Transcript Norton Rose presentation

Seventh Annual MIG seminar:
An Overview of CFTC Cross-Border Swap Regulation
Michael Loesch
Terry Arbit
Fulbright & Jaworski LLP
801 Pennsylvania Avenue, NW, Washington, D.C. 20004-2623
5 March 2014
Order of presentation
1. Status Report on Dodd-Frank Implementation
2. CFTC Cross-Border Interpretive Guidance Generally
3. Swap Dealer and Major Swap Participant Registration
4. Entity-Level, Transaction-Level, and Non-Registrant
Requirements; Substituted Compliance
5. Recent Cross-Border Developments
Status report on Dodd-Frank implementation
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Where do US swap reforms stand today?
Status of Dodd-Frank Swap Rulemakings
– Former CFTC Chairman Gary Gensler, in the last public speech of his
tenure: “[T]he initial major compliance dates are behind us.”
– Just a few key rules still to be finalized by CFTC:
1.
Capital requirements for swap dealers and MSPs;
2.
Margin requirements for uncleared swaps;
3.
Speculative position limits and aggregation requirements
– Security-based swaps: No final SEC rules yet, other than entity and
product definitional rulemakings
Time of Transition at CFTC
– Acting Chairman; vacant and soon-to-be-vacant Commissioner
positions; new Director of Market Oversight from Enforcement
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What are the “big issues” discussed today?
1. Cross-Border Application of Swap Regulations (see below)
2. Swap Execution Facilities
–
Trade execution mandates for certain interest rate and credit
default swaps going into effect February 15 through April 9, 2014
3. Re-Proposed Position Limits and Aggregation Rules
–
Comment period recently closed
4. Volcker Rule
–
Federal Reserve Board granted 1-year extension of conformance
period to July 21, 2015 (except for reporting requirements)
5. Banks’ Commodities Activities under Increasing Scrutiny
– US Senate hearings
– Federal Reserve Board’s advance notice of proposed rulemaking
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What lies ahead?
• Likely focus on details of implementation
1.
Swap execution facilities
2.
Additional clearing and trade execution mandates
3.
Clarifying forwards with embedded optionality vs. trade options
• Cross-border guidance
1. Substituted compliance
2.
Results of pending litigation?
3.
Exemptions for non-US trading platforms or clearinghouses?
• Possible pivot to futures: Futures block trades and “CP9”?
• Aggressive enforcement
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CFTC cross-border
interpretive guidance generally
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CFTC’s cross-border interpretive guidance
Issues Addressed in Guidance:
1. Interpretation of “US Person”
2. Foreign Branches
3. Guaranteed and Conduit Affiliates of US Persons
4. Swap Dealer and Major Swap Participant Registration
Calculations
5. General Framework for Substituted Compliance
6. Entity-Level and Transaction-Level Requirements
7. Non-Registrant Requirements
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Interpretation of “US Person” (part 1)
“US Person” Includes (But is Not Limited To):
1.
Natural person who is a resident of US
2.
Estate of decedent resident of US at time of death
3.
Corporation, partnership, business, etc., organized or incorporated in US
or having its principal place of business in US
4.
Fund organized or incorporated in US
5.
Pension plan for entity in #3 or #4 (unless primarily for foreign
employees)
6.
Trust governed by laws in US, if a court in US is able to exercise primary
supervision over its administration; and
7.
Individual or joint account (discretionary or not) where beneficial owner
(or one beneficial owner if joint account) is a US Person
[CFTC previously had indicated that these would be “US Persons”]
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Interpretation of “US Person” (part 2)
3 New Categories of “US Person” Added in Final Guidance:
1. Fund having its principal place of business in the US
2. Commodity pool, pooled account, investment fund, or other
collective investment vehicle that is not organized or incorporated
in US and does not have its principal place of business in US, but
that is majority-owned by US Persons (exception for publiclyoffered funds)
3. Other legal entities that are directly or indirectly majority-owned by
one or more US Persons and in which such US Person(s) bears
unlimited responsibility for the obligations and liabilities of the
legal entity
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Interpretation of “US Person” (part 3)
What is a Foreign Branch?
– A foreign branch of a US bank that—
1.
Is subject to Federal Reserve Board Regulation K or FDIC International
Banking Regulation;
2.
Maintains accounts independently of home office, with profit/loss
determined as a separate item for the branch;
3.
Is subject to regulation in banking or financing in the jurisdiction where it
is located; and
4.
Other facts and circumstances may be considered
– A foreign branch of a US Person is a US Person
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Interpretation of “US Person” (part 4)
When is a Swap “With” a Foreign Branch of a US Bank?
– A swap is considered to be “with” a foreign branch of a US bank (as
opposed to being with the principal US bank itself) when—
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1.
The non-clerical employees negotiating and agreeing to the swap (or, if
swap is executed electronically, managing the execution of the swap) are
located in the foreign branch;
2.
Foreign branch is the office through which the US bank makes and
receives payments and deliveries under the swap on behalf of the branch
pursuant to a master netting or similar trading agreement, and swap
documentation specifies the foreign branch as the office for the US bank;
3.
Swap is entered into by the foreign branch in its normal course of
business;
4.
Swap is treated as a swap of the foreign branch for tax purposes;
5.
Swap is reflected in the local accounts of the foreign branch; and
6.
Note: Trade confirmation generally is not relevant
Guaranteed affiliates described
Guaranteed Affiliate of a US Person:
– Refers to a non-US Person whose swap obligations are guaranteed
by a US Person or a “Conduit Affiliate” (described on next slide)
1.
“Guarantee” generally equated with recourse to the US Person in
connection with the swap position of the non-US Person
– Includes limited or partial recourse guarantees
2.
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“Guarantee” will be broadly construed: Any formal arrangement that, in
view of all facts and circumstances, supports the non-US Person’s
ability to pay or perform its swap obligations – i.e., any explicit financial
support arrangement
Conduit affiliates described
Conduit Affiliate of a US Person:
– Relevant factors in determining if a non-US Person is a Conduit
Affiliate of a US Person (informally referred to as a “treasury
conduit”) include—
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1.
Non-US Person is a majority-owned affiliate of a US Person;
2.
Non-US Person is controlling, controlled by, or under common control
with the US Person;
3.
Financial results of the non-US Person are included in the consolidated
financial statements of the US Person; and
4.
The non-US Person, in the regular course of its business, enters into
swaps with non-US third parties to hedge risks faced by (or take
positions on behalf of) its US affiliate(s), and enters into arrangements
with its US affiliate(s) to transfer the risks/benefits of such third-party
swaps to its US affiliates
Swap dealer and
major swap participant registration
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Swap dealer registration calculations (part 1)
In Calculating Whether $8B swap dealer (SD) De Minimis
Test is Met (i.e., What Swaps are “Countable”?):
– “Countable” swaps for a US Person: All “dealing” swaps (i.e., with
both US and non-US counterparties)
– “Countable” swaps for a non-US Person that is a Guaranteed or
Conduit Affiliate: Same – all “dealing” swaps (i.e., with both US and
non-US counterparties)
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Swap dealer registration calculations (part 2)
In Calculating Whether $8B SD De Minimis Test is Met:
– “Countable” swaps for a non-US Person that is NOT a Guaranteed
or Conduit Affiliate:
1.
“Dealing” swaps with US Persons and most Guaranteed Affiliates;
2.
But not “dealing” swaps—
– With a foreign branch of a US SD;
– With a Conduit Affiliate;
– With a Guaranteed Affiliate that is—
– An SD;
– Not an SD and below de minimis, but is affiliated with an SD; or
– Guaranteed by a non-financial entity;
– With another non-US Person that is not Guaranteed/Conduit Affiliate;
– Entered anonymously on a designated contract market (DCM), swap
execution facility (SEF), or foreign board of trade (FBOT) and cleared
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Swap dealer registration calculations (part 3)
Aggregation When Calculating
Whether $8B SD De Minimis Test is Met:
– Aggregation Rule: All persons (i.e., both US and non-US
Persons)—
– Aggregate all “countable” swaps of all US and non-US affiliates under
common control;
– Do not aggregate “dealing” swaps of any affiliate that is an SD
– Aggregation Explanation:
– Both US and non-US Persons in an affiliated group can engage in
“dealing” activity up to de minimis threshold;
– When affiliated group hits de minimis in the aggregate, one or more
affiliate(s) (inside or outside US) must register as an SD so aggregate
“dealing” activity of unregistered affiliates stays below de minimis
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Major swap participant registration (part 1)
In Calculating Whether Major Swap Participant (MSP)
Thresholds are Met:
– Note: Where a swap obligation is guaranteed, it is generally
attributed to the guarantor in MSP registration calculations
– US Person counts all swap positions (i.e., with both US and non-US
counterparties)
– Non-US Person that is a Guaranteed or Conduit Affiliate counts—
– All swap positions; and
– All “Guaranteed Swaps” (i.e., a swap between another person – either
US or non-US – and a US Person or Guaranteed Affiliate, if the potential
non-US MSP guarantees the obligations of the other person)
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Major swap participant registration (part 2)
In Calculating Whether MSP Thresholds are Met:
– Non-US Person that is NOT a Guaranteed or Conduit Affiliate:
1.
Counts—
– Swaps with US Persons;
– Swaps with Guaranteed Affiliates; and
– Guaranteed Swaps
2.
Does not count swaps with a foreign branch of a US SD or a
Guaranteed Affiliate that is an SD if the non-US Person is—
– Not a financial entity; or
– A financial entity and the swap is cleared or the swap documentation
requires the foreign branch or Guaranteed Affiliate to collect daily
variation margin, with no threshold, on its swaps with the non-US
Person
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Entity-Level, Transaction-Level, and
Non-Registrant Requirements;
Substituted Compliance
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Substituted compliance – general framework
What is Substituted Compliance?
– CFTC may determine that certain laws and regulations of a foreign
jurisdiction are comparable to, and as comprehensive as, Dodd-Frank and
CFTC regulations
– There are 14 categories of requirements that can be evaluated
– If CFTC issues a favorable “Substituted Compliance Determination” for a
category, then certain market participants (identified in the Final
Guidance) may comply with their home country laws and regulations in
lieu of compliance with Dodd-Frank and CFTC regulations
– If there is no Substituted Compliance Determination for a jurisdiction or a
category of requirements, then compliance with Dodd-Frank and CFTC
regulations is required
– 6 jurisdictions have submitted applications for substituted compliance:
Australia, Canada, European Union (EU), Hong Kong, Japan, and
Switzerland (the “6 Jurisdictions”)
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Entity-level requirements described
Entity-Level Requirements (For Swaps Involving SD/MSP):
– First Category—
1. Capital adequacy (not in effect yet)
2. Chief compliance officer for SDs and MSPs
3. Risk management for SDs and MSPs
4. Swap data recordkeeping for all swap parties – including requirement to
obtain a Legal Entity Identifier (LEI) number
– Second Category—
1. Swap data repository (SDR) reporting (including historical swaps)
2. Recordkeeping for SDs and MSPs relating to complaints and sales
materials
3. Large trader reporting for physical commodities
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Entity-level requirements applied
When Do Entity-Level Requirements Apply?
1. US SDs and MSPs:
– Both categories apply to all swaps (i.e., with both US and non-US
counterparties, including Guaranteed and Conduit Affiliates)
– No substituted compliance available
– Same result for foreign branches of US banks that are SDs or MSPs
2. Non-US SDs and MSPs:
– First Category: Applies to all swaps
– Substituted compliance available
– Second Category (primarily SDR reporting): Applies to all swaps
– Substituted compliance available only where counterparty is a non-US
Person that is NOT a Guaranteed or Conduit Affiliate
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Transaction-level requirements described
Transaction-Level Requirements (For Swaps Involving SD/
MSP):
– Category A—
1. Clearing mandate and swap processing
2. Margin and segregation for uncleared swaps (not in effect yet)
3. Trade execution mandate
4. Swap trading relationship documentation for SDs and MSPs
5. Portfolio reconciliation and compression for SDs and MSPs
6. Real-time public reporting
7. Trade confirmation for SDs and MSPs
8. Daily trading records for SDs and MSPs
– Category B—
1. External business conduct standards with counterparties for SDs and
MSPs (i.e., sales practice rules)
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Transaction-level requirements applied (part 1)
When Does Category A of Transaction-Level Requirements Apply?
1. US SDs and MSPs
– Applies to all swaps (i.e., with both US and non-US counterparties,
including Guaranteed and Conduit Affiliates)
– No substituted compliance available, except:
– Substituted compliance available to foreign branch of US bank that is
an SD/MSP if counterparty is: i) a non-US Person (including
Guaranteed and Conduit Affiliates); or ii) another foreign branch
2. 5% Exemption: Foreign branch of US SD/MSP outside 6 Jurisdictions that
have applied for substituted compliance may comply with local requirements
for swaps with non-US Persons (not Guaranteed or Conduit Affiliates) if—
– Aggregate notional value of swaps of all the US SD/MSP’s foreign
branches outside the 6 Jurisdictions does not exceed 5% of aggregate
notional value of all swaps of the US SD/MSP; and
– SD/MSP keeps records to support the 5% calculation and identify risks
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Transaction-level requirements applied (part 2)
When Does Category A of Transaction-Level Requirements Apply?
3. Non-US SDs and MSPs
– Applies to swaps with US Persons
– Substituted compliance generally not available unless—
– Counterparty is a foreign branch of a US bank; or
– CFTC finds that foreign law is “essentially identical” to US law
(Substituted Compliance Determination not needed)
– Applies to swaps with Guaranteed and Conduit Affiliates
– Substituted compliance is available
– Does not apply to swaps with non-US Persons that are not Guaranteed or
Conduit Affiliates
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Transaction-level requirements applied (part 3)
When Does Category B of Transaction-Level Requirements Apply?
1.
US SDs and MSPs
– Applies to all swaps (i.e., with both US and non-US counterparties,
including Guaranteed and Conduit Affiliates)
– No substituted compliance available
– For foreign branch of US bank that is an SD or MSP, applies only to
swaps with US Persons (other than foreign branches)
– No substituted compliance available
– Does not apply to swaps with other foreign branches or non-US
Persons (even if non-US Person is a Guaranteed or Conduit Affiliate)
2. Non-US SDs and MSPs
– Applies only to swaps with US Persons (other than foreign branches)
– No substituted compliance available
– Does not apply to swaps with foreign branches or non-US Persons (even
if non-US Person is a Guaranteed or Conduit Affiliate)
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Non-registrant requirements described
Non-Registrant Requirements (Swaps with No SD/MSP):
– Generally: Clearing, trade execution, reporting, and recordkeeping:
1. Clearing mandate
2. Trade execution mandate
3. Real-time public reporting
4. Large-trader reporting for physical commodities
5. SDR reporting
6. Swap data recordkeeping (including obtaining LEI number)
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Non-registrant requirements applied
When Do Non-Registrant Requirements Apply?
1. One or Both Parties is a US Person
– Non-Registrant Requirements apply
– Substituted compliance generally not available
2. Both Parties are Non-US Persons and Both are Guaranteed or
Conduit Affiliates
– Non-Registrant Requirements apply
– Substituted compliance generally is available
3. Both Parties are Non-US Persons and Neither, or One, is a
Guaranteed or Conduit Affiliate
– Non-Registrant Requirements generally do not apply
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Recent cross-border developments
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CFTC substituted compliance determinations
Has CFTC Issued Substituted Compliance Determinations?
– December 20, 2013: CFTC issued some Substituted Compliance
Determinations for the 6 Jurisdictions
1. This Means: Non-US SDs in the 6 Jurisdictions may comply with their
home country laws and regulations in lieu of compliance with DoddFrank and CFTC regulations, in certain categories of requirements
2. Applies mostly to Entity-Level Requirements – plus a few TransactionLevel Requirements – relating to Business Conduct Standards for SDs:
– E.g., chief compliance officer, risk management program, daily
trading records, swap trading relationship documentation, trade
confirmations, portfolio reconciliation and compression
– No Substituted Compliance Determinations, even for 6 Jurisdictions:
1. For US SDs or their foreign branches
2. For clearing or trade execution mandates, SDR reporting, or
recordkeeping (including LEI) requirements
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CFTC staff SDR reporting no-action relief
Although CFTC has not issued Substituted Compliance
Determinations for SDR reporting requirement:
– December 20, 2013: CFTC staff issued no-action relief from SDR
reporting for non-US SDs in 5 of the 6 Jurisdictions (not Hong Kong)
with respect to their swaps with non-US Person counterparties
– No-action relief for these non-US SDs lasts until:
1. March 3, 2014 for: New swaps entered into with non-US Persons that
are Guaranteed or Conduit Affiliates of US Persons;
2. April 2, 2014 for: Historical swaps entered into with non-US Persons
that are Guaranteed or Conduit Affiliates of US Persons; and
3. December 1, 2014 for: New and historical swaps entered into with nonUS Persons that are not Guaranteed or Conduit Affiliates of US Persons
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Non-US swap trading platforms
1. October 2, 2013: Multilateral swap trading platforms located
outside the US that facilitate the execution of swaps by US Persons
must register with CFTC as Swap Execution Facilities (SEFs)
– Requirement applies even for swaps that are not subject to a trade
execution mandate
2. November 15, 2013: CFTC staff guidance – SEF registration
requirement also applies to multilateral swap trading platforms
outside the US that allow persons located in the US (personnel and
agents of non-US Persons) to trade/execute swaps on the platform
3. February 12, 2014: CFTC staff no-action relief from SEF
registration requirement:
– For regulated multilateral trading facilities (MTFs) in the EU;
– Only if MTF’s eligibility requirements, pre- and post-trade price
transparency, non-discriminatory market access, reporting of swaps to
SDRs, clearing, and oversight are equivalent to those of SEFs
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Controversial CFTC staff advisory → litigation
1. November 14, 2013: CFTC staff Advisory stating that:
– Swaps between non-US SDs and non-US Persons;
– That are booked outside the US;
– Still are subject to US Transaction-Level Requirements, if —
– The non-US SD regularly uses personnel or agents located in the US
to arrange, negotiate, or execute swaps with non-US Persons
2. December 4, 2013: Advisory triggered a lawsuit by ISDA, SIFMA,
and IIB challenging legality of entire Cross-Border Guidance
– Schedule for written briefs on dispositive motions lasts through April 2014
3. November 26, 2013 and January 3, 2014: CFTC backtracked a bit-– CFTC staff issued no-action relief to non-US SDs, giving them until
September 15, 2014, to comply with Transaction-Level Requirements in
circumstances described in the Advisory
– CFTC issued a Request for Comment on issues raised by the Advisory
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Contacts
Michael Loesch, Partner
Fulbright & Jaworski LLP
801 Pennsylvania Avenue, NW, Washington, D.C. 20004-2623
Tel +1 202 662 4552 | Fax +1 202 662 4643
[email protected]
Terry Arbit, Partner
Fulbright & Jaworski LLP
801 Pennsylvania Avenue, NW, Washington, D.C. 20004-2623
Tel +1 202 662 0223 | Fax +1 202 662 4643
[email protected]
* Terry is admitted in Illinois and is practicing pursuant to the supervision of principals of the firm while his
application for admission to the District of Columbia Bar is pending.
Jeff Sherman, Senior Counsel
Fulbright & Jaworski LLP
801 Pennsylvania Avenue, NW, Washington, D.C. 20004-2623
Tel +1 202 662 4573 | Fax +1 202 662 4643
[email protected]
Salman Banaei, Senior Counsel
Fulbright & Jaworski LLP
801 Pennsylvania Avenue, NW, Washington, D.C. 20004-2623
Tel +1 202 662 0287| Fax +1 202 662 4643
[email protected]
* Salman is admitted in Texas and is practicing pursuant to the supervision of principals of the firm while
application
for admission to the District of Columbia Bar is pending.
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