CFTC rule seeks to clarify cross-border swap issues

The Commodity Futures Trading Commission voted unanimously to adopt a proposal that will try to clarify issues relating to the cross-border application of its swap rules.

“This is just the latest in a number of steps we have taken to address cross-border issues in swaps rules,” CFTC Chairman Timothy Massadsaid in a statement following the Oct. 7 vote. “We have harmonized clearinghouse regulation through our accord with the European Commission — as well as through our work to address recovery and resolution internationally.”

Additionally, Massad said the CFTC is working to unify global data reporting standards and exploring the possibility of doing the same for trading requirements.

Clearly defined.

The proposed rule defines a “U.S. person” and a “Foreign Consolidated Subsidiary” (FCS) so that the two are consistent with definitions in the CFTC’s cross-border margin rules.

Under the new rule, a “U.S. person” is defined “to include those individuals or entities whose activities have a significant nexus to the U.S. market by virtue of their organization or domicile in the United States.”

The “FCS” definition identifies “a non-U.S. person that is consolidated for accounting purposes with an ultimate parent entity that is a U.S. Person.”

Both definitions will apply to future cross-border rulemakings.

ANE Transactions.

The rule determines the degree to which two additional measures within the rule — registration thresholds and external business conduct standards — apply to non-U.S. dealers based on the type of tasks they use U.S. personnel for.

The transactions, known as ANE transactions, refer to those which use U.S. personnel to arrange, negotiate, or execute deals. The commission ruled only work associated with sales and trading, not clerical or ministerial tasks, fall under the ANE category.

Cross-border registration.

The rule sets a cross-border standard for which swap transactions must be accounted for when determining whether an entity must register with the CFTC.

Under the rule, a U.S. person, an FCS, and a non-U.S. person guaranteed by a U.S. person must count all swap transactions. A non-U.S. person that’s neither an FCS nor guaranteed by a U.S. person must include all swap transactions, unless the swap is executed anonymously on a registered platform and cleared.

Commissioner Sharon Bowen said ensuring that all dealers associated with U.S. markets count all their transactions is critical to swap market stability.

“It is important that we subject non-U.S. entities guaranteed by U.S. persons, and FCS to this standard, because their swap risks have a material effect on the related U.S. entity, and therefore, poses risks to our U.S. financial system,” Bowen said.

In addition, the CFTC press release stated the rule, “provides a similar counting framework for major swap participant registration thresholds.”

Business standards.

The rule requires U.S. dealers to comply with external business conduct (EBC) standards, while non-U.S. dealers must comply with EBC standards only for deals with U.S. counterparties.

“For all other transactions, non-U.S. dealers would not be subject to EBC standards, unless they use personnel located in the United States to arrange, negotiate, or execute such transactions,” Massad stated. “In that case, they would be required to comply with those EBC standards prohibiting fraud and other abusive conduct.”

No-action.

The commission said it expects to address the application of more swap requirements to ANE standards in the near future.

Commissioner J. Christopher Giancarlo said he wants the CFTC to extend a no-action letter until those areas are addressed.

“This will provide the marketplace with certainty that all the swap requirements not addressed in today’s rulemaking will not apply to the ANE Transactions until the Commission takes further action,” he said.

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