarding the cross-border applica-

tion of the swaps provisions of the CEA, which, among other things, addressed the general man-

ner in which the Commission would apply the SD and MSP definitions with respect to cross-

border swap activity involving Non-U.S. persons.12 With regard to swap dealing activity, the

Commission stated that it would generally expect a Non-U.S. person, together with its non-U.S.

affiliates, to include swap dealing activity with U.S. person counterparties when calculating its

aggregate gross notional amount of swaps connected with swap dealing activity for purposes of

determining whether it may rely on the de minimis exception from SD registration set forth in the

definition of “swap dealer.”13 Similarly, swap positions of a Non-U.S. person with U.S. person

counterparties would be included in determining whether its positions are in excess of the appli-

cable MSP registration thresholds.14

Under the Cross-Border Guidance, an entity whose principal place of business or jurisdiction of

incorporation is within the United States would generally be considered a U.S. person, and thus

swap activity of a Non-U.S. person with such entities would generally be considered for purpos-

es of determining whether such Non-U.S. persons are required to register as SDs or MSPs.15

Conversely, swap activity between two Non-U.S

ance, an entity whose principal place of business or jurisdiction of

incorporation is within the United States would generally be considered a U.S. person, and thus

swap activity of a Non-U.S. person with such entities would generally be considered for purpos-

es of determining whether such Non-U.S. persons are required to register as SDs or MSPs.15

Conversely, swap activity between two Non-U.S. persons would generally not be considered for

purposes of determining whether such Non-U.S. persons are required to register as SDs or

MSPs.16 In addition, under the Cross-Border Guidance, the swap activity of a Non-U.S. person

that is not a guaranteed or conduit affiliate17 of a U.S. Person with an entity that is not a U.S.

person but that is guaranteed by a U.S. person, subject to certain exceptions and conditions,

would generally be considered for purposes of determining whether such Non-U.S. persons are

required to register as SDs or MSPs.18

12 See Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regula-

tions, 78 FR 45292 (July 26, 2013) (“Cross-Border Guidance”). For purposes of this letter, the term

“Non-U.S. person” means a person that is not a U.S. person and the term “U.S. person” has the same

meaning as in the Cross-Border Guidance. See Cross-Border Guidance, 78 FR at 45316-17.

13 See Cross-Border Guidance, 78 FR at 45326.

14 See id.

15 See Cross-Border Guidance, 78 FR at 45316-17.

16 See id.

17 For purposes of this letter, the terms “guarantee” and “guaranteed affiliate” have the same mean-

ing as in the Commission’s Exemptive Order Regarding Compliance with Certain Swap Regulations, 78

FR 43785, 43794 (July 22, 2013). For purposes of this letter, the term “conduit affiliate” has the same

meaning as in the Cross-Border Guidance, 78 FR at 45358-59.

18 See Cross-Border Guidance, 78 FR at 45319, 45324-25

his letter, the terms “guarantee” and “guaranteed affiliate” have the same mean-

ing as in the Commission’s Exemptive Order Regarding Compliance with Certain Swap Regulations, 78

FR 43785, 43794 (July 22, 2013). For purposes of this letter, the term “conduit affiliate” has the same

meaning as in the Cross-Border Guidance, 78 FR at 45358-59.

18 See Cross-Border Guidance, 78 FR at 45319, 45324-25. Exceptions and conditions include circumstanc-

es where the guaranteed counterparty is an SD, is affiliated with an SD, is guaranteed by a non-financial

entity, or, for purposes of MSP registration, the guaranteed counterparty is an SD and the documentation

of the swap requires such SD to collect daily variation margin with no threshold. See id.

No-Action Position for Non-U.S. Persons Engaging in Swaps with IFIs

Page 4

II.

Summary of Request for No-Action Position

Based on representations by the Requestor, DSIO understands certain facts to be as follows. The

Requestor is incorporated in the Netherlands and is regulated by the Netherlands Authority for

the Financial Markets pursuant to the laws and regulations of the European Union and the Neth-

erlands. The Requestor is not currently registered, and is not required to be registered, with the

Commission as an SD or as an MSP. The Requestor is a Non-U.S. person. The Requestor is also

neither guaranteed by a U.S. person, nor a conduit affiliate of a U.S. person. The Requestor plans

to enter into swaps with certain IFIs (as defined below). To the extent an IFI is incorporated in,

or has its principal place of business in, the United States, it could be considered to be a U.S.

person for purposes of the Cross-Border Guidance, and therefore the Requestor may be required

to include swaps with such IFI for purposes of determining whether it is required to register as an

SD or MSP.19 In addition, to the extent an IFI is or becomes guaranteed by a U.S

IFI is incorporated in,

or has its principal place of business in, the United States, it could be considered to be a U.S.

person for purposes of the Cross-Border Guidance, and therefore the Requestor may be required

to include swaps with such IFI for purposes of determining whether it is required to register as an

SD or MSP.19 In addition, to the extent an IFI is or becomes guaranteed by a U.S. person, the

Requestor may be required to include swaps with such IFI for purposes of determining whether it

is required to register as an SD or MSP.20

The Requestor notes that the Commission has provided a number of specific exceptions for the

IFIs from the application of certain Commission regulations, including the following:

1.

The Commission issued an interpretive letter to the World Bank Group (which group in-

cludes several IFIs) in 1991,21 indicating that the World Bank Group should be treated as

a non-U.S. person for purposes of application of the Commission’s Part 30 rules, thereby

allowing the World Bank to undertake foreign futures and options transactions through

unregistered intermediaries.22 The Commission indicated that its interpretation was based

on the unique attributes and status of the World Bank Group as a multinational member

agency, and the public policy affecting its ability to enter into transactions in all member

countries in conjunction with promoting global economic development. The Commission

further stated that the World Bank Group should not be precluded from selecting a firm,

and a firm should not be precluded from dealing with the World Bank Group in foreign

futures and options transactions, regardless of whether such firm is registered as a futures

commission merchant or exempt from registration as such under Commission regula-

tions.23

19 See id at 45316-17.

20 See id at 45419, 45324-25.

21 See CFTC Interpretative Letter to World Bank Group, Comm. Fut. L. Rep. ¶ 25,149 (Oct. 30, 1991)

n foreign

futures and options transactions, regardless of whether such firm is registered as a futures

commission merchant or exempt from registration as such under Commission regula-

tions.23

19 See id at 45316-17.

20 See id at 45419, 45324-25.

21 See CFTC Interpretative Letter to World Bank Group, Comm. Fut. L. Rep. ¶ 25,149 (Oct. 30, 1991).

22 Part 30 of the Commission’s regulations prohibits any person located in the United States from trading

in foreign futures or foreign options unless such transactions are conducted through a registered futures

commission merchant or a person exempt from registration as a futures commission merchant. See

Commission regulation § 30.4, 17 CFR § 30.4.

23 In 2015, a staff no-action position provided similar relief for introducing broker and commodity trading

advisor registration in connection with swaps activities with certain of the IFIs. See CFTC Staff Letter 15-

No-Action Position for Non-U.S. Persons Engaging in Swaps with IFIs

Page 5

2.

As part of the Entities Definitions Rulemaking the Commission indicated that special

considerations, including the international status of certain IFIs, warrant an exclusion for

certain IFIs from registration as SDs or MSPs.24

3.

In recognition of the important public policy implications related to the application of the

swap clearing requirement and exceptions from that requirement, the Commission deter-

mined that certain IFIs should not be subject to required clearing.25

4.

Based on similar policy considerations, under the Cross-Border Guidance, the Commis-

sion would generally not apply transaction-level rules to swap transactions between non-

U.S. SDs and certain IFIs, effectively treating certain IFIs as Non-U.S. persons for pur-

poses of the application of transaction-level rules.26

5

er-

mined that certain IFIs should not be subject to required clearing.25

4.

Based on similar policy considerations, under the Cross-Border Guidance, the Commis-

sion would generally not apply transaction-level rules to swap transactions between non-

U.S. SDs and certain IFIs, effectively treating certain IFIs as Non-U.S. persons for pur-

poses of the application of transaction-level rules.26

5.

Finally, for similar reasons, the Commission does not require SDs and MSPs to comply

with the Commission’s uncleared swap margin requirements when transacting with cer-

tain IFIs.27

For the same reasons that supported the Commission determinations summarized above, the Re-

questor believes that its swaps activity with IFI counterparties should not be included when de-

termining whether it is deemed to be an SD or MSP, notwithstanding the fact that the principal

place of business or jurisdiction of incorporation of an IFI may be in the United States, or the

fact that an IFI may be or become guaranteed by a U.S. person.

III.

DSIO No-Action Position

Based on the facts presented and representations made by the Requestor, and consistent with cer-

tain regulatory exceptions provided by the Commission and Commission staff to the IFIs in simi-

lar contexts, DSIO believes that no-action relief is warranted. Accordingly, DSIO will not rec-

ommend that the Commission take an enforcement action against a Non-U.S. person that is nei-

ther a guaranteed affiliate nor conduit affiliate of a U.S. person28 if it does not include one or

more swaps entered with IFI counterparties in determining whether it is (i) deemed to be an SD

37, available on the Commission’s website at:

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/15-37.pdf.

24 See Entity Definitions Rulemaking, 77 FR at 30692-93

in determining whether it is (i) deemed to be an SD

37, available on the Commission’s website at:

https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/15-37.pdf.

24 See Entity Definitions Rulemaking, 77 FR at 30692-93.

25 See End-User Exception to the Clearing Requirement for Swaps, 77 FR 42560, 42561-62 (July 19,

2012) (“End-User Exception”).

26 See Cross-Border Guidance, 78 FR at 45353 n. 531, 45360 n. 595. The Commission would also treat IFIs

as Non-U.S. persons for transactions with unregistered non-U.S. entities. See id. at 45361 n. 605.

27 Certain IFIs are excluded from the definition of “financial end user” under Commission regulation

23.151, 17 CFR § 23.151. See Margin Requirements for Uncleared Swaps for Swap Dealers and Major

Swap Participants, 81 FR 636, 642-43 (Jan. 6, 2016).

28 Although requested by ABN AMRO Bank N.V., the no-action position provided by this letter is available

to all Non-U.S. persons that are neither guaranteed affiliates nor conduit affiliates of a U.S. person.

No-Action Position for Non-U.S. Persons Engaging in Swaps with IFIs

Page 6

pursuant to the criteria set forth in the Commission’s definition of “swap dealer;”29 or (ii) an

MSP pursuant to the criteria set forth in the Commission’s definition of “major swap partici-

pant.”30

For the purposes of this letter, IFIs are those international financial institutions referenced in the

Commission’s Cross-Border Guidance,31 with the addition of the North American Development

Bank (“NADB”), to the extent a Non-U.S. person that is neither a guaranteed nor conduit affili-

ate would be required to include swaps with such IFI for purposes of determining whether it is

required to register as an SD or MSP. The international financial institutions referenced in the

Cross-Border Guidance, with the addition of NADB are:

31 with the addition of the North American Development

Bank (“NADB”), to the extent a Non-U.S. person that is neither a guaranteed nor conduit affili-

ate would be required to include swaps with such IFI for purposes of determining whether it is

required to register as an SD or MSP. The international financial institutions referenced in the

Cross-Border Guidance, with the addition of NADB are:

(1)

The International Monetary Fund,

(2)

International Bank for Reconstruction and Development,

(3)

International Development Association,

(4)

International Finance Corporation,

(5)

Multilateral Investment Guarantee Agency,

(6)

European Bank for Reconstruction and Development,

(7)

African Development Bank,

(8)

African Development Fund,

(9)

Asian Development Bank,

(10)

Inter-American Development Bank,

(11)

Bank for Economic Cooperation and Development in the Middle East and North Africa,

(12)

Inter-American Investment Corporation,

(13)

Council of Europe Development Bank,

(14)

Nordic Investment Bank,

(15)

Caribbean Development Bank,

(16)

European Investment Bank,

(17)

European Investment Fund; and

(18)

NADB.32

This letter, and the positions taken herein, represent the views of DSIO only, and do not neces-

sarily represent the positions or views of the Commission or of any other office or division of the

29 See subparagraph (4) of the definition of “swap dealer” in 17 CFR § 1.3. See also Entities Definitions

Rulemaking, 77 FR at 30626-35 (May 23, 2012).

30 See the definition of “major swap participant” in 17 CFR § 1.3.

31 See Cross-Border Guidance, 78 FR at 45353 n. 531 (citing the institutions listed in the Entities Defini-

tions Rulemaking, 77 FR at 30692 n. 1180), 45360 n. 595.

32 NADB has been added to this list because it is located in the United States and Commission staff has

found that it has a similar status to that of the other IFIs listed above

efinition of “major swap participant” in 17 CFR § 1.3.

31 See Cross-Border Guidance, 78 FR at 45353 n. 531 (citing the institutions listed in the Entities Defini-

tions Rulemaking, 77 FR at 30692 n. 1180), 45360 n. 595.

32 NADB has been added to this list because it is located in the United States and Commission staff has

found that it has a similar status to that of the other IFIs listed above. See CFTC Staff Letter 17-59 (provid-

ing no-action relief to NADB from the swap clearing requirement of section 2(h)(1) of the CEA), available

on the Commission’s website at:

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

No-Action Position for Non-U.S. Persons Engaging in Swaps with IFIs

Page 7

Commission. The relief issued by this letter does not excuse persons relying on it from compli-

ance with any other applicable requirements contained in the CEA or in Commission regulations.

Further, this letter, and the positions taken herein, are based upon the representations made to

DSIO. Any different, changed, or omitted material facts or circumstances might render this no-

action position void.

Questions concerning this letter may be directed to me at (202) 418-5213; or Frank Fisanich,

Chief Counsel, at (202) 418-5949.

Very truly yours,

Matthew B. Kulkin

Director

Division of Swap Dealer and Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

Jamila A. Piracci, OTC Derivatives

National Futures Association, New York