CFTC final cross-border rule replaces cross-border guidance

On July 23, 2020, the U.S. Commodity Futures Trading Commission (the CFTC) voted to approve final rules (the Final Rules) regarding the cross-border application of various requirements under the U.S. Commodity Exchange Act (the CEA) applicable to swap dealers (SDs) and major swap participants (MSPs; SDs and MSPs collectively being Swap Entities). The Final Rules supersede the CFTC’s Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations published on July 26, 2013 (the Final Guidance). While the Final Guidance merely reflected the “general policy” of the CFTC in interpreting the cross-border application of the swap provisions of the CEA, [1] the Final Rules have the force of a binding CFTC rule. Accordingly, the Final Rules should provide greater certainty to market participants than the Final Guidance regarding the cross-border application of the swap provisions of the CEA and related CFTC rules and regulations. Below is a summary of the Final Rules with references to changes made from the Final Guidance.

1. “U.S. person” definition The Final Rules include a definition of “U.S. person” that replaces the corresponding definition in the Final Guidance. The definition in the Final Rules is narrower in scope than the Final Guidance definition such that no person or entity that is not a U.S. person under the Final Guidance will be a U.S. person under the Final Rules. The key changes from the Final Guidance are as follows:
   • Collective investment vehicles owned by U.S. persons were included as “U.S. persons” in the Final Guidance but not in the Final Rules.
   • The “unlimited U.S. responsibility” prong in the Final Guidance has been eliminated in the Final Rules.Under the Final Guidance, the CFTC indicated that it would consider a majority-owned affiliate to be a U.S. person “where one or more U.S. owners has unlimited responsibility for losses or nonperformance by its majority-owned affiliate.” [2] In its discussion of the Final Rules, the CFTC indicated that while such persons no longer qualify as U.S. persons under the Final Rules, explicit financial support is considered a guarantee.Accordingly, swaps entered into by such a majority-owned affiliate would be considered to be guaranteed by a U.S. person for purposes of the Final Rules.The “unlimited U.S. responsibility” prong also is present in the CFTC’s final cross-border margin rule [3] and that application is unchanged by the Final Rules.
   • Commodity pools, investment funds and other collective investment vehicles majority owned by U.S. persons were included as “U.S. persons” in the Final Guidance but not in the Final Rules.
   • The definition of U.S. person in the Final Guidance is non-exhaustive.In the Final Guidance, the CFTC indicated that it “will interpret the term ‘U.S. person’ generally to include, but not be limited to” an enumerated list. [4] The Final Rules contain a definitive list of individuals and entities that can be considered U.S. persons, which provides greater certainty and eliminates any “catch-all” considerations.

Market participants currently are able to rely on representations from their counterparty regarding their status as a U.S. person. These representations may be made in a bilateral agreement or by delivery of the Cross-Border Representation Letter published by the International Swaps and Derivatives Association, Inc. (ISDA) on August 19, 2013 (the “Cross-Border Representation Letter”). Notwithstanding the change to the definition of “U.S. person,” the Final Rules permit reliance on Final Guidance U.S. person representations until December 31, 2027 if such representations were obtained prior to effectiveness of Final Rule. [5] Accordingly, to the extent that market participants have obtained such representations from counterparties through the Cross-Border Representation Letter or otherwise, those market participants do not need to refresh those representations to reflect the requirements of the Final Rules until December 31, 2027.

three-year rolling average GAAP equity capital of at least 5 percent of that of the ultimate U.S. parent as of the end of the most recent fiscal year

“Subsidiary” is defined in Final Rules as “an affiliate of a person controlled by such person directly or indirectly or through one or more intermediaries.” [10]

Since SRS is a new kind of market participant, representations and other disclosures regarding SRS status and type do not appear in any ISDA protocols or standard representation letters published as of the date of this alert. Swap participants likely will be requested to make these representations and/or disclosures as a condition to future swap trading following effectiveness of the Final Rule.

Exchange traded exception (for group B and C).[23] This exception applies with respect to certain anonymously cleared, exchange-traded, and cleared foreign-based swaps entered into by a non-U.S. Swap Entity or a foreign branch of a U.S. Swap Entity. [24]

[1] Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 Fed. Reg. 45292, 45297 (July 23, 2013).