Interpretive Guidance and Policy Statement

Vol. 78 Friday,

No. 144 July 26, 2013

Part II

Commodity Futures Trading Commission

17 CFR Chapter I

Interpretive Guidance and Policy Statement Regarding Compliance With

Certain Swap Regulations; Rule

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Chapter I

RIN 3038–AD85

Interpretive Guidance and Policy

Statement Regarding Compliance With

Certain Swap Regulations

AGENCY

: Commodity Futures Trading

Commission.

ACTION

: Interpretive Guidance and

Policy Statement.

SUMMARY

: On July 12, 2012, the

Commodity Futures Trading

Commission (‘‘Commission’’ or

‘‘CFTC’’) published for public comment

its proposed interpretive guidance and

policy statement (‘‘Proposed Guidance’’)

regarding the cross-border application of

the swaps provisions of the Commodity

Exchange Act (‘‘CEA’’), as added by

Title VII of the Dodd-Frank Wall Street

Reform and Consumer Protection Act

(‘‘Dodd-Frank Act’’ or ‘‘Dodd-Frank’’).

On December 21, 2012, the Commission

also proposed further guidance on

certain aspects of the Proposed

Guidance (‘‘Further Proposed

Guidance’’).

The Commission has determined to

finalize the Proposed Guidance with

certain modifications and clarifications

to address public comments. The

Commission’s Interpretive Guidance

and Policy Statement (‘‘Guidance’’)

addresses the scope of the term ‘‘U.S.

person,’’ the general framework for

swap dealer and major swap participant

registration determinations (including

the aggregation requirement applicable

to the de minimis calculation with

respect to swap dealers), the treatment

of swaps involving certain foreign

branches of U.S. banks, the treatment of

swaps involving a non-U.S.

counterparty guaranteed by a U.S.

person or ‘‘affiliate conduit,’’ and the

categorization of the Dodd-Frank swaps

provisions as ‘‘Entity-Level

Requirements’’ or ‘‘Transaction-Level

Requirements.’’

DATES

: Effective Date: This Guidance

will become effective July 26, 2013.

FOR FURTHER INFORMATION CONTACT

: Gary

Barnett, Director, Division of Swap

Dealer and Intermediary Oversight,

(202) 418–5977, [email protected];

Sarah E. Josephson, Director, Office of

International Affairs, (202) 418–5684,

[email protected]; Mark Fajfar,

Assistant General Counsel, Office of

General Counsel, (202) 418–6636,

[email protected]; Laura B. Badian,

Counsel, Office of General Counsel,

(202) 418–5969, [email protected];

Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street NW., Washington, DC

20581.

SUPPLEMENTARY INFORMATION

Table of Contents

I. Introduction

A. The Dodd-Frank Wall Street Reform and

Consumer Protection Act

B. The Proposed Guidance and Further

Proposed Guidance

II. Scope of This Guidance

III. Interpretation of Section 2(i)

A. Comments

B. Statutory Analysis

C. Principles of International Comity

IV. Guidance

A. Interpretation of the Term ‘‘U.S. Person’’

1. Proposed Interpretation

2. Comments

a. Phase-In Interpretation

b. Comments on Particular Prongs of the

Proposed Interpretation of the Term

‘‘U.S. Person’’

c. Commenters’ Proposed Alternatives

d. Due Diligence

e. Non-U.S. Person That Is Affiliated,

Guaranteed, or Controlled by U.S. Person

f. Foreign Branch of U.S. Person

g. Regulation S

h. Other Clarifications

3. Commission Guidance

a. Due Diligence

b. Foreign Branch of U.S. Person

c. Regulation S

d. Other Clarifications

4. Summary

B. Registration

1. Proposed Guidance

2. Comments

3. Commission Guidance

a. Registration Thresholds for U.S. Persons

and Non-U.S. Persons, Including Those

Guaranteed by U.S. Persons

b. Aggregation

c. Exclusion of Certain Swaps by Non-U.S.

Persons From the Swap Dealer De

Minimis Threshold

d. Exclusion of Certain Swaps by Non-U.S.

Persons From the MSP Calculation

e. Exclusion of Certain Swaps Executed

Anonymously on a SEF, DCM, or Foreign

Board of Trade (‘‘FBOT’’) and Cleared

f. MSP-Parent Guarantees

4. Summary

C. Interpretation of the Term ‘‘Foreign

Branch;’’ When a Swap Should Be

Considered To Be With the Foreign

Branch of a U.S. Person That Is a Swap

Dealer or MSP

1. Interpretation of the Term ‘‘Foreign

Branch’’ and Treatment of Foreign

Branches

2. Comments

3. Commission Guidance

a. Scope of the Term ‘‘Foreign Branch’’

b. Commission Consideration of Whether a

Swap Is With a Foreign Branch of a U.S.

Bank

D. Description of the Entity-Level and

Transaction-Level Requirements

1. Description of the Entity-Level

Requirements

a. First Category of Entity-Level

Requirements

i. Capital Adequacy

ii. Chief Compliance Officer

iii. Risk Management

iv. Swap Data Recordkeeping (Except

Certain Aspects of Swap Data

Recordkeeping Relating to Complaints

and Sales Materials)

b. Second Category of Entity-Level

Requirements

i. SDR Reporting

ii. Swap Data Recordkeeping Relating to

Complaints and Marketing and Sales

Materials

iii. Physical Commodity Large Swaps

Trader Reporting (Large Trader

Reporting)

2. Description of the Transaction-Level

Requirements

a. Category A: Risk Mitigation and

Transparency

i. Required Clearing and Swap Processing

ii. Margin and Segregation Requirements

for Uncleared Swaps

iii. Trade Execution

iv. Swap Trading Relationship

Documentation

v. Portfolio Reconciliation and

Compression

vi. Real-Time Public Reporting

vii. Trade Confirmation

viii. Daily Trading Records

b. Category B: External Business Conduct

Standards

E. Categorization of Entity-Level and

Transaction-Level Requirements

1. Categorization Under the Proposed

Guidance

2. Comments

a. Reporting and Trade-Execution

Requirements

b. Swap Trading Relationship

Documentation, Portfolio Reconciliation

and Compression, Daily Trading Records

and External Business Conduct

Standards

c. Internal Conflicts of Interest

Requirement

d. Position Limits and Anti-Manipulation

Rules

3. Commission Guidance

a. Entity-Level Requirements

i. The First Category—Capital Adequacy,

Chief Compliance Officer, Risk

Management, and Swap Data

Recordkeeping (Except for Certain

Recordkeeping Requirements)

ii. The Second Category—SDR Reporting,

Certain Swap Data Recordkeeping

Requirements and Large Trader

Reporting

b. Transaction-Level Requirements

i. The Category A Transaction-Level

Requirements

ii. The Category B Transaction-Level

Requirements (External Business

Conduct Standards)

F. Substituted Compliance

1. Proposed Guidance

2. Comments

3. Overview of the Substituted Compliance

Regime

4. Process for Comparability

Determinations

5. Conflicts Arising Under Privacy and

Blocking Laws

6. Clearing

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Public Law 111–203, 124 Stat. 1376 (2010). The

text of the Dodd-Frank Act may be accessed at

http://www.cftc.gov/LawRegulation/OTCDERI

VATIVES/index.htm.

For purposes of this Guidance, the term ‘‘swap

dealer’’ means any swap dealer registered with the

Commission. Similarly, the term ‘‘MSP’’ means any

MSP registered with the Commission.

7 U.S.C. 2(i).

Id. Section 2(i) of the CEA states that the

provisions of the Act relating to swaps that were

enacted by the Wall Street Transparency and

Accountability Act of 2010 (including any rule

prescribed or regulation promulgated under that

Act), 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 this Act that was enacted by the Wall Street

Transparency and Accountability Act of 2010.

See, e.g., Congressional Oversight Panel, June

Oversight Report, The AIG Rescue, Its Impact on

Markets, and the Government’s Exit Strategy, (Jun.

10, 2010), available at http://www.gpo.gov/fdsys/

pkg/CPRT–111JPRT56698/pdf/CPRT–111JPRT5

6698.pdf (‘‘AIG Report’’); Office of the Special

Inspector General for the Troubled Asset Relief

Program, Factors Affecting Efforts to Limit

Payments to AIG Counterparties (Nov. 17, 2009),

available at http://www.sigtarp.gov/Audit%20

Reports/Factors_Affecting_Efforts_to_Limit_

Payments_to_AIG_Counterparties.pdf. AIGFP was a

Delaware corporation based in Connecticut that was

an active participant in the credit default swap

(‘‘CDS’’) market in the years leading up to the crisis.

See id. at 23. AIGFP’s CDS activities benefited from

credit support provided by another Delaware

corporation, American International Group, Inc.,

AIGFP’s highly-rated parent company. Although

both AIG and AIGFP were incorporated and

headquartered in the U.S., much of AIGFP’s CDS

business was conducted through its London office

and involved non-U.S. counterparties and credit

exposures. Id. at 18. See also Office of the Special

Inspector General for the Troubled Asset Relief

Program, Factors Affecting Efforts to Limit

Payments to AIG Counterparties, at 20 (Nov. 17,

2009) (listing AIGFP’s CDS counterparties,

including a variety of U.S. and foreign financial

institutions), available at: http://www.sigtarp.gov/

Audit%20Reports/Factors_Affecting_Efforts_to_

Limit_Payments_to_AIG_Counterparties.pdf.

a. Clearing Venues

b. Foreign End-Users

G. Application of the Entity-Level and

Transaction-Level Requirements To

Swap Dealers and MSPs

1. Comments

2. Commission Guidance

3. Application of the Entity-Level

Requirements To Swap Dealers and

MSPs the Commission’s policy on

a. To U.S. Swap Dealers and MSPs

b. To Non-U.S. Swap Dealers and MSPs

4. Application of the ‘‘Category A’’

Transaction-Level Requirements To

Swap Dealers and MSPs

a. Swaps With U.S. Swap Dealers and

MSPs

b. Swaps With Non-U.S. Swap Dealers and

Non-U.S. MSPs

c. Swaps With a Non-U.S. Person

Guaranteed by a U.S. Person

i. Proposed Guidance

ii. Comments

iii. Commission Guidance

d. Swaps With a Non-U.S. Person That Is

an Affiliate Conduit

i. Proposed Guidance

ii. Comments

iii. Commission Guidance

5. Application of the ‘‘Category B’’

Transaction-Level Requirements To

Swap Dealers and MSPs

a. Swaps With U.S. Swap Dealers and U.S.

MSPs

b. Swaps With Foreign Branches of a U.S.

Bank That Is a Swap Dealer or MSP

c. Swaps With Non-U.S. Swap Dealers and

Non-U.S. MSPs

H. Application of the CEA’s Swap

Provisions and Commission Regulations

to Market Participants That Are Not

Registered as a Swap Dealer or MSP

1. Swaps Between Non-Registrants Where

One or More of the Non-Registrants Is a

U.S. Person

2. Swaps between Non-Registrants That

Are Both Non-U.S. Persons

a. Large Trader Reporting

b. Swaps Where Each of the Counterparties

Is Either a Guaranteed or Conduit

Affiliate

c. Swaps Where Neither or Only One of the

Parties Is a Guaranteed or Conduit

Affiliate

V. Appendix A—The Entity-Level

Requirements

A. First Category of Entity-Level

Requirements

1. Capital Adequacy

2. Chief Compliance Officer

3. Risk Management

i. Swap Data Recordkeeping (Except

Certain Aspects of Swap Data

Recordkeeping Relating to Complaints

and Sales Materials)

B. Second Category of Entity-Level

Requirements

1. SDR Reporting

2. Swap Data Recordkeeping Relating to

Complaints and Marketing and Sales

Materials

3. Physical Commodity Large Swaps

Trader Reporting (Large Trader

Reporting)

VI. Appendix B—The Transaction-Level

Requirements

A. Category A: Risk Mitigation and

Transparency

1. Required Clearing and Swap Processing

2. Margin and Segregation Requirements

for Uncleared Swaps

3. Trade Execution

4. Swap Trading Relationship

Documentation

5. Portfolio Reconciliation and

Compression

6. Real-Time Public Reporting

7. Trade Confirmation

8. Daily Trading Records

B. Category B: External Business Conduct

Standards

VII. Appendix C—Application of the Entity-

Level Requirements to Swap Dealers and

MSPs*

VIII. Appendix D—Application of the

Category A Transaction-Level

Requirements to Swap Dealers and

MSPs*

IX. Appendix E—Application of the Category

B Transaction-Level Requirements to

Swap Dealers and MSPs*

X. Appendix F—Application of Certain

Entity-Level and Transaction-Level

Requirements to Non-Swap Dealer/Non-

MSP Market Participants*

I. Introduction

A. The Dodd-Frank Wall Street Reform

and Consumer Protection Act

On July 21, 2010, President Obama

signed the Dodd-Frank Act,

Title VII of

which amended the CEA to establish a

new regulatory framework for swaps.

The legislation was enacted to reduce

systemic risk (including risk to the U.S.

financial system created by

interconnections in the swaps market),

increase transparency, and promote

market integrity within the financial

system by, among other things: (1)

Providing for the registration and

comprehensive regulation of swap

dealers

and major swap participants

(each, an ‘‘MSP’’); (2) imposing clearing

and trade execution requirements on

standardized derivatives products; (3)

creating rigorous recordkeeping and

data reporting regimes with respect to

swaps, including real-time public

reporting; and (4) enhancing the

Commission’s rulemaking and

enforcement authorities over all

registered entities, intermediaries, and

swap counterparties subject to the

Commission’s oversight.

Section 722(d) of the Dodd-Frank Act

amended the CEA by adding section

2(i),

which provides that the swaps

provisions of the CEA (including any

CEA rules or regulations) apply to cross-

border activities when certain

conditions are met, namely, when such

activities have a ‘‘direct and significant

connection with activities in, or effect

on, commerce of the United States’’ or

when they contravene Commission

rules or regulations as are necessary or

appropriate to prevent evasion of the

swaps provisions of the CEA enacted

under Title VII of the Dodd-Frank Act.

The potential for cross-border

activities to have a substantial impact

on the U.S. financial system was

apparent in the fall of 2008, when a

series of large financial institutional

failures threatened to freeze foreign and

domestic credit markets. In September

2008, for example, U.S.-regulated

insurance company American

International Group (‘‘AIG’’) nearly

failed as a result of risk incurred by the

London swap trading operations of its

subsidiary AIG Financial Products

(‘‘AIGFP’’).

Enormous losses on credit

default swaps entered into by AIGFP

and guaranteed by AIG led to a credit

downgrade for AIG, triggering massive

collateral calls and an acute liquidity

crisis for both entities. AIG only avoided

default through more than $112.5

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‘‘The global nature of the Lehman business with

highly integrated, trading and non-trading

relationships across the group led to a complex

series of inter-company positions being outstanding

at the date of Administration. There are over 300

debtor and creditor balances between LBIE and its

affiliates representing $10.5B of receivables and

$11.0B of payables as of September 15 2008.’’ See

Lehman Brothers International (Europe) in

Administration, Joint Administrators’ Progress

Report for the Period 15 September 2008 to 14

March 2009 (Apr. 14, 2009) (‘‘Lehman Brothers

Progress Report’’), available at http://www.pwc.co.

uk/en_uk/uk/assets/pdf/lbie-progress-report-

140409.pdf.

See In re Bear Sterns High-Grade Structured

Credit Strategies Master Funds, Ltd., 374 B.R. 122

(Bankr. S.D.N.Y. 2007), available at http://www.

nysb.uscourts.gov/opinions/brl/158971_25_

opinion.pdf.

See id.

See The President’s Working Group on

Financial Markets, Hedge Funds, Leverage, and the

Lessons of Long-Term Capital Management (April

1999), available at http://www.treasury.gov/

resource-center/fin-mkts/Documents/hedgfund.pdf.

See id. at 13.

See id. at 17.

See Sen. Permanent Subcomm. on

Investigations, 113th Cong., Majority and Minority

Staff Report, JPMorgan Chase Whale Trades: A Case

History of Derivatives Risks and Abuses (March 15,

2013), available at http://www.levin.senate.gov/

download/?id=bfb5cd04-41dc-4e2d-a5e1-

ab2b81abfaa8-2560k. See also Dodd-Frank

Statement (‘‘[A]ny suggestion that U.S. financial

entities learned enough from AIG’s devastating

misjudgments are [sic] undercut by the multi-

billion dollar loss incurred by a bank generally

considered to be among the most careful—

J.P.Morgan Chase—in its London derivative

trading.’’).

See Letter from Sen. Carl Levin, Chairman of

the Permanent Subcommittee on Investigations at 4

(Apr. 23, 2013) (‘‘Letter from Sen. Levin’’), available

at http://www.levin.senate.gov/download/

levin_comment_letter_cftc_042313. See also Cross-

Border Application of Certain Swaps Provisions of

the Commodity Exchange Act, 77 FR 41214, 41216

(Jul. 12, 2012) (‘‘Proposed Guidance’’).

Legislatures and regulators in a number of

foreign jurisdictions are undertaking significant

regulatory reforms over the swaps market and its

participants. See CFTC and SEC, Joint Report on

International Swap Regulation Required by Section

719(c) of the Dodd-Frank Wall Street Reform and

Consumer Protection Act at 13 (Jan. 31, 2012),

available at http://www.cftc.gov/ucm/groups/

public/@swaps/documents/file/dfstudy_isr_

013112.pdf.

For example, the European Commission released

a public consultation on revising the Markets in

Financial Instruments Directive (‘‘MiFID’’) in

December 2010. See ‘‘European Commission Public

Consultation: Review of the Markets in Financial

Instruments Directive’’ (Dec. 8, 2010), available at

http://ec.europa.eu/internal_market/consultations/

docs/2010/mifid/consultation_paper_en.pdf.

In October 2011, the European Commission

released two public consultations, one to revise

MiFID and the other for creating a new regulation

entitled the Markets in Financial Instruments

Regulation (‘‘MiFIR’’). See European Commission,

Proposal for a Directive of the European Parliament

and of the Council on markets in financial

instruments repealing Directive 2004/39/EC of the

European Parliament and of the Council, COM

(2011) 656 final (Oct. 20, 2011), available at http://

ec.europa.eu/internal_market/securities/docs/isd/

mifid/COM_2011_656_en.pdf; European

Commission, Proposal for a Regulation of the

European Parliament and of the Council on markets

in financial instruments and amending regulation

[EMIR] on OTC derivatives, central counterparties

and trade repositories, COM (2011) 652 final (Oct.

20, 2011), available at http://ec.europa.eu/internal_

market/securities/docs/isd/mifid/COM_2011_652_

en.pdf.

As of March 15, 2013, the majority of the

regulatory technical standards (i.e., rulemakings) of

the European Market Infrastructure Regulation

(‘‘EMIR’’) entered into force. The EMIR and the

related regulatory technical standards generally

regard requirements for clearinghouses, clearing,

data repositories, regulatory reporting, and

uncleared OTC transactions. Certain technical

standards under EMIR have yet to be developed and

completed. These standards regard margin and

capital for uncleared transactions and contracts that

have a ‘‘direct, substantial and foreseeable effect

within the [European] Union.’’ See EMIR Article

11(14)(e).

The Japanese legislature passed the Amendment

to the Financial Instruments and Exchange Act

billion in support from the Federal

Reserve Bank of New York and nearly

$70 billion from the U.S. Department of

the Treasury and the Federal Reserve.

A global, complex, and highly

integrated business model also played a

role in, and complicated, the

bankruptcy of former U.S.-based

multinational corporation Lehman

Brothers Holding Inc. (‘‘LBHI’’) in

September 2008. In addition to

guaranteeing certain swaps for its

subsidiary Lehman Brothers

International Europe (‘‘LBIE’’),

estimated at nearly 130,000 OTC

derivatives contracts at the time LBIE

was placed into administration on

September 15, 2008, LBHI and its global

affiliates relied on each other for many

of their financial and operational

services, including treasury and

depository functions, custodial

arrangements, trading facilitation, and

information management.

The

complexity of the financial and

operational relationships of LBHI and

its domestic and international affiliates,

including with respect to risk associated

with swaps, provides an example of

how risks can be transferred across

multinational affiliated entities, in some

cases in non-transparent ways that make

it difficult for market participants and

regulators to fully assess those risks.

Even in the absence of an explicit

business arrangement or guarantee, U.S.

companies may for reputational or other

reasons choose, or feel compelled, to

assume the cost of risks incurred by

foreign affiliates. In 2007, U.S.-based

global investment firm Bear Stearns

decided to extend loans secured by

assets of uncertain value to two Cayman

Islands-based hedge funds it sponsored

after they suffered substantial losses due

to their investments in subprime

mortgages, even though Bear Stearns

was not legally obligated to support

those funds.

Shortly thereafter, the

funds, filed for bankruptcy protection.

Although the Dodd-Frank Act was

enacted in the wake of the 2008

financial crisis, the impact of cross-

border activities on the health and

stability of U.S. companies and financial

markets is not new. A decade before the

AIG and Lehman collapses, a Cayman

Islands hedge fund managed by

Connecticut-based Long-Term Capital

Management L.P. (‘‘LTCM’’) nearly

failed.

The hedge fund had a swap

book of more than $1 trillion notional

and only $4 billion in capital. The

hedge fund avoided collapse only after

the Federal Reserve Bank of New York

intervened and supervised a financial

rescue and reorganization by creditors

of the fund.

While the fund was a

Cayman Island partnership, its default

would have caused significant market

disruption in the United States.

More recently, J.P. Morgan Chase &

Co. (‘‘J.P. Morgan’’), the largest U.S.

bank, disclosed a multi-billion dollar

trading loss stemming in part from

positions in a credit-related swap

portfolio managed through its London

Chief Investment Office.

The

relationship between the New York and

London offices of J.P. Morgan that were

involved in the credit swaps that were

the source of this loss demonstrates the

close integration among the various

branches, agencies, offices, subsidiaries

and affiliates of U.S. financial

institutions, which may be located both

inside and outside the United States.

Despite their geographic expanse, the

branches, agencies, offices, subsidiaries

and affiliates of large U.S. financial

institutions in many cases effectively

operate as a single business.

Efforts to regulate the swaps market in

the wake of the 2008 financial crisis are

underway not only in the United States,

but also abroad. In 2009, leaders of the

Group of 20 (‘‘G20’’)—whose

membership includes the European

Union (‘‘EU’’), the United States, and 18

other countries—agreed that: (i) OTC

derivatives contracts should be reported

to trade repositories; (ii) all

standardized OTC derivatives contracts

should be cleared through central

counterparties and traded on exchanges

or electronic trading platforms, where

appropriate, by the end of 2012; and (iii)

non-centrally cleared contracts should

be subject to higher capital

requirements. In line with the G20

commitment, much progress has been

made to coordinate and harmonize

international reform efforts, but the pace

of reform varies among jurisdictions and

disparities in regulations remain due to

differences in cultures, legal and

political traditions, and financial

systems.

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(‘‘FIEA’’) in May 2010. See Japan Financial Services

Agency, Outline of the bill for amendment of the

Financial Instruments and Exchange Act (May

2010), available at http://www.fsa.go.jp/en/refer/

diet/174/01.pdf.

On October 3, 2008, President Bush signed the

Emergency Economic Stabilization Act of 2008,

which was principally designed to allow the U.S.

Treasury and other government agencies to take

action to restore liquidity and stability to the U.S.

financial system (e.g., the Troubled Asset Relief

Program—also known as TARP—under which the

U.S. Treasury was authorized to purchase up to

$700 billion of troubled assets that weighed down

the balance sheets of U.S. financial institutions).

See Public Law 110–343, 122 Stat. 3765 (2008).

See Financial Crisis Inquiry Commission, The

Financial Crisis Inquiry Report: Final Report of the

National Commission on the Causes of the

Financial and Economic Crisis in the United States

at xvi-xxvii (Jan. 21, 2011), available at http://

www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-

FCIC.pdf.

See Proposed Guidance, 77 FR 41214.

Simultaneously with publication of the Proposed

Guidance, the Commission published a proposed

exemptive order providing time-limited relief from

certain cross-border applications of the swaps

provisions of Title VII and the Commission’s

regulations. See Proposed Exemptive Order

Regarding Compliance with Certain Swap

Regulations, 77 FR 41110 (July 12, 2012)

(‘‘Proposed Order’’). The Commission approved a

final exemptive order on December 21, 2012, which

reflected certain modifications and clarifications to

the Proposed Order to address public comments.

See Final Exemptive Order Regarding Compliance

with Certain Swap Regulations, 78 FR 858 (Jan. 7,

2013) (‘‘January Order’’).

See 7 U.S.C. 1a(49) (defining the term ‘‘swap

dealer’’).

See 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) (‘‘Final Entities Rules’’).

See 7 U.S.C. 1a(33) (defining the term ‘‘major

swap participant’’).

The Commission also received approximately

26 comment letters on the Proposed Order. Because

the Proposed Guidance and Proposed Order were

substantially interrelated, many commenters

submitted a single comment letter addressing both

proposals. The comment letters submitted in

response to the Proposed Order and Proposed

Guidance may be found on the Commission’s Web

site at http://comments.cftc.gov/PublicComments/

CommentList.aspx?id=1234.

Approximately 200 individuals submitted

substantially identical letters to the effect that

oversight of the $700 trillion global derivatives

market is the key to meaningful reform. The letters

state that because the market is inherently global,

risks can be transferred around the world with the

touch of a button. Further, according to these

letters, loopholes in the Proposed Guidance could

allow foreign affiliates of Wall Street banks to

escape regulation. Lastly, the letters request that the

Proposed Guidance be strengthened to ensure that

the Dodd-Frank derivatives protections will directly

apply to the full global activities of all important

participants in the U.S. derivatives markets.

See Further Proposed Guidance Regarding

Compliance With Certain Swap Regulations, 78 FR

909, 913 (Jan. 7, 2013) (‘‘Further Proposed

Guidance’’).

17 CFR 1.3(ggg)(4). The Commission’s

regulations are codified at 17 CFR Ch. I.

The comment letters submitted in response to

the Further Proposed Guidance are available on the

Commission’s Web site at http://comments.cftc.gov/

PublicComments/CommentList.aspx?id=1315.

The failures of Lehman Brothers and

the Bear Stearns hedge funds, and the

near failures of LTCM’s hedge fund and

AIG (which required intervention by the

government and Federal Reserve), and

their collateral effects on the broader

economy and U.S. commerce,

provide

examples of how risks that a large

financial institution takes abroad in

swap transactions or otherwise can

result in or contribute to substantial

losses to U.S. persons and threaten the

financial stability of the entire U.S.

financial system. These failures and

near failures revealed the vulnerability

of the U.S. financial system and

economy to systemic risk resulting from,

among other things, poor risk

management practices of certain

financial firms, the lack of supervisory

oversight for certain financial

institutions as a whole, and the overall

interconnectedness of the global swap

business.

These failures and near

failures demonstrate the need for and

potential implications of cross-border

swaps regulation.

B. The Proposed Guidance and Further

Proposed Guidance

To address the scope of the cross-

border application of the Dodd-Frank

Act, the Commission published the

Proposed Guidance on July 12, 2012,

setting forth its proposed interpretation

of the manner in which it intends that

section 2(i) of the CEA would apply

Title VII’s swaps provisions to cross-

border activities.

In view of the

complex legal and policy issues

involved, the Commission published the

Proposed Guidance to solicit comments

from all interested persons and to

further inform the Commission’s

deliberations. Specifically, the Proposed

Guidance addressed the general manner

in which the Commission proposed to

consider: (1) When a non-U.S. person’s

swap dealing activities would justify

registration as a ‘‘swap dealer,’’

further defined in a joint release

adopted by the Commission and the

Securities and Exchange Commission

(‘‘SEC’’);

(2) when a non-U.S. person’s

swaps positions would justify

registration as a ‘‘major swap

participant,’’

as further defined in the

Final Entities Rules; and (3) how foreign

branches, agencies, affiliates, and

subsidiaries of U.S. swap dealers

generally should be treated. The

Proposed Guidance also generally

described the policy and procedural

framework under which the

Commission would consider

compliance with a comparable and

comprehensive regulatory requirement

of a foreign jurisdiction as a reasonable

substitute for compliance with the

attendant requirements of the CEA. Last,

the Proposed Guidance set forth the

manner in which the Commission

proposed to interpret section 2(i) of the

CEA as it would generally apply to

clearing, trading, and certain reporting

requirements under the Dodd-Frank Act

with respect to swaps between

counterparties that are not swap dealers

or MSPs.

The public comment period on the

Proposed Guidance ended on August

27, 2012. The Commission received

approximately 290 comment letters on

the Proposed Guidance from a variety of

interested parties, including major U.S.

and non-U.S. banks and financial

institutions that conduct global swap

business, trade associations, clearing

organizations, law firms (representing

international banks and dealers), public

interest organizations, and foreign

regulators.

The Further Proposed Guidance,

issued on December 21, 2012,

reflected the Commission’s

determination that further consideration

of public comments regarding the

Commission’s proposed interpretation

of the term ‘‘U.S. person,’’ and its

proposed guidance regarding

aggregation for purposes of swap dealer

registration, would be helpful to the

Commission in issuing final interpretive

guidance. In order to facilitate the

Commission’s further consideration of

these issues, in the Further Proposed

Guidance the Commission sought public

comment on: (1) An alternative

interpretation of the aggregation

requirement for swap dealer registration

in Commission regulation 1.3(ggg)(4);

(2) an alternative ‘‘prong’’ of the

proposed interpretation of the term

‘‘U.S. person’’ in the Proposed Guidance

which relates to U.S. owners that are

responsible for the liabilities of a non-

U.S. entity; and (3) a separate alternative

prong of the proposed interpretation of

the term ‘‘U.S. person’’ which relates to

commodity pools and funds with

majority-U.S. ownership.

The public comment period on the

Further Proposed Guidance ended on

February 6, 2013. The Commission

received approximately 24 comment

letters on the Further Proposed

Guidance from interested parties

including major U.S. and non-U.S.

banks and financial institutions, trade

associations, law firms (representing

international banks and dealers), public

interest organizations, and foreign

regulators.

With respect to both the

Proposed Guidance and the Further

Proposed Guidance and throughout the

process of considering this Guidance,

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The records of these meetings and

communications are available on the Commission’s

Web site at http://www.cftc.gov/LawRegulation/

DoddFrankAct/Rulemakings/Cross-Border

ApplicationofSwapsProvisions/index.htm.

Sections 722 and 772 of the Dodd-Frank Act

establish the scope of the Commission’s and SEC’s

jurisdiction over cross-border swaps and security-

based swaps, respectively. CEA section 2(i), which

was added by section 722 of the Dodd-Frank Act,

is discussed above. Section 30(c) of the Securities

Exchange Act of 1934 (‘‘Exchange Act’’), which was

added by section 772 of the Dodd-Frank Act,

provides that the swaps provisions of the Exchange

Act added by Title VII do not apply ‘‘to any person

insofar as such person transacts a business in

security-based swaps without the jurisdiction of the

United States, unless such person transacts such

business in contravention of such rules and

regulations as the [SEC] may prescribe as necessary

or appropriate to prevent the evasion of any

provision [added by Title VII of the Dodd-Frank

Act] . . . ’’ See 15 U.S.C. 78dd(c).

See Cross-Border Security-Based Swap

Activities; Re-Proposal of Regulation SBSR and

Certain Rules and Forms Relating to the

Registration of Security-Based Swap Dealers and

Major Security-Based Swap Participants, 78 FR

30968 (May 23, 2013) (‘‘SEC Cross-Border

Proposal’’).

The SEC Cross-Border Proposal notes that the

definition of ‘‘security’’ in the Exchange Act

includes security-based swaps, which raises issues

related to the statutory definitions of ‘‘broker’’ and

‘‘dealer,’’ the statutory exchange registration

requirement, and other statutory requirements

related to securities. Id. at 30972.

Id. at 30990.

Id. at 30983–84.

One commenter expressed the view that the

SEC’s proposed rule is entirely inapplicable to the

CFTC’s statutory mandate to regulate the risks from

cross border derivatives trading and related

activities. This commenter stated that the SEC was

given very limited statutory authority in the Dodd-

Frank Act related solely to anti-evasion, in contrast

to the Commission, which was given the same anti-

evasion authority plus an affirmative statutory

mandate to regulate cross-border derivative

activities that ‘‘have a direct an significant

connection with activities in, or effect on,

commerce of the United States.’’ This commenter

further stated that a broader statutory mandate

makes sense because the Commission ‘‘has decades

of expertise and jurisdiction for virtually the entire

derivatives markets,’’ whereas the SEC has

‘‘jurisdiction for no more than 3.5 percent of those

markets.’’ See Better Markets Inc. (‘‘Better Markets’’)

(Jun. 24, 2013) at 2.

This is one aspect of the Commission’s on-

going bilateral and multilateral efforts to promote

international coordination of regulatory reform. The

Commission’s staff is engaged in consultations with

Europe, Japan, Hong Kong, Singapore, Switzerland,

Canada, Australia, Brazil, and Mexico on

derivatives reform. In addition, the Commission’s

staff is participating in several standard-setting

initiatives, co-chairs the IOSCO Task Force on OTC

Derivatives, and has created an informal working

group of derivatives regulators to discuss

implementation of derivatives reform. See also Joint

Press Statement of Leaders on Operating Principles

and Areas of Exploration in the Regulation of the

Cross-border OTC Derivatives Market, published as

CFTC Press Release 6439–12, Dec. 4, 2012, available

at http://www.cftc.gov/PressRoom/PressReleases/

pr6439-12; OTC Derivatives Regulators Group

Report to the G–20 Meeting of Finance Ministers

and Central Bank Governors of 18–19 April 2013,

linked to CFTC Press Release ODRG Report to G–

20, Apr. 16, 2013, available at http://www.cftc.gov/

PressRoom/PressReleases/odrg_reporttog20release.

See, e.g., Securities Industry and Financial

Markets Association (‘‘SIFMA’’) (Aug. 27, 2012);

Institute of International Bankers (‘‘IIB’’) (Aug. 27,

2012); Sullivan & Cromwell, on behalf of Bank of

America Corp., Citi, and J.P. Morgan (‘‘Sullivan &

Cromwell’’) (Aug. 13, 2012); Bank of America

Merrill Lynch, Barclays Capital, and PNB Paribas et

al., submitted by Cleary Gottlieb Steen & Hamilton

LLP (‘‘Cleary’’) (Aug. 16, 2012).

See, e.g., Americans for Financial Reform,

submitted by Marcus Stanley (‘‘AFR’’) (Aug. 27,

2012); Better Markets (Aug. 16, 2012); Michael

Greenberger, Francis King Cary School of Law,

the Commission (and Commission’s

staff) held numerous meetings and

discussions with various market

participants, domestic bank regulators,

and other interested parties.

Further, the Commission’s staff

closely consulted with the staff of the

SEC in an effort to increase

understanding of each other’s regulatory

approaches and to harmonize the cross-

border approaches of the two agencies

to the greatest extent possible,

consistent with their respective

statutory mandates.

The Commission

is cognizant of the value of

harmonization by the Commission and

the SEC of their cross-border policies to

the fullest extent possible. The staffs of

the Commission and the SEC have

participated in numerous meetings to

work jointly toward this objective. The

Commission expects that this

consultative process will continue as

each agency works towards

implementing its respective cross-

border policy.

The SEC recently published for public

comment proposed rules and

interpretive guidance to address the

application of the provisions of the

Exchange Act, added by Subtitle B of

Title VII of the Dodd-Frank Act, that

relate to cross-border security-based

swap activities.

The Commission has

considered the SEC’s cross-border

proposal and has taken it into account

in the process of considering this

Guidance. The SEC’s proposal

acknowledges the statutory provisions

and regulatory precedents that are

relevant to security-based swaps by

virtue of the fact that security-based

swaps are securities.

For example, the

SEC’s proposed rules regarding

registration of security-based swap

dealers build from the SEC’s traditional

approach to the registration of brokers

and dealers under the Exchange Act.

The SEC’s proposal also notes the SEC’s

belief that Congress intended the

territorial application of Title VII to

entities and transactions in the security-

based swaps market to follow similar

principles to those applicable to the

securities market under the Exchange

Act.

The Commission believes that

one factor in harmonization of the two

agencies’ approaches is that Congress

did not express a similar intent that the

application of Title VII to entities and

transactions in the swaps market should

follow principles that preceded the

Dodd-Frank Act, but rather mandated a

new regulatory regime for swaps.

The Commission also recognizes the

critical role of international cooperation

and coordination in the regulation of

derivatives in the highly interconnected

global market, where risks are

transmitted across national borders and

market participants operate in multiple

jurisdictions. Close cooperative

relationships and coordination with

other jurisdictions take on even greater

importance given that, prior to the

recent reforms, the swaps market has

largely operated without regulatory

oversight, and given that many

jurisdictions are in differing stages of

implementing their regulatory reform.

To this end, the Commission’s staff has

actively engaged in discussions with

their foreign counterparts in an effort to

better understand and develop a more

harmonized cross-border regulatory

framework. The Commission expects

that these discussions will continue as

it implements the cross-border

interpretive guidance and as other

jurisdictions develop their own

regulatory approaches to derivatives.

In general, many of the financial

institutions and law firms (representing

financial institutions) that commented

on the Proposed Guidance and Further

Proposed Guidance stated that the

Commission’s proposed interpretation

of the extraterritorial application of Title

VII of the Dodd-Frank Act was overly

broad and unnecessarily complex and

unclear.

Among the issues they raised

were concerns relating to the

interpretation of the term ‘‘U.S. person,’’

aggregation for purposes of swap dealer

registration, lack of parity in the

treatment of foreign branches and

affiliates of U.S. persons, the approach

to guaranteed non-U.S. affiliates and

non-U.S. affiliate ‘‘conduits,’’ and the

‘‘comparability’’ assessment for

purposes of substituted compliance. The

commenters also urged the Commission

to allow sufficient time after the

publication of the final interpretive

guidance for market participants to

understand and implement any new

policies of the Commission, before the

Commission begins to apply such

policies.

Other commenters disagreed that the

Commission’s proposed interpretation

of its extraterritorial authority was

overly broad, instead arguing that the

Commission had not gone far enough.

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University of Maryland (‘‘Greenberger’’) (Aug. 13,

2012).

AFR (Aug. 27, 2012) at 2.

Letter from Sen. Levin at 3.

See 7 U.S.C. 2(i).

The Commission notes that part 23 of its

regulations defines ‘‘swaps activities’’ to mean,

‘‘with respect to a [registered swap dealer or MSP],

such registrant’s activities related to swaps and any

product used to hedge such swaps, including, but

not limited to, futures, options, other swaps or

security-based swaps, debt or equity securities,

foreign currency, physical commodities, and other

derivatives.’’ See 17 CFR 23.200(j); 23.600(a)(7).

In this regard, the Commission notes that it

would consider codifying certain aspects of the

Guidance in future rulemakings, as appropriate; but

at this time, this guidance is intended to provide

an efficient and flexible vehicle to communicate the

agency’s current views on how the Dodd-Frank

swap requirements would apply on a cross-border

basis.

Certain provisions of Title VII apply regardless

of whether a swap dealer or MSP is a counterparty

to the swap. These provisions include the clearing

requirement (7 U.S.C. 2(h)(1)), the trade execution

requirement (2(h)(8)), reporting to SDRs

(2(a)(13)(G)), and real-time public reporting

(2(a)(13)).

For example, AFR stated that the

Proposed Guidance ‘‘takes some real

positive steps in affirming CFTC

jurisdiction over a variety of cross-

border transactions,’’ but ‘‘falls well

short of closing potential cross-border

loopholes.’’

Senator Levin wrote that

although ‘‘members of the financial

industry have filed comment letters

urging the CFTC to weaken its proposals

. . . American families and businesses

deserve strong protections against the

risks posed by derivatives trading,

including from cross-border swaps, and

. . . the Proposed Guidance should be

strengthened rather than weakened.’’

II. Scope of This Guidance

After carefully reviewing and

considering the comments on the

Proposed Guidance and the Further

Proposed Guidance, the Commission

has determined to finalize the Proposed

Guidance. This Guidance sets forth the

general policy of the Commission in

interpreting how section 2(i) of the CEA

provides for the application of the

swaps provisions of the CEA and

Commission regulations to cross-border

activities when such activities have a

‘‘direct and significant connection with

activities in, or effect on, commerce of

the United States’’ or when they

contravene Commission rulemaking.

Unlike a binding rule adopted by the

Commission, which would state with

precision when particular requirements

do and do not apply to particular

situations, this Guidance is a statement

of the Commission’s general policy

regarding cross-border swap activities

and allows for flexibility in application

to various situations, including

consideration of all relevant facts and

circumstances that are not explicitly

discussed in the guidance. The

Commission believes that the statement

of its policy in this Guidance will assist

market participants in understanding

how the Commission intends that the

registration and certain other

substantive requirements of the Dodd-

Frank Act generally would apply to

their cross-border activities.

This release is intended to inform the

public of the Commission’s views on

how it ordinarily expects to apply

existing law and regulations in the

cross-border context. In determining the

application of the CEA and Commission

regulations to particular entities and

transactions in cross-border contexts,

the Commission will apply the relevant

statutory provisions, including CEA

section 2(i), and regulations to the

particular facts and circumstances.

Accordingly, the public has the ability

to present facts and circumstances that

would inform the application of the

substantive policy positions set forth in

this release.

The Commission understands the

complex and dynamic nature of the

global swap market and the need to take

an adaptable approach to cross-border

issues, particularly as it continues to

work closely with foreign regulators to

address potential conflicts with respect

to each country’s respective regulatory

regime. Although the Commission is

issuing the Guidance at this time, the

Commission will continue to follow

developments as foreign regulatory

regimes and the global swaps market

continue to evolve. In this regard, the

Commission will periodically review

this Guidance in light of future

developments.

This release is organized into four

main sections. Section III sets forth the

Commission’s interpretation of CEA

section 2(i) and the general manner in

which it intends to apply the swaps

provisions of the Dodd-Frank Act to

activities outside the United States.

Section IV addresses the public

comments and Commission Guidance

on: (A) The Commission’s interpretation

of the term ‘‘U.S. person’’; (B) swap

dealer and MSP registration; (C) the

scope of the term ‘‘foreign branch’’ of a

U.S. bank and consideration of when a

swap should be considered to be with

the foreign branch of a U.S. bank; (D) a

description of the entity-level

requirements and transaction-level

requirements under Title VII and the

Commission’s related regulations

(‘‘Entity-Level Requirements’’ and

‘‘Transaction-Level Requirements,’’

respectively); (E) the categorization of

Title VII swaps provisions (and

Commission regulations) as either

Entity-Level or Transaction-Level

Requirements; (F) substituted

compliance, including an overview of

the principles guiding substituted

compliance determinations for Entity-

Level and Transaction-Level

Requirements, a general description of

the process for comparability

determinations, and a discussion of

conflicts arising under foreign privacy

and blocking laws; (G) application of the

Entity-Level Requirements and

‘‘Category A’’ and ‘‘Category B’’

Transaction-Level Requirements to

swap dealers and MSPs; and (H)

application of the CEA’s swaps

provisions and Commission regulations

where both parties to a swap are neither

swap dealers nor MSPs.

In addition, this Guidance includes

the following Appendices, which

should be read in conjunction with (and

are qualified by) the remainder of the

Guidance: (1) Appendix A—The Entity-

Level Requirements; (2) Appendix B—

The Transaction-Level Requirements:

(3) Appendix C—Application of the

Entity-Level Requirements; (4)

Appendix D—Application of the

Category A Transaction-Level

Requirements to Swap Dealers and

MSPs; (5) Appendix E—Application of

the Category B Transaction-Level

Requirements to Swap Dealers and

MSPs; and (6) Appendix F—Application

of Certain Entity-Level and Transaction-

Level Requirements to Non-Swap

Dealer/Non-MSP Market Participants.

III. Interpretation of Section 2(i)

CEA section 2(i) provides that the

swaps 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].

In the Proposed Guidance, the

Commission noted that section 2(i)

provides the Commission 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.

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Sullivan & Cromwell (Aug. 13, 2012) at 6–7.

Id. at 8.

Id. at 9.

SIFMA (Aug. 27, 2012) at 2.

Sullivan & Cromwell (Aug. 13, 2012) at 10.

Id. at 11; SIFMA (Aug. 27, 2012) at 3 and A55.

SIFMA (Aug. 27, 2012) at 3.

12 U.S.C. 611–31.

Id.; Sullivan & Cromwell (Aug. 13, 2012) at 12–

14.

Letter from Sen. Levin at 4.

Id.

Id. at 7. See also Dodd-Frank Statement (‘‘An

exemption for foreign derivatives activity by the [

] affiliates of American institutions is a free pass no

matter where that activity is located.’’).

15 U.S.C. 6a.

15 U.S.C. 1–7.

15 U.S.C. 6a.

6a(1).

6a(2).

542 U.S. 155, 162 (2004) (emphasis in original).

A. Comments

Some commenters addressing the

interpretation of section 2(i) in the

Proposed Guidance stated that the

activities of the non-U.S. branches and

subsidiaries of U.S. persons outside the

United States with respect to swaps

with non-U.S. persons should not be

subject to Dodd-Frank requirements.

Sullivan & Cromwell asserted that the

non-U.S. branches and subsidiaries

generally do not enter into swaps with

U.S. persons and therefore the

jurisdictional nexus with the United

States that would justify application of

the Dodd-Frank Act is absent.

Sullivan

& Cromwell stated that there are

legitimate business reasons for U.S.

persons to establish non-U.S. branches

and subsidiaries, so doing so should not

be interpreted to mean that the U.S.

person is using the branch to evade

application of the Dodd-Frank Act.

Sullivan & Cromwell argued that the

Dodd-Frank Act’s application outside

the United States should be narrowly

construed because it includes only

specific exceptions to the judicial

precedent that U.S. laws should be

interpreted to apply outside the United

States only when such application is

clearly expressed in the law.

Similarly, SIFMA argued that the

Commission’s proposal asserted a broad

jurisdictional scope that is inconsistent

with the congressional intent expressed

in section 2(i) of the CEA.

Sullivan & Cromwell cited past

instances where the Commission has

not applied its regulations to firms that

deal solely with foreign customers and

do not conduct business in or from the

United States or to the non-U.S.

subsidiaries of entities registered with

the Commission.

Sullivan & Cromwell

and SIFMA stated that the application

of Dodd-Frank requirements to non-U.S.

swap activities would be contrary to

principles of international comity and

cooperation with foreign regulators,

would lead to less efficient use of

regulatory resources, and would subject

the affected entities to potentially

conflicting regulations and increased

costs of compliance.

SIFMA asserted

that the jurisdictional scope in the

Commission’s proposal is not necessary

to prevent evasive activity, because the

Commission already has broad authority

to address evasion.

Sullivan &

Cromwell and SIFMA also argued that

imposing the Dodd-Frank requirements

on non-U.S. branches and subsidiaries

of U.S. persons would put those entities

at a disadvantage compared to

competitors in foreign jurisdictions,

while other federal laws and banking

regulations (such as the Edge Act

)

indicate that Congress wishes to

promote such entities’ ability to

compete in foreign jurisdictions.

By contrast, Senator Levin stated that

the J.P. Morgan ‘‘whale trades’’ provide

an example of how major U.S. financial

institutions have integrated their U.S.

and non-U.S. swap activities, and

therefore supports the application of the

swaps provisions of Title VII and

Commission regulations to the non-U.S.

offices of U.S. financial institutions.

He explained that a Senate investigation

found that J.P. Morgan personnel in

London executed the ‘‘whale trades’’

using money from the U.S. bank’s

excess deposits, and while traders in

London conducted the trades, the trades

were attributed to a U.S. affiliate of J.P.

Morgan through back-to-back

arrangements between the London

branch and New York branch.

He also

stated the whale trades were entered

into with counterparties including

major U.S. banks and J.P. Morgan’s own

investment bank.

Senator Levin

concluded that because of the

integration of U.S. and non-U.S. offices

and affiliates of U.S. financial

institutions, it is critical that the non-

U.S. offices and affiliates of U.S.

financial institutions follow the same

Dodd-Frank requirements as are

applicable to the U.S. financial

institutions.

B. 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 new CEA

section 2(i) is structured similarly to the

statutory language in the Foreign Trade

Antitrust Improvements Act of 1982 (the

‘‘FTAIA’’),

which provides the

standard for the cross-border

application of the Sherman Antitrust

Act.

The FTAIA, like CEA section 2(i),

excludes certain non-U.S. commercial

transactions from the reach of U.S. law.

It 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.’’

In F.

Hoffman-LaRoche, Ltd. v. Empagran

S.A., the 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.’ ’’

It is appropriate, therefore, to read

section 2(i) of the CEA as a clear

expression of congressional intent that

the swaps 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.

An examination of the language in the

FTAIA, however, does not provide an

unambiguous roadmap for the

Commission in interpreting section 2(i)

of the CEA. There are both similarities,

and a number of significant differences,

between the language in CEA section

2(i) and the language in the FTAIA.

Further, the Supreme Court has not

provided definitive guidance as to the

meaning of the ‘‘direct, substantial, and

reasonably foreseeable’’ test in the

FTAIA, and the lower courts have

interpreted the individual terms in the

FTAIA differently.

Although a number of courts have

interpreted the various terms in the

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See 28 U.S.C. 1605(a)(2).

United States v. LSL Biotechnologies, 379 F.3d

672, 693 (9th Cir. 2004). ‘‘As a threshold matter,

many courts have debated whether the FTAIA

established a new jurisdictional standard or merely

codified the standard applied in [United States v.

Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945)]

and its progeny. Several courts have raised this

question without answering it. The Supreme Court

did as much in [Harford Fire Ins. Co. v. California,

509 U.S. 764 (1993)].’’ Id. at 678.

Id. at 692–3, quoting Republic of Argentina v.

Weltover, Inc., 504 U.S. 607, 618 (1992) (providing

that, pursuant to the FSIA, 28 U.S.C. 1605(a)(2),

immunity does not extend to commercial conduct

outside the United States that ‘‘causes a direct effect

in the United States’’).

Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845,

857 (7th Cir. 2012) (en banc).

Id.

Id. at 856–57.

See, e.g., Animal Sciences Products. v. China

Minmetals Corp., 654 F.3d 462, 471 (3d Cir. 2011)

(‘‘[T]he FTAIA’s ‘reasonably foreseeable’ language

imposes an objective standard: the requisite ‘direct’

and ‘substantial’ effect must have been ‘foreseeable’

to an objectively reasonable person.’’).

Hoffman-LaRoche, 452 U.S. at 173.

The provision that ultimately became section

722(d) of the Dodd-Frank Act was added during

consideration of the legislation in the House of

Representatives. See 155 Cong. Rec. H14685 (Dec.

10, 2009). The version of what became Title VII that

was reported by the House Agriculture Committee

and the House Financial Services Committee did

not include any provision addressing cross-border

application. See 155 Cong. Rec. H14549 (Dec. 10,

2009). The Commission finds it significant that, in

adding the cross-border provision before final

passage, the House did so in terms that, as

discussed in text, were different from, and broader

than, the terms used in the analogous provision of

the FTAIA.

See Proposed Guidance, 77 FR at 41215–41216.

Cf. 156 Cong. Rec. S5818 (July 14, 2010)

(statement of Sen. Lincoln) (‘‘In 2008, our Nation’s

economy was on the brink of collapse. America was

being held captive by a financial system that was

so interconnected, so large, and so irresponsible

that our economy and our way of life were about

to be destroyed.’’), available at

http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/

pdf/CREC-2010-07-14.pdf; 156 Cong. Rec. S5888

(July 15, 2010) (statement of Sen. Shaheen) (‘‘We

need to put in place reforms to stop Wall Street

firms from growing so big and so interconnected

that they can threaten our entire economy.’’),

available at http://www.gpo.gov/fdsys/pkg/CREC-

2010-07-15/pdf/CREC-2010-07-15-senate.pdf; 156

Cong. Rec. S5905 (July 15, 2010) (statement of Sen.

Stabenow) (‘‘For too long the over-the-counter

derivatives market has been unregulated,

transferring risk between firms and creating a web

of fragility in a system where entities became too

interconnected to fail.’’), available at http://

www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/

CREC-2010-07-15-senate.pdf.

The legislative history of the Dodd-Frank Act

shows that in the fall of 2009, neither the Over-the-

Counter Derivatives Markets Act of 2009, H.R. 3795,

111th Cong. (1st Sess. 2009), reported by the

Financial Services Committee chaired by Rep.

Barney Frank, nor the Derivatives Markets

Transparency and Accountability Act of 2009, H.R.

977, 111th Cong. (1st Sess. 2009), reported by the

Agriculture Committee chaired by Rep. Collin

Peterson, included a general territoriality limitation

that would have restricted Commission regulation

of transactions between two foreign persons located

outside of the United States. During the House

Financial Services Committee markup on October

14, 2009, Rep. Spencer Bachus offered an

Continued

FTAIA, only the term ‘‘direct’’ appears

in both CEA section 2(i) and the FTAIA.

Relying upon the Supreme Court’s

definition of the term ‘‘direct’’ in the

Foreign Sovereign Immunities Act

(‘‘FSIA’’),

the U.S. Court of Appeals

for the Ninth Circuit construed the term

‘‘direct’’ in the FTAIA as requiring a

‘‘relationship of logical causation,’’

such that ‘‘an effect is ‘direct’ if it

follows as an immediate consequence of

the defendant’s activity.’’

However, in

an en banc decision, the U.S. Court of

Appeals for the Seventh Circuit held

that ‘‘the Ninth Circuit jumped too

quickly on the assumption that the FSIA

and the FTAIA use the word ‘direct’ in

the same way.’’

After examining the

text of the FTAIA as well as its history

and purpose, the Seventh Circuit found

persuasive the ‘‘other school of thought

[that] has been articulated by the

Department of Justice’s Antitrust

Division, which takes the position that,

for FTAIA purposes, the term ‘direct’

means only ‘a reasonably proximate

causal nexus.’ ’’

The Seventh Circuit

rejected interpretations of the term

‘‘direct’’ that included any requirement

that the consequences be foreseeable,

substantial, or immediate.

Other terms in the FTAIA differ from

the terms used in section 2(i) of the

CEA. First, the FTAIA test explicitly

requires that the effect on U.S.

commerce be a ‘‘reasonably foreseeable’’

result of the conduct.

Section 2(i) of

the CEA, by contrast, does not provide

that the effect on U.S. commerce must

be foreseeable. Second, whereas the

FTAIA solely relies on the ‘‘effects’’ on

U.S. commerce to determine cross-

border application of the Sherman Act,

section 2(i) of the CEA refers to both

‘‘effect’’ and ‘‘connection.’’ ‘‘The FTAIA

says that the Sherman Act applies to

foreign ‘conduct’ with a certain kind of

harmful domestic effect.’’

Section 2(i),

by contrast, applies more broadly—not

only to particular instances of conduct

that have an effect on U.S. commerce,

but also to activities that have a direct

and significant ‘‘connection with

activities in’’ U.S. commerce. Unlike the

FTAIA, section 2(i) applies the swaps

provisions of the CEA to activities

outside the United States that have the

requisite connection with activities in

U.S. commerce, regardless of whether a

‘‘harmful domestic effect’’ has occurred.

As the foregoing textual analysis

indicates, Congress crafted section 2(i)

differently from its analogue in the

antitrust laws. Congress delineated the

cross-border scope of the Sherman Act

in section 6a of the FTAIA as applying

to conduct that has a ‘‘direct’’ and

‘‘substantial’’ and ‘‘reasonably

foreseeable’’ ‘‘effect’’ on U.S. commerce.

In section 2(i), on the other hand,

Congress did not include a requirement

that the effects or connections of the

activities outside the United States be

‘‘reasonably foreseeable’’ for the Dodd-

Frank swaps provisions to apply.

Further, Congress included language in

section 2(i) to apply the Dodd-Frank

swaps provisions in circumstances in

which there is a direct and significant

connection with activities in U.S.

commerce, regardless of whether there

is an effect on U.S. commerce. The

different words that Congress used in

paragraph (1) of section 2(i), as

compared to its closest statutory

analogue in section 6a of the FTAIA,

inform the Commission in construing

the boundaries of its cross-border

authority over swap activities under the

CEA.

Accordingly, the Commission

believes it is appropriate to interpret

section 2(i) such that it applies to

activities outside the United States in

circumstances in addition to those that

would be reached under the FTAIA

standard.

As further described in the Proposed

Guidance, one of the principal

rationales for the enactment of the

Dodd-Frank derivatives reforms was the

need for a comprehensive scheme of

regulation to prevent systemic risk in

the U.S. financial system.

particularly, a primary purpose of Title

VII of the Dodd-Frank Act is to address

risk to the U.S. financial system created

by interconnections in the swaps

market.

Title VII of the Dodd-Frank

Act gave the Commission new and

broad authority to regulate the swaps

market to address and mitigate risks

arising from swap activities that in the

future could cause a financial crisis.

In global markets, the source of such

risk is not confined to activities within

U.S. borders. Due to the

interconnectedness between firms,

traders, and markets in the U.S. and

abroad, a firm’s failure, or trading losses

overseas, can quickly spill over to the

United States and affect activities in

U.S. commerce and the stability of the

U.S. financial system. Accordingly,

Congress did not limit the application of

the Dodd-Frank Act to activities within

the United States. Rather, in recognition

of the global nature of the swaps market,

and the fact that risks to the U.S.

financial system may arise from

activities outside the United States, as

well as from activities within the United

States, Congress explicitly provided for

cross-border application of Title VII to

activities outside the United States that

pose risks to the U.S. financial system.

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amendment that would have restricted the

jurisdiction of the Commission over swaps between

non-U.S. resident persons transacted without the

use of the mails or any other means or

instrumentality of interstate commerce. Chairman

Frank opposed the amendment, noting that there

may well be cases where non-U.S. residents are

engaging in transactions that have an effect on the

United States and that are insufficiently regulated

internationally and that he would not want to

prevent U.S. regulators from stepping in. Chairman

Frank expressed his commitment to work with Rep.

Bachus going forward, and Rep. Bachus withdrew

the amendment. See H. Fin. Serv. Comm. Mark Up

on Discussion Draft of the Over-the-Counter

Derivatives Markets Act of 2009, 111th Cong., 1st

Sess. (Oct. 14, 2009) (statements of Rep. Bachus and

Rep. Frank), available at http://financialservices.

house.gov/calendar/eventsingle.aspx?Event

ID=231922.

The Commission also notes that the Supreme

Court has indicated that the FTAIA may be

interpreted more broadly when the government is

seeking to protect the public from anticompetitive

conduct than when a private plaintiff brings suit.

See Hoffman-LaRoche, 452 U.S. at 170 (‘‘A

Government plaintiff, unlike a private plaintiff,

must seek to obtain the relief necessary to protect

the public from further anticompetitive conduct

and to redress anticompetitive harm. And a

Government plaintiff has legal authority broad

enough to allow it to carry out its mission.’’).

See note 63 and accompanying text, supra.

The Seventh Circuit’s rationale for rejecting the

Ninth Circuit’s interpretation applies with at least

equal, if not greater, force to the interpretation of

the word ‘‘direct’’ in section 2(i) of the CEA. As

discussed in note 68 and the accompanying text,

supra, Congress expressly declined to import the

FTAIA standards of substantiality, immediacy, or

foreseeability into section 2(i). The Commission

believes that the terms included in section 2(i) that

are the same as the terms in the FTAIA should be

interpreted in a manner consistent with Congress’s

determination to not import other, different

standards from the FTAIA into section 2(i). Where

Congress has included in a new statute one term but

not another from an existing statute, it is reasonable

to conclude that Congress did not want the other

existing standards included in the new statute.

The Commission believes this interpretation is

supported by Congress’s use of the plural term

‘‘activities’’ in CEA section 2(i), rather than the

singular term ‘‘activity.’’ The Commission believes

it is reasonable to interpret the use of the plural

term ‘‘activities’’ in section 2(i) to require not that

each particular activity have the requisite

connection with U.S. commerce, but rather that

such activities in the aggregate, or a class of activity,

have the requisite nexus with U.S. commerce. This

interpretation is consistent with the overall

objectives of Title VII, as described above. Further,

the Commission believes that a swap-by-swap

approach to jurisdiction would be ‘‘too complex to

prove workable.’’ See Hoffman-LaRoche, 542 U.S. at

168.

132 S. Ct. 2566 (2012).

317 U.S. 111 (1942).

132 S. Ct. 2566, 2588 (2012). At issue in

Wickard was the regulation of a farmer’s production

and use of wheat even though the wheat was ‘‘not

intended in any part for commerce but wholly for

consumption on the farm.’’ 317 U.S. at 118. The

Supreme Court upheld the application of the

regulation, stating that although the farmer’s ‘‘own

contribution to the demand for wheat may be trivial

by itself,’’ the federal regulation could be applied

when his contribution ‘‘taken together with that of

many others similarly situated, is far from trivial.’’

Id. at 128–29. The Court also stated it had ‘‘no

doubt that Congress may properly have considered

that wheat consumed on the farm where grown, if

wholly outside the scheme of regulation, would

have a substantial effect in defeating and

obstructing its purpose . . . .’’ Id.

545 U.S. 1 (2005).

21 U.S.C. 801 et seq.

In Sebelius, the Court stated, ‘‘Where the class

of activities is regulated, and that class is within the

reach of federal power, the courts have no power

to excise, as trivial, individual instances of the

class.’’ 132 S. Ct. at 2587 (quoting Perez v. United

States, 402 U.S. 146, 154 (1971).

542 U.S. at 164.

Id. at 165.

Therefore, upon consideration of the

statutory language, as well as the

prophylactic purpose of the CEA and

the amendments made to it by Title VII,

the Commission construes section 2(i) to

apply the swaps 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. The Commission interprets

section 2(i) in a manner consistent with

the overall goals of the Dodd-Frank Act

to reduce risks to the U.S. financial

system and avoid future financial

crises.

Consistent with this overall

interpretation, the Commission believes

that the term ‘‘direct’’ in CEA section

2(i) should be interpreted in a manner

consistent with the position of the

Department of Justice Antitrust Division

with respect to the meaning of the same

term in the FTAIA, and as recently

adopted by the Seventh Circuit.

The

Commission therefore interprets the

term ‘‘direct’’ in section 2(i) so as to

require ‘‘a reasonably proximate causal

nexus’’ and not to require foreseeability,

substantiality, or immediacy.

Consistent with the purpose of Title

VII to protect the U.S. financial system

against the build-up of systemic risks,

the Commission does not read section

2(i) so as to require a transaction-by-

transaction determination that a specific

swap outside the United States has a

‘‘direct and significant connection with

activities in, or effect on, commerce of

the United States’’ in order to apply the

swaps provisions of the CEA to such

transactions. Rather, it is the connection

of swap activities, viewed as a class or

in the aggregate, to activities in

commerce of the United States that must

be assessed to determine whether

application of the CEA swaps provisions

is warranted.

This conclusion is bolstered by

similar interpretations of other federal

statutes regulating interstate commerce.

Recently, the Supreme Court reaffirmed

a similar ‘‘aggregate effects’’ approach in

Nat’l Fed’n of Indep. Bus. v. Sebelius.

In that case, the Court phrased the

holding in the seminal ‘‘aggregate

effects’’ decision, Wickard v. Filburn,

in this way: ‘‘[The farmer’s] decision,

when considered in the aggregate along

with similar decisions of others, would

have had a substantial effect on the

interstate market for wheat.’’

another recent case, Gonzales v Raich,

the Court adopted similar reasoning to

uphold the application of the Controlled

Substance Act

to prohibit the

intrastate use of medical marijuana for

medicinal purposes. In Raich, the Court

held that Congress could regulate purely

intrastate activity if the failure to do so

would ‘‘leave a gaping hole’’ in the

federal regulatory structure. These cases

support the Commission’s cross-border

authority over swap activities that as a

class, or in the aggregate, have a direct

and significant connection with

activities in, or effect on, U.S.

commerce—whether or not an

individual swap may satisfy the

statutory standard.

C. Principles of International Comity

The case law in the antitrust area also

teaches the importance of recognizing

the laws and interests of other countries

in applying an ambiguous federal

statute across borders; in such

circumstances, principles of

international comity counsel courts and

agencies to act reasonably in exercising

jurisdiction with respect to activity that

takes place elsewhere. In Hoffman-

LaRoche, an antitrust class action

lawsuit alleging an international price-

fixing conspiracy by foreign and

domestic vitamin manufacturers and

distributors, the Supreme Court held

that ambiguous statutes should be

construed to ‘‘avoid unreasonable

interference with the sovereign

authority of other nations.’’

The Court

explained that this rule of construction

‘‘reflects customary principles of

international law’’ and ‘‘helps the

potentially conflicting laws of different

nations work together in harmony—a

harmony particularly needed in today’s

highly interdependent commercial

world.’’

In determining whether the exercise

of jurisdiction by one nation over

activities in another nation would be

reasonable, the courts and agencies are

guided by the Restatement (Third) of

Foreign Relations Law of the United

States (the ‘‘Restatement’’). Drawing

upon traditional principles of

international law, the Restatement

provides bases of jurisdiction to

prescribe law, as well as limitations on

the exercise of jurisdiction. In addition

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See Restatement sec. 402(1)(c). A comment to

the Restatement also identifies jurisdiction with

respect to activity outside the country, but having

or intended to have substantial effect within the

country’s territory, as an aspect of jurisdiction

based on territoriality. See Restatement sec. 402

cmt. d.

Restatement sec. 403(1).

Restatement sec. 403(2).

With regard to conflicting exercises of

jurisdiction, section 403(3) of the Restatement

states:

(3) When it would not be unreasonable for each

of the two states to exercise jurisdiction over a

person or activity, but the prescriptions by the two

states are in conflict, each state has an obligation

to evaluate its own as well as the other state’s

interest in exercising jurisdiction, in light of all the

relevant factors, including those set out in

Subsection (2), a state should defer to the other state

if that state’s interest is clearly greater.

Comment e. to section 403 of the Restatement

states:

Conflicting exercises of jurisdiction. Subsection

(3) applies when an exercise of jurisdiction by each

of two states is not unreasonable, but their

regulations conflict. In that case, each state is

required to evaluate both its interests in exercising

jurisdiction and those of the other state. When

possible, the two states should consult with each

other. If one state has a clearly greater interest, the

other should defer, by abandoning its regulation or

interpreting or modifying it so as to eliminate the

conflict. When neither state has a clearly stronger

interest, states often attempt to eliminate the

conflict so as to reduce international friction and

avoid putting those who are the object of the

regulations in a difficult situation. Subsection (3) is

addressed primarily to the political departments of

government, but it may be relevant also in judicial

proceedings.

Subsection (3) applies only when one state

requires what another prohibits, or where

compliance with the regulations of two states

exercising jurisdiction consistently with this

section is otherwise impossible. It does not apply

where a person subject to regulation by two states

can comply with the laws of both; for example,

where one state requires keeping accounts on a cash

basis, the other on an accrual basis. It does not

apply merely because one state has a strong policy

to permit or encourage an activity which another

state prohibits, or one state exempts from regulation

an activity which another regulates. Those

situations are governed by Subsection (2), but do

not constitute conflict within Subsection (3).

For purposes of this Guidance, the terms

‘‘home jurisdiction’’ or ‘‘home country’’ are used

interchangeably and refer to the jurisdiction in

which the person or entity is established, including

the European Union.

As discussed in section IV.F, infra, the

Commission’s recognition of substituted

compliance would be based on an evaluation of

whether the requirements of the foreign jurisdiction

are comparable and comprehensive compared to the

applicable requirement(s) under the CEA and

Commission regulations, based on a consideration

of all relevant factors, including among other

things: (i) the comprehensiveness of the foreign

regulator’s supervisory compliance program, and

(ii) the authority of such foreign regulator to

support and enforce its oversight of the registrant’s

branch or agency with regard to such activities to

which substituted compliance applies.

See Proposed Guidance, 77 FR at 41218. The

discussion of the term ‘‘U.S. person’’ in this

Guidance is limited to the relevance of this term for

purposes of the Commission regulations

promulgated under Title VII. The Commission does

not intend that this discussion would apply to other

uses of the term ‘‘person’’ in the CEA.

to recognizing territoriality and

nationality as bases for jurisdiction, the

Restatement expressly provides that a

country has jurisdiction to prescribe law

with respect to ‘‘conduct outside its

territory that has or is intended to have

substantial effect within its territory.’’

The Restatement also provides that

even where a country has a basis for

jurisdiction, it should not prescribe law

with respect to a person or activity in

another country when the exercise of

such jurisdiction is unreasonable.

The

reasonableness of such an exercise of

jurisdiction, in turn, is to be determined

by evaluating all relevant factors,

including certain specifically

enumerated factors where appropriate:

(a) the link of the activity to the territory

of the regulating state, i.e., the extent to

which the activity takes place within the

territory, or has substantial, direct, and

foreseeable effect upon or in the territory;

(b) the connections, such as nationality,

residence, or economic activity, between the

regulating state and the persons principally

responsible for the activity to be regulated, or

between that state and those whom the

regulation is designed to protect;

regulated, the importance of regulation to the

regulating state, the extent to which other

states regulate such activities, and the degree

to which the desirability of such regulation

is generally accepted;

(d) the existence of justified expectations

that might be protected or hurt by the

regulation;

(e) the importance of the regulation to the

international political, legal, or economic

system;

(f) the extent to which the regulation is

consistent with the traditions of the

international system;

(g) the extent to which another state may

have an interest in regulating the activity;

and

(h) the likelihood of conflict with

regulation by another state.

Notably, the Restatement does not

preclude concurrent regulation by

multiple jurisdictions. However, where

concurrent jurisdiction by two or more

jurisdictions creates conflict, the

Restatement recommends that each

country evaluate both its interests in

exercising jurisdiction and those of the

other jurisdiction, and where possible,

to consult with each other.

Consistent with the Restatement, in

determining the extent to which the

Dodd-Frank swaps provisions apply to

activities abroad, the Commission has

strived to protect U.S. interests as

determined by Congress in Title VII, and

minimize conflicts with the laws of

other jurisdictions. The Commission has

carefully considered, among other

things, the level of the home

jurisdiction’s supervisory interests over

the subject activity and the extent to

which the activity takes place within

the foreign territory.

At the same time,

the Commission has also considered the

potential for cross-border activities to

have substantial connection to or impact

on the U.S. financial system and the

global, highly integrated nature of

today’s swap business; to fulfill the

purposes of the Dodd-Frank swaps

reform, the Commission’s supervisory

oversight cannot be confined to

activities strictly within the territory of

the United States.

The Commission believes that the

Guidance strikes the proper balance

between these competing factors to

ensure that the Commission can

discharge its responsibilities to protect

the U.S. markets, market participants,

and financial system, consistent with

the traditions of the international

system and comity principles, as set

forth in the Restatement. Of particular

relevance is the Commission’s approach

to substituted compliance, which would

be expected to mitigate any burden

associated with potentially conflicting

foreign regulations and would generally

be appropriate in light of the

supervisory interests of foreign

regulators in entities domiciled and

operating in its jurisdiction.

In addition, recognizing that close

cooperation and coordination with other

jurisdictions is vital to the regulation of

derivatives in the highly interconnected

global market, the Commission’s staff

expects to remain actively engaged in

discussions with foreign regulators as

the Commission implements the cross-

border interpretive guidance and as

other jurisdictions develop their own

regulatory requirements for derivatives.

The Commission recognizes that

conflicts of law may exist and is ready

to address those issues as they may

arise. In that regard, where a real

conflict of laws exists, the Commission

strongly encourages regulators and

registrants to consult directly with its

staff.

IV. Guidance

A. Interpretation of the Term ‘‘U.S.

Person’’

1. Proposed Interpretation

Under the Proposed Guidance, the

term ‘‘U.S. person’’ identifies those

persons who, under the Commission’s

interpretation, could be expected to

satisfy the jurisdictional nexus under

section 2(i) of the CEA based on their

swap activities either individually or in

the aggregate.

As proposed, the

Commission’s interpretation of the term

‘‘U.S. person’’ would generally

encompass: (1) persons (or classes of

persons) located within the United

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States; and (2) persons that may be

domiciled or operate outside the United

States but whose swap activities

nonetheless have a ‘‘direct and

significant connection with activities in,

or effect on, commerce of the United

States’’ within the meaning of CEA

section 2(i).

Specifically, as set forth in the

Proposed Guidance, the Commission’s

interpretation of the term ‘‘U.S. person’’

would generally include, but not be

limited to:

(i) any natural person who is a resident of

the United States;

(ii) any corporation, partnership, limited

liability company, business or other trust,

association, joint-stock company, fund or any

form of enterprise similar to any of the

foregoing, in each case that is either (A)

organized or incorporated under the laws of

the United States or having its principal

place of business in the United States (legal

entity) or (B) in which the direct or indirect

owners thereof are responsible for the

liabilities of such entity and one or more of

such owners is a U.S. person;

(iii) any individual account (discretionary

or not) where the beneficial owner is a U.S.

person;

(iv) any commodity pool, pooled account,

or collective investment vehicle (whether or

not it is organized or incorporated in the

United States) of which a majority ownership

is held, directly or indirectly, by a U.S.

person(s);

(v) any commodity pool, pooled account,

or collective investment vehicle the operator

of which would be required to register as a

commodity pool operator under the CEA;

(vi) a pension plan for the employees,

officers or principals of a legal entity with its

principal place of business inside the United

States; and

(vii) an estate or trust, the income of which

is subject to U.S. income tax regardless of

source.

Under the proposed interpretation, a

‘‘U.S. person’’ would include a foreign

branch of a U.S. person; on the other

hand, a non-U.S. affiliate guaranteed by

a U.S. person would not be within the

Commission’s interpretation of the term

‘‘U.S. person.’’

The Further Proposed Guidance

included alternatives for two ‘‘prongs’’

of the proposed interpretation of the

term ‘‘U.S. person’’ in the Proposed

Guidance: prong (ii)(B), which relates to

U.S. owners that are responsible for the

liabilities of a non-U.S. entity; and

prong (iv), which relates to commodity

pools and funds with majority-U.S.

ownership.

The alternative version of prong (ii)(B)

in the Further Proposed Guidance

would limit its scope to a non-U.S. legal

entity that is directly or indirectly

majority-owned by one or more natural

persons or legal entities that meet prong

(i) or (ii) of the interpretation, in which

such U.S. person(s) bears unlimited

responsibility for the obligations and

liabilities of the legal entity. This

alternative prong (ii)(B) would generally

not include an entity that is a

corporation, limited liability company

or limited liability partnership where

shareholders, members or partners have

limited liability. Further, the

Commission stated in the Further

Proposed Guidance that the majority-

ownership criterion would be intended

to avoid capturing those legal entities

that have negligible U.S. ownership

interests. Unlimited liability

corporations where U.S. persons have

majority ownership and where such

U.S. persons have unlimited liability for

the obligations and liabilities of the

entity generally would be covered under

this alternative to prong (ii)(B).

The alternative prong (ii)(B) in the

Further Proposed Guidance was as

follows:

(ii) A corporation, partnership, limited

liability company, business or other trust,

association, joint-stock company, fund or any

form of enterprise similar to any of the

foregoing, in each case that is either (A)

organized or incorporated under the laws of

a state or other jurisdiction in the United

States or having its principal place of

business in the United States or (B) directly

or indirectly majority-owned by one or more

persons described in prong (i) or (ii)(A) and

in which such person(s) bears unlimited

responsibility for the obligations and

liabilities of the legal entity (other than a

limited liability company or limited liability

partnership where partners have limited

liability);

The Further Proposed Guidance

explained that this alternative proposed

prong would generally treat an entity as

a U.S. person if one or more of its U.S.

majority owners has unlimited

responsibility for losses of, or

nonperformance by, the entity. This

prong would reflect that when the

structure of an entity is such that the

U.S. direct or indirect owners are

ultimately liable for the entity’s

obligations and liabilities, the

connection to activities in, or effect on,

U.S. commerce would be expected to

satisfy the requisite jurisdictional nexus.

This ‘‘look-through’’ requirement also

would serve to discourage persons from

creating such indirect ownership

structures for the purpose of engaging in

activities outside of the Dodd-Frank

regulatory regime. Under the Further

Proposed Guidance, this alternative

proposed prong generally would not

render a legal entity organized or

domiciled in a foreign jurisdiction a

‘‘U.S. person’’ simply because the

entity’s swaps obligations are

guaranteed by a U.S. person.

With respect to prong (iv) of the

interpretation of the term ‘‘U.S. person’’

in the Proposed Guidance, the Further

Proposed Guidance set forth an

alternative under which any commodity

pool, pooled account, investment fund

or other collective investment vehicle

generally would be within the

interpretation of the term ‘‘U.S. person’’

if it is (directly or indirectly) majority-

owned by one or more natural persons

or legal entities that meet prong (i) or (ii)

of the interpretation of the term ‘‘U.S.

person.’’ The Further Proposed

Guidance explained that for purposes of

this alternative prong (iv), the

Commission would interpret ‘‘majority-

owned’’ to mean the beneficial

ownership of 50 percent or more of the

equity or voting interests in the

collective investment vehicle. Similar to

the alternative prong (ii)(B) discussed

above, the Commission generally would

not interpret the collective investment

vehicle’s place of organization or

incorporation to be determinative of its

status as a U.S. person. The Further

Proposed Guidance clarified that under

alternative prong (iv), the Commission

would interpret the term ‘‘U.S. person’’

to include a pool, fund, or other

collective investment vehicle that is

publicly traded only if it is offered,

directly or indirectly, to U.S. persons.

The alternative prong (iv) in the

Further Proposed Guidance was as

follows:

(iv) A commodity pool, pooled account,

investment fund, or other collective

investment vehicle that is not described in

prong (ii) and that is directly or indirectly

majority-owned by one or more persons

described in prong (i) or (ii), except any

commodity pool, pooled account, investment

fund, or other collective investment vehicle

that is publicly-traded but not offered,

directly or indirectly, to U.S. persons;

The Further Proposed Guidance

explained that this alternative proposed

prong (iv) is intended to capture

collective investment vehicles that are

created for the purpose of pooling assets

from U.S. investors and channeling

these assets to trade or invest in line

with the objectives of the U.S. investors,

regardless of the place of the vehicle’s

organization or incorporation. These

collective investment vehicles may

serve as a means to achieve the

investment objectives of their beneficial

owners, rather than being separate,

active operating businesses. As such,

the beneficial owners would be directly

exposed to the risks created by the

swaps that their collective investment

vehicles enter into.

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See SIFMA (Aug. 27, 2012) at 5; Societe

Generale (‘‘SocGen’’) (Aug. 8, 2012) at 4; IIB (Aug.

27, 2012) at 4–14; Deutsche Bank AG (‘‘Deutsche

Bank’’) (Aug. 27, 2012) at 1–4; Goldman Sachs

‘‘(Goldman’’) (Aug. 27, 2012) at 3; The Hong Kong

Association of Banks (‘‘Hong Kong Banks’’) (Aug.

27, 2012) at 3–4; Australian Bankers’ Association

Inc. (‘‘Australian Bankers’’) (Aug. 27, 2012) at 4.

SIFMA (August 27, 2012) at A10.

See, e.g., European Commission (Aug. 24, 2012)

at 1–2; Hong Kong Banks (Aug. 27, 2012) at 4; J.P.

Morgan (Aug. 13, 2012) at 9.

See Better Markets (Feb. 15, 2013) at 4–8;

Michael Greenberger and Brandy Bruyere,

University of Maryland, and AFR (‘‘Greenberger/

AFR’’) (Feb. 6, 2013) at 3 (stating that none of the

definitions of U.S. person proposed by the CFTC are

sufficient to protect U.S. taxpayers from the risks

of foreign subsidiaries and affiliates of U.S.

financial institutions). See also Letter from Sen.

Levin at 7–8.

See, e.g., Cleary (Aug. 16, 2012) at 6; SIFMA

(Aug. 27, 2012) at A8–9; IIB (Aug. 9, 2012) at 4;

Deutsche Bank (Aug. 13, 2012) at 2; State Street

Corporation (‘‘State Street’’) (Aug. 27, 2012) at 2;

Goldman (Aug. 27, 2012) at 3.

See IIB (Aug. 9, 2012) at 4.

For purposes of IIB’s definition, a foreign

branch of a U.S. swap dealer would be considered

a non-U.S. person. IIB added that it believes that the

Commission should adopt a final definition of ‘‘U.S.

person’’ that is consistent with its proposed interim

definition. Id.

See SIFMA (Aug. 25, 2012) at A8.

Id. at A8.

100

See IIAC (Aug. 27, 2012) at 3–5.

101

See Lloyds Banking Group (‘‘Lloyds’’) (Aug.

24, 2012) at 3; Managed Fund Association and

Alternative Investment Management Association

(‘‘MFA/AIMA’’) (Aug. 28, 2012) at 6.

102

See Letter from Sen. Levin at 7–8.

103

Id. (stating that it ‘‘makes little economic

sense, given the insubstantial reality of many

foreign affiliates and subsidiaries in the financial

industry’’ to ‘‘view a foreign affiliate or subsidiary

as a non-U.S. person even if it were fully integrated

with its U.S. parent, operated as a wholly owned

shell operation with no offices or employees of its

own, and functioned in the same way as a branch

or agency office’’).

104

Id. at 8.

105

See Capital Markets (Aug. 24, 2012) at 5.

106

See SIFMA (Aug. 27, 2012) at A13 and A19.

2. Comments

In general, commenters stated that the

proposed ‘‘U.S. person’’ interpretation

presented significant interpretive issues

and implementation challenges.

The

commenters contended that it would be

difficult to determine U.S. person status

because of the breadth of the proposed

interpretation, potential ambiguities it

contains, and the collection of

information its application may require.

The commenters, therefore, urged the

Commission to consider how the

proposed interpretation could be stated

in a simpler and more easily applied

manner.

While a number of

commenters stated that the

Commission’s construction of the term

‘‘U.S. person’’ in the Proposed Guidance

was overbroad,

several commenters on

the Further Proposed Guidance

advocated for a broader reading of the

term than any of those proposed by the

Commission.

a. Phase-in Interpretation

A number of commenters requested

that the Commission adopt an interim

interpretation of ‘‘U.S. person’’ that

would allow firms to rely on their

existing systems and classifications and

avoid the need to develop systems to

follow a temporary interpretation of the

term ‘‘U.S. person’’ that may change in

the near future.

IIB explained that

applying any interpretation of ‘‘U.S.

person’’ that departs from status based

on residence or jurisdiction of

organization, and in some cases

principal place of business, will require

sufficient time to implement relevant

documentation conventions and

diligence procedures.

IIB, therefore,

requested that the Commission

implement a phased-in approach to the

‘‘U.S. person’’ interpretation that would

encompass, in general, (1) a natural

person who is a U.S. resident and (2) a

corporate entity that is organized or

incorporated under the laws of the

United States or has its place of

business in the United States.

SIFMA also urged the Commission to

phase in the ‘‘U.S. person’’

interpretation, citing the

implementation difficulties identified

by IIB. Specifically, SIFMA

recommended that the Commission

allow market participants to apply an

interim interpretation of ‘‘U.S. person’’

until 90 days after the final

interpretation of ‘‘U.S. person’’ is

published.

SIFMA stated that the

interim interpretation—which was

identical to IIB’s interim

interpretation—should identify ‘‘core’’

U.S. persons and would allow its

members to phase in compliance with

the Dodd-Frank requirements without

building new systems that might have to

be changed when the Commission states

a final interpretation of the term.

b. Comments on Particular Prongs of the

Proposed Interpretation of the Term

‘‘U.S. Person’’

Commenters’ concerns were primarily

(though not exclusively) directed to

three prongs of the proposed ‘‘U.S.

person’’ interpretation: prong (ii)(B)

relating to U.S. owners that are

responsible for the liabilities of a non-

U.S. company; prong (iv) relating to

commodity pools and funds with

majority-U.S. ownership; and prong (v)

relating to registered commodity pool

operators. Below, the Commission

describes the main comments to all the

prongs of the proposed interpretation of

‘‘U.S. person’’ in greater detail.

Commenters generally did not

comment on prong (i).

With respect to prong (ii)(A), the

Investment Industry Association of

Canada (IIAC) stated that the

Commission should look to the location

of a legal entity’s management (or the

majority of its directors and executive

officers), instead of the location of

organization.

100

Two commenters stated

that the ‘‘principal place of business’’

element of the interpretation was

ambiguous and difficult to administer

and thus recommended that it be

removed.

101

On the other hand, Senator Levin

supported an inclusive interpretation of

the term ‘‘U.S. person’’ that would

encompass foreign offices and affiliates

of U.S. financial institutions and

corporations, because requiring a case-

by-case analysis of whether they should

be subject to the Dodd-Frank Act would

be complicated, burdensome, and

susceptible to gamesmanship.

102

He also

suggested that, since it appears that

typically foreign affiliates and

subsidiaries operate not as independent

actors but are closely integrated with

their parent corporations, obtaining

from them the financial backing needed

for their derivative trades, the

Commission’s interpretation should

presume that a foreign affiliate engaged

in swap activity is an extension of the

parent corporation, unless the parent

can demonstrate that the foreign affiliate

should be treated as independent.

103

Senator Levin also stated that the

Commission’s interpretation should

include as a U.S. person any foreign

affiliate under common control with a

U.S. person, based on factors such as

common management, funding,

systems, and financial reporting.

104

With respect to prong (ii)(B) of the

interpretation, which addresses

situations where the direct or indirect

owners of an entity are responsible for

its liabilities, several commenters stated

that the phrase ‘‘responsible for the

liabilities’’ was vague. For example, the

Committee on Capital Markets

Regulation (‘‘Capital Markets’’) stated

that the phrase ‘‘responsible for the

liabilities’’ was open to interpretation

and requested that the Commission

provide more details regarding its

interpretation of this phrase.

105

SIFMA

sought clarification on whether the

Commission intended to capture

partnerships where the partners have

unlimited liability.

106

The International

Swaps and Derivatives Association Inc.

(‘‘ISDA’’) stated that it was not clear

whether the concept includes

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107

See ISDA (Aug. 27, 2012) at 9; MFA/AIMA

(Aug. 28, 2012) at 6.

108

See Deutsche Bank (Aug. 27, 2012) at 3. See

also Peabody Energy Corporation (‘‘Peabody’’)(Aug.

28, 2012) at 2–3 (‘‘By contrast, a foreign affiliate or

subsidiary of a U.S. person would be considered a

non-U.S. person, even where such an affiliate or

subsidiary has certain or all of swap-related

obligations guaranteed by the U.S. person.’’) (citing

Proposed Guidance, 77 FR at 41218); SIFMA (Aug.

27, 2012) at A2 (stating that the Commission should

clarify that prong (ii)(B) of the interpretation is not

meant to capture an entity merely because it is

guaranteed by a U.S. person).

109

See Sumitomo (Aug. 24, 2012) at 2.

110

See ISDA (Aug. 10, 2012) at 8 (recommending

that regardless of the nature of the ‘‘responsibilities

for the liabilities,’’ only direct owners of apparent

non-U.S. persons should be considered, and that

the Commission adopt a presumptive control

threshold of 25% direct ownership for

distinguishing between control persons and owners

that need not be considered in assessing the status

of an entity as a U.S. person).

111

See FSR (Aug. 27, 2012) at 3.

112

See Capital Markets (Aug. 24, 2012) at 5.

113

See FSR (Aug. 27, 2012) at 3.

114

See CEWG, submitted by Sutherland Asbill &

Brennan LLP (Feb. 25, 2013) at 5.

115

Id.

116

See ICI (Feb. 6, 2013) at 3.

117

See id. at 2. See also IIB (Feb 6, 2013) at 10–

11 (collective investment vehicles should be

excluded from prong (ii) and addressed only in

prong (iv)).

118

See MFA/AIMA (Feb. 6, 2013) at 7–8. Thus

under MFA/AIMA’s approach, the status of

collective investment vehicles would be determined

by reference to only the tests in alternative prong

(ii)(B).

119

Id. at 10–11; Asociacio

n Bancaria y de

Entidades Financieras de Colombia (‘‘Colombian

Bankers’’) (Feb. 6, 2013) at 1–2; IIB (Feb. 6, 2013)

at 10; ISDA (Feb. 6, 2013) at 5–6.

120

See MFA/AIMA (Feb. 6, 2013) at 12; SIFMA/

AMG (Feb. 14, 2013) at 6. ISDA stated that the

Commission should clarify how the prong would

apply to an entity where some but not all of the

owners have unlimited responsibility. In this case,

the Commission should clarify whether the U.S.

owners with majority ownership of the entity also

each must bear unlimited responsibility for the

entity’s obligations and liabilities or, rather,

whether it suffices that a single U.S. owner has

unlimited responsibility once U.S. majority

ownership is established. See ISDA (Feb. 6, 2013)

at 5–7.

121

See Greenberger/AFR (Feb. 6, 2013) at 7;

Better Markets (Feb. 15, 2013) at 7–8.

122

See Greenberger/AFR (Feb. 6, 2013) at 7.

123

See MFA/AIMA (Feb. 6, 2013) at 7; SIFMA,

The Clearing House, Association LLC (‘‘The

Clearing House’’), and FSR (‘‘SIFMA/CH/FSR’’)

(Feb. 6, 2013) at 2, A8–9; ISDA (Feb. 6, 2013) at 5.

IIB and SIFMA/AMG made similar comments and

questioned whether extending this prong to entities

where a majority of indirect owners are U.S.

persons would be consistent with the ‘‘direct and

significant connection’’ language in CEA section

2(i). See IIB (Feb. 6, 2013) at 10; SIFMA/AMG (Feb.

14, 2013) at 3–4.

guarantees, sureties, simple risk of loss

of equity, or other type of exposure.

107

Deutsche Bank further noted that the

language in prong (ii)(B) could be read

to include an entity guaranteed by a

U.S. person, which appears at odds with

possibly varying policies elsewhere in

the Proposed Guidance for entities

guaranteed by U.S. persons.

108

Commenters also expressed concerns

about the lack of a minimum U.S.-

ownership threshold. For example,

Sumitomo Mitsui Trust Bank Ltd.

(‘‘Sumitomo’’) stated that there should

be a minimum level of ownership of the

entity in question by one or more U.S.

persons for this prong to apply, and

suggested that the majority ownership

threshold used in prong (iv) apply here

as well.

109

ISDA emphasized a different

point, stating that without clear

thresholds, a non-U.S. business would

be within the Commission’s

interpretation of the term ‘‘U.S. person’’

by virtue of even negligible ownership

interests by U.S. persons.

110

The

Financial Services Roundtable (‘‘FSR’’)

stated that prong (ii) is overbroad

because it would cover even minority-

U.S. owned institutions based only on a

pro-rata (or less) parent liability

guarantee.

111

Capital Markets raised a concern that

whether a conclusion that the direct or

indirect owners of a U.S. legal entity are

‘‘responsible for the liabilities’’ of such

entity requires knowledge of each

counterparty’s legal and ownership

structure.

112

FSR stated that

interpretation of prong (ii)(B) would

depend on a reevaluation of most, if not

all, counterparty relationships in order

to determine what type of liability

guarantees exist between an entity and

its parent.

113

Both Capital Markets and

FSR stated that firms do not currently

have any reasonable means to obtain

information necessary to assess this

element of the interpretation,

particularly within the short time frame

prior to the registration date.

One commenter supported

finalization of the alternative prong

(ii)(B) in the Further Proposed

Guidance, with minor clarifying

changes. The Commercial Energy

Working Group (‘‘CEWG’’) stated that

the words ‘‘all of’’ should be added to

clarify that this prong would generally

apply when U.S. persons that are

majority owners bear ‘‘unlimited

responsibility for all of the obligations

and liabilities of the legal entity

. . .’’

114

The CEWG also stated that the

Guidance should reaffirm that a

guarantee of a non-U.S. person by a U.S.

person, in and of itself, generally would

not invoke U.S. person status.

115

Other

commenters that supported the

principles of the alternative prong (ii)(B)

thought that the interpretation of ‘‘U.S.

person’’ in this regard should be

restructured. The Investment Company

Institute (‘‘ICI’’) stated that the

Commission should clarify that

collective investment vehicles would

not fall within the alternative prong

(ii)(B) because the investors’ liabilities

are limited to the amount of their

investment.

116

Thus, ICI stated that it

believes the alternative prong (ii)(B)

would be superfluous with respect to

collective investment vehicles because

the alternative prong (iv) in the Further

Proposed Guidance would address these

entities if they are majority-owned by

U.S. persons.

117

MFA/AIMA, on the

other hand, supported the combination

of majority ownership and unlimited

liability elements in the alternative

prong (ii)(B) and recommended that

collective investment vehicles be

considered under that prong.

118

Other commenters stated that the

Commission should clarify that the

language at the end of the proposed

alternative prong (ii)(B), which refers to

limited liability companies and limited

liability partnerships, would generally

also apply to other types of entities

where owners have limited liability but

where the entities have different names

in foreign legal jurisdictions.

119

MFA/

AIMA and SIFMA AMG stated that the

Commission should clarify how

frequently an entity should consider

(e.g., annually) whether U.S. persons are

its direct or indirect majority owners,

and provide for a transition period after

an entity falls within this prong of the

interpretation for the first time.

120

Other commenters were critical of the

alternative prong (ii)(B). Greenberger/

AFR and Better Markets stated that this

proposed prong is too narrow, because

it appears to require that U.S. persons be

both the majority owners of an entity

and bear unlimited responsibility for the

entity’s obligations and liabilities, in

order for the entity to be within the

Commission’s interpretation of the term

‘‘U.S. person’’ based solely on

ownership by U.S. persons.

121

Greenberger/AFR pointed out that a U.S.

person could be the majority owner of

an entity organized outside the United

States, and be responsible for 99% of

the entity’s obligations, yet the entity

would not fall within the Commission’s

interpretation under the proposed

prong.

122

Other commenters suggested that the

alternative prong (ii)(B) is too broad,

recommending that the ownership

element be limited to when a majority

of the direct owners of an entity are U.S.

persons, because considering the

indirect ownership of an entity will be

unworkable for many entities.

123

ISDA

also stated that the concept of

‘‘unlimited responsibility’’ is too

amorphous to be a basis for the

Commission’s interpretation, because it

could turn on fact-sensitive and

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124

See ISDA (Feb. 6, 2013) at 6. ISDA also stated

that the Commission should make clear that the

reference to ‘‘unlimited responsibility’’ does not

include responsibility arising out of separate

contractual arrangements or extraordinary

circumstances, such as conduct by owners that

results in veil piercing or limited partner

participation in management of a partnership. See

id. SIFMA/CH/FSR made similar points and stated

that this prong is not necessary because market

participants have not used unlimited liability

entities to avoid Dodd-Frank regulations. See

SIFMA/CH/FSR (Feb. 6, 2013) at A12.

125

See ISDA (Feb. 6, 2013) at 6.

126

Id. at 6–7; SIFMA/CH/FSR (Feb. 6, 2013) at

A1, A5–6, B5; IIB (Feb. 6, 2013) at 7–8, 10.

127

See MFA/AIMA (Feb. 6, 2013) at 8–9; SIFMA/

AMG (Feb. 6, 2013) at A7–8. The Japanese Bankers

Association made similar comments and stated that

the Commission should clarify whether the location

of the principal place of business of a subsidiary

that is controlled by its parent is the location of the

subsidiary’s headquarters or the parent’s

headquarters. Japanese Bankers Association (Feb. 6,

2013) at 7.

128

See Peabody (Feb. 5, 2013) at 1–2; SIFMA/

AMG (Feb. 6, 2013) at 1–3.

129

See, e.g., ISDA (Aug. 10, 2012) at 8; SIFMA

(Aug. 27, 2012) at A17; Credit Suisse (Aug. 27,

2012) at 3–4; The Clearing House Association LLC

(‘‘The Clearing House’’) (Aug. 27, 2012) at 12–13;

Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012) at

6–7.

130

See SIFMA (Aug. 27, 2012) at A17–18. See

also IIB (Aug. 27, 2012) at 7 (arguing that since

pools cannot ascertain or control the status of their

indirect investors, the reference to indirect

ownership should be removed).

131

SIFMA (Aug. 27, 2012) at A17.

132

See The Clearing House (Aug. 13, 2012) at 15

n. 20.

133

See, e.g., SIFMA/AMG (Aug. 27, 2012) at 2–

3; MFA/AIMA (Aug. 28, 2012) at 4–5; ICI (Aug. 23,

2012) at 4.

134

See Cleary (Aug. 16, 2012) at 6–7.

135

Id.

136

Id. IIB also noted that fund sponsors/operators

verify investor status through subscription materials

provided at the time of initial investment.

Therefore, they request that any test based on fund

ownership apply only to funds formed after the

effective date of the final ‘‘U.S. person’’

interpretation. IIB also agreed that majority

ownership is the minimum threshold under which

a foreign fund should be included in the

interpretation of the term ‘‘U.S. person.’’ See IIB

(Aug. 27, 2012) at 6–7.

137

See, e.g., SIFMA (Aug. 27, 2012) at A20; ICI

(Aug. 23, 2012) at 3–7; MFA/AIMA (Aug. 28, 2012)

at 4; Credit Suisse (Aug. 27, 2012) at 3–4.

138

See ICI (Aug. 23, 2012) at 3.

139

ICI also noted that certain jurisdictions may

prohibit disclosure by intermediaries of beneficial

owner information. Id.

140

See SIFMA (Aug. 27, 2012) at A19–20.

141

See Credit Suisse (Aug, 27, 2012) at 3–4.

142

See Citadel (Feb. 6, 2013) at 1.

143

See id.

uncertain legal judgments under

doctrines such as ‘‘veil-piercing’’ or

‘‘alter ego’’ entities.

124

Moreover, ISDA

asserted that the Commission has not

justified the treatment of unlimited

liability entities in the proposed

alternative prong (ii)(B) by

demonstrating how such entities are

more susceptible to being used to evade

Dodd-Frank regulations or otherwise

raise the concerns addressed by the

Commission’s regulations.

125

Commenters were also critical of the

element of the alternative prong (ii)(B)

that would treat a collective investment

vehicle as a U.S. person if its principal

place of business is in the United States.

They stated that application of this

element would be very unclear and

difficult on an operational level.

126

Commenters also stated that a collective

investment vehicle should be treated as

a U.S. person if it is organized in the

U.S., not if its manager or operator is in

the U.S.

127

Peabody Energy Corporation

(‘‘Peabody’’) and SIFMA/AMG stated

the Commission should adopt the

interpretation of U.S. person in the

January Order, which does not include

all the elements of the proposed

alternative prong (ii)(B).

128

Commenters generally did not

comment on prong (iii) of the proposed

interpretation of the term ‘‘U.S. person.’’

With respect to prong (iv) relating to

majority direct- or indirect-owned

commodity pools, pooled accounts, or

collective investment vehicles, several

commenters stated that this prong was

unworkable because the proposed

interpretation would require potentially

unascertainable information.

129

According to SIFMA, reliance on

representations would be the only

practical way to consider the status of

counterparties as U.S. persons under

this prong since other types of

information, such as the direct and

indirect ownership of any commodity

pool, pooled account or collective

investment vehicle with which a market

participant transacts, may be

unavailable, non-public or otherwise

sensitive.

130

Moreover, a fund would be

required to monitor its level of U.S.

ownership on an on-going basis, and

this prong could result in frequent

changes in the fund’s U.S. person

status.

131

The Clearing House argued

that the interpretation should not look

through direct investors to indirect

investors, unless there is evidence of

evasion.

132

Other commenters

questioned whether the proposed

interpretation of ‘‘U.S. person’’ for

commodity pools, pooled accounts, and

collective investment vehicles meets the

‘‘direct and significant’’ jurisdictional

nexus applicable to the Commission’s

application of Title VII to transactions

with such persons.

133

Cleary urged that the Commission not

adopt an interpretation of ‘‘U.S. person’’

based on the composition of fund

ownership, at least prior to finalizing

the interpretation.

134

As it explained,

even if the Commission’s interpretation

would allow for reasonable reliance on

counterparty representations, fund

counterparties would not be able to

provide any representation except with

respect to funds formed after the

finalization of the interpretation for

which the fund’s subscription materials

could have been modified to capture the

relevant information.

135

If the

Commission nevertheless decided to

adopt an interpretation based on

investor composition, Cleary argued

against including a fund in the

interpretation on the basis of indirect

ownership at any level less than a

majority-ownership.

136

Consideration of majority-ownership

is particularly problematic with respect

to funds that are publicly traded,

according to several commenters.

137

For

example, ICI explained that U.S.

persons typically purchase shares in

non-U.S. funds through intermediaries,

and that such shares are registered and

held in nominee/street name

accounts.

138

In such cases, the fund

manager/operator would not have

information regarding the underlying

investors.

139

SIFMA recommended that

publicly offered and listed commodity

pools organized in foreign jurisdictions

be excluded from the interpretation.

140

Credit Suisse stated that a fund should

not be considered a U.S person to the

extent that it is organized outside the

United States and is subject to foreign

regulation that is comparable to U.S.

law. To the extent the fund is not so

regulated, then the fund would be

within the U.S. person interpretation

only where it is organized under the

laws of the United States or marketed to

U.S. residents.

141

One commenter strongly supported

the alternative prong (iv) in the Further

Proposed Guidance. Citadel stated that

since the Dodd-Frank clearing and

reporting requirements will mitigate

systemic risk, increase transparency and

promote competition, the U.S. person

interpretation should encompass

offshore collective investment vehicles

that have a sufficient U.S. nexus.

142

If it

did not, then a core, active portion of

the swaps market would fall outside the

scope of the transaction level

requirements, including clearing, which

would undermine central objectives of

Dodd-Frank, create opportunities for

regulatory arbitrage, and risk

fragmenting the swaps markets.

143

Other commenters argued that the

entities that would be covered by the

alternative prong (iv) should not be

covered by the interpretation of ‘‘U.S.

person,’’ which should cover only

entities that are directly majority-owned

by U.S. persons. For example, SIFMA/

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144

See SIFMA/CH/FSR (Feb. 6, 2013) at A8–9.

See also IIB (Feb. 6, 2013) at 11 (systems to track

indirect ownership would be difficult and

expensive to implement).

145

See SIFMA/CH/FSR (Feb. 6, 2013) at A8–9.

ISDA stated that the lack of an objective policy

regarding the interpretation of majority ownership

would lead to arbitrary or indeterminate results for

many collective investment vehicles due to their

varied capital structures (citing, for example,

structured finance vehicles, which merit further

analysis due not only to their complex capital

structures but also to practical difficulties in

monitoring ownership of their securities), and the

practical consequences of the alternative

interpretations can be considered only following a

more concrete proposal offered for public comment.

See ISDA (Feb. 6, 2013) at 6–7.

146

MFA/AIMA stated that since interactions

between collective investment vehicles and

registered swap dealers are expected to be covered

by Dodd-Frank requirements or comparable foreign

regulations, the inclusion of collective investment

vehicles as ‘‘U.S. persons’’ is less important to

achieve regulatory coverage. See MFA/AIMA (Feb.

6, 2013) at 7–8. MFA/AIMA also disputed whether

the pooling of assets in a collective investment

vehicle is a fundamental difference that denotes a

greater U.S. nexus than the pooling of assets by

corporations or other financial entities, and

therefore it is problematic that alternative prong (iv)

is more onerous (in MFA/AIMA’s view) for non-U.S

collective investment vehicles than alternative

prong (ii) is for corporate or other financial entities.

See id. IAA stated that it is inappropriate to define

an entity as a U.S. person based on characteristics

of investors in the entity rather than the

characteristics of the entity itself. See IAA (Feb. 6,

2013) at 4.

147

See Invesco Advisers Inc. (‘‘Invesco’’) (Feb. 6,

2013) at 11 (manager of collective investment

vehicle determines whether to make offering in the

United States; subsequent purchases by non-U.S.

persons who have relocated to the U.S. should not

alone constitute offering in the U.S.); IIB (Feb. 6,

2013) at 11. Invesco, ICI and IAA each stated that

the language at the end of alternative prong (iv) (if

it is adopted) should be interpreted to cover

collective investment vehicles that are ‘‘publicly-

offered’’ only to non-U.S. persons, even if the

vehicles are not publicly-traded. See Invesco (Feb.

6, 2013) at 2; ICI (Feb. 6, 2013) at 3; IAA (Feb. 6,

2013) at 4. See also ICI (Jul. 5, 2013) at 3 n. 9

(‘‘There is an important distinction between

publicly-traded funds and publicly-offered funds:

publicly-offered funds are those that are broadly

available to retail investors; publicly-traded funds

are simply a subset of publicly-offered funds that

trade on exchanges or other secondary markets.

Excluding from the U.S. person definition only

publicly-traded funds would capture only a subset

of non-U.S. regulated funds. We note that, by

contrast, hedge funds are neither publicly offered

nor publicly traded and, unlike non-U.S. retail

funds, are not subject to substantive government

regulation and oversight similar in scope to that

provided by the U.S. Investment Company Act.’’).

ICI and IAA stated that the Commission should

interpret whether an offer is made to U.S. persons

in accordance with precedents under the SEC’s

Regulation S. See ICI (Feb. 6, 2013) at 4–5 n. 14;

IAA (Feb. 6, 2013) at 4. ISDA stated that the

Commission’s interpretation should specifically

exclude any collective investment vehicle that

offers its securities in accordance with local law

and customary documentation practices in a local

market, as well as offerings conducted in

accordance with the Regulation S. See ISDA (Feb.

6, 2013) at 7.

148

See SIFMA/AMG (Feb. 14, 2013) at 4 n. 8; IIB

(Feb. 6, 2013) at 7; ISDA (Feb. 6, 2013) at 7;

Japanese Bankers Association (Feb. 6, 2013) at 5.

149

See, e.g., SIFMA (Aug. 27, 2012) at A21; ICI

(Aug. 23, 2012) at 3–7; IIB (Aug. 9, 2012) at 3; MFA/

AIMA (Aug. 28, 2012) at 4–5; IIAC (Aug. 27, 2012)

at 4, 5. As IIB explained, even a fund that lacks a

sufficient U.S. connection can be considered a U.S.

person where its commodity pool operator is

required to register. IIB (Aug. 9, 2012) at 3. Under

Commission regulation 3.10, the operator of a non-

U.S. fund with even one U.S.-based owner is

required to register as a commodity pool operator.

150

See SIFMA (Aug. 27, 2012) at A13; ICI (Aug,

23, 2012) at 4; Cleary (Aug. 16, 2012) at 7; The

Clearing House (Aug. 27, 2012) at 13–14.

151

See ICI (Aug. 23, 2012) at 5–6.

152

Id. at 6–7. Regulation S is codified at 17 CFR

230.901 through 230.905.

153

IIAC (Aug. 27, 2012) at 4.

CH/FSR stated that consideration of

indirect ownership could require

ongoing monitoring of ownership,

which is burdensome or even

impossible, and would not necessarily

reflect a sufficient jurisdictional nexus

to the United States.

144

SIFMA/CH/FSR

also stated that if consideration of

majority ownership is included in the

interpretation, it should reflect an

objective statement of the ownership

level that the Commission would

consider relevant to U.S.-person status,

so as to exclude entities that are owned

by U.S. persons only to a de minimis

extent and allow an annual

consideration of ownership.

145

MFA/

AIMA and the Investment Adviser

Association (‘‘IAA’’) also provided

reasons that there is not a sufficient

jurisdictional nexus with the United

States to include in the Commission’s

interpretation of the term ‘‘U.S. person’’

collective investment vehicles that are

indirectly majority-owned by U.S.

persons.

146

Some commenters stated that whether

a collective investment vehicle would

be included in the interpretation of U.S.

person should depend on whether the

fund or other collective investment

vehicle is being offered to U.S. persons,

arguing that the interpretation should

cover collective investment vehicles

that are targeted to the U.S. market or

to U.S. investors by focusing on

activities within the control of the

vehicle’s manager.

147

Commenters also stated that

regardless of the policy adopted in this

regard, in the consideration of whether

an entity is a U.S. person, only

information that is available to third

parties or other parties should be

considered relevant, and the

Commission’s policy should

contemplate that market participants

would rely on a representation of U.S.

person status. Also, the Commission’s

policy should clarify how it would

apply during the transition period

immediately after expiration of the

January Order.

148

Addressing prong (v) relating to

registered commodity pool operators,

many commenters stated that the

Commission should not adopt an

interpretation that looks to the

registration status of a fund’s operator,

because this interpretation could

capture a non-U.S. fund that does not

itself trigger registration as a commodity

pool operator and has a minimal U.S.

nexus.

149

A number of commenters

urged the Commission not to adopt an

interpretation that looks to the

nationality of the fund’s manager/

operator since this would place U.S.-

based investment managers at a

competitive disadvantage, without

addressing the Commission’s regulatory

objectives.

150

IIB generally agreed with

these commenters and stated that the

commodity pool operator registration

prong would be over-inclusive because,

under the Commission’s current rules,

an operator of a foreign pool may be

required to register as a commodity pool

operator with less than 50 percent U.S.

ownership; at the same time, the prong

also would be under-inclusive because

it would not cover funds whose

operators are eligible for relief from

commodity pool operator registration.

ICI recommended that the

Commission, instead, interpret the term

‘‘U.S. person’’ to include a commodity

pool, pooled account, or collective

investment vehicle that is ‘‘offered

publicly, directly or indirectly’’ by the

manager/sponsor to U.S. persons.

151

ICI explained, this alternative approach

would base a fund’s U.S. person status

on more workable considerations, and

not on changes in investor status that

are beyond the control of a fund or its

manager/operator. In the consideration

of whether a fund is making a public

offering to U.S. persons, ICI

recommended that the Commission look

to SEC Regulation S.

152

IIAC recommended that prong (vi)

relating to pension plans be modified so

that pension plans designed exclusively

for foreign employees of a U.S.-based

entity are not within the interpretation

of the term ‘‘U.S. person.’’ Further, IIAC

urged the Commission to clarify that

U.S. investment advisers or other

fiduciaries not be considered to be

within the interpretation of the term

‘‘U.S. person’’ when they are acting on

behalf of non-U.S. accounts.

153

IIB stated that prong (vii) relating to

an estate or trust should be replaced,

explaining that market participants do

not typically identify an estate’s or

trust’s regulatory status on the basis of

its tax status. Instead, it recommended

that the Commission’s interpretation

look to the status of the executor,

administrator, or trustee. Specifically,

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154

IIB (Aug. 27, 2012) at 14.

155

See, e.g., SIFMA (Aug. 27, 2012); IIB (Aug. 27,

2012); The Clearing House (Aug. 27, 2012).

156

See SIFMA (Aug. 27, 2012) at A10–11.

157

See IIB (Aug. 27, 2012) at 13–14.

158

See, e.g., SIFMA (Aug. 27, 2012) at A16–17;

Deutsche Bank (Aug. 27, 2012) at 4; Capital Markets

(Aug. 24, 2012) at 5; SIFMA/AMG (Aug. 27, 2012)

at 4–5.

159

SIFMA (Aug. 27, 2012) at A16–18.

160

SIFMA/AMG (Aug. 27, 2012) at 4–5; Cleary

(Aug. 16. 2012) at 6.

161

See Proposed Guidance, 77 FR at 41218. For

purposes of this Guidance, the Commission

generally interprets the term ‘‘affiliates’’ to include

an entity’s parent entity and subsidiaries, if any,

unless stated otherwise.

162

Id.

163

Id.

164

See Public Citizen’s Congress Watch (‘‘Public

Citizen’’) (Aug. 14, 2012) at 9–10; IATP (Aug. 27,

2012) at 4; Better Markets (Aug. 27, 2012) at 6.

165

See Letter from Sen. Levin at 8.

166

See id. (citing Proposed Guidance, 77 FR at

41218).

167

Public Citizen (Aug. 14, 2012) at 3.

168

Greenberger (Aug. 27, 2012) at 6–7.

169

See Better Markets (Aug. 27, 2012) at 6–7;

Public Citizen (Aug. 14, 2012) at 3.

170

See Sullivan & Cromwell (Aug. 13, 2012) at

A2–3. See also Hong Kong Banks (Aug. 27, 2012)

at 4.

IIB recommended that the Commission’s

interpretation of the term ‘‘U.S. person’’

include an estate or trust that is

organized in the United States ‘‘unless

(A) an executor, administrator or trustee

that is not a U.S. person has sole or

shared investment discretion with

respect to the assets of the trust or

estate, (B) in the case of an estate, the

estate is governed by foreign law and (C)

in the case of a trust, no beneficiary of

the trust (and no settlor if the trust is

revocable) is a U.S. person . . . .’’

154

c. Commenters’ Proposed Alternatives

A number of commenters provided

substantially different alternative

interpretations of the term ‘‘U.S.

person.’’

155

Most notably, the

commenters’ alternatives would not

encompass persons by virtue of

‘‘indirect’’ U.S. ownership. For example,

SIFMA’s proposed ‘‘U.S. person’’

interpretation would include only those

commodity pools or collective

investment vehicles that are organized

or incorporated under U.S. law or are (1)

directly majority owned by ‘‘U.S.

persons’’ or, in the case of ownership by

a pool, a pool that is organized in the

United States and (2) not publicly

offered.

156

IIB submitted an alternative

‘‘U.S. person’’ interpretation that

generally tracked SIFMA’s proposed

interpretation.

157

d. Due Diligence

Many commenters stated that the

Commission’s policy in this regard

should contemplate that a firm would

reasonably rely on counterparty

representations regarding their U.S.

person status.

158

For example, SIFMA

stated that the Commission’s policy

should be consistent with a

determination by the swap counterparty

itself of its U.S.-person status, but in the

alternative, SIFMA recommended that

the Commission’s policy contemplate

reasonable reliance on counterparty

representations.

159

According to these

commenters, counterparty

representations are the only practical

means of determining counterparty

status as firms do not currently collect

the information necessary to evaluate

counterparty status under the proposed

interpretation. The commenters also

were concerned that certain prongs of

the proposed interpretation (e.g., ‘‘look-

through’’ obligations associated with the

‘‘direct and indirect ownership’’

criterion in prong (iv)) would render it

difficult, if not impossible, for market

participants to directly consider

whether their counterparties would be

within the Commission’s interpretation

of the term ‘‘U.S. person.’’ SIFMA and

Cleary further pointed out that the

Commission has accepted reasonable

reliance on counterparty representations

in the context of the external business

conduct standards.

160

e. Non-U.S. Person That Is Affiliated,

Guaranteed, or Controlled by U.S.

Person

Viewed as a whole, the proposed

interpretation of the term ‘‘U.S. person,’’

would generally not include a non-U.S.

affiliate of a U.S. person, even if all of

such affiliate’s swaps are guaranteed by

the U.S. person.

161

The Commission,

nevertheless, raised a concern regarding

risks associated with a U.S. person

providing a guarantee to its non-U.S.

affiliates and requested comments on

whether the term ‘‘U.S. person’’ should,

in fact, be interpreted to generally

include a non-U.S. affiliate guaranteed

by a U.S. person.

162

In addition, the

Commission sought comments on

whether the term ‘‘U.S. person’’ also

should be interpreted to generally

include any non-U.S. persons controlled

by or under common control with a U.S.

person.

163

Responding to the Commission’s

request for comments on this issue,

many commenters stated that Title VII

requires the Commission to interpret the

term ‘‘U.S. person’’ to include foreign

affiliates of U.S. persons, and U.S.

affiliates of foreign persons, in order to

protect U.S. taxpayers from the risks

posed by the global swaps market.

164

Senator Levin urged that ‘‘[a]t a

minimum, it is essential that [the

Guidance] . . . include as a U.S. person

any foreign affiliate or subsidiary under

common control with a U.S. person.’’

165

He also agreed with statements in the

Proposed Guidance that non-U.S.

affiliates guaranteed by U.S. persons

effectively transfer the risks of their

swaps to the U.S. guarantor, and

therefore the guaranteed non-U.S.

affiliates should be subject to U.S.

safeguards.

166

Public Citizen stated that

not interpreting the term ‘‘U.S. person’’

to include a foreign affiliate of a U.S.

person ‘‘hides the rabbit in the hat’’ for

Title VII purposes.

167

It argued that

Congress intended financial entities that

are controlled by U.S. financial

institutions or that could adversely

impact the U.S. economy to be regulated

as U.S. persons under Title VII in order

to fully protect American taxpayers

from the threat of ‘‘future financial

bailouts.’’

Greenberger also expressed support

for including foreign swap entities

controlled by U.S. parents in the

interpretation of the term ‘‘U.S. person.’’

In his view, the Commission’s

distinction between guaranteed and

non-guaranteed foreign subsidiaries is

arbitrary, as the absence of a U.S.

guarantee does not insulate the U.S.

parent from risk exposure.

168

Other

commenters argued that the

Commission’s interpretation of the term

‘‘U.S. person’’ should include foreign

affiliates whose swaps are guaranteed by

a U.S. person.

169

Other commenters objected to

including a non-U.S. entity in the

interpretation of the term ‘‘U.S. person’’

solely on the basis of affiliation with a

U.S. person or having its swaps

guaranteed by a U.S. person. Sullivan &

Cromwell argued that foreign operations

of a U.S.-based bank do not have a

‘‘direct and significant connection with

activities in, or effect on,’’ U.S.

commerce based solely on affiliation

with or guarantee by a U.S. parent

bank.

170

It stated that overseas

operations usually have a non-U.S.

orientation (i.e., transactions with non-

U.S. counterparties for non-U.S.

business purposes), and thus the

connection to U.S. commerce is indirect

and, further, transactions with non-U.S.

counterparties will not have a

significant effect on U.S. commerce.

Other commenters raised similar

concerns about the lack of jurisdictional

nexus. For example, The Clearing House

stated that the Commission must

conclude that the risk to the U.S. entity

is ‘‘significant’’ before designating a

non-U.S. guaranteed entity a ‘‘U.S.

person,’’ and further stated that a non-

U.S. entity that is subject to local capital

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171

See The Clearing House (Aug. 27, 2012) at 17.

172

See SIFMA (Aug. 27. 2012) at A20. See also

Australian Bankers (Aug. 27, 2012) at 4 (stating that

the control concept should not be relevant in the

definition of ‘‘U.S. person,’’ and while common

control may potentially indicate common risk, the

Commission’s focus on the ultimate location of the

risk is a more relevant to the interpretation of the

term ‘‘U.S. person.’’).

173

See Japanese Bankers Association (Aug. 27.

2012) at 8.

174

See End-Users Coalition (Aug. 27, 2012) at 3

(urging the Commission to exclude a foreign

affiliate of a U.S. end-user, guaranteed by that end-

user, from its interpretation).

175

See Proposed Guidance, 77 FR at 41218.

176

See, e.g., Public Citizen (Aug. 27, 2012) at 5;

Greenberger (Aug. 27, 2012) at 3; Better Markets

(Aug. 27, 2012) at 2, 6–7.

177

See Letter from Sen. Levin at 7.

178

See Sullivan & Cromwell (Aug. 13, 2012) at

A6–7.

179

See Citi (Aug. 27, 2012) at 2–4 (stating that

foreign branches of U.S.-based swap dealers should

not be considered ‘‘U.S. persons,’’ but should still

be subject to the Commission’s Entity-Level and

Transactional-Level Requirements). See also State

Street (Aug. 27, 2012) at 3; IIB (Aug. 27, 2012) at

180

See MFA/AIMA (Aug. 28, 2012) at 8–9.

181

See J.P. Morgan (Aug. 13, 2012) at 9.

182

See IATP (Aug. 27, 2012) at 4.

183

See SIFMA (Aug. 27, 2012) at A15; IIB (Aug.

27, 2012) at 11–12; EC (Aug. 24, 2012) at 1–2;

Australian Bankers (Aug. 27, 2012) at 4.

184

See, e.g., The Futures and Options Association

Ltd. (‘‘FOA’’) (Aug. 13, 2012) at 10–11; SIFMA

(Aug. 27, 2012); IIB (Aug. 27, 2012); EC (Aug. 24,

2012).

185

See FIA (Aug. 27, 2012) at 2–3.

186

See SIFMA (Aug. 27, 2012) at A14–15.

187

Id.

188

Id. at A21.

189

For purposes of this Guidance, the

Commission interprets the term ‘‘U.S. person’’ by

reference to the extent to which swap activities or

transactions involving one or more such persons

have the relevant jurisdictional nexus. For example,

this interpretation would help determine whether

non-U.S. persons engaging in swap dealing

transactions with ‘‘U.S. persons’’ in excess of the de

minimis level would be required to register and be

regulated as a swap dealer. In addition, for the same

reasons, the term ‘‘U.S. person’’ can be helpful in

determining the level of U.S. interest for purposes

rules or swap dealer registration should

be excluded from the interpretation of

‘‘U.S. person.’’

171

SIFMA, addressing

the control issue, objected to including

a non-U.S. person that is controlled by,

or under common control with, such

person in the interpretation of the term

‘‘U.S. person’’ since such control is

insufficient to satisfy the jurisdictional

nexus required by section 2(i).

172

Japanese Bankers Association did not

agree that these situations effect a risk

transfer to the U.S. person, arguing that

the risk would ultimately be incurred by

the non-U.S. person and not by the U.S.

guarantor; thus, it believed that the term

‘‘U.S. person’’ should not be interpreted

to include a non-U.S. person guaranteed

by a U.S. person.

173

The Coalition for

Derivatives End-Users (‘‘End-Users

Coalition’’) expressed concerns about

competitive implications, stating that

imputing U.S. status to a non-U.S.

person guaranteed by a U.S. person may

disadvantage the non-U.S. affiliates of

U.S. end-users, since those non-U.S.

affiliates may need to be guaranteed to

enter into swaps with non-U.S.

counterparties.

174

f. Foreign Branch of U.S. Person

In the Proposed Guidance, the

Commission stated that a foreign branch

of a U.S. swap dealer should be

included in the Commission’s

interpretation of the term ‘‘U.S. person’’

because it is a part, or an extension, of

a U.S. person.

175

Several commenters

agreed with the Commission’s

interpretation.

176

Senator Levin asserted

that the ‘‘JP Morgan whale trades

provide strong factual support for an

inclusive definition of U.S. person, in

particular when it comes to the foreign

branch or agency of a U.S.

corporation.’’

177

Other commenters

recommended that a foreign branch of a

U.S. swap dealer be excluded from the

interpretation. Sullivan & Cromwell

argued that a foreign branch should not

be included in the interpretation solely

on the basis that it is a part of a U.S.

bank.

178

Citi recommended that the

Commission’s policy should be that a

foreign branch of a U.S. swap dealer is

generally considered a non-U.S. person,

so long as the branch remains subject to

Entity-Level Requirements and obtains

substituted compliance for Transaction-

Level Requirements for transactions

with non-U.S. persons.

179

In Citi’s view,

this would address comments by the

foreign branch’s non-U.S. clients that

they would have to register as swap

dealers or MSPs, while assuring that

such non-U.S. clients’ swaps with the

foreign branch would generally be

covered by the Transaction-Level

Requirements or substituted

compliance.

g. Regulation S

Some commenters believed that the

Commission’s policy should explicitly

adopt the SEC’s Regulation S definition

of a ‘‘U.S. person.’’ MFA/AIMA stated

that Regulation S eliminates problems

and inconsistencies in the

Commission’s proposed

interpretation.

180

J.P. Morgan stated that

Regulation S would facilitate

compliance by non-U.S. market

participants since they are familiar with

the SEC’s approach.

181

On the other

hand, the Institute for Agriculture and

Trade Policy (‘‘IATP’’) argued against

incorporating the Regulation S

definition, stating that it predates the

prominence of the swaps market.

182

h. Other Clarifications

A number of commenters voiced

concerns regarding potential expansion

of the Commission’s interpretation of

the term ‘‘U.S. person,’’ which they

thought could result from the prefatory

phrase ‘‘includes, but is not limited to,’’

and requested that the Commission

affirmatively state that non-U.S. persons

are any persons that would not be

covered by the interpretation of the term

‘‘U.S. person.’’

183

A non-exhaustive

‘‘U.S. person’’ interpretation, they

contended, would create unnecessary

uncertainty.

A number of commenters further

stated that the interpretation of the term

‘‘U.S. person’’ should be applied only

for purposes of the registration and

regulation of swap dealers and MSPs.

184

The Futures Industry Association

(‘‘FIA’’) argued that the interpretation of

the term ‘‘U.S. person’’ should not

extend to those provisions of the CEA

governing the activities of futures

commission merchants (‘‘FCMs’’) with

respect to either exchange-traded

futures (whether executed on a

designated contract market or a foreign

board of trade) or cleared swaps.

185

SIFMA similarly requested that the

Commission clarify that the final

interpretation of the term ‘‘U.S. person’’

does not override existing market

practice as it relates to futures or FCMs,

including with respect to clearing.

186

SIFMA also requested that the

Commission clarify that the final

interpretation of the term ‘‘U.S. person’’

for cross-border swaps regulation is the

single interpretation for all Dodd-Frank

swaps regulation purposes.

187

Finally,

SIFMA requested that supranational

organizations, such as the World Bank

and International Monetary Fund (and

their affiliates) be excluded from the

interpretation.

188

3. Commission Guidance

The Commission has carefully

reviewed and considered the comments

received and is finalizing a policy that

will generally set forth an interpretation

of the term ‘‘U.S. person,’’ as used in

this Guidance, with certain

modifications to the proposed definition

as described below. As explained in the

Proposed Guidance, the term ‘‘U.S.

person,’’ as used in the context of CEA

section 2(i), generally encompasses

those persons whose activities—either

individually or in the aggregate—have

the requisite ‘‘direct and significant’’

connection with activities in, or effect

on, U.S. commerce within the meaning

of section 2(i).

189

The various prongs of

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of analyzing and applying principles of

international comity when considering the extent to

which U.S. transaction-level requirements should

apply to swap transactions.

190

For clarity, the Commission has reordered the

prongs of its interpretation of the term ‘‘U.S.

person.’’

191

For purposes of this Guidance, the

Commission would interpret the term ‘‘United

States’’ to include the United States, its states, the

District of Columbia, Puerto Rico, the U.S. Virgin

Islands, and any other territories or possessions of

the United States government, or enclave of the

United States government, its agencies or

instrumentalities.

192

In this respect, the Commission declines to

adopt a commenter’s recommendation that IRS

regulations should be relevant in considering

whether a person is included in the interpretation

of the term ‘‘U.S. person.’’ The Commission

believes that adopting the IRS’s approach in the

Commission’s policy would be inappropriate;

rather, consistent with CEA section 2(i), the

Commission’s interpretation of the term ‘‘U.S.

person’’ focuses on persons whose swap activities

meet the ‘‘direct and significant’’ nexus.

193

See Hertz Corp. v. Friend, 559 U.S. 77, 80

(2010) (determining a corporation’s principal place

of business for purposes of diversity jurisdiction).

194

Id. at 92–93.

195

See Further Proposed Guidance, 78 FR at 913.

196

As mentioned in the Introduction, Long-Term

Capital Portfolio LP, a Cayman Islands hedge fund

advised by LTCM, collapsed in 1998, leading a

number of creditors to provide LTCM substantial

financial assistance under the supervision of the

Federal Reserve Bank of New York. High level

officers at LTCM’s offices in Greenwich,

Connecticut, directed, controlled and coordinated

the activities of Long-Term Capital Portfolio LP.

This hedge fund, with approximately $4 billion in

capital and a balance sheet of just over $100 billion

had a swap book in excess of $1 trillion notional.

Federal Reserve Chairman Alan Greenspan testified

that ‘‘[h]ad the failure of LTCM triggered the seizing

up of markets, substantial damage could have been

inflicted on many market participants, including

some not directly involved with the firm, and could

have potentially impaired the economies of many

nations, including our own.’’ Systemic Risks to the

Global Economy and Banking System from Hedge

Fund Operations: Hearing Before the House

Banking and Fin. Services Comm., 105th Cong., 2nd

sess. (Oct. 1, 1998) (statement of Alan Greenspan,

Chairman, Federal Reserve), available at 1998 WL

694498.

197

This discussion regarding the location of a

collective investment vehicle’s principal place of

business is solely for purposes of applying

Commission swaps regulations promulgated under

Title VII. The Commission does not intend to

address here the interpretation of ‘‘principal place

of business’’ for any other purpose.

198

See Gerald T. Lins, et al., Hedge Funds and

Other Private Funds: Regulation and Compliance

§ 9:1 (Thomson Reuters 2012–2013 ed. 2012).

199

See note 193 and accompanying text, supra.

the Commission’s interpretation are

intended to identify persons for which,

in practice, the connection or effects

required by section 2(i) are likely to

exist and thereby inform the public of

circumstances in which the Commission

expects that the swaps provisions of the

CEA and the Commission’s regulations

would apply pursuant to the statute. In

this respect, the Commission will

consider not only a person’s legal form

and its domicile (or location of

operation), but also the economic reality

of a particular structure or arrangement,

along with all other relevant facts and

circumstances, in order to identify those

persons whose activities meet the

‘‘direct and significant’’ jurisdictional

nexus. Below, the Commission

discusses each prong of its proposed

interpretation of the term ‘‘U.S. person.’’

First, the Commission will include in

its consideration the elements in prongs

(i) and (ii)(A), as proposed, renumbered

as prongs (i) and (iii).

190

These prongs

of the ‘‘U.S. person’’ interpretation

generally incorporate a ‘‘territorial’’

concept of a U.S. person.

191

That is,

these are natural persons and legal

entities that are physically located or

incorporated within U.S. territory and,

consequently, the Commission would

generally consider swap activities

involving such persons to satisfy the

‘‘direct and significant’’ test under

section 2(i).

192

The Commission clarifies

that it expects that prong (iii) would

encompass legal entities that engage in

non-profit activities, as well as U.S.

state, county and local governments and

their agencies and instrumentalities.

Under prong (iii), the Commission

would generally interpret the term ‘‘U.S.

person’’ to include also a legal entity

that is not incorporated in the United

States if it has its ‘‘principal place of

business’’ in the United States. The

Commission intends that this

interpretation would generally include

those entities that are organized outside

the United States but have the center of

direction, control, and coordination of

their business activities in the United

States.

The concept of an operating company

having a principal place of business has

been addressed by the Supreme Court.

In a recent case, the Supreme Court

described a corporation’s principal

place of business as the ‘‘place where

the corporation’s high level officers

direct, control, and coordinate the

corporation’s activities.’’

193

The

Supreme Court explained that

‘‘‘principal place of business’ is best

read as referring to the place where a

corporation’s officers direct, control,

and coordinate the corporation’s

activities. It is the place that Courts of

Appeals have called the corporation’s

‘nerve center.’ And in practice it should

normally be the place where the

corporation maintains its

headquarters—provided that the

headquarters is the actual center of

direction, control and coordination, i.e.,

the ‘nerve center,’ and not simply an

office where the corporation holds its

board meetings.’’

194

The Commission

notes that commenters on the Proposed

Guidance and Further Proposed

Guidance generally did not object to the

inclusion in the interpretation of the

term ‘‘U.S. person’’ of an entity that has

its principal place of business in the

United States.

The Commission is of the view that

the application of the principal place of

business concept to a collective

investment vehicle may require

consideration of additional factors

beyond those applicable to operating

companies. A collective investment

vehicle is an entity or group of related

entities created for the purpose of

pooling assets of one or more investors

and channeling these assets to trade or

invest to achieve the investment

objectives of the investor(s), rather than

being a separate, active operating

business.

195

In this context, the

determination of where the collective

investment vehicle’s ‘‘high level officers

direct, control, and coordinate the

[vehicle’s] activities’’—to apply the

Hertz decision noted above—can

involve several different factors.

196

The Commission is aware that the

formation and structure of collective

investment vehicles involve a great deal

of variability, including with regard to

the formation of the legal entities that

will hold the relevant assets and enter

into transactions (including swaps) in

order to achieve the investors’

objectives. Legal, regulatory, tax and

accounting considerations may all play

a role in determining how the collective

investment vehicle is structured and the

jurisdictions in which the legal entities

will be incorporated.

197

Many legal

jurisdictions around the world have

promulgated specialized regimes for the

formation of collective investment

vehicles, which offer various legal,

regulatory, tax and accounting

efficiencies.

198

In view of these circumstances, the

Commission believes that for a

collective investment vehicle, the

locations where the relevant legal

entities have registered offices, hold

board meetings or maintain books and

records are generally not relevant in

determining the principal place of

business of the collective investment

vehicle. Instead, as stated in the Hertz

case cited above, the determination

should generally depend on the location

of the ‘‘actual center of direction,

control and coordination,’’ i.e., the

‘‘nerve center,’’ of the collective

investment vehicle.

Hertz focuses on the place where the

‘‘high level officers direct, control, and

coordinate’’ the entity’s activities.

199

this regard, the Commission believes

that the focus should not necessarily be

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200

In many cases, the entities that comprise the

collective investment vehicle may not have ‘‘high

level officers’’ as contemplated by Hertz, and the

directors of the entities may be individuals who are

affiliated with a firm that is the legal counsel or

administrator of the collective investment vehicle

and who may serve as directors for many different

vehicles. See Lins, supra note 198, at § 9:4.

201

The Commission understands that the

collective investment vehicle may obtain the

services of the relevant personnel through a variety

of arrangements, including contracting with an

asset manager that employs the personnel,

contracting with other employers, or retaining the

personnel as independent contractors. Thus, in this

analysis, the Commission would generally expect to

consider the location of the personnel who

undertake the relevant activities, regardless of their

particular employment arrangements.

202

The promoters who form a collective

investment vehicle may be integral to the ongoing

success of the collective investment vehicle. In fact,

the importance of the role played by the promoters

of a legal entity has long been recognized. See

generally 1A Fletcher Cyc. Corp. § 189. For

example, in Old Dominion Copper Mining &

Smelting Co. v. Bigelow, the court drew upon

English law in describing the promoters as follows:

In a comprehensive sense promoter includes

those who undertake to form a corporation and to

procure for it the rights, instrumentalities and

capital by which it is to carry out the purposes set

forth in its charter, and to establish it as fully able

to do its business. Their work may begin long before

the organization of the corporation, in seeking the

opening for a venture and projecting a plan for its

development, and it may continue after the

incorporation by attracting the investment of capital

in its securities and providing it with the

commercial breath of life.

203 Mass. 159, 177 (1909), aff’d, 225 U.S. 111

(1912).

Modern law continues to refer to the

responsibility of promoters of legal entities. See,

e.g., SEC Form D, instructions to Item 3 (requiring

information regarding the ‘‘promoters’’ of a

securities issuer). See also In Re Charles Schwab

Corp. Sec. Litig., 2010 WL 1261705 (N.D. Cal. Mar.

30, 2010) (discussing responsibility of ‘‘fund

managers and promoters’’ to operate a collective

investment vehicle in accordance with its formation

documents).

The Commission generally does not intend that

when the promoters of a collective investment

vehicle serve an administrative, purely ministerial

function of handling the flow of funds from

investors into the vehicle, the location of these

personnel would be relevant in this context.

203

The Commission is aware that the boards of

directors (or equivalent corporate bodies) of the

legal entities that comprise a collective investment

vehicle typically have the authority to appoint or

remove the legal entity’s investment manager,

administrator, and auditor, and to approve major

transactions involving the legal entity and the legal

entity’s audited financial statements. But since

these functions are not key to the actual

implementation of the investment objectives of the

collective investment vehicle, and noting that Hertz

focuses on the ‘‘high level officers’’ of the entity

rather than its directors, the Commission would

generally not view the boards of directors of the

legal entities to be key personnel for the collective

investment vehicle.

204

The collective investment vehicle could be a

hedge fund, a private equity fund, or other type of

investment fund. The Commission is aware that the

asset management firm may use any of a variety of

structures to form the collective investment vehicle,

which may involve one or more legal entities. In a

common hedge fund structure, the asset

management firm forms a legal entity outside the

United States which holds the collective investment

vehicle’s assets and is the legal counterparty in its

investment transactions, including swaps (a

‘‘master fund’’). If this structure is used, then

typically the equity of the master fund is held by

several ‘‘feeder funds,’’ each of which is a separate

legal entity formed by the asset management firm

with characteristics that are important to a different

type of investor. Each investor in the collective

investment vehicle obtains an equity interest in one

of the feeder funds and thereby holds an indirect

interest in the master fund. The Commission

intends that this Example 1 would encompass, but

not be limited to, a collective investment vehicle

using a master/feeder structure such as this.

on the persons who are named as

directors or officers of the legal entities

that comprise the collective investment

vehicle.

200

As noted above, these legal

entities are merely the legal structure

through which the investment

objectives of the collective investment

vehicle are implemented. Rather, the

analysis should focus on the persons

who are the equivalent for the collective

investment vehicle to the ‘‘high level

officers’’ of an operating company

because they direct, control and

coordinate key functions of the vehicle,

such as formation of the vehicle or its

trading and investment.

The ‘‘high level officers [who] direct,

control and coordinate’’ the collective

investment vehicle may be those senior

personnel who implement the

investment and trading strategy of the

collective investment vehicle and

manage its risks, and the location where

they conduct the activities necessary to

implement the investment strategies of

the vehicle may be its center of

direction, control and coordination. In

this regard, the Commission notes that

the achievement of the investment

objectives of a collective investment

vehicle typically depends upon

investment performance and risk

management. Investors in a collective

investment vehicle seek to maximize the

return on their investment while

remaining within their particular

tolerance for risk. Thus, the key

personnel relevant to this aspect of the

analysis are those senior personnel

responsible for implementing the

vehicle’s investment strategy and its risk

management. Depending on the

vehicle’s investment strategy, these

senior personnel could be those

responsible for investment selections,

risk management decisions, portfolio

management, or trade execution.

201

The achievement of a collective

investment vehicle’s investment

objectives may be closely linked to its

formation. Decisions made in the

structuring and formation of the

collective investment vehicle may have

a significant effect on the performance

of the vehicle. Thus, for purposes of

identifying the vehicle’s principal place

of business, the Commission may also

consider the location of the senior

personnel who direct, control and

coordinate the formation of the vehicle

(i.e., the promoters).

202

The location of

the promoters of the collective

investment vehicle is relevant,

particularly where the vehicle has a

specialized structure or where the

promoters of the vehicle continue to be

integral to the ongoing success of the

fund, including by retaining overall

control of the vehicle. The location

where the promoters of the collective

investment vehicle act to form the

vehicle and bring it to commercial life

is relevant in determining the center of

direction, control and coordination of

the vehicle, and those promoters may be

the ‘‘high level officers’’ of the vehicle

referred to in Hertz.

203

Accordingly, the Commission will

generally consider the principal place of

business of a collective investment

vehicle to be in the United States if the

senior personnel responsible for either

(1) the formation and promotion of the

collective investment vehicle or (2) the

implementation of the vehicle’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 vehicle.

Since the Commission recognizes that

the structures of collective investment

vehicles vary greatly, the Commission

believes it is useful to provide examples

to illustrate how the Commission’s

approach could apply to a consideration

of whether the ‘‘principal place of

business’’ of a collective investment

vehicle is in the United States in

particular hypothetical situations.

However, because of variations in the

structure of collective investment

vehicles as well as the factors that are

relevant to the consideration of whether

a collective investment vehicle has its

principal place of business in the

United States under this Guidance,

these examples are for illustrative

purposes only. In addition, these

examples are not intended to be

exclusive or to preclude a determination

that any particular collective investment

vehicle has its principal place of

business in the United States.

Example 1. An asset management firm

located in the United States establishes a

collective investment vehicle outside the

United States (‘‘Fund A’’).

204

Typically, the

formation of the collective investment

vehicle by the personnel of the asset

management firm involves the selection of

firms to be the administrator, prime broker,

custodian and placement agent for the

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205

The collective investment vehicle’s

administrator generally handles day-to-day

administrative activities, such as operating the

vehicle’s bank account, issuing payment

instructions, providing net asset calculations,

calculating fees, receiving and processing

subscriptions, preparing accounts, maintaining the

shareholder register, arranging payments of

redemption proceeds, coordinating

communications with shareholders, and overseeing

anti-money laundering compliance. See id. at § 9:6.

The prime broker facilitates the execution of the

vehicle’s investment transactions, including swaps.

The custodian is responsible for holding the

vehicle’s assets. The placement agent markets and

sells shares to investors.

The Commission generally considers all of these

functions, although important to the collective

investment vehicle, to be ministerial functions that

are generally not relevant to the determination of

the location of a collective investment vehicle’s

principal place of business. Thus, even if all of

these firms and all the personnel performing these

functions were outside the United States, the

Commission would nonetheless be inclined to view

the principal place of business of Fund A as within

the United States.

Additional elements that could be relevant to the

determination include the location of the collective

investment vehicle’s primary assets, and the

location of the collective investment vehicle’s

counterparties. However, the Commission believes

that the location of these additional elements

outside the United States should generally not

preclude an interpretation that the collective

investment vehicle’s principal place of business is

in the United States.

206

The Commission notes that elements of

Example 1 are similar to the facts of a recent court

case involving a similar issue—the location of a

collective investment vehicle’s ‘‘center of main

interest’’ for purposes of bankruptcy law. See Bear

Stearns, note 7 and accompanying text, supra. In

Bear Stearns, the collective investment vehicle’s

‘‘center of main interest’’ was found to be in the

United States even though its registered office was

in the Cayman Islands, because it had no employees

or managers in the Cayman Islands, and its

investment manager was located in New York. Id.,

374 B.R. at 129–30. The court further observed that

the administrator that ran the back-office operations

was in the United States, the collective investment

vehicle’s books and records were in the United

States before the foreign proceedings began, and all

of its liquid assets were located in the United

States. Id. at 130. In addition, investor registries

were maintained in Ireland; accounts receivables

were located throughout Europe and the United

States; and counterparties to master repurchase and

swap agreements were based both inside and

outside the United States—but none were claimed

to be in the Cayman Islands. Id.

The Commission believes that Bear Stearns aligns

with its view that the principal place of business

of a collective investment vehicle should not be

determined based on where it is organized or has

its registered office, but rather should be based on

an analysis of the relevant facts and circumstances.

However, the Commission notes that under

bankruptcy law various factors, particularly factors

relating to the debtor’s assets and creditors, may be

relevant to the determination of where a debtor has

its ‘‘center of main interest’’ for purposes of

determining whether a U.S. bankruptcy court has

jurisdiction over the matter. See, e.g., In re SPhinX,

Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006) (including

various factors in the determination of center of

main interest, including the location of the debtor’s

primary assets and the location of the majority of

the debtor’s creditors). The Commission believes

that the factors that are relevant in such bankruptcy

jurisdictional cases differ from those that are

relevant to the consideration of whether a collective

investment vehicle has its principal place of

business in the United States for purposes of this

Guidance.

207

The Commission expects that in this example,

this result would be the same if the asset

management firm entered into a subadvisory

agreement with an independent firm that employed

the personnel in the U.S. office described in this

example. That is, regardless of whether the U.S.

personnel are employed by the asset management

firm or a third party employer, the relevant issue

is whether the personnel who fulfill the key

functions relating to its formation or the

achievement of its investment objectives are located

in, or outside of, the United States.

208

Legal entities that may be formed with

separate classes are known in various jurisdictions

as segregated portfolio companies, protected cell

companies or segregated accounts companies. A

collective investment vehicle with a structure such

as this is typically referred to as a ‘‘hedge fund

platform’’ or an ‘‘umbrella’’ or ‘‘multi-series’’ hedge

fund.

209

The Commission expects that the result would

generally be the same where the assets of Fund C

are not segregated into separate classes.

210

The Commission believes that Commission

regulation 140.99, which provides for persons to

request that the staff of the Commission provide

written advice or guidance, would be an

appropriate mechanism for a collective investment

vehicle to seek guidance as to whether the principal

place of business of the vehicle is in the United

States for purposes of applying the Commission

swaps regulations promulgated under Title VII.

collective investment vehicle.

205

The legal

entities comprising the collective investment

vehicle enter into agreements retaining the

asset management firm as investment

manager. Personnel of the asset management

firm who are located in the United States will

be responsible for implementing Fund A’s

investment and trading strategy and its risk

management. Based on the above facts, the

Commission would be inclined to view the

principal place of business of Fund A as

being in the United States,

206

and therefore

each of the legal entities that comprise Fund

A would be within the interpretation of the

term ‘‘U.S. person.’’

Example 2. An asset management firm

located outside the United States establishes

a collective investment vehicle located

outside the United States (‘‘Fund B’’).

Personnel of the asset management firm who

are located outside the United States will be

responsible for implementing Fund B’s

investment and trading strategy and its risk

management. However, personnel in two

offices of the asset management firm—one of

which is located outside the United States

and the other of which is located in the

United States—will be involved in managing

Fund B’s investment portfolio. Although the

personnel in the U.S. office may act

autonomously on a day-to-day basis, they

will be under the direction of senior

personnel in the non-U.S. office regarding

how they are implementing the investment

objectives of Fund B. In terms of the asset

management firm’s internal organization, the

personnel in the U.S. office report to the

personnel in the non-U.S. office, who also

generally hold higher positions within the

firm. Because the personnel located inside

the United States merely facilitate the

implementation of the investment objectives

of Fund B, for which senior personnel

outside the United States are responsible, the

Commission would be inclined to view the

principal place of business of Fund B as not

being in the United States.

207

As a result,

assuming that Fund B is not majority-owned

by U.S. persons (as discussed further below),

Fund B would not be within the

interpretation of the term ‘‘U.S. person,’’ and

none of the legal entities that comprise Fund

B would be U.S. persons (unless the legal

entity was actually incorporated or organized

in the United States).

Example 3. A financial firm located in the

United States establishes a collective

investment vehicle outside the United States

(‘‘Fund C’’). The collective investment

vehicle includes a single legal entity

organized outside the United States, the

assets of which are segregated into several

separate classes.

208

The U.S. financial firm

arranges with several unaffiliated investment

management firms to manage the assets in

the various classes; an investment

management firm affiliated with the U.S.

financial firm may also manage the assets in

one or more of the classes. Some of these

investment management firms are located in,

and others outside, the United States. Under

the terms of the contracts between Fund C,

the U.S. financial firm and these investment

management firms, Fund C has delegated

responsibility for the overall control of its

investment strategies to the U.S. financial

firm that established Fund C, and the U.S.

financial firm will have rights to reallocate

Fund C’s assets among the investment

management firms for various reasons,

including the U.S. financial firm’s discretion

regarding Fund C’s investment strategies.

Based on the above facts, the Commission

would be inclined to view the principal place

of business of Fund C as being in the United

States, even though some of the investment

managers involved in implementing Fund C’s

investment and trading strategy are located

outside the United States. Therefore, Fund C

(including each of the legal entities that

comprise Fund C) would be within the

interpretation of the term ‘‘U.S. person.’’

209

The Commission recognizes that the

structures of collective investment

vehicles are complex and varied, and it

does not intend to establish bright line

tests for when the principal place of

business of a collective investment

vehicle would or would not be within

the United States. Rather, the

Commission’s examples above are

intended to illustrate the considerations

that would be relevant to whether a

collective investment vehicle’s principal

place of business is in the United States,

within the framework of reviewing all

the relevant facts and circumstances.

210

The Commission also understands

that non-U.S. individuals, institutions,

pension plans or operating companies

may retain asset management firms in

the United States to provide a range of

asset management and other

investment-related services. Where the

individual, institution, pension plan or

operating company is not within any

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However, this policy (that non-U.S. persons

generally do not become U.S. persons solely by

retaining U.S. asset management firms) would not

apply to the legal entities comprising a collective

investment vehicle that is within the interpretation

of the term ‘‘U.S. person.’’ Rather, those legal

entities would be within the interpretation of the

term ‘‘U.S. person’’ for other reasons (e.g., because

the vehicle has its principal place of business in the

United States or a majority of its direct or indirect

owners are U.S. persons)—not solely because they

had retained a U.S. asset management firm.

212

In this context, the term ‘‘U.S. person’’ refers

to those natural persons or legal entities that meet

prong (i), (ii), (iii), (iv), or (v) of the interpretation

of ‘‘U.S. person.’’

213

When Lehman Brothers collapsed in 2008, it

had a complex web of affiliates. This included

LBIE, an unlimited liability company in London. At

that time, it had more than 300 outstanding creditor

and debtor balances with its affiliates amounting to

more than $21 billion in total. What happened to

LBIE is directly relevant to the current discussions

about cross-border application of swaps reforms, as

LBIE had more than 130,000 swaps contracts

outstanding when it failed. Many of the Lehman

Brothers entities were guaranteed by the parent,

Lehman Brothers Holdings, in the United States.

More than $28 billion in client assets and money

were caught up in the bankruptcy of the UK entity.

This uncertainty led, further, to a run on many

other financial institutions when customers feared

for their positions and collateral housed in overseas

affiliates of other U.S. financial institutions. See

Lehman Brothers Progress Report, note 6 and

accompanying text, supra.

214

Unlimited liability corporations include,

solely by way of example, entities such as an

unlimited company formed in the U.K., see Brian

Stewart, Doing Business in the United Kingdom

§ 18.02[2][c], or an unlimited liability company

formed under the law of Alberta, British Columbia,

or Nova Scotia, see Richard E. Johnston, Doing

Business in Canada § 15.04[5].

215

Also, the Commission does not interpret

section 2(i) to require that it treat a non-U.S. person

as a ‘‘U.S. person’’ solely because it is controlled

by or under common control with a U.S. person.

216

See, e.g., Letter from Sen. Levin at 10 (‘‘If a

U.S.-based parent company provides an implicit or

explicit guarantee, regardless of the form of the

guarantee, to a non-U.S. subsidiary or affiliate, the

risk is effectively transferred to the U.S. person. In

such circumstances, the exact form of the guarantee

should not prevent the CFTC from demanding

compliance with the CFTC’s derivatives

safeguards.’’).

217

Since a guarantee is treated in law as a

contract, a guarantor may be protected by legal

defenses to the enforcement of the contract. Also,

in some circumstances, a guarantee may not be

enforceable with respect to underlying obligations

that are materially altered without the guarantor’s

consent. See, e.g., Debtor-Creditor Law § 44.04

(Theodore Eisenberg ed., Matthew Bender 2005).

218

See note 267 and accompanying text, supra,

for guidance regarding the Commission’s

interpretation of the term ‘‘guarantee.’’

prong of the interpretation of the term

‘‘U.S. person’’ described in this

Guidance (including prongs (iii) and (vi)

which relate to collective investment

vehicles), then the Commission

generally believes that the person would

not come within the ‘‘U.S. person’’

interpretation solely because it retains

an asset management firm located in the

United States to manage its assets or

provide other financial services.

211

Second, the Commission will include

in its consideration the elements in the

alternative version of prong (ii)(B) that

was described in the Further Proposed

Guidance (and renumbered in the

Guidance as prong (vii)). The relevant

elements in the alternative version are

whether a legal entity is directly or

indirectly majority-owned by one or

more U.S. persons,

212

in which one or

more of these U.S. person(s) bears

unlimited responsibility for the

obligations and liabilities of such legal

entity, and the entity is not a

corporation, limited liability company,

limited liability partnership or similar

entity where shareholders, members or

partners have limited liability.

In response to comments on the

Proposed Guidance, the Commission

intends that this prong would cover

entities that are directly or indirectly

majority-owned by U.S. person(s), but

not those legal entities that have

negligible U.S. ownership interests. In

the Commission’s view, where the

structure of an entity is such that the

U.S. owners are ultimately liable for the

entity’s obligations and liabilities, the

connection to activities in, or effect on,

U.S. commerce would generally satisfy

section 2(i), irrespective of the fact that

the ownership is indirect. The

Commission expects that this ‘‘look-

through’’ aspect of the interpretation

also would serve to discourage persons

from engaging in activities outside of

the Dodd-Frank regulatory regime by

creating such indirect ownership

structures.

In the Commission’s view, where one

or more U.S. owners has unlimited

responsibility for losses or

nonperformance by its majority-owned

affiliate, there is generally a direct and

significant connection with activities in,

or effect on, commerce of the United

States within the meaning of section

2(i). Therefore, for purposes of section

2(i), the majority-owned entity would

appropriately be considered a ‘‘U.S.

person.’’

213

Unlimited liability

corporations where U.S. persons have

direct or indirect majority ownership

and any such U.S. persons have

unlimited liability for the obligations

and liabilities of the entity would

generally be covered under this

prong.

214

By contrast, a limited liability

corporation or limited liability

partnership would generally not be

covered under this prong; the

Commission also clarifies, in response

to comments on the Further Proposed

Guidance, that it intends that entities in

other jurisdictions that are similar to

limited liability corporations or limited

liability partnerships in that none of the

owners of such entities bear unlimited

liability for the entity’s obligations and

liabilities would generally be excluded

from this prong.

The Commission has considered the

comments requesting that the

interpretation include consideration of

whether the U.S. person majority

owners have unlimited responsibility

for ‘‘all of’’ the obligations and liabilities

of the entity in connection with this

prong of the interpretation. The

Commission believes that even if there

are some potential obligations and

liabilities of the entity that may not flow

to the U.S. persons, the risk of unlimited

responsibility for other obligations and

liabilities would generally be a

sufficient nexus to the United States for

purposes of section 2(i). Similarly, it

would generally not be necessary for all

the U.S. persons who are majority

owners to bear unlimited responsibility

(as some commenters suggested).

Rather, if any of the U.S. persons who

are direct or indirect majority owners

bears unlimited responsibility for the

obligations and liabilities of the entity,

it would generally be covered by this

prong of the interpretation.

In response to requests from

commenters on the Proposed Guidance,

the Commission clarifies that it does not

intend that prong (vii) would cover legal

entities organized or domiciled in a

foreign jurisdiction but whose swaps

obligations are guaranteed by a U.S.

person.

215

To be clear, the Commission

remains concerned, as explained in the

Proposed Guidance, about the risks to a

U.S. guarantor that flow from its

guarantee of the swaps obligations of an

entity that is organized or domiciled

abroad.

216

Yet, a guarantee does not

necessarily provide for ‘‘unlimited

responsibility for the obligations and

liabilities of the guaranteed entity’’ in

the same sense that the owner of an

unlimited liability corporation bears

such unlimited liability.

217

The

Commission believes, therefore, that its

concern regarding the risks associated

with guarantee arrangements can,

consistent with CEA section 2(i) and in

the interests of international comity,

appropriately be addressed in a more

targeted fashion without broadly

treating such guaranteed entities as U.S.

persons at this time.

Thus, for example, as set forth below,

where a non-U.S. affiliate of a U.S.

person has its swap dealing obligations

with non-U.S. counterparties guaranteed

by a U.S. person,

218

the guaranteed

affiliate generally would be required to

count those swap dealing transactions

with non-U.S. counterparties (in

addition to its swap dealing transactions

with U.S. persons) for purposes of

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The term ‘‘U.S. person,’’ as used in this

context, refers to those natural persons or legal

entities that meet (i), (ii), (iii), (iv), or (v) of the

interpretation of ‘‘U.S. person.’’

220

The ability of the collective investment

vehicle to rely on the bona fide representation of

the unrelated investor entity does not affect the due

diligence that the unrelated investor entity should

conduct in order to make such representation to the

collective investment vehicle.

221

The Commission has applied similar anti-

evasion standards in other contexts. See, e.g., 17

CFR 4.7(a)(1)(iv)(D) (providing that a passive

investment vehicle will be considered a non-U.S.

person for purposes of section 4.7 under certain

circumstances provided that the entity was ‘‘not

formed principally for the purpose of facilitating

investment by persons who do not qualify as Non-

United States persons in a pool’’ whose operator is

claiming relief under that section).

222

See the discussion of due diligence below,

which the Commission believes is generally

applicable to the ‘‘due diligence’’ required by the

collective investment vehicle in this context.

determining whether the affiliate

exceeds a de minimis amount of swap

dealing activity and must register as a

swap dealer. The Commission notes that

where a non-U.S. affiliate of a U.S.

person has its swap dealing obligations

with non-U.S. counterparties guaranteed

by a U.S. person, the guarantee creates

a significant risk transfer into the United

States. In the absence of such

guarantees, non-U.S. counterparties may

be unwilling to enter into swaps with

such non-U.S. affiliates. As for the

substantive swaps requirements, as

discussed below, Transaction-Level

Requirements generally would apply to

swaps between a non-U.S. swap dealer

or non-U.S. MSP on the one hand, and

a U.S.-guaranteed affiliate on the other

hand, though such swaps may be

subject to substituted compliance, as

appropriate. The Commission generally

expects that, in considering

international comity and the factors set

forth in the Restatement (e.g., the

character of the activity to be regulated,

the existence of justified expectations,

the likelihood of conflicts with

regulation by foreign jurisdictions), this

approach would strike a reasonable

balance in assuring that the swaps

market is brought under the new

regulatory regime as directed by

Congress, consistent with section 2(i) of

the CEA.

Third, the Commission will include

in its interpretation of the term ‘‘U.S.

person’’ the elements in prong (iii),

(renumbered as prong (viii)),

substantially as proposed. Commenters

did not comment on, nor object to, this

prong. The Commission clarifies that it

expects that this prong would

encompass a joint account where any

one of the beneficial owners is a U.S.

person.

Fourth, the Commission will include

in its interpretation of the term ‘‘U.S.

person’’ the elements in the alternative

prong (iv) that was described in the

Further Proposed Guidance

(renumbered in the Guidance as prong

(vi)), with some modifications. The

Commission understands from

commenters that the determination by

some collective investment vehicles of

whether they are majority-owned by

U.S. persons may pose practical

difficulties. In response to these

practical difficulties, the Commission

has eliminated the reference to

‘‘indirect’’ majority ownership in this

prong. As revised, this prong no longer

refers to ‘‘direct or indirect’’ majority

ownership by U.S. persons.

Under alternative prong (vi), any

commodity pool, pooled account,

investment fund or other collective

investment vehicle that is majority-

owned by one or more U.S. person(s)

219

would be deemed a U.S. person. For

purposes of this prong, majority-owned

means the beneficial ownership of more

than 50 percent of the equity or voting

interests in the collective investment

vehicle. The Commission expects that

the collective investment vehicle would:

(1) Determine whether its direct

beneficial owners are U.S. persons

described in prong (i), (ii), (iii), (iv), or

(v) of the term ‘‘U.S. person,’’ and (2)

‘‘look-through’’ the beneficial

ownership of any other legal entity

invested in the collective investment

vehicle that is controlled by or under

common control with the collective

investment vehicle in determining

whether the collective vehicle is

majority-owned by U.S. persons.

For example, a limited company is

formed under the laws of the Cayman

Island as a collective investment vehicle

that engages in swap transactions. It has

a single investor, which is an

investment company registered with the

Securities and Exchange Commission

under the Investment Company Act of

1940. Shares in the registered

investment company are only owned by

United States persons and both the

Cayman Island limited company and the

registered investment company are

sponsored by the same investment

adviser. The Cayman Island limited

company would be viewed as a

‘‘controlled foreign corporation’’ of the

registered investment company. Because

the Cayman Island limited company is

controlled by the same investment

adviser as the investor registered

investment company, the Cayman

Island limited company would be

required to ‘‘look through’’ the

registered investment company and

would be considered majority owned by

U.S. persons. Therefore, under revised

prong (vi), the Cayman Island limited

company generally would be a U.S.

person, subject to consideration of all

the facts and circumstances.

As another example, a limited

company is formed under the laws of

the Cayman Island by an investment

manager as a collective investment

vehicle that engages in swap

transactions as part of its investment

strategy (‘‘Master Fund’’). It has two

investors, which are also collective

investment vehicles that were formed by

the same investment manager for the

purpose of investing in the Master

Fund. One investor collective

investment vehicle is formed under the

laws of the state of Delaware and the

other investor collective investment

vehicle is a limited company formed

under the laws of the Cayman Island.

Because Master Fund and the two

investor collective investment vehicles

are under common control by the

investment manager, the Master Fund is

required to ‘‘look through’’ the two

investor vehicles to their beneficial

owners to determine whether it is

majority owned by U.S. persons.

Whether the Master Fund is a U.S.

person will require the assessment of

whether the majority of its equity is

held indirectly by U.S. persons through

the two investor vehicles.

However, where a collective

investment vehicle is owned in part by

an unrelated investor collective

investment vehicle, the collective

investment vehicle need not ‘‘look

through’’ the unrelated investor entity,

but may reasonably rely upon written,

bona fide representations from the

unrelated investor entity regarding

whether it is a U.S. person,

220

unless the

investee collective investment vehicle

has reason to believe that such

unrelated investor entity was formed or

is operated principally for the purpose

of avoiding looking through to the

ultimate beneficial owners of that

entity.

221

The Commission expects that

the collective investment vehicle would

take reasonable ‘‘due diligence’’ steps

with respect to its investors in making

this determination, along the lines of the

verifications that the collective

investment vehicle may conduct in

connection with other regulatory

requirements.

222

The Commission is also including a

minor modification to clarify that it

expects that the interpretation in prong

(vi) would apply irrespective of whether

the collective investment vehicle is

organized or incorporated in the United

States. Similar to the Commission’s

analysis with respect to prong (vii)

discussed above, the Commission’s

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A collective investment vehicle is an

arrangement pursuant to which funds of one or

more investors are pooled together and invested on

behalf of such investors by a manager. Typically,

investors do not have day-to-day control over the

management or operation of the vehicle and are

essentially passive, beneficial owners of the

vehicle’s assets. Prior to participating in a collective

investment vehicle, an investor enters into an

arrangement with the vehicle which governs the

fees collected by the manager of the vehicle and the

investor’s payout from the vehicle, which may

include periodic payments. Typically a limited

liability entity such as a corporation, limited

partnership or limited liability company is used as

part of the arrangement so that investor liability is

limited to the investor’s beneficial interest in the

vehicle’s assets.

With respect to a swap between a collective

investment vehicle and a non-U.S. swap dealer, the

Commission believes that losses borne by the

vehicle upon a default by the non-U.S. swap dealer

are better seen as losses incurred by the investors

in the collective investment vehicle rather than by

the vehicle itself. In contrast with a collective

investment vehicle, when an operating company

enters into a swap with a non-U.S. swap dealer,

losses borne by the operating company upon a

default by the non-U.S. swap dealer are better seen

as losses incurred by the operating company and

only indirectly by its shareholders. Therefore, prong

(vi) only relates to collective investment vehicles

and does not extend to operating companies.

224

The publicly-offered collective investment

vehicle could be a UCITS (Undertakings for

Collective Investment in Transferable Securities).

See Directive 2009/65/EC of the European

Parliament and of the Council (Jul. 13, 2009),

available at http://eur-lex.europa.eu/LexUriServ/

LexUriServ.do?uri=OJ:L:2009:302:0032:0096:

EN:PDF. Under the Commission’s interpretation of

section 2(i), a UCITS would not be included in the

term ‘‘U.S. person,’’ provided it is not offered,

directly or indirectly, to U.S. persons.

policy is that the place of a collective

investment vehicle’s organization or

incorporation would not necessarily be

determinative of its status as a ‘‘U.S.

person’’ for purposes of CEA section

2(i). As noted above, collective

investment vehicles are created for the

purpose of pooling assets from investors

and channeling these assets to trade or

invest in line with the objectives of the

investors. In the Commission’s view,

these are generally passive investment

vehicles that serve as a means to achieve

the investment objectives of their

beneficial owners, rather than being

separate, active operating businesses. As

such, the beneficial owners would be

directly exposed to the risks created by

the swaps that their collective

investment vehicles enter into.

223

Therefore, the Commission’s policy is

that if U.S. persons beneficially own

more than 50 percent of the equity or

voting interests in a collective

investment vehicle, then the collective

investment vehicle would ordinarily

satisfy the ‘‘direct and significant’’

standard of CEA section 2(i).

The Commission is also revising its

interpretation in prong (vi) to exclude

non-U.S. publicly-offered, as opposed to

publicly-traded, collective investment

vehicles. That is, a collective investment

vehicle that is publicly offered to non-

U.S. persons, but not offered to U.S.

persons, would generally not be

included within the interpretation of the

term U.S. person. This revision is

intended to address comments that

publicly-traded funds are only a subset

of non-U.S. regulated collective

investment vehicles and that ownership

verification is expected to be

particularly difficult for pools, funds,

and other collective investment vehicles

that are publicly offered.

224

In addition, a collective investment

vehicle that is publicly offered only to

non-U.S. persons and not offered to U.S.

persons generally would not fall within

any of the prongs of the interpretation

of the term ‘‘U.S. person.’’

Fifth, the Commission will not

include in its interpretation of the term

‘‘U.S. person’’ the elements in proposed

prong (v), which related to registered

commodity pool operators. The

Commission agrees with commenters

that neither the location (nor the

nationality), nor the registration status,

of the pool operator would normally,

without more, be determinative of

whether the underlying pool(s) should

be included in its interpretation of the

term ‘‘U.S. person.’’ The Commission

has further considered that, as discussed

above, the relevant elements for a

commodity pool or other collective

investment vehicle would generally be

whether or not its principal place of

business is in the United States or it is

majority owned by U.S. persons. The

Commission believes that proposed

prong (v) could be overly broad and

have the effect of capturing commodity

pools with minimal participation of U.S.

persons and a minimal U.S. nexus.

Sixth, the Commission will include in

its interpretation of the term ‘‘U.S.

person’’ the elements in prong (vi)

(renumbered as prong (iv)) relating to

pension plans. In response to

comments, though, the Commission is

clarifying that it does not intend that its

interpretation encompass pension plans

that are primarily for foreign employees

of U.S.-based entities described in prong

(iii) of the interpretation. Also, as noted

above in the discussion of collective

investment vehicles, the Commission

does not generally expect that a pension

plan which is not a U.S. person would

become a U.S. person simply because

some of the individuals or entities that

manage the investments of the pension

plan are located or organized in the

United States.

Finally, the Commission will include

in its interpretation of the term ‘‘U.S.

person’’ the elements in prong (vii)

(renumbered as prongs (ii) and (v))

pertaining to an estate or trust, with

certain modifications to take into

account the views of commenters who

addressed this issue, and the legal and

practical considerations that are

relevant to the treatment of estates and

trusts for purposes of the Dodd-Frank

Act. The Commission agrees with the

commenters who stated that treatment

of an estate or trust should generally not

depend on whether the income of the

estate or trust is subject to U.S. tax. The

Commission understands that whether

income is subject to U.S. tax can depend

on a variety of factors, including the

source of the income, which may not be

relevant to whether the Dodd-Frank Act

should apply to swaps entered into by

the estate or trust.

After further consideration, the

Commission will include in its

interpretation of the term ‘‘U.S. person’’

(a) an estate if the decedent was a U.S.

person at the time of death and (b) a

trust if it is governed by the law of a

state or other jurisdiction in the United

States and a court within the United

States is able to exercise primary

supervision over the administration of

the trust. For what it expects to be the

relatively few estates that would use

swaps (most likely for purposes of

investment hedging), the Commission

believes that the treatment of such

swaps should generally be the same as

for swaps entered into by the decedent

during life. 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, when the swaps

would most likely pass to the decedent’s

estate. Also, the Commission expects

that this element of the interpretation

will be predictable and easy 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.

With respect to trusts, the

Commission expects that its approach

would be in line with how trusts are

treated for other purposes under 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 would generally be reasonable to treat

the trust as a U.S. person for purposes

of the Dodd-Frank Act. Another relevant

element in this regard would be whether

a court within the United States is able

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The Commission is aware that one element

applied by the Internal Revenue Service to

determine if a trust is a U.S. person for tax purposes

depends on whether a court within the United

States is able to exercise primary supervision over

the administration of the trust. See 26 CFR

301.7701–7(a)(1)(i). The Commission believes that

precedents developed under tax law could be

relevant, as appropriate, in applying this aspect of

its interpretation of the term ‘‘U.S. person.’’

However, the Commission does not intend to

formally adopt the Internal Revenue Service test for

this purpose.

226

The Commission does not intend to preclude

considerations relating to the trustee in determining

whether the trust is governed by U.S. law or subject

to the jurisdiction of U.S. courts, if any such

considerations are relevant. Rather, the Commission

believes that the status of the trustee would

generally not be directly relevant to determining if

a trust should be treated as a U.S. person.

227

See Business Conduct Standards for Swap

Dealers and Major Swap Participants with

Counterparties, 77 FR 9734 (Feb. 17, 2012)

(‘‘External Business Conduct Rules’’). Consistent

with the ‘‘reasonable reliance’’ standard in the

External Business Conduct Rules, a swap dealer or

MSP may rely on the written representations of a

counterparty to satisfy its due diligence

requirements. However, a swap dealer or MSP

should not rely on a written representation if it has

information that would cause a reasonable person

to question the accuracy of the representation. In

other words, a swap dealer or MSP should not

ignore red flags when relying on written

representations to satisfy its due diligence

obligations. Further, if agreed to by the

counterparty, the written representations may be

included in counterparty relationship

documentation. However, a swap dealer or MSP

may only rely on such representations in the

counterparty relationship documentation if the

counterparty agrees to timely update any material

changes to the representations. In addition, the

Commission expects swap dealers and MSPs to

review the written representations on a periodic

basis to ensure that they remain appropriate for the

intended purpose.

228

This approach is generally consistent with

suggestions provided by commenters. For example,

SIFMA suggested that the determination of whether

a counterparty is a U.S. person should be made at

the inception of the swap transaction based on the

most recent representation from the counterparty,

which should be renewed by the counterparty once

per calendar year. See SIFMA (Aug. 27, 2012) at

A17.

to exercise primary supervision over the

administration of the trust.

225

The

Commission expects that including this

element of the interpretation would

generally align the treatment of the trust

for purposes of the Dodd-Frank Act 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 would generally be in line

with how it is treated for other

purposes.

The Commission disagrees with

commenters that the status of an estate

or trust should be based solely on the

status of the executor, administrator or

trustee.

226

For one thing, this would

mean that the treatment of the estate or

trust could change if, for example, the

executor or trustee relocates its offices.

The Commission also does not believe

it would be appropriate that the

treatment of a trust would depend solely

on the identity of the beneficiaries to the

trust because, among other reasons, the

beneficiaries may be described as a class

of persons, rather than particular

persons. In the Commission’s view,

more important considerations in

formulating its policy are whether the

treatment of the estate or trust is

predictable and whether it is in line

with how the entity is treated for other

purposes. The Commission would also

consider other facts and circumstances

related to the estate or trust that could

be relevant to whether the entity should

be within the interpretation of the term

‘‘U.S. person’’ in the context of section

2(i).

a. Due Diligence

As described above, many

commenters indicated that the

information necessary to accurately

assess the status of their counterparties

as U.S. persons may not be available, or

may be available only through overly

burdensome due diligence, particularly

where the interpretation includes a

‘‘look-through’’ element that considers

‘‘direct and indirect’’ ownership. For

this reason, these commenters requested

that the Commission’s policy

contemplate reasonable reliance on

counterparty representations as to the

relevant elements of the interpretation

of the term ‘‘U.S. person.’’

The Commission agrees with the

commenters that a party to a swap

should generally be permitted to

reasonably rely on its counterparty’s

written representation in determining

whether the counterparty is within the

Commission’s interpretation of the term

‘‘U.S. person.’’ In this context, the

Commission’s policy is to interpret the

‘‘reasonable’’ standard to be satisfied

when a party to a swap conducts

reasonable due diligence on its

counterparties, with what is reasonable

in a particular situation to depend on

the relevant facts and circumstances.

The Commission notes that under the

External Business Conduct Rules, a

swap dealer or MSP generally meets its

due diligence obligations if it reasonably

relies on counterparty representations,

absent indications to the contrary.

227

in the case of the External Business

Rules, the Commission believes that

allowing for reasonable reliance on

counterparty representations encourages

objectivity and avoids subjective

evaluations, which in turn facilitates a

more consistent and foreseeable

determination of whether a person is

within the Commission’s interpretation

of the term ‘‘U.S. person’’ and the extent

to which the Title VII requirements

apply to certain cross-border

activities.

228

b. Foreign Branch of U.S. Person

The Commission is confirming its

interpretation, as proposed, that a

foreign branch of a U.S. person is itself

a ‘‘U.S. person.’’ As the Commission

explained in the Proposed Guidance, a

branch does not have a legal identity

separate from that of its principal entity.

In this respect, the Commission notes

that branches are neither separately

incorporated nor separately capitalized

and, more generally, the rights and

obligations of a branch are the rights

and obligations of its principal entity

(and vice versa). Under these

circumstances, the Commission views

the activities of a foreign branch as the

activities of the principal entity, and

thus a foreign branch of a U.S. person

is a U.S. person.

Accordingly, the Commission

declines to recognize foreign branches

of U.S. persons separately from their

U.S. principal for purposes of

registration. That is, if the foreign

branch were to be a swap dealer or MSP,

as discussed further below, the U.S.

person would be required to register,

and the registration would encompass

the foreign branch. Upon consideration

of principles of international comity and

the factors set forth in the Restatement,

though, the Commission has calibrated

the requirements otherwise applicable

to such foreign branches in respects

other than broadly excluding them from

the U.S. person interpretation. For

example, as discussed further below,

foreign branches of U.S. persons may

comply with Transaction-Level

Requirements through substituted

compliance, where appropriate, with

respect to swaps with foreign

counterparties, as well as with a foreign

branch of another U.S. person. Further,

non-U.S. persons may exclude swaps

with foreign branches of registered swap

dealers for purposes of determining

whether they have exceeded the de

minimis level of swap dealing activity

under the swap dealer definition.

The types of offices the Commission

would consider to be a ‘‘foreign branch’’

of a U.S. bank, and the circumstances in

which a swap is with such foreign

branch, are discussed further below in

section C below.

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229

See, e.g., MFA/AIMA (Aug. 28, 2012) at 4, 8–

9; IIAC (Aug. 27, 2012) at 3; J.P. Morgan (Aug. 27,

2012) at 3, 8–9; SocGen (Aug. 8, 2012) at 5; ISDA

(Aug. 10, 2012) at 9. See also IIB (Aug. 9, 2012) at

3 (noting that the proposed interpretation is more

expansive than other Commission and SEC

definitions of ‘‘U.S. person’’ and makes it difficult

to assess U.S. person status). Regulation S is

codified at 17 CFR 230.901 through 230.905.

230

See 17 CFR 230.902(k)(2)(v).

231

See Offshore Offers and Sales, 55 FR 18306

(May 2, 1990).

232

See 17 CFR 230.902(k)(1)(viii). Also, the

exception from the Regulation S definition of ‘‘U.S.

person’’ is not available if any of such accredited

investors are natural persons, estates or trusts. Id.

233

These factors are among those relevant to

whether a country has a basis to assert jurisdiction

over an activity under the Restatement. See

generally note 86 and accompanying text, supra.

234

See, e.g., Goldman (Aug. 27, 2010) at 3, FOA

(Aug. 13, 2012) at 10–11; SIFMA (Aug. 27, 2012)

at A14–15, FIA (Aug. 27, 2012) at 2–5.

235

The Commission believes that Commission

regulation 140.99, which provides for persons to

request that the staff of the Commission provide

written advice or guidance, would be an

appropriate mechanism for a person to seek

guidance as to whether it is a U.S. person for

purposes of applying the Commission swaps

regulations promulgated under Title VII.

c. Regulation S

The Commission has considered the

recommendation by several commenters

that the Commission follow, entirely or

to some extent, the definition of ‘‘U.S.

person’’ in the SEC’s Regulation S.

229

With respect to the treatment of foreign

branches in particular, Regulation S

excludes from its definition of ‘‘U.S.

person’’ any agency or branch of a U.S.

person located outside the United States

if (1) the agency or branch operates for

valid business reasons; and (2) the

agency or branch is engaged in the

business of insurance or banking, and is

subject to substantive insurance or

banking regulation in the jurisdiction

where it is located.

230

As the

Commission noted in the Proposed

Guidance, however, Regulation S

addresses the level of activities (i.e.,

offerings of securities) conducted within

the United States, and related customer

protection issues.

231

As such, the

regulation’s territorial approach to

determining U.S. person status is, in the

Commission’s view, unsuitable for

purposes of interpreting section 2(i),

which addresses the connection with

activities in and the risks to U.S.

commerce arising from activities outside

the United States.

Similarly, Regulation S and the Dodd-

Frank swaps provisions also serve

fundamentally different regulatory

objectives with respect to the treatment

of collective investment vehicles. Under

Regulation S, the SEC will consider

certain investment funds and securities

issuers that are organized in foreign

jurisdictions, but owned by U.S.

investors, to be U.S. persons unless the

U.S. investors are accredited

investors.

232

The accredited investor

condition provides a level of assurance

that U.S. investors are entities that

understand the consequences of

investing through a foreign entity and,

in effect, may be deemed to have waived

the benefits of the U.S. securities laws.

In contrast, the focus of Title VII is not

limited to customer protection. Whether

or not the investors in a collective

investment vehicle are accredited

investors, in the Commission’s view, is

irrelevant; rather, under section 2(i), the

focus is whether the swap activities of

a collective investment vehicle have a

direct and significant connection with

activities in, or effect on, U.S.

commerce.

The Commission understands that the

Regulation S definition of ‘‘U.S. person’’

is generally understood and applied by

market participants. However, as the

foregoing examples demonstrate, the

Regulation S definition of ‘‘U.S. person’’

could fail to capture persons whose

activities, the Commission believes,

meet the ‘‘direct and significant’’

jurisdictional test of CEA section 2(i)—

and whose activities present the type of

risk that Congress addressed in Title VII.

This potential for underinclusion,

together with the fact that the

Commission has addressed commenter

concerns by providing further details

and guidance about its interpretation of

the term ‘‘U.S. person,’’ which the

Commission expects will facilitate a

more consistent understanding of that

term among market participants,

provides the basis for not importing the

Regulation S definition into the

Commission’s interpretation of CEA

section 2(i).

d. Other Clarifications

The Commission continues to include

the prefatory phrase ‘‘include, but not

be limited to’’ in its interpretation of the

term ‘‘U.S. person,’’ as it appeared in

the Proposed Guidance. While the

Commission’s policy generally is to

limit its interpretation of this term, for

purposes of this Guidance, to persons

encompassed within the several prongs

discussed above, the Commission also

expects that there may be circumstances

that are not fully addressed by those

prongs, or other situations where the

interpretation discussed above does not

appropriately resolve whether a person

should be included in the interpretation

of the term ‘‘U.S. person.’’ Thus, the

Commission continues to include the

prefatory phrase to indicate that there

may be situations where a person not

fully described in the interpretation

above is appropriately treated as a ‘‘U.S.

person’’ for purposes of this Guidance

in view of the relevant facts and

circumstances and a balancing of the

various regulatory interests that may

apply. In these situations, the

Commission anticipates that the

relevant facts and circumstances may

generally include the strength of the

connections between the person’s swap-

related activities and U.S. commerce;

the extent to which such activities are

conducted in the United States; the

importance to the United States (as

compared to other jurisdictions where

the person may be active) of regulating

the person’s swap-related activities; the

likelihood that including the person

within the interpretation of ‘‘U.S.

person’’ could lead to regulatory

conflicts; and considerations of

international comity.

233

The

Commission anticipates that it would

also likely be helpful to consider how

the person (and in particular its swap

activities) is currently regulated, and

whether such regulation encompasses

the person’s swap activities as they

relate to U.S. commerce.

Finally, in response to commenters’

requests for clarification regarding the

scope of the applicability of the ‘‘U.S.

person’’ interpretation,

234

the

Commission confirms that its policy is

to apply its interpretation of the term

‘‘U.S. person’’ only to swaps regulations

promulgated under Title VII, unless

provided otherwise in any particular

regulation. Therefore, for example, the

Commission does not intend that this

Guidance address how the term

‘‘person’’ or ‘‘U.S. person’’ should be

interpreted in connection with any

other CEA provisions or Commission

regulations promulgated thereunder.

4. Summary

In summary, for purposes of the

application of CEA section 2(i), the

Commission will interpret the term

‘‘U.S. person’’ generally to include, but

not be limited to:

235

(i) Any natural person who is a resident of

the United States;

(ii) any estate of a decedent who was a

resident of the United States at the time of

death;

(iii) any corporation, partnership, limited

liability company, business or other trust,

association, joint-stock company, fund or any

form of enterprise similar to any of the

foregoing (other than an entity described in

prongs (iv) or (v), below) (a ‘‘legal entity’’),

in each case that is organized or incorporated

under the laws of a state or other jurisdiction

in the United States or having its principal

place of business in the United States;

(iv) any pension plan for the employees,

officers or principals of a legal entity

described in prong (iii), unless the pension

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236

See Proposed Guidance, 77 FR at 41218–

41219.

237

Id.

238

Id. at 41218–20.

239

Id. at 41221.

240

One commenter, Japanese Bankers

Association, stated that the cross-border application

of Dodd-Frank is overbroad because it would

capture even hedging transactions made by a non-

U.S. swap dealer with a U.S. swap dealer that is

making a market. The definition of ‘‘dealing

activity’’ is ambiguous, this commenter asserted,

and might require the non-U.S. swap dealer to

2012) at 1.

241

See, e.g., Goldman (Aug. 27, 2012) at 5; ISDA

(Aug. 10, 2012) at 12 (stating that, in the typical

case, an intra-group guarantee allocates risks and

activities within the corporate group and is not a

dealing activity of the non-U.S. person); CEWG

(Aug. 27, 2012) at 6–7 (stating that the Proposed

Guidance should not include swap guarantees for

aggregation purposes because it is contrary to the

Final Entities Rules; jurisdiction should not be

extended to transactions between two non-U.S.

persons if the swaps obligations of one party are

guaranteed by a U.S. person because U.S.

jurisdiction in these circumstances is not supported

by law or existing conventions of international

jurisdiction).

242

SIFMA (Aug. 27, 2012) at A29.

plan is primarily for foreign employees of

such entity;

(v) any trust governed by the laws of a state

or other jurisdiction in the United States, if

a court within the United States is able to

exercise primary supervision over the

administration of the trust;

(vi) any commodity pool, pooled account,

investment fund, or other collective

investment vehicle that is not described in

prong (iii) and that is majority-owned by one

or more persons described in prong (i), (ii),

(iii), (iv), or (v), except any commodity pool,

pooled account, investment fund, or other

collective investment vehicle that is publicly

offered only to non-U.S. persons and not

offered to U.S. persons;

(vii) any legal entity (other than a limited

liability company, limited liability

partnership or similar entity where all of the

owners of the entity have limited liability)

that is directly or indirectly majority-owned

by one or more persons described in prong

(i), (ii), (iii), (iv), or (v) and in which such

person(s) bears unlimited responsibility for

the obligations and liabilities of the legal

entity; and

(viii) any individual account or joint

account (discretionary or not) where the

beneficial owner (or one of the beneficial

owners in the case of a joint account) is a

person described in prong (i), (ii), (iii), (iv),

(v), (vi), or (vii).

Under this interpretation, the term

‘‘U.S. person’’ generally means that a

foreign branch of a U.S. person would

be covered by virtue of the fact that it

is a part, or an extension, of a U.S.

person.

For convenience of reference, this

Guidance uses the terms ‘‘U.S. swap

dealer’’ and ‘‘U.S. MSP’’ to refer to swap

dealers and MSPs, respectively, that are

within the Commission’s interpretation

of the term ‘‘U.S. person’’ under this

Guidance. The terms ‘‘non-U.S. swap

dealer’’ and ‘‘non-U.S. MSP’’ refer to

swap dealers and MSPs, respectively,

that are not within the Commission’s

interpretation of the term ‘‘U.S. person’’

under this Guidance; and the term

‘‘non-U.S. person’’ refers to a person

that is not within the Commission’s

interpretation of the term ‘‘U.S. person’’

under this Guidance.

B. Registration

1. Proposed Guidance

Under section 2(i) of the CEA, the

Dodd-Frank swaps provisions,

including the swap dealer and MSP

registration provisions, do not apply to

activities overseas unless such activities

have a ‘‘direct and significant

connection with activities in, or effect

on,’’ U.S. commerce. In the Proposed

Guidance, the Commission addressed

the general manner in which a person’s

overseas swap dealing activities or

positions may require registration as a

swap dealer or MSP, respectively.

Specifically, under the Proposed

Guidance, the Commission would

expect that a non-U.S. person whose

swap dealing transactions with U.S.

persons exceed the de minimis

threshold would register as a swap

dealer.

236

Likewise, under the Proposed

Guidance, the Commission would

expect that a non-U.S. person who holds

swaps positions where one or more U.S.

persons are counterparties above the

specified MSP thresholds would register

as an MSP.

237

As explained in the

Proposed Guidance, the Commission

believes that, consistent with section

2(i), the level of swap dealing or

positions that is sufficient to require a

person to register as a swap dealer or

MSP when conducted by a person

located in the United States would

generally also meet the ‘‘direct and

significant’’ nexus when such activities

are conducted by a non-U.S. person

with a U.S. person and in some other

limited circumstances.

In the consideration of whether a non-

U.S. person is engaged in more than a

de minimis level of swap dealing, the

Proposed Guidance would generally

include the notional value of any swaps

between such non-U.S. person (or any of

its non-U.S. affiliates under common

control) and a U.S. person (other than a

foreign branch of a registered swap

dealer).

238

Further, where the potential

non-U.S. swap dealer’s obligations are

guaranteed by a U.S. person, the

Commission would expect that the non-

U.S. person would register with the

Commission as a swap dealer when the

aggregate notional value of its swap

dealing activities (along with the swap

dealing activities of its non-U.S.

affiliates that are under common control

and also guaranteed by a U.S. person)

with U.S. persons and non-U.S. persons

exceeds the de minimis threshold.

Additionally, the Proposed Guidance

clarified that the Commission would not

expect a non-U.S. person without a

guarantee from a U.S. person to register

as a swap dealer if it does not engage in

swap dealing with U.S. persons as part

of ‘‘a regular business’’ with U.S.

persons, even if the non-U.S. person

engages in dealing with non-U.S.

persons.

Following a similar rationale, under

the Proposed Guidance if a non-U.S

person holds swaps positions above the

requisite threshold, the Commission

would expect such non-U.S. person to

whether a non-U.S. person that is a

potential MSP meets the applicable

threshold, under the Proposed

Guidance, the non-U.S. person would

have included the notional value of: (1)

any swaps entered into between such

non-U.S. person and a U.S. person

(provided that if the non-U.S. person’s

swaps are guaranteed by a U.S. person,

then such swaps will be attributed to

the U.S. guarantor and not the potential

non-U.S. MSP); and (2) any swaps

between another non-U.S. person and a

U.S. person if the potential non-U.S.

MSP guarantees the obligations of the

other non-U.S. person thereunder.

239

2. Comments

In general, commenters on the

Proposed Guidance did not raise

concerns or objections to the

Commission’s interpretation that non-

U.S. persons who engage in more than

a de minimis level of swap dealing with

U.S. persons should be expected to

240

A number of

commenters argued, however, that a

non-U.S. person should not be expected

to register as a swap dealer solely by

reason of being guaranteed by a U.S.

person.

241

SIFMA stated that the

‘‘connection between a non-U.S. swap

dealing entity and its U.S. guarantor

creates too tenuous a nexus to justify

registration on the basis of this

relationship alone.’’

242

As an

alternative, SIFMA posited that only

guarantees by a U.S. person for which

there is a material likelihood of payment

by the U.S. guarantor should be counted

towards the de minimis calculation. To

implement this recommendation,

SIFMA suggested that the Commission

establish how to determine whether the

likelihood of payment is remote, such as

a comparison of the aggregate

contingent liability of the U.S. person

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243

Id. at A29–30.

244

Goldman (Aug 27, 2012) at 5. See also CEWG

(Aug. 27, 2012) 6–7 (stating that because there is no

legal basis under section 2(i) for asserting

jurisdiction based on a guaranty, the Commission

should amend the Proposed Guidance to clarify that

a non-U.S. person is not subject to Commission

regulation, even where a U.S. person guarantees

either counterparty; swap dealing activity outside

the United States that does not involve a U.S.

person should not be subject to the Commission’s

jurisdiction; guarantees do not alter the location of

activity, nor should they alter a participant’s

residency); Hong Kong Banks (Aug. 27, 2012) at 8

(arguing that swaps between non-U.S. persons

should be excluded from the de minimis

determination regardless of whether a counterparty

is guaranteed).

245

ISDA (Aug. 10, 2012) at 12.

246

Australian Bankers (Aug. 27, 2012) at 4.

247

IIAC (Aug. 27, 2012) at 6, 8.

248

J.P. Morgan (Aug. 27, 2012) at 10.

249

See Further Definition of ‘‘Swap,’’ ‘‘Security-

Based Swap,’’ and ‘‘Security-Based Swap

Agreement’’; Mixed Swaps; Security-Based Swap

Agreement Recordkeeping; Final Rule, 77 FR 48208

(Aug. 13, 2012) (‘‘Final Swap Definition’’).

250

CEWG (Aug. 27, 2012) at 5.

251

Letter from Sen. Levin at 10.

252

Id. at 11.

253

Letter from Senators Blumenthal, Boxer,

Feinstein, Harkin, Levin, Merkley, Shaheen, and

Warren (Jul. 3, 2013).

254

AFR (Aug. 27, 2012) at 4.

255

Id. at 4.

256

As discussed in greater detail below, in light

of the global nature of the swaps markets, the

Commission’s policy is to interpret the aggregation

requirement in Commission regulation 1.3(ggg)(4)

in a manner that applies the same aggregation

principles to all affiliates in a corporate group,

whether they are U.S. or non-U.S. persons.

257

See note 267 and accompanying text, supra,

for guidance regarding the Commission’s

interpretation of the term ‘‘guarantee.’’

258

When a non-U.S. person generally would be

considered to be an affiliate conduit is discussed

below in section G. As discussed below, for the

purposes of the Commission’s interpretation of CEA

section 2(i), the Commission believes that certain

factors are relevant to considering whether a non-

U.S. person is an ‘‘affiliate conduit.’’ Such factors

include whether: The non-U.S. person is a majority-

owned affiliate of a U.S. person; the non-U.S.

person is controlling, controlled by or under

common control with the U.S. person; the financial

results of the non-U.S. person are included in the

consolidated financial statements of the U.S.

person; and the non-U.S. person, in the regular

course of business, engages in swaps with non-U.S.

third-parties for the purpose of hedging or

mitigating risks faced by, or to take positions on

behalf of, its U.S. affiliate(s), and enters into

guarantor to the net equity of that

guarantor.

243

Similarly, Goldman argued that it

would be inconsistent with the Dodd-

Frank Act to expect non-U.S. persons to

basis of guarantees by a U.S. parent,

absent any showing of a ‘‘direct and

significant’’ jurisdictional nexus.

Goldman recommended that any

concerns regarding potential evasion of

the registration requirement be

addressed through the Commission’s

exercise of its anti-evasion authority.

244

ISDA agreed, suggesting that rather than

protecting the U.S. guarantor by

encouraging swap dealer registration of

the guaranteed non-U.S. person, a better

course is addressing the question of

when (if ever) the U.S. guarantor must

245

Australian

Bankers stated that the considerations

relevant to whether a non-U.S. person

(without a guarantee from a U.S.

affiliate) is expected to register as a

swap dealer should relate to the

aggregate notional amount of swap

dealing activities with U.S. persons

within a particular asset class.

246

IIAC requested that the Commission

confirm that a guarantee by a foreign

holding company would not be deemed

to be a guarantee by all of its

subsidiaries, including U.S. entities,

solely as a result of the indirect

ownership.

247

J.P. Morgan raised

concerns regarding the scope of the

interpretation of the term a ‘‘guarantee.’’

Specifically, it argued that the term

‘‘guarantee’’ should not be interpreted to

include keepwells and liquidity puts

because these agreements do not create

the same types of third-party rights as

traditional guarantees and may be

unenforceable by third parties.

248

CEWG

objected to the broader interpretation of

the term ‘‘guarantee’’ in the Proposed

Guidance than under the Final Product

Definitions Rules,

249

stating that the

Commission ‘‘must undertake a more

thorough regulatory analysis with

respect to guarantees of swaps

obligations.’’

250

On the other hand, Senator Levin

stated that guarantees are central to

concerns regarding cross-border swaps,

and that any guarantee, implicit or

explicit, by a U.S. parent company to its

non-U.S. affiliates effectively transfers

risk to the U.S. parent.

251

Therefore,

Senator Levin stated that the exact form

of the guarantee should not limit

compliance with Dodd-Frank

requirements, and the list of relevant

guarantee arrangements should be

expanded to include arrangements

involving total return swaps, credit

default swaps or customized options

that result in the foreign affiliate’s

activities creating off balance sheet

liabilities for a U.S. person.

252

Eight

Senators commented that focusing on

whether affiliates are explicitly

‘‘guaranteed’’ by a U.S. affiliate does not

go far enough. They expressed concern

that market pressures cause U.S. parent

firms to stand behind their foreign

affiliates even if explicit guarantees are

not in place. The Senators suggested

that other factors be considered to

determine whether risk is effectively

guaranteed such as: limitations on

permissible transactions between the

parent and affiliate; explicit non-

guarantee disclosures to investors,

regulators and counterparties;

restrictions on operating under a

common name or sharing employees

and officers; and whether

comprehensive resolution protocols

exist in the foreign jurisdiction.

253

AFR stated that the Commission’s

failure to clarify its interpretation of

when affiliates of a ‘‘U.S. person’’ would

be treated as guaranteed, or to capture

‘‘the large grey area’’ between explicit

and informal guarantees, among other

things, creates opportunities to escape

Dodd-Frank regulations by shifting

business overseas.

254

AFR stressed that

the Commission should clarify in the

guidance that it ‘‘intends to follow

through on properly implementing these

principles and will not enable a ‘race to

the bottom’ in which incentives are

created for derivatives affiliates of global

banks . . . to relocate to areas of lax

regulation to take advantage of an

inadequate ‘substituted compliance’

regime.’’

255

3. Commission Guidance

a. Registration Thresholds for U.S.

Persons and Non-U.S. Persons,

Including Those Guaranteed by U.S.

Persons

Under the Final Entities Rules, a

person is required to register as a swap

dealer if its swap dealing activity

activities over the preceding 12 months

exceeds the de minimis threshold of

swap dealing. In addition, Commission

regulation 1.3(ggg)(4) requires that a

person include, in determining whether

its swap dealing activities exceed the de

minimis threshold, the aggregate

notional value of swap dealing

transactions entered by its affiliates

under common control.

256

For purposes of determining whether

a U.S. person is required to register as

a swap dealer, a U.S. person should

count all of its swap dealing activity,

whether with U.S. or non-U.S.

counterparties. This interpretation

reflects that swaps markets are global,

and therefore, in the Commission’s

view, all of a U.S. person’s swap dealing

activities, whether with U.S. persons or

non-U.S. persons, have the requisite

jurisdictional nexus and potential to

impact the U.S. financial system.

Similarly, the Commission believes that

all of the swap dealing activities of a

non-U.S. person that is an affiliate of a

U.S. person and that is guaranteed by a

U.S. person (a ‘‘guaranteed affiliate’’),

257

or that is an ‘‘affiliate conduit’’ of a U.S.

person,

258

have the requisite statutory

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offsetting swaps or other arrangements with its U.S.

affiliate(s) in order to transfer the risks and benefits

of such swaps with third-parties to its U.S.

affiliates. The term ‘‘conduit affiliate’’ generally

would not include swap dealers or affiliates thereof.

259

This Guidance uses the term ‘‘guaranteed or

conduit affiliate’’ to refer to a non-U.S. person

whose swap obligations are guaranteed by a U.S.

person or that is an affiliate conduit.

260

See Final Swap Definition, 77 FR at 48225–

48226. The Commission explained that when a

swap counterparty typically uses a guarantee as

credit support for its swaps obligations, the

guarantor’s resources are added to the analysis of

the swap because ‘‘the market will not trade with

that counterparty at the same price, on the same

terms, or at all without the guarantee.’’ Id. The

Commission stated that it viewed a guarantee as,

generally, ‘‘a collateral promise by a guarantor to

answer for the debt or obligation of a counterparty

obligor under a swap.’’ Id.

261

Id. at 48226 n. 187. In response to a comment

that guarantees are contingent obligations that do

not necessarily replicate the economics of the

underlying swap, the Commission stated:

The CFTC is persuaded that when a swap (that

is not a security-based swap or mixed swap) has the

benefit of a guarantee, the guarantee and related

guaranteed swap must be analyzed together. The

events surrounding the failure of [AIGFP] highlight

how guarantees can cause major risks to flow to the

guarantor. The CFTC finds that the regulation of

swaps and the risk exposures associated with them,

which is an essential concern of the Dodd- Frank

Act, would be less effective if the CFTC did not

interpret the term ‘‘swap’’ to include a guarantee of

a swap.

Id. at 48226.

262

Congress has recognized the significance of

guarantees of swaps obligations with respect to the

activities of financial entities in section 210(c)(16)

of the Dodd-Frank Act. There, Congress specifically

addressed guarantees in the context of a Title II

resolution proceeding. Section 210(c)(16) provides

that, where a financial institution is in FDIC

receivership, a ‘‘qualified financial contract’’ (or

‘‘QFC,’’ which includes swaps) with a subsidiary of

that financial institution that is guaranteed by the

financial institution cannot be terminated by a

counterparty facing that subsidiary pursuant to the

QFC based solely on the insolvency or receivership

of the financial institution if certain conditions are

satisfied.

263

The Commission notes that the SEC Cross-

Border Proposal agrees that ‘‘[i]n a security-based

swap transaction between two non-U.S. persons

where the performance of at least one side of the

transaction is guaranteed by a U.S. person, . . . the

guarantee creates risk to the U.S. financial system

and counterparties (including U.S. guarantors) to

the same degree as if the transaction were entered

into directly by a U.S. person.’’ SEC Cross-Border

Proposal, 78 FR at 30986. However, the SEC does

not propose to address the risk posed by the

guarantee through requiring the non-U.S.

guaranteed affiliate to register as a security-based

swap dealer, but rather through the application of

principles of attribution in the major security-based

swap participant definition. See id. at 31006.

Continued

nexus and potential to impact the U.S.

financial system. Therefore, under the

Commission’s interpretation of 2(i), a

guaranteed or conduit affiliate

259

should count swap dealing transactions

towards the de minimis threshold for

swap dealer registration in the same

manner as a U.S. person. That is, in

light of the global nature of the swaps

markets, a guaranteed or conduit

affiliate should count all of its swap

dealing transactions, whether with U.S.

or non-U.S. counterparties, towards the

de minimis threshold for swap dealer

registration.

However, under the Commission’s

interpretation of section 2(i), a more

circumscribed registration policy

applies to non-U.S. persons that are not

guaranteed or conduit affiliates. In this

case, the Commission believes that the

non-U.S. person should count only its

swap dealing transactions with U.S.

persons (other than foreign branches of

swap dealers that are registered with the

Commission), and with guaranteed

affiliates towards the de minimis

thresholds for swap dealer registration,

with three exceptions, which are

described below. Non-U.S. persons that

are not guaranteed or conduit affiliates

are not required to count swaps with a

conduit affiliate towards the swap

dealer de minimis calculation.

Similarly, for purposes of determining

whether a U.S. person is required to

interprets section 2(i), a U.S. person and

a guaranteed or conduit affiliate should

include all of swap positions with

counterparties, whether they are U.S. or

non-U.S. persons. With respect to

whether a non-U.S. person must

calculate whether its swap positions

create exposures above the relevant

MSP thresholds, the Commission

believes, for policy reasons and

consistent with principles of

international comity, that CEA section

2(i) should not be interpreted to require

non-U.S. persons that are not financial

entities to include for MSP calculation

purposes certain swap positions as

explained below.

As the Commission explained in the

Proposed Guidance, in the event of a

default or insolvency of a non-U.S. swap

dealer with more than a de minimis

level of swap dealing with U.S. persons,

or a non-U.S. MSP with more than the

threshold level of swaps positions with

U.S. persons, the swap dealer’s or MSP’s

U.S. counterparties could be adversely

affected. Such an event may adversely

affect numerous persons engaged in

commerce within the United States,

disrupt such commerce, and increase

the risk of a widespread disruption to

the financial system in the United

States.

Similar effects on U.S. persons and on

the U.S. financial system may occur in

the event of a default or insolvency of

certain non-U.S. person with respect to

swap dealing transactions in excess of

the de minimis level, or swaps positions

above the MSP threshold, entered into

such non-U.S. persons with other non-

U.S. persons whose swaps obligations

are guaranteed by a U.S. person. The

Commission interprets section 2(i) of

the CEA to encompass swaps entered

into by guaranteed or conduit affiliates

in addition to encompassing swaps

entered into by U.S. persons. In the final

rule to further define the term ‘‘swap,’’

the Commission found that a guarantee

of a swap is a term of that swap that

affects the price or pricing attributes of

that swap, and that when a swap has the

benefit of a guarantee, the guarantee is

an integral part of that swap.

260

The

Commission therefore interprets the

term ‘‘swap’’ (that is not a security-

based swap or mixed swap) ‘‘to include

a guarantee of such swap, to the extent

that a counterparty to a swaps position

would have recourse to the guarantor in

connection with the position.’’

261

Because a guarantee of a swap is an

integral part of the swap, and

counterparties may not otherwise be

willing to enter into a swap with the

guaranteed affiliate, the affiliate would

not have significant swap business if not

for the guarantee. The Commission

believes that swap activities outside the

United States that are guaranteed by

U.S. persons would generally have a

direct and significant connection with

activities in, or effect on, U.S. commerce

in a similar manner as the underlying

swap would generally have a direct and

significant connection with activities in,

or effect on, U.S. commerce if the

guaranteed counterparty to the

underlying swap were a U.S. person.

262

Similarly, the Commission believes that

swap activities outside the United States

of an affiliate conduit would generally

have a direct and significant connection

with activities in, or effect on, U.S.

commerce in a similar manner as would

be the case if the affiliate conduit’s U.S.

affiliates entered into the swaps

directly.

Accordingly, under section 2(i), the

Commission intends to interpret section

2(i) as applying the swaps provisions of

the CEA to swaps that are entered into

by guaranteed or conduit affiliates in a

manner similar to how section 2(i)

would apply if a U.S. person had

entered into the swap (subject to

appropriate considerations of

international comity for non-guaranteed,

non-U.S. persons facing such

guaranteed or conduit affiliates, as

discussed below).

Thus, in the case of a guaranteed or

conduit affiliate, the Commission

interprets CEA section 2(i) to provide

that the guaranteed or conduit affiliate

is expected to count toward the swap

dealer de minimis threshold all of its

swap dealing activities.

263

Following a

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The Commission believes that while the SEC’s

proposed approach may be appropriate for the

securities-based swaps market, it would not be

desirable to follow a similar approach for the swaps

markets within the Commission’s jurisdiction. Due

to the differing characteristics of the markets, such

as the involvement of a much larger and more

diverse number of commercial companies using

swaps as compared to security-based swaps, the

risks that may be transmitted through the

interconnected financial system from the non-U.S.

guaranteed affiliate operating as a swap dealer to

the U.S. swaps market may not be adequately

managed by the MSP structure, which has relatively

high exposure thresholds before registration is

required.

264

Final Swap Definition, 77 FR at 48226.

265

According to one commenter, these concerns

may be present even where a guarantee is implicit,

but not explicitly provided:

A recent example of the importance of implicit

guarantees is the collapse of Bear Stearns, which

was brought down by the failure of non-guaranteed

hedge fund affiliates. These hedge funds were

foreign affiliates technically not guaranteed by the

parent, and the investment by the parent company

in the funds was minimal. However, the firm was

forced to try to save the funds for reputational

reasons and also because a fire sale of subsidiary

assets could have seriously impacted correlated

positions held by the parent company. . . . The

example of Bear Stearns is only one among many

instances where parent companies have been forced

to rescue failing affiliates even in the absence of an

explicit guarantee.

AFR (Aug. 27, 2012) at 8. See also Letter from

Sen. Levin, note 216, supra.

266

See Proposed Guidance, 77 FR at 41221 n. 47.

267

Thus, for example, while keepwells and

liquidity puts, certain types of indemnity

agreements, master trust agreements, liability or

loss transfer or sharing agreements, and any other

explicit financial support arrangements may

provide for different third-party rights and/or

address different risks than traditional guarantees,

the Commission does not believe that these

differences would generally be relevant for

purposes of section 2(i). Under these agreements or

arrangements, one party commits to provide a

financial backstop or funding against potential

losses that may be incurred by the other party,

either from specific contracts or more generally. In

the Commission’s view, this is the essence of a

guarantee.

268

For purposes of this Guidance regarding the

application of Commission regulation 1.3(ggg)(4),

the Commission construes the phrase ‘‘affiliates

under common control’’ with respect to affiliates as

stated in the Final Entities Rules, which defines

control as ‘‘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 securities, by

contract or otherwise.’’ See Final Entities Rules, 77

FR at 30631 n. 437. Thus, for purposes of this

Guidance, a reference to ‘‘affiliates under common

control’’ with a person includes affiliates that are

controlling, controlled by, or under common

control with such person.

269

See, e.g., Cleary (Aug. 16, 2012) at 9–10; IIB

(Aug. 27, 2012) at 22–24; FOA (Aug. 13, 2012) at

11–12; ISDA (Aug. 10, 2012) at 11–12; SocGen

(Aug. 8, 2012) at 8; Deutsche Bank (Aug. 27, 2012)

at 4–5, FSR (Aug. 27, 2012) at 4–6.

270

Cleary (Aug. 16, 2012) at 9–10; IIB (Aug. 27,

2012) at 22.

271

IIB (Aug. 9, 2012) at 6.

272

Cleary (Aug. 16, 2012) at 9–10.

similar rationale, the Commission

interprets CEA section 2(i) to provide

that a guaranteed or conduit affiliate, in

calculating whether the applicable MSP

threshold is met, would be expected to

include, and attribute to the U.S.

guarantor, the notional value of: (1) All

swaps with U.S. and non-U.S.

counterparties, and (2) any swaps

between another non-U.S. person and a

U.S. person or guaranteed affiliate, if the

potential non-U.S. MSP guarantees the

obligations of the other non-U.S. person

thereunder.

In the Final Swap Definition, the

Commission also acknowledged that a

‘‘full recourse’’ guarantee would have a

greater effect on the price of a swap than

a ‘‘limited’’ or ‘‘partial recourse’’

guarantee, yet nevertheless determined

that the presence of any guarantee with

recourse, no matter how robust, is price

forming and an integral part of a

guaranteed swap.

264

Moreover, as the

recent financial crisis has demonstrated,

in a moment of crisis—whether at the

firm-level or more generally, market-

wide—it matters little whether the

parent guarantees are capped or

otherwise qualified. In the face of

solvency concerns, the parent guarantor

will find it necessary to assume the

liabilities of its affiliates.

265

For these

reasons, the Commission declines to

incorporate in the Guidance

commenters’ suggestions that only

certain types of guarantees (e.g., under

which there is a material likelihood of

liability) should be considered for

purposes of registration determinations

for non-U.S. persons.

Finally, with respect to the Japanese

Bankers Association’s concern about

potential constraints on their hedging

activities, the Commission contemplates

that swaps that are between foreign

branches of U.S. swap dealers and

dealing non-U.S. persons generally will

be excluded from the swap dealer

registration determination, as further

described below. The Commission

believes that under section 2(i) of the

CEA, it would generally be appropriate

for non-U.S. market participants, such

as members of the Japanese Bankers

Association, to engage in hedging

activities with foreign branches of U.S.

swap dealers without being expected to

count such transactions for purposes of

the swap dealer registration

determination.

The Commission also is affirming

that, for purposes of this Guidance, the

Commission 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 with

respect to its swaps.

266

The Commission

believes that it is necessary to interpret

the term ‘‘guarantee’’ to include the

different financial arrangements and

structures that transfer risk directly back

to the United States. In this regard, it is

the substance, rather than the form, of

the arrangement that determines

whether the arrangement should be

considered a guarantee for purposes of

the application of section 2(i).

267

b. Aggregation

Commission regulation 1.3(ggg)(4)

requires that a person include, in

determining whether its swap dealing

activities exceed the de minimis

threshold, the aggregate notional value

of swap dealing transactions entered by

its affiliates under common control.

268

Additionally, under the Proposed

Guidance, a non-U.S. person, in

determining whether its swap dealing

transactions exceed the de minimis

threshold, would include the aggregate

notional value of swap dealing

transactions entered into by its non-U.S.

affiliates under common control but

would not include the aggregate

notional value of swap dealing

transactions entered into by its U.S.

affiliates.

Numerous commenters objected to the

aggregation interpretation regarding

swap dealer registration in the Proposed

Guidance.

269

IIB and Cleary, while

acknowledging the Commission’s

evasion concerns, contended that the

aggregation interpretation in the

Proposed Guidance would effectively

eliminate the de minimis exemption for

any affiliate of a registered swap

dealer.

270

IIB further stated that the

proposed aggregation interpretation

would require a significant amount of

coordination among entities within a

corporate group in order to gather the

relevant information and to reconfigure

their registration plans. These

difficulties, according to IIB, would be

compounded by uncertainties in the

proposed interpretation of the term

‘‘U.S. person.’’

271

Cleary argued that the positions of a

registered swap dealer should be

excluded from the de minimis

calculation by its affiliate and further

added that such aggregation relief

should be available to any U.S. or non-

U.S. affiliates of any U.S.- or non-U.S.

registered swap dealer.

272

FOA

recommended that the Commission

consider a policy that would permit

non-U.S. persons to not aggregate the

swap dealing activities of their non-U.S.

swap dealing affiliates under common

control and to require aggregation only

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273

FOA (Aug. 13, 2012) at 11–12. FOA argued

that the Proposed Guidance would have a

disproportionate effect by providing that a non-U.S.

person engaging in a de minimis amount of U.S.-

facing swap dealing activities should register as a

swap dealer simply because its other non-U.S.

affiliates under common control, in the aggregate,

exceed the de minimis threshold, even though there

is no coordinated effort. Id.

274

ISDA (Aug. 10, 2012) at 12 (noting that if an

exclusion from aggregation for an affiliated swap

dealer’s swaps were in place, then the group in the

above example could decide which entity registers

and thereby bring the swaps attributable to the

other entity under the threshold).

275

Also, under this alternative approach, a non-

U.S. person would not be expected to include the

aggregate notional value of swap dealing

transactions of any of its non-U.S. affiliates under

common control where the counterparty to such

affiliate is also a non-U.S. person.

276

Greenberger/AFR (Feb. 6, 2013) at 8–9.

277

Better Markets (Feb. 15, 2013) at 8–9.

278

SIFMA/CH/FSR (Feb. 6, 2013) at A2–3

279

ISDA (Feb. 6, 2013) at 3–4 (relevant affiliates

are unlikely to have systems to monitor U.S. person

status of swap counterparties). See also European

Federation of Energy Traders (‘‘EFET’’) (Feb. 6,

2013) at 3–4 (arguing that cost of system to monitor

aggregation would be substantial and relative

benefits of requiring aggregation are small, given

that equivalent regulation already applies, or soon

will apply, in non-U.S. jurisdictions). ISDA, IIB and

CEWG all stated that the treatment in the January

Order of grandfathered affiliates (i.e., those affiliates

engaged in swap dealing with U.S. persons on

December 21, 2012) should be made permanent in

order to avoid disrupting established transactional

relationships. See ISDA (Feb. 6, 2013) at 3; IIB (Feb.

6, 2013) at 6; CEWG (Feb. 25, 2013) at 2–4.

280

Mitsubishi UFJ (Feb. 1, 2013) at 3–4.

281

Id. at 5.

where there is evidence that a group of

non-U.S. swap dealing affiliates

sufficiently coordinate their swap

dealing activities.

273

ISDA asserted that

the proposed asymmetric application of

aggregation (i.e., U.S. affiliates aggregate

the entire worldwide group, but non-

U.S. affiliates aggregate only non-U.S.

affiliates) would produce arbitrary

results, citing, as an example, a group

that has a U.S. affiliate with $500

million of swaps and a non-U.S. affiliate

with $7.6 billion of swaps with non-U.S.

persons. In that scenario, the U.S.

affiliate must register; the non-U.S.

affiliate is not required to register.

274

In the Further Proposed Guidance, the

Commission proposed an alternative

interpretation of the aggregation

requirement in Commission regulation

1.3(ggg)(4). Under this alternative, a

non-U.S. person would be expected, in

the consideration of whether its swap

dealing transactions exceed the de

minimis threshold, to include the

aggregate notional value of swap dealing

transactions entered into by all its

affiliates under common control (i.e.,

both non-U.S. affiliates and U.S.

affiliates), but not include the aggregate

notional value of swap dealing

transactions of any non-U.S. affiliate

under common control that is registered

as a swap dealer.

275

The Commission

noted that the application of the

aggregation requirement in Commission

regulation 1.3(ggg)(4) to non-U.S.

affiliates of non-U.S. swap dealers may,

in certain circumstances, impose

significant burdens on such non-U.S.

affiliates without advancing significant

regulatory interests of the Commission.

Because the conduct of swap dealing

business through locally-organized

affiliates may in some cases be required

in order to comply with legal

requirements or business practices in

foreign jurisdictions, such non-U.S.

affiliates may be numerous and it could

be impractical to require all such non-

U.S. affiliates to register as swap

dealers. Further, the Commission’s

interest in registration may be reduced

for a non-U.S. affiliate of a registered

non-U.S. swap dealer where the non-

U.S. affiliate (or group of such affiliates)

engages in only a small amount of swap

dealing activity with U.S. persons.

On the other hand, the Commission

also noted in the Further Proposed

Guidance that, given the borderless

nature of swap dealing activities, a swap

dealer may conduct swap dealing

activities through various affiliates in

different jurisdictions, which suggests

that its interpretation should take into

account the applicable swap dealing

transactions entered by all of a non-U.S.

person’s affiliates under common

control worldwide. Otherwise, affiliated

persons may not register solely because

their swap dealing activities are

divided, such that each affiliate falls

below the de minimis level. The

Commission noted its concern that a

policy under which such affiliates

whose swap dealing activities

individually fall below the de minimis

level, but whose swap dealing activities

in the aggregate exceed the de minimis

level, would not register as swap dealers

could provide an incentive for firms to

spread their swap dealing activities

among several unregistered affiliates

rather than centralize their swap dealing

in registered firms. Such a result would

increase systemic risks to U.S. market

participants and impede the

Commission’s ability to protect U.S.

markets.

Two commenters supported the

alternative interpretation of the

aggregation requirement set out in the

Further Proposed Guidance.

Greenberger/AFR stated that the

aggregation requirement helps to

prevent the spreading of risk, because

without aggregation U.S. persons could

avoid registration as swap dealers by

routing their swap activity through non-

U.S. affiliates and thereby remain under

the de minimis threshold.

276

Better

Markets supported the alternative

interpretation in the Further Proposed

Guidance because it contemplates that

non-U.S. persons would aggregate all

swap dealing of all affiliates, including

U.S. affiliates, except where the affiliate

is registered as a swap dealer.

277

Other commenters were opposed to

the alternative interpretation in the

Further Proposed Guidance. SIFMA/

CH/FSR stated that aggregation of swap

dealing activity across affiliates is not

appropriate in any circumstance.

278

ISDA stated that application of the

aggregation principle to non-U.S.

affiliates may impose significant

burdens on the non-U.S. affiliates

without advancing significant regulatory

interests, and expanding the scope of

aggregation to include swaps of U.S.

affiliates would exacerbate this

disproportionality.

279

Mitsubishi UFJ Financial Group Inc.

(‘‘Mitsubishi UFJ’’) asked the

Commission to clarify its interpretation

of the term ‘‘control’’ in the context of

a non-U.S. joint venture where only one

owner controls and operates, and

financially consolidates, the joint

venture entity.

280

Mitsubishi UFJ stated

that in this case the joint venture should

be linked for aggregation purposes to the

owner that has operational control,

provided that the owner has at least one

affiliate that is a registered swap

dealer.

281

In the Further Proposed Guidance, the

Commission asked commenters to

address several questions regarding the

aggregation provision. In particular, the

Commission asked whether the

alternative interpretation of the

aggregation requirement should apply to

non-U.S. persons that are guaranteed by

a U.S. person with respect to their

swaps obligations in the same way that

it applies to non-U.S. persons that are

not so guaranteed, and if so, should the

Commission continue to construe the

term ‘‘guarantee’’ for this purpose to

mean any collateral promise by a

guarantor to answer for the debt or

obligation of an obligor under a swap

and should the term include

arrangements such as keepwells and

liquidity puts.

Greenberger/AFR replied to this

question affirmatively, stating that the

Commission should establish a

rebuttable presumption that foreign

affiliates are guaranteed by the parent

company, and require clear evidence

that the market has been explicitly

informed that the parent will not stand

behind affiliate liabilities in the event of

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282

Greenberger/AFR (Feb. 6, 2013) at 5–6.

283

Id. at 6.

284

SIFMA/CH/FSR (Feb. 6, 2013) at A4.

285

Id.

286

ISDA (Feb. 6, 2013) at 2–3.

287

Id. at 3.

288

Japan FSA (Feb. 6, 2013) at 2.

289

Greenberger/AFR (Feb. 6, 2013) at 9.

290

Id.

291

Id.

292

CEWG (Feb. 25, 2013) at 2–4.

293

ISDA (Feb. 6, 2013) at 4; SIFMA/CH/FSR (Feb.

6, 2013) at B11–12. CEWG and ISDA also both

stated that U.S. persons should in no event be

required to aggregate swaps of non-U.S. affiliates

with non-U.S. persons, because such swaps have

insufficient nexus to the United States. CEWG (Feb.

25, 2013) at 2; ISDA (Feb. 6, 2013) at 4.

294

Mizuho/Sumitomo (Feb. 6, 2013) at 3.

295

Id. See also Japan FSA (Feb. 6, 2013) at 2

(arguing that the swap dealing activity of U.S.

affiliates that are registered as swap dealers should

be excluded because the affiliates are subject to

supervision by the Commission).

296

IIB (Feb. 6, 2013) at 5–6.

297

Japanese Bankers Association (Feb. 6, 2013) at

2–3. See also Japan FSA (Feb. 6, 2013) at 2 (arguing

that all affiliates of Japanese financial institutions

should be excluded from the de minimis

calculation because the affiliates are supervised by

Japan FSA on a consolidated basis).

298

EDF Trading (Feb. 6, 2013) at 1–4. See also

Brigard & Urrutia Abogados (Feb. 6, 2013) at 2 (non-

U.S. persons should be allowed to exclude from the

de minimis calculation the swap dealing activities

of U.S. affiliates, and of any affiliate (U.S. or non-

U.S.) that is a registered swap dealer).

a default or bankruptcy.

282

To do

otherwise, they stated, would encourage

swap activity through non-U.S. affiliates

rather than U.S. persons.

283

Other commenters stated that the

alternative interpretation should not

apply to non-U.S. persons that are

guaranteed by a U.S. person in the same

way that it applies to non-U.S. persons

that are not so guaranteed. SIFMA/CH/

FSR stated that a guarantee by a U.S.

person is not, in itself, a sufficient nexus

for jurisdiction under section 2(i) of the

CEA, since swaps may be guaranteed for

a number of reasons that do not

necessarily implicate U.S.

jurisdiction.

284

Thus, there may be no

importation of risk to the United States

through the guarantee and, in any event,

concern about importation of risk is

appropriately addressed where the

guarantor is a prudentially regulated

entity, and the Commission should rely

on its anti-evasion authority to prevent

use of guarantees to evade registration

requirements.

285

ISDA also stated that a

guarantee constitutes an insufficient

jurisdictional nexus, and that it would

be consistent with international comity

and regulatory reciprocity to regulate

swaps between two non-U.S. persons

primarily under non-U.S. regulation.

286

Regarding the potential for risk transfer

across borders, ISDA stated that much of

the regulation applicable to swap

dealers is not relevant to this concern—

external and internal business conduct

rules, for example, cannot assure the

ultimate solvency of a swap dealer, and

it is unclear that encouraging further

capitalization of overseas affiliates of a

U.S. guarantor, causing financial

resources to be contributed overseas,

would advance the stability of the U.S.

financial system.

287

The Financial

Services Agency, Government of Japan

(‘‘Japan FSA’’) also thought that a

guarantee from a U.S. person should

not, in itself, cause swaps with a non-

U.S. person to be included in the de

minimis calculation.

288

The Commission also asked if non-

U.S. persons should not be expected to

include in the de minimis calculation

the swap dealing transactions of their

U.S. affiliates under common control,

or, alternatively, should the policy of

the Commission contemplate that they

would exclude from the de minimis

calculation the swap dealing

transactions of their U.S. affiliates under

common control that are registered as

swap dealers.

Responding to this question,

Greenberger/AFR stated it is important

in any case to require aggregation across

all non-U.S. affiliates of a global bank,

in order to effectively capture

transactions spread across multiple

foreign affiliates; otherwise, it would be

much easier to avoid registration as a

swap dealer.

289

They believe that the

second alternative—excluding only the

swap dealing transactions of U.S.

affiliates that are registered as swap

dealers—is much preferable to the first,

because the first alternative would

permit two groups of affiliates, one

within the U.S. and another non-U.S., to

both engage in swap dealing up to the

de minimis level, which would create

an incentive to split a swap dealing

business between U.S. and non-U.S.

affiliates.

290

The second alternative

would effectively allow a group of

affiliates that individually and

collectively fall below the de minimis

threshold to forego registration, which

they believed could be a sensible

compromise, so long as aggregation

across foreign affiliates is maintained.

291

Several commenters were opposed to

a policy under which non-U.S. persons

would aggregate the swap dealing

activities of U.S. affiliates that are

registered swap dealers. CEWG argued

that this policy could lead to

registration of non-U.S. persons as swap

dealers because of the activities of their

U.S. affiliates, which it asserted would

be contrary to the separation sometimes

maintained between U.S. and non-U.S.

affiliates and unsupported by any policy

rationale.

292

ISDA and SIFMA/CH/FSR

were of the view that all persons (both

U.S. and non-U.S.) should be able to

exclude from their de minimis

calculations the swaps of any affiliate

(whether U.S. or non-U.S.) that is

registered with the Commission as a

swap dealer, because swaps by a

registered swap dealer are subject to

Dodd-Frank protections and no purpose

would be served by attributing them to

affiliated entities in order to impose

swap dealer registration on those

affiliates.

293

The Mizuho Corporate Bank, Ltd.

(‘‘Mizuho’’) and Sumitomo submitted a

joint letter arguing that the swap dealing

activity of U.S. affiliates that are

registered as swap dealers should be

excluded from aggregation because

otherwise the de minimis exception

would be effectively unavailable to non-

U.S. based firms that conduct U.S.-

facing swap dealing activity through a

U.S. affiliate that is registered as a swap

dealer.

294

This result, in turn, would

inappropriately disfavor these firms as

compared to firms that conduct the

same business through non-U.S.

affiliates registered as swap dealers; the

Commission’s interpretation should

encourage, rather than disfavor,

registration of U.S. affiliates as swap

dealers.

295

IIB stated that the policy

reasons for allowing the exclusion of

swap dealing by non-U.S. affiliates

registered as swap dealers also applies

to the dealing activity of U.S affiliates

that are registered.

296

Other commenters went further,

stating that non-U.S. persons should not

be required to aggregate the swap

dealing activities of any of their U.S.

affiliates. The Japanese Bankers

Association stated U.S. affiliates should

be excluded from the non-U.S. person’s

calculations because the U.S. persons

are already subject to Dodd-Frank

regulation as warranted by their

activities.

297

EDF Trading stated that

non-U.S. persons that maintain minimal

contacts with the United States should

not be required to register as swap

dealers due to the activities of their U.S.

affiliates, because such a requirement

would be inconsistent with the

jurisdictional limitation in section 2(i)

of the CEA; result in duplicative and

potentially inconsistent regulatory

requirements of multiple jurisdictions

applying to the same swap activity; and

encourage commercial firms to cease

potential swap dealing activity in the

U.S., resulting in reduced U.S. swaps

market liquidity and fragmentation of

the global swaps markets.

298

Last, the Commission solicited

commenters’ views on whether a person

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299

Greenberger/AFR (Feb. 6, 2013) at 8–9.

300

See id. (citing press reports that U.S. banks

such as Morgan Stanley and Goldman Sachs are

using foreign entities ‘‘in seriatim fashion to avoid

going over the $ 8 billion test’’). Making a similar

point, Better Markets emphasized that market

participants may be expected to implement the

lowest-cost structure, considering all regulatory

costs. Better Markets (Feb. 6, 2013) at 15.

301

Japanese Bankers Association (Feb. 6, 2013)

at 3.

302

Id.

303

Id. at 3–4.

304

EDF Trading (Feb. 6, 2013) at 5.

305

SIFMA/CH/FSR (Feb. 6, 2013) at A3.

306

IIB (Feb. 6, 2013) at 3.

307

Id.

308

For purposes of this Guidance, the

Commission clarifies that a reference to ‘‘affiliates

under common control’’ with a person includes

affiliates that are controlling, controlled by, or

under common control with such person. See note

268, supra. Further, in response to a question from

a commenter, the Commission clarifies that for this

purpose, the term ‘‘affiliates under common

control’’ includes parent companies and

subsidiaries, and is not limited to ‘‘sister

companies’’ at the same organizational level. See

David Mu (Jan. 8, 2013).

engaged in swap dealing activities could

take advantage of an interpretation of

the aggregation provision that allows a

person to exclude the swap dealing

activities of one or more of its affiliates

under common control. The

Commission asked whether, under such

an interpretation, a person could spread

its swap dealing activities into multiple

affiliates, each under the de minimis

threshold, and therefore avoid the

registration requirement, even though

the aggregate level of swap dealing by

the affiliates exceeds the de minimis

threshold. In this regard, the

Commission asked if any such

interpretation should include any

conditions or limits on the overall

amount of swap dealing engaged in by

unregistered persons within an affiliated

group.

Greenberger/AFR opined that any

approach that did not require significant

aggregation of swap dealing activities

across affiliates would create the danger

of risk spreading outlined in the Further

Proposed Guidance.

299

They stated that

financial institutions could easily

remain under the de minimis threshold

and thereby avoid registration by

routing swaps through their non-U.S.

affiliates.

300

The Japanese Bankers Association

stated that while the approach in the

Further Proposed Guidance could

potentially prevent evasion, it would do

so at the cost of requiring multiple non-

U.S. affiliates to register as swap dealers

even if the group of affiliates

concentrated its U.S. swap dealing

activity in one U.S. entity.

301

In fact,

they argued, concentrating U.S. swap

dealing activity in a U.S. entity should

be encouraged because it facilitates

Commission supervision of that

activity.

302

Further, they stated that to

expect non-U.S. persons to register as

swap dealers as a result of dealing

activity by their U.S. affiliates

undermines the regulatory

independence of different jurisdictions

and international understandings on

regulatory harmonization.

303

Similarly,

EDF Trading stated that expecting

multiple entities within a corporate

group to register as swap dealers would

be burdensome and may not advance

regulatory interests, and the alternative

in the Further Proposed Guidance

would merely increase economic and

regulatory burdens without achieving a

significant reduction in systemic risk,

because it would encourage the

concentration of swap dealing activity

in non-U.S affiliates.

304

SIFMA/CH/FSR were of the view that

it would be burdensome for market

participants to use multiple affiliates to

avoid swap dealer registration, because

moving swap dealing activity between

affiliates requires a significant legal,

technological and operational

investment, and fragmenting the activity

among affiliates may make it harder for

a multinational institutions to manage

risk efficiently.

305

Along the same lines,

IIB stated that where one entity in a

corporate group is registered as a swap

dealer, there are substantial commercial

and credit risk incentives to centralize

swap dealing in the registered entity,

because doing so maximizes the

potential to net offsetting transactions,

uses capital more efficiently, and is

operationally efficient.

306

On the other

hand, IIB stated that using unregistered

entities for swap dealing would not

reduce the fixed costs incurred in

registration and that the unregistered

entities in the group would still be

subject to swap costs such as clearing,

reporting and trade execution.

307

Based on the comments received on

the Proposed Guidance and the Further

Proposed Guidance, and its further

review of issues related to the

aggregation requirement, the

Commission’s policy is to interpret the

aggregation requirement in Commission

regulation 1.3(ggg)(4) in a manner that

applies the same aggregation principles

to all affiliates in a corporate group,

whether they are U.S. or non-U.S.

persons. Further, the Commission will

generally apply the aggregation

principle (as articulated in the Final

Entities Rules) such that, in considering

whether a person is engaged in more

than a de minimis level of swap dealing,

a person (whether U.S. or non-U.S.)

should generally include all relevant

dealing swaps of all its U.S. and non-

U.S. affiliates under common control,

308

except that swaps of an affiliate (either

U.S. or non-U.S.) that is a registered

swap dealer are excluded, as discussed

below. The Commission notes that this

policy would ensure that the aggregate

notional value of applicable swap

dealing transactions of all such

unregistered U.S. and non-U.S. affiliates

does not exceed the de minimis level.

Stated in general terms, the

Commission’s interpretation allows both

U.S. persons and non-U.S. persons in an

affiliated group to engage in swap

dealing activity up to the de minimis

threshold. When the affiliated group

meets the de minimis threshold in the

aggregate, one or more affiliate(s) (inside

or outside the United States) would

generally have to register as swap

dealer(s) so that the relevant swap

dealing activity of the unregistered

affiliates remains below the threshold.

The Commission recognizes the

borderless nature of swap dealing

activities, in which a dealer may

conduct swap dealing business through

its various affiliates in different

jurisdictions, and the Commission

believes that its policy on aggregation

outlined above addresses the concern

that an affiliated group of U.S. and non-

U.S. persons with significant swap

dealing transactions with U.S. persons

or guaranteed affiliates may not be

required to register solely because such

swap dealing activities are divided

between affiliates that each fall below

the de minimis level.

c. Exclusion of Certain Swaps by Non-

U.S. Persons From the Swap Dealer De

Minimis Threshold

The Proposed Guidance would

generally allow a non-U.S. person to

exclude from its de minimis threshold

calculation its swaps with foreign

branches of U.S. swap dealers. This

exclusion was intended to allow non-

U.S. persons to continue their inter-

dealer swap activities with foreign

branches of U.S. swap dealers without

exceeding the de minimis threshold,

thereby triggering a requirement to

Commenters on the Proposed

Guidance, such as Goldman Sachs,

argued that the rationale for this

exclusion is equally applicable when

non-U.S. persons that are banks or

broker-dealers engage in swap dealing

transactions with U.S. swap dealers that

do not conduct overseas business

through foreign branches. Absent a

similar interpretation in these

circumstances, the commenters argued,

U.S. swap dealers would be at a

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309

Goldman (Aug. 27, 2012) at 5–6.

310

Note that if a non-U.S. person that is not a

guaranteed or conduit affiliate of a U.S. person

engages in a swap dealing transaction with another

non-U.S. person that is not a guaranteed affiliate of

a U.S. person (including such non-U.S. person that

is a swap dealer), then such swap dealing

transaction does not count toward the de minimis

threshold of the unregistered, swap dealing party.

311

The types of offices the Commission would

generally consider in this regard to be a ‘‘foreign

branch’’ of a U.S. bank, and the circumstances in

which a swap would generally be treated as being

with such foreign branch, are discussed further in

section C, infra.

312

See Goldman (Aug. 27, 2012) at 3–4.

313

In the Proposed Guidance, the Commission

asked whether the place of execution or clearing is

relevant to the determination of whether a non-U.S.

person should be required to register as a swap

dealer. The Commission’s policy is that a person

generally would not be required to register as a

swap dealer if the person’s only connection to the

United States is that the person uses a U.S.-

registered swap execution facility (‘‘SEF’’)or

designated contract market (‘‘DCM’’) in connection

with its swap dealing activities.

314

See CEA section 2(h)(7)(C) for a definition of

financial entity.

315

See SIFMA (Aug. 27, 2012) at A28–29; Citi

(Aug. 27, 2012) at 2–3.

316

The interpretation applies to non-U.S. persons

that are not guaranteed by U.S. persons. Non-U.S.

financial entities would be required to include

swaps positions with foreign branches and

guaranteed affiliates of U.S. persons unless they

choose to comply with voluntary margining

requirements, discussed below.

competitive disadvantage vis-a

-vis

foreign branches of U.S. swap dealers

since non-U.S. persons would be

incentivized to limit their dealing

activities to foreign branches of U.S.

swap dealers.

309

The Commission’s policy is to

generally allow non-U.S. persons that

are not guaranteed or conduit affiliates

of U.S. persons not to count toward

their de minimis thresholds their swap

dealing transactions with (i) A foreign

branch of a U.S. swap dealer, (ii) a

guaranteed affiliate of a U.S. person that

is a swap dealer, and (iii) a guaranteed

or conduit affiliate that is not a swap

dealer and itself engages in de minimis

swap dealing activity and which is

affiliated with a swap dealer.

310

The

Commission believes that where the

guaranteed affiliate of a U.S. person is

registered as a swap dealer, or where the

foreign branch is included within the

swap dealer registration of its U.S. home

office, then it is appropriate to generally

permit such non-U.S. not to count its

swap dealing transactions with those

entities against the non-U.S. person’s de

minimis threshold, because in these

cases one counterparty to the swap is a

swap dealer subject to comprehensive

swap regulation and operating under the

oversight of the Commission.

The Commission understands that

commenters are concerned that foreign

entities, in order to avoid swap dealer

status, may decrease their swap dealing

business with foreign branches of U.S.

registered swap dealers and guaranteed

affiliates that are swap dealers.

Therefore, the Commission’s policy,

based on its interpretation of section 2(i)

of the CEA, will be that swap dealing

transactions with a foreign branch of a

U.S. swap dealer or with guaranteed

affiliates that are swap dealers should

generally be excluded from the de

minimis calculations of non-U.S.

persons that are not guaranteed or

conduit affiliates.

311

However, the

Commission is not persuaded that

similar concerns arise regarding foreign

entities that may engage in swap dealing

business with such persons.

312

With regard to non-U.S. persons that

are not guaranteed or conduit affiliates

of U.S. persons, such non-U.S. persons

also generally would not count toward

their de minimis thresholds their swap

dealing transactions with a guaranteed

affiliate that is not a swap dealer and

itself engages in de minimis swap

dealing activity and which is affiliated

with a swap dealer. This interpretation

reflects the Commission’s view that

when the aggregate level of swap

dealing by a non-U.S. person that is not

a guaranteed affiliate, considering both

swaps with U.S. persons and swaps

with unregistered guaranteed affiliates

(together with any swap dealing

transactions that the non-U.S. person

aggregates for purposes of the de

minimis calculation as described below)

exceeds the de minimis level of swap

dealing, the non-U.S. person’s swap

dealing transactions have the requisite

‘‘direct and significant connection with

activities in, or effect on, commerce of

the United States.’’

313

The Commission

believes, however, that where the

counterparty to a swap is a guaranteed

affiliate and is not a registered swap

dealer, the Commission’s regulatory

concerns are addressed because the

guaranteed affiliate engages in a level of

swap dealing below the de minimis

threshold and is part of an affiliated

group with a swap dealer.

In addition, non-U.S. persons that are

not guaranteed or conduit affiliates of

U.S. persons also generally would not

count toward their de minimis

thresholds their swap dealing

transactions with a guaranteed affiliate

where the guaranteed affiliate is

guaranteed by a non-financial entity.

314

This exception is appropriate given that

the risks to the U.S. financial markets

are mitigated because the U.S. guarantor

is a non-financial entity.

The Commission notes that under its

interpretation of section 2(i), a non-U.S.

person that is not a guaranteed or

conduit affiliate would not have to

count its swap dealing transactions with

other non-U.S. persons that are not

guaranteed affiliates because, in the

Commission’s view, such swap dealing

activity would not have the requisite

‘‘direct and significant connection with

activities in, or effect on, U.S.

commerce.’’

d. Exclusion of Certain Swaps by Non-

U.S. Persons From the MSP Calculation

Related to their discussion of the

swap dealer de minimis threshold, some

commenters, such as SIFMA and Citi,

stated that a non-U.S. person should not

have to include swaps with foreign

branches of U.S. swap dealers towards

the MSP calculation.

315

The Commission has considered

whether, under section 2(i), the swaps

that a non-U.S. person that is not a

guaranteed or conduit affiliate enters

into with a foreign branch of a U.S.

swap dealer or a guaranteed affiliate that

is a swap dealer should be excluded

from the calculation of the non-U.S.

person’s MSP registration threshold.

The Commission notes that its policy

regarding such swaps for purposes of

the MSP registration may reasonably be

distinguished from its policy for

purposes of the swap dealer registration

threshold calculation. As described in

the Final Entities Rules, MSP

registration is required for non-dealers

with swaps positions so large as to pose

systemic risk. This is in contrast to swap

dealer registration, which is a functional

test focused on the nature of activities

conducted by a potential registrant.

Consequently, if all swaps between a

non-U.S. person and foreign branches of

U.S. swap dealers or swap dealers that

are guaranteed affiliates were generally

excluded under the Commission’s

policy with respect to MSP registration,

a market participant that poses systemic

risk within the meaning of the MSP

definition could potentially be relieved

of the requirement to register as an MSP.

The Commission believes that such an

outcome could undermine the MSP

registration scheme. However, the

Commission is persuaded that it is

possible to control the potential risk of

the non-U.S. person’s risk with foreign

branches of U.S. swap dealers and

guaranteed affiliates that are swap

dealers under certain limited

circumstances and therefore that limited

interpretive relief from the MSP

calculation requirement is

appropriate.

316

Thus, a non-U.S. person

that is not a guaranteed affiliate of a U.S.

person and is a financial entity

generally does not have to count toward

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317

See Commission regulation 23.600(c)(4)(ii),

requiring swap dealers and MSPs to have credit risk

policies and procedures that account for daily

measurement of overall credit exposure to comply

with counterparty credit limits, and monitoring and

reporting of violations of counterparty credit limits

performed by personnel that are independent of the

business trading unit. See also Commission

regulation 23.600(c)(1)(i), requiring the senior

management and the governing body of each swap

dealer and MSP to review and approve credit risk

tolerance limits for the swap dealer or MSP.

318

See Final Entities Rules at 30689, stating the

Commission’s interpretation that ‘‘an entity’s swap

. . . positions in general would be attributed to a

parent, other affiliate or guarantor for purposes of

the major participant analysis to the extent that the

counterparties to those position would have

recourse to that other entity in connection with the

position.’’ The Commission stated further that

‘‘entities will be regulated as major participants

when they pose a high level of risk in connection

with the swap . . . positions they guarantee.’’

319

See CEA section 2(h)(7)(C) for a definition of

financial entity.

320

Based on data the Bank for International

Settlements obtained from thirteen reporting

countries (Australia, Belgium, Canada, France,

Germany, Italy, Japan, the Netherlands, Spain,

Sweden, Switzerland, the United Kingdom and the

United States), at the end of December 2012,

notional amounts outstanding for OTC foreign

exchange derivatives, interest rate derivatives, and

credit default swaps with non-financial customers

accounted for an average of less than 8 percent of

the total aggregate amounts outstanding for these

asset classes. See Bank for International

Settlements, Statistical release: OTC derivatives

statistics at end-December 2012 (May 2013),

available at http://www.bis.org/publ/

otc_hy1305.pdf.

321

See BCBS IOSCO, Margin Requirements for

Non-Centrally Cleared Derivatives, Second

Consultative Document, at 7 (issued for comment

March 15, 2013), available at http://www.bis.org/

publ/bcbs242.pdf.

322

As used herein, a registered FBOT means an

FBOT that is registered with the Commission

pursuant to part 48 of the regulations in order to

permit direct access to the FBOT’s order entry and

trade matching system from within the U.S. Among

others, 16 FBOTs that currently permit direct access

for the trading of futures and option contracts, but

not swaps, pursuant to no-action relief letters

issued by Commission staff have submitted

complete applications for registration. In light of the

fact that registered FBOTs can also list swaps for

trading by direct access and in view of the time

required to properly assess registration applications

and the interest on the part of certain FBOTs

operating pursuant to the no-action relief in listing

swaps for trading by direct access, the Division of

Market Oversight has determined to amend the 16

no-action letters to permit those FBOTs, subject to

certain conditions, to also list swaps for trading by

direct access. Accordingly, all provisions in this

document that apply to registered FBOTs also apply

to the 16 FBOTs permitting trading by direct access

pursuant to the amended no-action relief.

323

The Commission notes that while the real-time

reporting requirement will be satisfied for cleared

swaps executed anonymously on a DCM or SEF,

absent further affirmative actions by an FBOT, the

requirement will not be satisfied through FBOT

execution alone. See section G, infra.

324

A swap that is submitted for clearing is

extinguished upon novation and replaced by new

swap(s) that result from novation. See Commission

regulation 39.12(b)(6). See also Derivatives Clearing

Organization General Provisions and Core

Principles, 76 FR 69334, 69361 (Nov. 8, 2011).

325

SIFMA (Aug. 27, 2012) at A32. Along similar

lines, IIB commented that there might be

Continued

its MSP threshold its exposure under

swaps with foreign branches of a U.S.

swap dealer or guaranteed affiliates that

are swap dealers; provided, that the

swap is either cleared, or the

documentation of the swap requires the

foreign branch or guaranteed affiliate to

collect daily variation margin, with no

threshold, on its swaps with such non-

U.S. person. When this condition is met,

the Commission believes that it would

generally be appropriate for the non-

U.S. person not to count its exposure

under such swaps against its MSP

threshold.

The Commission notes that a non-U.S.

person’s swaps positions with

guaranteed affiliates that are swap

dealers and foreign branches of U.S.

swap dealers must be addressed in the

latter entities’ risk management

programs. Such programs must account

for, among other things, overall credit

exposures to non-U.S. persons.

317

Second, the Commission notes that a

non-U.S. person’s swaps with a

guaranteed affiliate that is a swap dealer

would be included in exposure

calculations and attributed to the U.S.

guarantor for purposes of determining

whether the U.S. guarantor’s swap

exposures are systemically-important on

a portfolio basis and therefore require

the protections provided by MSP

registration.

318

Finally, a non-U.S. person that is not

a guaranteed affiliate and is not a

financial entity

319

would generally not

have to count toward its MSP thresholds

its exposure under swaps with a foreign

branch of a U.S. swap dealer or

guaranteed affiliate that is a swap

dealer. This exclusion reflects the

Commission’s recognition of the more

modest risk to the U.S. financial markets

from swaps activities with non-financial

entities organized outside the United

States.

320

Further, the Commission

notes that the Basel Committee on

Banking Supervision (‘‘BCBS’’) and the

International Organization of Securities

Commissions (‘‘IOSCO’’) have recently

issued a second consultative document

under which, if finalized, would not

apply margin requirements to the non-

centrally cleared derivatives of non-

financial entities, given that such

transactions are viewed as posing little

or no systemic risk and are exempt from

clearing mandates in most

jurisdictions.

321

e. Exclusion of Certain Swaps Executed

Anonymously on a SEF, DCM, or

Foreign Board of Trade (‘‘FBOT’’) and

Cleared

The Commission believes that when a

non-U.S. person that is not a guaranteed

or conduit affiliate enters into swaps

anonymously on a registered DCM, SEF,

or FBOT

322

and such swaps are cleared,

the non-U.S. person would generally not

have to count such swaps against its de

minimis threshold. The Commission

understands that in these

circumstances, the non-U.S. person

would not have any prior information

regarding its counterparty to the swap.

Also, as discussed below, the

Commission is interpreting CEA section

2(i) such that, where a swap between

such a non-U.S. person and a U.S.

person is executed anonymously on a

registered DCM, SEF, or FBOT and

cleared the non-U.S. person generally

will satisfy all of the applicable

Category A Transaction-Level

Requirements

323

that pertain to such a

swap transaction. The Commission

believes that the regulatory interest in

including such swaps in the non-U.S.

person’s de minimis calculation is

outweighed by the practical difficulties

involved in determining whether the

non-U.S. person should include the

swap in the calculation, given that the

non-U.S. person would have no

information regarding its swap

counterparty prior to execution of the

swap.

The Commission also believes that

when a non-U.S. person that is not a

guaranteed or conduit affiliate clears a

swap through a registered derivatives

clearing organization (‘‘DCO’’), such

non-U.S. person would generally not

have to count the resulting swap (i.e.,

the novated swap) against its swap

dealer de minimis threshold or MSP

threshold.

324

Where a swap is created

by virtue of novation, such swap does

not implicate swap dealing, and

therefore it would not be appropriate to

include such swaps in determining

whether a non-U.S. person should

f. MSP-Parent Guarantees

While under the Proposed Guidance

swaps conducted by a non-U.S. person,

where guaranteed by a U.S. person,

would generally be attributed only to

the U.S. person in determining who

must register as an MSP, the

Commission did not expressly address a

guarantee by a non-U.S. person of the

swaps obligations of its U.S. subsidiary.

In SIFMA’s view, the Proposed

Guidance created ambiguity as to the

treatment of guarantees between other

types of entities (e.g., where a U.S.

person is guaranteed by a non-U.S.

person or where a non-U.S. person is

guaranteed by a non-U.S. person).

325

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circumstances under which a wholly-owned

subsidiary of a person already registered as a swap

dealer enters into swaps with U.S. persons where

its obligations are guaranteed by the swap dealer.

IIB (Aug. 27, 2012) at 25.

326

Cleary (Aug. 16, 2012) at 12.

327

See Final Entities Rules, 77 FR at 30689.

addition, Cleary noted that the

Commission determined in the Final

Entities Rules not to include a parental

guarantee of a subsidiary’s swaps in the

computation of the parent’s outward

exposure under the MSP definition

where the subsidiary is subject to

capital oversight by the Commission,

SEC, or an appropriate banking

regulator. They asked that the

Commission consider extending

comparable treatment for parental

guarantees where the non-U.S.

subsidiary is subject to Basel-compliant

capital oversight by another G20

prudential supervisor.

326

Under the Commission’s

interpretation of section 2(i) of the CEA,

the discussion in the Final Entities

Rules regarding attribution of swaps

positions of guaranteed persons for

purposes of the MSP definition should

generally apply to non-U.S. persons.

That is, as applied to non-U.S. persons,

where there is no guarantee or recourse

to another person under the swap, the

swap should generally be attributed to

the person who enters into the swap,

and there generally would be no

attribution or aggregation of the swaps

position with the swaps positions of the

person’s affiliates.

327

On the other hand,

where the counterparty to the swap

would have recourse to another person,

such as a parent guarantor, the swap

should generally be attributed to the

person to whom there is recourse. Thus,

if a U.S. person enters into a swap

guaranteed by a non-U.S. person, the

swap should generally be attributed to

the non-U.S. person, and if a non-U.S.

person enters into a swap guaranteed by

a U.S. person, the swap should

generally be attributed to the U.S.

person.

However, the Commission is also

cognizant that, as a matter of

international comity, regulation of non-

U.S. persons can be less preferable

where the same regulatory outcomes can

be achieved by regulating an affiliated

U.S. person. So where the swaps of a

U.S. person are guaranteed by a non-

U.S. person, the Commission would

consider the possibility that registration

of the non-U.S. person would not be

required if the U.S. person registers as

an MSP, and there may be

circumstances where registration of the

U.S. person would be preferable. Also,

the same considerations of international

comity suggest that regulation of non-

U.S. persons should be effected in a

manner that generally does not interfere

with non-U.S. regulation. Thus, the

Commission would be willing to

consider that the swaps positions of

non-U.S. persons that are guaranteed by

other non-U.S. persons may be

attributed to either the non-U.S.

guarantor or the guaranteed non-U.S.

person so long as all of the swaps

positions that would trigger MSP

registration are subject to the MSP

registration and regulatory

requirements. Thus, in IIB’s scenario,

the non-U.S.-based bank may consult

with the Commission and decide to

MSP. The Commission would generally

not expect both the parent guarantor

bank and the guaranteed bank to register

as MSPs. In the Commission’s view, the

related risk concerns should be

adequately addressed by requiring

either the guarantor or the guaranteed

person to register, provided that the

swap activities giving rise to MSP

registration are regulated under Dodd-

Frank.

As to Cleary’s request regarding

comparable treatment for certain

parental guarantees, the Commission

agrees that, as a matter of policy, it

would generally be appropriate to

extend similar treatment to parental

guarantees of a subsidiary that is subject

to comparable and comprehensive

capital oversight by a G20 prudential

supervisor. In this respect, the

Commission views Basel-compliant

capital standards as sufficiently

comparable and comprehensive to

capital oversight by the Commission,

SEC, or banking regulator. Thus, where

a subsidiary is subject to Basel-

compliant capital standards and

oversight by a G20 prudential

supervisor, the subsidiary’s positions

would generally not be attributed to a

parental guarantor in the computation of

the parent’s outward exposure under the

MSP definition.

4. Summary

The Commission’s policy under this

Guidance may be summarized as

follows.

The Commission will generally apply

the aggregation principle (as articulated

in the Final Entities Rules) such that, in

considering whether a person is engaged

in more than a de minimis level of swap

dealing, a person (whether U.S. or non-

U.S.) should generally include all

relevant dealing swaps of all its U.S.

and non-U.S. affiliates under common

control, except that swaps of an affiliate

(either U.S. or non-U.S.) that is a

registered swap dealer are excluded. For

this purpose, consistent with the

Commission’s policy on counting swap

transactions towards the de minimis

threshold for swap dealer registration

detailed above, the dealing swaps of an

affiliate under common control with

such person would include:

(i) In the case of a U.S. person or a

guaranteed or conduit affiliate, all its swap

dealing transactions; and

(ii) in the case of a non-U.S. person that is

not a guaranteed or conduit affiliate:

a. all dealing swaps with counterparties

who are U.S. persons (other than foreign

branches of U.S. swap dealers); and

b. all dealing swaps with guaranteed

affiliates except:

i. guaranteed affiliates that are swap

dealers;

ii. guaranteed affiliates that are not swap

dealers but which are affiliated with a swap

dealer and where the guaranteed affiliate

itself engages in de minimis swap dealing

activity;

iii. guaranteed affiliates that are guaranteed

by a non-financial entity.

In addition, a non-U.S. affiliate that is not

a guaranteed or conduit affiliate may exclude

any swaps that are entered into anonymously

on a registered DCM, SEF, or FBOT and

cleared, as more fully discussed above.

The Commission’s interpretation

would allow both U.S. persons and non-

U.S. persons in an affiliated group to

engage in unregistered swap dealing

activity up to the de minimis level for

the entire group. When the affiliated

group nears the de minimis threshold in

the aggregate, it would have to register

a number of affiliates (inside or outside

the United States) as swap dealers

sufficient to maintain the relevant

dealing swaps of the unregistered

affiliates below the threshold.

In determining whether a non-U.S.

person holds swap positions above the

MSP thresholds, the non-U.S. person

should consider the aggregate notional

value of:

(i) Any swap position between it and a U.S.

person;

(ii) any swap position between it and a

guaranteed affiliate (but its swap positions

where its own obligations thereunder are

guaranteed by a U.S. person should be

attributed to that U.S. person and not

included in the non-U.S. person’s

determination); and

(iii) any swap position between another

(U.S. or non-U.S.) person and a U.S. person

or guaranteed affiliate, where it guarantees

the obligations of the other person

thereunder.

A non-U.S. person that is not a

guaranteed affiliate of a U.S. person and

is a financial entity would generally not

have to count toward its MSP thresholds

its exposure under swaps with foreign

branches of U.S. swap dealers or

guaranteed affiliates that are swap

dealers, provided that the swap is either

cleared, or the documentation of the

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328

See CEA section 2(h)(7)(C) for a definition of

financial entity.

329

See the January Order, 78 FR at 873 n. 123.

330

Id. at 873.

swap requires the foreign branch or

guaranteed affiliate to, and the swap

dealer actually does, collect daily

variation margin, on its swaps with the

non-U.S. person.

In addition, a non-U.S. person that is

not a guaranteed affiliate and is not a

financial entity

328

would generally not

have to count toward its MSP thresholds

its exposure under swaps with a foreign

branch or guaranteed affiliate, in each

case that is a swap dealer.

C. Interpretation of the Term ‘‘Foreign

Branch;’’ When a Swap Should Be

Considered To Be With the Foreign

Branch of a U.S. Person That Is a Swap

Dealer or MSP

1. Interpretation of the Term ‘‘Foreign

Branch’’ and Treatment of Foreign

Branches

As discussed above, the Commission

considers a foreign branch of a U.S.

person to be a part of the U.S. person.

Thus, in the Proposed Guidance, the

Commission proposed that the U.S.

person would be legally responsible for

complying with all applicable Entity-

Level Requirements. Under this

approach, the foreign branch of the U.S.

person would not register separately as

a swap dealer. The Commission believes

that this approach is appropriate

because a foreign branch of a U.S. swap

dealer is an integral part of a U.S. swap

dealer and not a separate legal entity.

In the Proposed Guidance, the

Commission also proposed interpreting

2(i) so that where a swap is with a

foreign branch of a U.S.-based swap

dealer, irrespective of whether the

counterparty is a U.S. person or non-

U.S. person, the foreign branch would

be expected to comply with most of the

Transaction-Level Requirements. The

Commission stated that this proposed

approach is appropriate in light of the

Commission’s strong supervisory

interests in entities that are a part or an

extension of a U.S.-based swap dealer.

The Commission also proposed

interpreting 2(i) so that swaps between

a foreign branch of a U.S. person and a

non-U.S. person counterparty

(irrespective of whether that non-U.S.

person counterparty’s obligations under

the swap are guaranteed by a U.S.

person or not) would be eligible for

substituted compliance with respect to

Category A Transaction-Level

Requirements. As discussed further

below, where the counterparty to a swap

with a foreign branch is a non-U.S.

person (whether or not swaps such non-

U.S. person is guaranteed or otherwise

supported by, or is an affiliate conduit

of, a U.S. person), the Commission

continues to be of the view that the

swap should be eligible for substituted

compliance with respect to Category A

Transaction-Level Requirements, to the

extent applicable, in light of the

supervisory interest of the foreign

jurisdiction in the execution and

clearing of trades occurring in that

jurisdiction. As discussed further in

section F below, the Commission’s

recognition of substituted compliance

would be based on an evaluation of

whether the requirements of the home

jurisdiction are comparable and

comprehensive to the applicable

requirement(s) under the CEA and

Commission regulations based on a

consideration of all relevant factors,

including among other things: (i) The

comprehensiveness of the foreign

regulator’s supervisory compliance

program and (ii) the authority of such

foreign regulator to support and enforce

its oversight of the registrant’s branch or

agency with regard to such activities to

which substituted compliance applies.

In the January Order, the Commission

gave exemptive relief from Transaction-

Level Requirements during the

pendency of the January Order for

swaps between a foreign branch of a

U.S. swap dealer or U.S. MSP and a

non-U.S. counterparty (including a non-

U.S. swap dealer or non-U.S. MSP).

Thus, notwithstanding the

Commission’s view that the foreign

branch of a U.S. swap dealer is a U.S.

person, the Commission granted

temporary relief during the pendency of

the January Order for swaps between a

foreign branch of a U.S. registrant and

a non-U.S. swap dealer, allowing the

non-U.S. swap dealer to treat the foreign

branch as a non-U.S. person.

In the January Order, the Commission

also stated that because it believes a

swap between two foreign branches of

U.S. registrants is a swap between two

U.S. persons, such swaps are fully

subject to the Transaction-Level

Requirements. Nevertheless, during the

pendency of the January Order, the

Commission determined it would be

appropriate to permit foreign branches

of U.S. registrants to comply only with

transaction-level requirements required

in the location of the foreign branch

while the Commission further

considered, and worked with

international regulators regarding, the

treatment of foreign branches of U.S.

registrants. However, for purposes of

this relief, the Commission stated that

for a swap between foreign branches of

U.S. registrants, the swap would be

treated as with the foreign branch of a

U.S. person when: (i) The personnel

negotiating and agreeing to the terms of

the swap are located in the jurisdiction

of such foreign branch; (ii) the

documentation of the swap specifies

that the counterparty or ‘‘office’’ for the

U.S. person is such foreign branch; and

(iii) the swap is entered into by such

foreign branch in its normal course of

business (collectively the ‘‘January

Order Criteria’’). If the swap failed to

satisfy all three of the January Order

Criteria, the Commission stated that the

swap would be treated as a swap of the

U.S. person and not as a swap of the

foreign branch of the U.S. person, and

would not be eligible for relief from

transaction-level requirements under

the January Order.

329

The Commission also stated in the

January Order that as part of the

Commission’s further consideration of

this issue, additional factors may be

relevant to the consideration of whether

a swap is with the foreign branch of a

U.S. person. These factors could

include, for example, that:

(i) The foreign branch is the location of

employment of the employees negotiating the

swap for the U.S. person or, if the swap is

executed electronically, the employees

managing the execution of the swap;

(ii) the U.S. person treats the swap as a

swap of the foreign branch for tax purposes,

(iii) the foreign branch operates for valid

business reasons and is not only a

representative office of the U.S. person; and

(iv) the branch is engaged in the business

of banking or financing and is subject to

substantive regulation in the jurisdiction

where it is located (collectively the

‘‘Additional Factors’’).

330

The Commission also sought

comment from market participants and

other interested parties regarding

whether it is appropriate to include

these or other factors in the

consideration of when a swap is with

the foreign branch of a U.S. person.

2. Comments

The Commission received several

comments on how the Commission

should determine whether a swap is

‘‘with a foreign branch,’’ both with

regard to swaps between a foreign

branch and a non-U.S. swap dealer and

swaps between two foreign branches of

U.S. swap dealers. In addition, several

organizations commented on the term

‘‘foreign branch’’ of a U.S. bank.

Commenters stated that in

determining whether a swap between a

non-U.S. swap dealer and a non-U.S.

branch of a U.S. bank is bona fide with

the non-U.S. branch, the Commission

should look to whether the swap is

booked in the foreign branch (as defined

in Regulation K), and that the four

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331

See SIFMA/CH/FSR (Feb. 6, 2013) at B18–20;

State Street (Feb. 6, 2013) at 2–4.

332

See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at

B18.

333

Id. at B17.

334

State Street (Feb. 6, 2013) at 3–4.

335

State Street (Feb. 6, 2013) at 2.

336

See SIFMA/CH/FSR (Feb. 6, 2013) at B18;

State Street (Feb. 6, 2013) at 2.

337

See SIFMA/CH/FSR (Feb. 6, 2013) at B19.

338

See id. at B19–20.

339

Better Markets (Feb. 15, 2013) at 2, 4–5.

additional factors that the Commission

stated it was considering are

unnecessary.

331

These commenters

stated that the first Additional Factor

being considered (i.e., that the foreign

branch is the location of employment of

the employees negotiating the swap for

the U.S. person or, if the swap is

executed electronically, the employees

managing the execution of the swap)

should be deleted because employees

that negotiate and agree to the terms of

a swap may be located outside of the

non-U.S. branch that books the trade for

a variety of valid reasons.

332

Similar

arguments were made with regard to the

first prong of the January Order Criteria

(i.e., that the personnel negotiating and

agreeing to the terms of the swap are

located in the jurisdiction of such

foreign branch).

333

As noted above,

State Street stated that in a global

economy, foreign exchange swaps are

negotiated 24 hours a day, by parties in

various locations. Therefore, the

physical location of employees has little

connection to the legal jurisdiction of

the branch in which the swaps are

booked. Determination of the branch in

which the swap is booked is influenced

by a number of factors, including the

convenience of the swap counterparty

and agreements between counterparties

to book swaps to mutually agreeable and

preferred locations. State Street further

stated that limiting the ability to book

transactions to a foreign branch would

be inappropriate for U.S. dealers in

foreign exchange because foreign

exchange transactions are typically

negotiated in large blocks, which

combine the orders of a variety of asset

owners, and which can include both

U.S. persons and non-U.S. persons.

Once negotiated and executed, these

blocks are allocated to the various asset

owners, and booked to the location

preferred by the asset owner or in some

cases the dealer’s non-U.S. branch. This

allows managers to trade foreign

exchange more efficiently, using a single

point of dealer contact, and ensures that

all asset owners on whose behalf they

are trading receive the same price. State

Street also stated that the approach

outlined in proposal would place U.S.

businesses at a competitive

disadvantage, as non-U.S. owners would

be unwilling to do business that would

subject them to the U.S. regulatory

requirements.

334

A commenter stated that it does not

strongly object to prongs 2, 3 and 4 of

the Additional Factors (that the swap is

treated as a swap of the foreign branch

for tax purposes, that the branch

operates for valid business reasons and

is not only a representative office, and

that the branch is engaged in banking or

financing and subject to substantive

local regulation) since they could ‘‘be

reasonable indicia of a bona fide non-

U.S. branch of a U.S. swap dealer.’’

However, this commenter stated that

each of these prongs may be challenging

to properly define and evaluate.

335

With respect to the proposed tax

prong (prong 2 of the Additional

Factors), other commenters stated that

the income from a swap that is booked

in a foreign branch of a U.S. person is

subject to taxation in the local

jurisdiction in which the foreign branch

is resident, which demonstrates that

such swaps are bona fide with the non-

U.S. branch. The commenters further

noted that a foreign tax credit is

generally allowed for income taxes paid

locally.

336

With regard to prong 3 of the

Additional Factors (that the branch

operates for valid business reasons and

is not only a representative office), as

noted earlier, SIFMA/CH/FSR argued

that the only criteria that is relevant in

determining whether a swap is bona

fide with a foreign branch of a U.S.

swap dealer is whether the swap is

booked in the foreign branch (as

reflected in the trade confirm), with the

term ‘‘foreign branch’’ defined with

reference to Regulation K. These

commenters stated that the definition of

a foreign branch in Regulation K makes

it clear that a foreign branch of a U.S.

bank is not a ‘‘representative office.’’ In

addition, Regulation K is a

comprehensive regulation of the Federal

Reserve Board that ensures that foreign

branches operate for valid reasons.

337

With regard to prong 4 of the

Additional Factors (that the branch is

engaged in banking or financing and

subject to substantive local regulation),

SIFMA/CH/FSR argue that this prong is

unnecessary because, in addition to

being regulated under Regulation K by

the Federal Reserve, foreign branches

are also subject to substantive local

regulation and supervision, including

licensing requirements and potentially

local derivatives rules that the

Commission could find to constitute

substituted compliance. Although these

commenters acknowledged that the

nature and scope of these regulations

will vary by jurisdiction, they state that

many foreign jurisdictions require the

same level of compliance with local

regulations that U.S. regulators require

of U.S. branches of foreign banks with

regards to U.S. laws and regulations.

They also stated that requiring foreign

branches to show that they are subject

to substantive regulation in their local

jurisdiction so as to determine whether

each swap they enter into is bona fide

would be overly burdensome and

unnecessary. In their view, the only

relevant factor that the Commission

should consider is whether the swap

has been booked into the foreign branch,

which the trade confirm would

reflect.

338

Conversely, one commenter argued

that, consistent with clear evidence

from the last crisis that the risks accrued

by foreign branches, guaranteed

subsidiaries, and even non-guaranteed

subsidiaries all flow back to the parent

entity, foreign branches of U.S. persons

should under no circumstances be

subject to weaker regulation than the

parent company. This commenter also

argues that there is no substantive

difference between a branch and a

subsidiary of a U.S. person in terms of

covering derivatives losses, and that

both must be held to the same high

standards as apply to the U.S. person

itself. Otherwise, the U.S. taxpayer will

be exposed to the risk of another

massive bailout.

339

In addition, this

commenter stated that claims made by

industry groups that foreign branches of

U.S. entities should not be classified as

U.S. persons or they will find no foreign

counterparties willing to do business

with them are absurd and

unsubstantiated, and taken literally,

seem to suggest that the Commission

should exempt all overseas swap

activity from the requirements of Title

VII of the Dodd-Frank Act, which would

directly violate Congress’s clear intent.

3. Commission Guidance

In preparing the Guidance, the

Commission has carefully considered

commenters’ concerns and

recommendations related to both the

appropriate scope of the term ‘‘foreign

branch’’ for purposes of this Guidance

and Commission consideration of when

a swap should be considered to be

‘‘with the foreign branch’’ of a U.S. bank

that is a swap dealer or MSP.

a. Scope of the Term ‘‘Foreign Branch’’

The Commission notes that foreign

branches of a U.S. bank are part of a

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340

As discussed further in section G, under the

Commission’s interpretation of 2(i), in the case of

a swap with a U.S. swap dealer or U.S. MSP

(including an affiliate of a non-U.S. person, and

including a foreign branch of a U.S. bank that is a

swap dealer or MSP), the parties to the swap

generally would not be not eligible for substituted

compliance with one exception—where the swap is

between the foreign branch of a U.S. bank that is

a swap dealer or MSP and a non-U.S. person

(regardless of whether the non-U.S. person is

guaranteed or otherwise supported by, or is an

affiliate conduit of, a U.S. person).

341

Regulation K is a regulation issued by the

Board of Governors of the Federal Reserve (‘‘Federal

Reserve Board’’) under the authority of the Federal

Reserve Act (‘‘FRA’’) (12 U.S.C. 221 et seq.); the

Bank Holding Company Act of 1956 (‘‘BHC Act’’)

(12 U.S.C. 1841 et seq.) and the International

Banking Act of 1978 (‘‘IBA’’) (12 U.S.C. 3101 et

seq.). Regulation K sets forth rules governing the

international and foreign activities of U.S. banking

organizations, including procedures for establishing

foreign branches to engage in international banking.

Under Regulation K, 12 CFR part 211, a ‘‘foreign

branch’’ is defined as ‘‘an office of an organization

(other than a representative office) that is located

outside the country in which the organization is

legally established and at which a banking or

financing business is conducted.’’ See 17 CFR

211.2(k).

342

12 CFR part 347 is a regulation issued by the

Federal Deposit Insurance Corporation under the

authority of the Federal Deposit Insurance Act (12

U.S.C. 1828(d)(2)), which sets forth rules governing

the operation of foreign branches of insured state

nonmember banks (‘‘FDIC International Banking

Regulation’’). Under 12 CFR 347.102(j), a ‘‘foreign

branch’’ is defined as ‘‘an office or place of business

located outside the United States, its territories,

Puerto Rico, Guam, American Samoa, the Trust

Territory of the Pacific Islands, or the Virgin

Islands, at which banking operations are conducted,

but does not include a representative office.’’

343

The Commission notes that national banks

operating foreign branches are required under

section 25 of the Federal Reserve Act, 12 U.S.C.

604a, to conduct the accounts of each foreign

branch independently of the accounts of other

foreign branches established by it and of its home

office, and are required at the end of each fiscal

period to transfer to its general ledger the profit or

loss accrued at each branch as a separate item.

344

See notes 341 and 342 above and

accompanying text for additional information

regarding the definition of a ‘‘foreign branch’’ in

Regulation K and the FDIC International Banking

Regulation.

345

The Commission notes that section 25 of the

Federal Reserve Act, 12 U.S.C. 604a, states that

national banking associations with $1 million or

more in capital and surplus may file an application

with the Board of Governors of the Federal Reserve

System for permission to exercise certain powers,

including establishment of foreign branches. In

addition, section 25(9) requires that every national

banking association operating foreign branches

conduct the accounts of each foreign branch

independently of the accounts of other foreign

branches established by it and of its home office,

and at the end of each fiscal period transfer to its

general ledger the profit or loss accrued at each

branch as a separate item.

346

See section B, supra.

347

See section G, infra.

U.S. bank rather than a separate legal

entity, and are therefore ‘‘U.S. persons.’’

Nevertheless, as a policy matter, the

Commission believes that CEA section

2(i) should be interpreted so as to

exclude swap dealing transactions with

a foreign branch of a U.S. swap dealer

from the de minimis calculations for

swap dealer or MSP registration. In

addition, the Commission believes that

CEA section 2(i) should be interpreted

so that swaps between a foreign branch

of a U.S. swap dealer or MSP and a non-

U.S. person should be eligible for

substituted compliance with regard to

Category A Transaction-Level

Requirements.

340

The Commission

believes that CEA section 2(i) should be

interpreted in this manner in order to

avoid the potential result that foreign

entities would cease doing swap dealing

business with foreign branches of U.S.

registered swap dealers. However, the

Commission notes that interpreting CEA

section 2(i) in this manner creates a

distinction between swaps with foreign

branches of U.S. banks and swaps with

the U.S. principal bank. Therefore, the

Commission also believes that

Commission consideration of both the

scope of the term ‘‘foreign branch’’ and

when a swap is with the foreign branch

of a U.S. bank should be construed

under CEA section 2(i) in a manner that

does not create unnecessary distinctions

between otherwise similar activities.

Therefore, the Commission interprets

CEA section 2(i) such that, for purposes

of this Guidance, the Commission will

generally consider a ‘‘foreign branch’’ of

a U.S. swap dealer or U.S. MSP to be

any ‘‘foreign branch’’ (as defined in the

applicable banking regulation) of a U.S.

bank that is: (i) Subject to Regulation

341

or the FDIC International Banking

Regulation,

342

or otherwise designated

as a ‘‘foreign branch’’ by the U.S. bank’s

primary regulator, (ii) maintains

accounts independently of the home

office and of the accounts of other

foreign branches with the profit or loss

accrued at each branch determined as a

separate item for each foreign branch,

343

and (iii) subject to substantive

regulation in banking or financing in the

jurisdiction where it is located (the

‘‘Foreign Branch Characteristics’’).

However, in addition to the foregoing

Foreign Branch Characteristics, the

Commission will consider other

relevant facts and circumstances in

considering whether a foreign office of

a U.S. bank is a ‘‘foreign branch’’ of a

U.S. bank for purposes of this Guidance.

Further, for purposes of this

Guidance, the Commission interprets

CEA section 2(i) so that generally a

foreign branch of a U.S. bank could

include an office of a foreign bank that

satisfies the foregoing Foreign Branch

Characteristics. However, a foreign

branch of a U.S. bank would generally

not include an affiliate of a U.S. bank

that is incorporated or organized as a

separate legal entity.

In considering the scope of the term

‘‘foreign branch,’’ the Commission

agrees with commenters that stated that

Regulation K of the Federal Reserve

Board’s regulations provides a useful

reference because Regulation K provides

a comprehensive regime for regulation

of foreign branches that ensures that

foreign branches of U.S. banks operate

for valid reasons and are not

‘‘representative offices.’’ Similarly, the

Commission believes that the FDIC

International Banking Regulation

provides a useful reference for U.S.

banks that have foreign branches which

are subject to FDIC jurisdiction.

344

In addition, regardless of a foreign

branch of a U.S. bank is subject to

Regulation K or the FDIC International

Banking Regulation or is otherwise

designated as a ‘‘foreign branch’’ by the

U.S. bank’s primary regulator, the

Commission believes that CEA section

2(i) should be interpreted so that, for

purposes of this Guidance, a foreign

branch of a U.S. bank should generally

also be subject to substantive regulation

in banking or financing in the

jurisdiction where it is located. Finally,

the Commission believes that in order

for a foreign office of a U.S. bank to be

viewed as a ‘‘foreign branch’’ for

purposes of this Guidance, another

factor should generally be present—the

foreign branch should maintain its

accounts independently of the home

office and of the accounts of other

foreign branches, and at the end of each

fiscal period the U.S. bank should

transfer to its general ledger the profit or

loss accrued at each branch as a separate

item.

345

b. Commission Consideration of

Whether a Swap Is With a Foreign

Branch of a U.S. Bank

With regard to Commission

consideration of whether a swap by a

U.S. bank through a foreign office

should be considered to be ‘‘with a

foreign branch’’ of the U.S. person for

purposes of the de minimis calculations

for swap dealer and MSP registration

346

or application of the Transaction-Level

Requirements

347

under this Guidance,

the Commission has carefully

considered the comments submitted on

this question.

SIFMA/CH/FSR stated that the only

criteria that is relevant in determining

whether a swap is bona fide with a

foreign branch of a U.S. swap dealer is

whether the swap is booked in the

foreign branch (as reflected in the trade

confirmation), with the term ‘‘foreign

branch’’ defined with reference to

Regulation K. However, the

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348

See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at

B18; State Street (Feb. 6, 2013) at 2–4.

349

See State Street (Feb. 6, 2013) at 2.

350

See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at

B18.

Commission’s view is that the trade

confirmation generally is not relevant

for purposes of determining whether to

treat a swap as being with a foreign

branch of a U.S. bank rather than with

the U.S. principal bank. In reality,

because the foreign branch of a U.S.

bank is not a separate legal entity, the

U.S. principal bank would generally be

the party that is ultimately responsible

for a swap with its foreign branch. The

Commission’s view is that a foreign

branch of a U.S. bank should be

considered a ‘‘U.S. person’’ under this

Guidance because it is a part of the U.S.

bank. Moreover, Better Markets has

argued that foreign branches of U.S.

banks as well as foreign subsidiaries and

affiliates should be treated exactly the

same as U.S. persons in all respects

under this Guidance.

However, in light of principles of

international comity and giving

consideration to comments that state

that foreign branches of U.S. banks will

be at a competitive disadvantage if

foreign branches of U.S. banks are not

treated the same as non-U.S. persons,

the Commission believes that in

considering whether a swap should be

considered as being with the foreign

branch of a U.S. bank under this

Guidance, all of the facts and

circumstances are relevant. In

particular, the Commission’s view is

that if all of the following factors are

present, generally the swap should be

considered to be with the foreign branch

of a U.S. bank for purposes of this

Guidance:

(i) The employees negotiating and agreeing

to the terms of the swap (or, if the swap is

executed electronically, managing the

execution of the swap), other than employees

with functions that are solely clerical or

ministerial, are located in such foreign

branch or in another foreign branch of the

U.S. bank;

(ii) the foreign branch or another foreign

branch is the office through which the U.S.

bank makes and receives payments and

deliveries under the swap on behalf of the

foreign branch pursuant to a master netting

or similar trading agreement, and the

documentation of the swap specifies that the

office for the U.S. bank is such foreign

branch;

(iii) the swap is entered into by such

foreign branch in its normal course of

business;

(iv) the swap is treated as a swap of the

foreign branch for tax purposes; and

(v) the swap is reflected in the local

accounts of the foreign branch.

However, if material terms of the

swap are negotiated or agreed to by

employees of the U.S. bank located in

the United States, the Commission

believes that generally the swap should

be considered to be with the U.S.

principal bank, rather than its foreign

branch, for purposes of this Guidance.

The Commission also believes that the

factors enumerated above would be

relevant both to an analysis of whether

a swap should be considered to be

between a foreign branch of a U.S. bank

and a non-U.S. swap dealer and an

analysis of whether a swap should be

considered to be between two foreign

branches of U.S. banks. The

Commission discusses each of the

enumerated factors in more detail

below.

The first of the five factors

enumerated above is similar to prong 1

of the Additional Factors (whether the

employees negotiating the swap for the

U.S. person are located in the foreign

branch, or if the swap is executed

electronically, the employees managing

the execution of the swap); however, the

first factor above considers whether the

employees negotiating and agreeing to

the terms of the swap are located in any

foreign branch of the U.S. bank. This

modification addresses the objection of

commenters that stated that employees

that negotiate and agree to swaps are

often located outside the foreign branch

for bona fide reasons.

348

However, to the

extent that material terms of the swap

are negotiated or agreed by employees of

the U.S. bank located in the United

States, the Commission believes that

generally the swap should be

considered to be with the U.S. principal

bank for purposes of this Guidance.

The second factor above is similar to

prong (ii) of the January Order Criteria

(that the documentation of the swap

specifies that the counterparty or

‘‘office’’ for the U.S. person is such

foreign branch). However, because a

foreign branch of a U.S. bank is not a

separate legal entity, the Commission

believes that the U.S. principal bank

generally should be considered to be the

counterparty for purposes of this

Guidance irrespective of whether the

foreign branch is named as the

counterparty in the swap

documentation. Therefore, the

Commission has modified the second

factor, consistent with its other

interpretations of section 2(i), so that it

makes no reference to the foreign branch

as counterparty. Rather, the second

factor above relates to whether the

foreign branch or another foreign branch

is the office through which the U.S.

bank makes and receives payments and

deliveries under the swap on behalf of

the foreign branch pursuant to a master

netting or similar trading agreement,

and whether the documentation of the

swap specifies that the office for the

U.S. bank is such foreign branch. This

modification is consistent with the

ISDA Master Agreement, which requires

that each party specify an ‘‘office’’ for

each swap, which is where a party

‘‘books’’ a swap and/or the office

through which the party makes and

receives payments and deliveries.

The third factor above (whether the

swap is entered into by such foreign

branch in its normal course of business)

is the same as prong (iii) in the January

Order Criteria discussed above. The

Commission is concerned about the

material terms of a swap being

negotiated or agreed by employees of

the U.S. bank that are located in the

United States and then routed to a

foreign branch in order for the swap to

be treated as a swap with the foreign

branch for purposes of the de minimis

calculations for swap dealer and MSP

registration or application of the

Transaction-Level Requirements under

this Guidance.

The fourth factor above (whether the

swap is treated as a swap of the foreign

branch for tax purposes) is the same as

prong 2 of the Additional Factors. The

Commission notes that State Street

stated that it does not strongly object to

prongs 2, 3 and 4 of the Additional

Factors (that the swap is treated as a

swap of the foreign branch for tax

purposes, that the branch operates for

valid business reasons and is not only

a representative office, and that the

branch is engaged in banking or

financing and subject to substantive

local regulation) since they could ‘‘be

reasonable indicia of a bona fide non-

U.S. branch of a U.S. swap dealer.’’

However, State Street stated that each of

these prongs may be challenging to

properly define and evaluate.

349

Other

commenters stated that the income from

a swap that is booked in a foreign

branch of a U.S. person is subject to

taxation in the local jurisdiction in

which the foreign branch is resident,

which demonstrates that such swaps are

bona fide with the non-U.S. branch.

350

The Commission notes that the fourth

factor above only refers to whether the

tax treatment of the swap is consistent

with the swap being treated as a swap

of the foreign branch for tax purposes.

The fifth factor above focuses on

whether the swap is reflected in the

accounts of the foreign branch. The

Commission believes that where a swap

is bona fide with the foreign branch of

a U.S. bank, it generally would be

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351

See, e.g., SIFMA (Feb. 3, 2011); ISDA (Jan. 24,

2011); Cleary (Sept. 20, 2011); Barclays Bank PLC,

BNP Paribas S.A., Deutsche Bank AG, Royal Bank

of Canada, The Royal Bank of Scotland Group PLC,

Societe Generale, and UBS AG (Jan. 11, 2011);

Barclays Bank PLC, BNP Paribas S.A., Credit Suisse

AG, Deutsche Bank AG, HSBC, Nomura Securities

International, Inc., Rabobank Nederland, Royal

Bank of Canada, The Royal Bank of Scotland Group

PLC, Societe Generale, The Toronto-Dominion

Bank, and UBS AG (Feb. 17, 2011).

352

See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug.

27, 2012) at 2; Clearing House (Aug. 27, 2012) at

22.

353

See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the

CEA explicitly requires the adoption of rules

establishing capital and margin requirements for

swap dealers and MSPs, and applies a bifurcated

approach that requires each swap dealer and MSP

for which there is a U.S. prudential regulator to

meet the capital and margin requirements

established by the applicable prudential regulator,

and each swap dealer and MSP for which there is

no prudential regulator to comply with the

Commission’s capital and margin regulations. See 7

U.S.C. 6s(e). Further, systemically important

financial institutions (‘‘SIFIs’’) that are not FCMs

would be exempt from the Commission’s capital

requirements, and would comply instead with

Federal Reserve Board requirements applicable to

SIFIs, while nonbank (and non-FCM) subsidiaries of

U.S. bank holding companies would calculate their

Commission capital requirement using the same

methodology specified in Federal Reserve Board

regulations applicable to the bank holding

company, as if the subsidiary itself were a bank

holding company. The term ‘‘prudential regulator’’

is defined in CEA section 1a(39) as the Board of

Governors of the Federal Reserve System, the Office

of the Comptroller of the Currency, the Federal

Deposit Insurance Corporation, the Farm Credit

Administration, and the Federal Housing Finance

Agency. See 7 U.S.C. 1a(39). In addition, in the

proposed capital regulations for swap dealers and

MSPs, the Commission solicited comment regarding

whether it would be appropriate to permit swap

dealers and MSPs to use internal models for

computing market risk and counterparty credit risk

charges for capital purposes if such models had

been approved by a foreign regulatory authority and

were subject to periodic assessment by such foreign

regulatory authority. See Capital Requirements of

Swap Dealers and Major Swap Participants, 76 FR

27802 (May 12, 2011) (‘‘Proposed Capital

Requirements’’).

354

See 7 U.S.C. 6s(e)(3)(A).

355

See 7 U.S.C. 6s(e). See also Proposed Capital

Requirements, 76 FR at 27817 (‘‘The Commission’s

capital proposal for [swap dealers] and MSPs

Continued

reflected in the foreign branch’s

accounts.

D. Description of the Entity-Level and

Transaction-Level Requirements

Title VII of the Dodd-Frank Act

establishes a comprehensive new

regulatory framework for swap dealers

and MSPs that Congress enacted with

the goal of reducing systemic risk and

enhancing market transparency. Under

this framework, a swap dealer or MSP

must, among other things, comport with

certain standards (and regulations as the

Commission may promulgate) governing

risk management, internal and external

business conduct, and reporting.

Further, swap dealers and MSPs are

required to comply with all of the

requirements applicable to swap dealers

and MSPs for all their swaps, not just

the swaps that make them a swap dealer

or MSP.

Even before the Commission

published the Proposed Guidance, a

number of commenters recommended

that the Commission, in interpreting the

cross-border applicability of the Dodd-

Frank Act swaps provisions, should

distinguish between requirements that

apply at an entity level (i.e., to the firm

as a whole) as compared to those that

apply at a transactional level (i.e., to the

individual swap transaction or trading

relationship).

351

These commenters

argued that requirements that relate to

the core operations of a firm and should

be applied to the entity as a whole

would include the capital and related

prudential requirements and

recordkeeping, as well as certain risk

mitigation requirements (e.g.,

information barriers and the designation

of a chief compliance officer). The

commenters stated that other

requirements, such as margin, should

apply on transaction-by-transaction

basis and only to swaps with U.S.

counterparties.

Commenters on the Proposed

Guidance generally supported the

division of Dodd-Frank’s swaps

provisions (and Commission regulations

thereunder) into Entity-Level and

Transaction-Level Requirements.

352

Certain of these commenters, however,

made specific recommendations for

reclassification of some of these

Requirements, which are discussed in

section E below.

The Commission agrees with the

commenters that the various Dodd-

Frank Act swaps provisions applicable

to swap dealers and MSPs can be

conceptually separated into Entity-Level

Requirements, which apply to a swap

dealer or MSP firm as a whole, and

Transaction-Level Requirements, which

apply on a transaction-by-transaction

basis. Descriptions of each of the Entity-

Level Requirements under this

Guidance are set out immediately

below, followed by descriptions of the

Transaction-Level Requirements.

Additional information related to the

categorization of Entity-Level and

Transaction-Level Requirements is

discussed in section E.

1. Description of the Entity-Level

Requirements

The Entity-Level Requirements under

Title VII of the Dodd-Frank Act and the

Commission’s regulations promulgated

thereunder relate to: (i) Capital

adequacy; (ii) chief compliance officer;

(iii) risk management; (iv) swap data

recordkeeping; (v) swap data repository

reporting (‘‘SDR Reporting’’); and (vi)

physical commodity large swaps trader

reporting (‘‘Large Trader Reporting’’).

The Entity-Level Requirements apply to

registered swap dealers and MSPs

across all their swaps without

distinctions as to the counterparty or the

location of the swap (although under

this Guidance in some circumstances

the availability of substituted

compliance may vary based on whether

the counterparty is a U.S. person or a

non-U.S. person).

The Entity-Level Requirements are

split into two categories. The first

category of Entity-Level Requirements

includes capital adequacy, chief

compliance officer, risk management,

and swap data recordkeeping under

Commission regulations 23.201 and

23.203 (except certain aspects of swap

data recordkeeping relating to

complaints and sales materials) (‘‘First

Category’’). The second category of

Entity-Level Requirements includes

SDR Reporting, certain aspects of swap

data recordkeeping relating to

complaints and marketing and sales

materials under Commission regulations

23.201(b)(3) and 23.201(b)(4) and Large

Trader Reporting (‘‘Second Category’’).

Each of the Entity-Level Requirements

is discussed in the subsections that

follow.

a. First Category of Entity-Level

Requirements

i. Capital Adequacy

Section 4s(e)(2)(B) of the CEA

specifically directs the Commission to

set capital requirements for swap

dealers and MSPs that are not subject to

the capital requirements of U.S.

prudential regulators (hereinafter

referred to as ‘‘non-bank swap dealers or

MSPs’’).

353

With respect to the use of

swaps that are not cleared, these

requirements must: ‘‘(1) [h]elp ensure

the safety and soundness of the swap

dealer or major swap participant; and

(2) [be] appropriate for the risk

associated with the non-cleared swaps

held as a swap dealer or major swap

participant.’’

354

Pursuant to section

4s(e)(3), the Commission proposed

regulations, which would require non-

bank swap dealers and MSPs to hold a

minimum level of adjusted net capital

(i.e., ‘‘regulatory capital’’) based on

whether the non-bank swap dealer or

MSP is: (i) Also a FCM; (ii) not an FCM,

but is a non-bank subsidiary of a bank

holding company; or (iii) neither an

FCM nor a non-bank subsidiary of a

bank holding company.

355

The primary

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includes a minimum dollar level of $20 million. A

non-bank [swap dealer] or MSP that is part of a U.S.

bank holding company would be required to

maintain a minimum of $20 million of Tier 1

capital as measured under the capital rules of the

Federal Reserve Board. [A swap dealer] or MSP that

also is registered as an FCM would be required to

maintain a minimum of $20 million of adjusted net

capital as defined under [proposed] section 1.17. In

addition, [a swap dealer] or MSP that is not part of

a U.S. bank holding company or registered as an

FCM would be required to maintain a minimum of

$20 million of tangible net equity, plus the amount

of the [swap dealer’s] or MSP’s market risk

exposure and OTC counterparty credit risk

exposure.’’).

356

See 7 U.S.C. 6s(k).

357

7 U.S.C. 6s(j).

358

Swap Dealer and Major Swap Participant

Recordkeeping, Reporting, and Duties Rules;

Futures Commission Merchant and Introducing

Broker Conflicts of Interest Rules; and Chief

Compliance Officer Rules for Swap Dealers, Major

Swap Participants, and Futures Commission

Merchants, 77 FR 20128 (Apr. 3, 2012) (‘‘Final

Swap Dealer and MSP Recordkeeping Rule’’)

(relating to risk management program, monitoring

of position limits, business continuity and disaster

recovery, conflicts of interest policies and

procedures, and general information availability,

respectively).

359

Customer Clearing Documentation, Timing of

Acceptance for Clearing, and Clearing Member Risk

Management, 77 FR 21278 (Apr. 9, 2012) (‘‘Final

Customer Documentation Rules’’). Also, swap

dealers must comply with Commission regulation

23.608, which prohibits swap dealers providing

clearing services to customers from entering into

agreements that would: (i) disclose the identity of

a customer’s original executing counterparty; (ii)

limit the number of counterparties a customer may

trade with; (iii) impose counterparty-based position

limits; (iv) impair a customer’s access to execution

of a trade on terms that have a reasonable

relationship to the best terms available; or (v)

prevent compliance with specified time frames for

acceptance of trades into clearing.

360

7 U.S.C. 6s(f)(1)(B).

361

7 U.S.C. 6s(g)(1).

362

See 17 CFR part 46; Swap Data Recordkeeping

and Reporting Requirements: Pre-Enactment and

Transition Swaps, 76 FR 22833 (Apr. 25, 2011)

(‘‘Proposed Data Rules’’).

363

7 U.S.C. 2(a)(13)(G).

364

7 U.S.C. 24a.

purpose of the capital requirement is to

reduce the likelihood and cost of a swap

dealer’s or MSP’s default by requiring a

financial cushion that can absorb losses

in the event of the firm’s default.

ii. Chief Compliance Officer

Section 4s(k) requires that each swap

dealer and MSP designate an individual

to serve as its chief compliance officer

(‘‘CCO’’) and specifies certain duties of

the CCO.

356

Pursuant to section 4s(k),

the Commission adopted regulation 3.3,

which requires swap dealers and MSPs

to designate a CCO who would be

responsible for administering the firm’s

compliance policies and procedures,

reporting directly to the board of

directors or a senior officer of the swap

dealer or MSP, as well as preparing and

filing with the Commission a certified

report of compliance with the CEA. The

chief compliance function is an integral

element of a firm’s risk management and

oversight and the Commission’s effort to

foster a strong culture of compliance

within swap dealers and MSPs.

iii. Risk Management

Section 4s(j) of the CEA requires each

swap dealer and MSP to establish

internal policies and procedures

designed to, among other things,

address risk management, monitor

compliance with position limits,

prevent conflicts of interest, and

promote diligent supervision, as well as

maintain business continuity and

disaster recovery programs.

357

The

Commission adopted implementing

regulations 23.600, 23.601, 23.602,

23.603, 23.605, and 23.606).

358

The

Commission also adopted regulation

23.609, which requires certain risk

management procedures for swap

dealers or MSPs that are clearing

members of a DCO.

359

Collectively,

these requirements help to establish a

robust and comprehensive internal risk

management program for swap dealers

and MSPs, which is critical to effective

systemic risk management for the

overall swaps market.

iv. Swap Data Recordkeeping (Except

Certain Aspects of Swap Data

Recordkeeping Relating to Complaints

and Sales Materials)

CEA section 4s(f)(1)(B) requires swap

dealers and MSPs to keep books and

records for all activities related to their

business.

360

Sections 4s(g)(1) and (4)

require swap dealers and MSPs to

maintain trading records for each swap

and all related records, as well as a

complete audit trail for comprehensive

trade reconstructions.

361

Pursuant to

these provisions, the Commission

adopted regulations 23.201and 23.203,

which require swap dealers and MSPs

to keep records including complete

transaction and position information for

all swap activities, including

documentation on which trade

information is originally recorded.

Pursuant to Commission regulation

23.203, records of swaps must be

maintained for the duration of the swap

plus 5 years, and voice recordings for 1

year, and records must be ‘‘readily

accessible’’ for the first 2 years of the 5

year retention period. Swap dealers and

MSPs also must comply with Parts 43,

45 and 46 of the Commission’s

regulations, which, respectively,

address the data recordkeeping and

reporting requirements for all swaps

subject to the Commission’s

jurisdiction, including swaps entered

into before the date of enactment of the

Dodd-Frank Act (‘‘pre-enactment

swaps’’) and swaps entered into on or

after the date of enactment of the Dodd-

Frank Act but prior to the compliance

date of the swap data reporting rules

(‘‘transition swaps’’).

362

b. Second Category of Entity-Level

Requirements

i. SDR Reporting

CEA section 2(a)(13)(G) requires all

swaps, whether cleared or uncleared, to

be reported to a registered SDR.

363

CEA

section 21 requires SDRs to collect and

maintain data related to swaps as

prescribed by the Commission, and to

make such data electronically available

to particular regulators under specified

conditions related to confidentiality.

364

Part 45 of the Commission’s regulations

(and Appendix 1 thereto) sets forth the

specific swap data that must be reported

to a registered SDR, along with

attendant recordkeeping requirements;

and part 46 addresses recordkeeping

and reporting requirements for pre-

enactment and transition swaps

(‘‘historical swaps’’). The fundamental

goal of part 45 of the Commission’s

regulations is to ensure that complete

data concerning all swaps subject to the

Commission’s jurisdiction is maintained

in SDRs where it will be available to the

Commission and other financial

regulators for fulfillment of their various

regulatory mandates, including systemic

risk mitigation, market monitoring and

market abuse prevention. Part 46

supports similar goals with respect to

pre-enactment and transition swaps and

ensures that data needed by regulators

concerning ‘‘historical’’ swaps is

available to regulators through SDRs.

Among other things, data reported to

SDRs will enhance the Commission’s

understanding of concentrations of risks

within the market, as well as promote a

more effective monitoring of risk

profiles of market participants in the

swaps market. The Commission also

believes that there are benefits that will

accrue to swap dealers and MSPs as a

result of the timely reporting of

comprehensive swap transaction data

and consistent data standards for

recordkeeping, among other things.

Such benefits include more robust risk

monitoring and management

capabilities for swap dealers and MSPs,

which in turn will improve the

monitoring of their current swaps

market positions.

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365

7 U.S.C. 6s(f)(1).

366

7 U.S.C. 6s(h)(1); see 7 U.S.C. 6s(h)(3).

367

Final Swap Dealer and MSP Recordkeeping

Rule, 77 FR 20128.

368

17 CFR 23.201(b)(3)(i).

369

17 CFR 23.201(b)(4).

370

7 U.S.C. 6t.

371

Large Trader Reporting for Physical

Commodity Swaps, 76 FR 43851 (July 22, 2011).

The rules require routine position reporting by

clearing organizations, as well as clearing members

and swap dealers with reportable positions in the

covered physical commodity swaps. The rules also

establish recordkeeping requirements for clearing

organizations, clearing members and swap dealers,

as well as traders with positions in the covered

physical commodity swaps that exceed a prescribed

threshold. In general, the rules apply to swaps that

are linked, directly or indirectly, to either the price

of any of the 46 U.S. listed physical commodity

futures contracts the Commission enumerates

(Covered Futures Contracts) or the price of the

physical commodity at the delivery location of any

of the Covered Futures Contracts.

372

7 U.S.C. 2(h)(1), (7).

373

Clearing Requirement Determination Under

Section 2(h) of the CEA, 77 FR 74284 (Dec. 13,

2012) (‘‘Clearing Requirement Determination’’).

374

A DCO’s eligibility to clear swaps that are

required to be cleared pursuant to section 2(h)(1)(A)

of the CEA and part 50 of the Commission’s

regulations is governed by regulation 39.5(a),

relating to DCO eligibility.

ii. Swap Data Recordkeeping Relating to

Complaints and Marketing and Sales

Materials

CEA section 4s(f)(1) requires swap

dealers and MSPs to ‘‘make such reports

as are required by the Commission by

rule or regulation regarding the

transactions and positions and financial

condition of the registered swap dealer

or MSP.’’

365

Additionally, CEA section

4s(h) requires swap dealers and MSPs to

‘‘conform with such business conduct

standards . . . as may be prescribed by

the Commission by rule or

regulation.’’

366

Pursuant to these

provisions, the Commission

promulgated final rules that set forth

certain reporting and recordkeeping for

swap dealers and MSPs.

367

Commission

Regulation 23.201 states that ‘‘[e]ach

swap dealer and major swap participant

shall keep full, complete, and

systematic records of all activities

related to its business as a swap dealer

or major swap participant.’’ Such

records must include, among other

things, ‘‘[a] record of each complaint

received by the swap dealer or major

swap participant concerning any

partner, member, officer, employee, or

agent,’’

368

as well as ‘‘[a]ll marketing

and sales presentations, advertisements,

literature, and communications.’’

369

iii. Physical Commodity Large Swaps

Trader Reporting (Large Trader

Reporting)

CEA section 4t authorizes the

Commission to establish a large trader

reporting system for significant price

discovery swaps (of which the

economically equivalent swaps subject

to part 20 of the Commission’s

regulations are a subset).

370

Pursuant

thereto, the Commission adopted its

Large Trader Reporting rules (part 20 of

the Commission’s regulations), which

require routine reports from swap

dealers, among other entities, that hold

significant positions in swaps that are

linked, directly or indirectly, to a

prescribed list of U.S.-listed physical

commodity futures contracts.

371

Additionally, Large Trader Reporting

requires that swap dealers, among other

entities, comply with certain

recordkeeping obligations.

2. Description of the Transaction-Level

Requirements

The Transaction-Level Requirements

include: (i) Required clearing and swap

processing; (ii) margining (and

segregation) for uncleared swaps; (iii)

mandatory trade execution; (iv) swap

trading relationship documentation; (v)

portfolio reconciliation and

compression; (vi) real-time public

reporting; (vii) trade confirmation; (viii)

daily trading records; and (ix) external

business conduct standards.

The Transaction-Level

Requirements—with the exception of

external business conduct standards—

relate to both risk mitigation and market

transparency. Certain of these

requirements, such as clearing and

margining, serve to lower a firm’s risk

of failure. In that respect, these

Transaction-Level Requirements could

be classified as Entity-Level

Requirements. Other Transaction-Level

Requirements—such as trade

confirmation, swap trading relationship

documentation, and portfolio

reconciliation and compression—also

serve important risk mitigation

functions, but are less closely connected

to risk mitigation of the firm as a whole

and thus are more appropriately applied

on a transaction-by-transaction basis.

Likewise, the requirements related to

trade execution, trade confirmation,

daily trading records, and real-time

public reporting have a closer nexus to

the transparency goals of the Dodd-

Frank Act, as opposed to addressing the

risk of a firm’s failure.

As a result, whether a particular

requirement of Title VII should apply on

a transaction-by-transaction basis in the

context of cross-border activity for

purposes of section 2(i) of the CEA

requires the Commission to exercise

some degree of judgment. Nevertheless,

in the interest of comity principles, the

Commission believes that the

Transaction-Level Requirements may be

applied on a transaction-by-transaction

basis. The Transaction-Level

Requirements are split into two

categories. All of the Transaction-Level

Requirements except external business

conduct standards are in Category A.

The external business conduct

standards are in Category B.

Each of the Transaction-Level

Requirements is discussed below.

a. Category A: Risk Mitigation and

Transparency

i. Required Clearing and Swap

Processing

Section 2(h)(1) of the CEA requires a

swap to be submitted for clearing to a

DCO if the Commission has determined

that the swap is required to be cleared,

unless one of the parties to the swap is

eligible for an exception from the

clearing requirement and elects not to

clear the swap.

372

Clearing via a DCO

mitigates the counterparty credit risk

between swap dealers or MSPs and their

counterparties.

Commission regulations

implementing the first designations of

swaps for required clearing were

published in the Federal Register on

December 13, 2012.

373

Under

Commission regulation 50.2, all persons

executing a swap that is included in a

class of swaps identified under

Commission regulation 50.4 must

submit such swap to an eligible DCO for

clearing as soon as technologically

practicable after execution, but in any

event by the end of the day of execution.

Regulation 50.4 establishes required

clearing for certain classes of swaps.

Currently, those classes include, for

credit default swaps: Specified series of

untranched North American CDX

indices and European iTraxx indices;

and for interest rate swaps: Fixed-to-

floating swaps, basis swaps, forward

rate agreements referencing U.S. Dollar,

Euro, Sterling, and Yen, and overnight

index swaps referencing U.S. Dollar,

Euro, and Sterling. Each of the six

classes is further defined in Commission

regulation 50.4. Swaps that have the

specifications identified in the

regulation are required to be cleared and

must be cleared pursuant to the rules of

any eligible DCO

374

unless an exception

or exemption specified in the CEA or

the Commission’s regulations applies.

Generally, if a swap is subject to CEA

section 2(h)(1)(A) and part 50 of the

Commission’s regulations, it must be

cleared through an eligible DCO, unless:

(i) One of the counterparties is eligible

for and elects the end-user exception

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375

See End-User Exception to the Clearing

Requirement for Swaps, 77 FR 42560 (July 19, 2012)

(‘‘End-User Exception’’).

376

The Commission has adopted an exemption

from required clearing for swaps between certain

affiliated entities. Exemption for Swaps Between

Certain Affiliated Entities, 78 FR 21750 (Apr. 11,

2013) (‘‘Inter-Affiliate Exemption’’).

377

17 CFR 23.506 and 23.610. See also Final

Customer Documentation Rules, 77 FR 21278.

378

See section H regarding the application of

required clearing rules to market participants that

are not registered as swap dealers or MSPs,

including the circumstances under which the

parties to such swaps would be eligible for

substituted compliance.

379

See 7 U.S.C. 6s(e). See also Margin

Requirements for Uncleared Swaps for Swap

Dealers and Major Swap Participants, 76 FR 23732,

23733–23740 (Apr. 28, 2011) (‘‘Proposed Margin

Requirements’’). Section 4s(e) explicitly requires

the adoption of rules establishing margin

requirements for swap dealers and MSPs, and

applies a bifurcated approach that requires each

swap dealer and MSP for which there is a

prudential regulator to meet the margin

requirements established by the applicable

prudential regulator, and each swap dealer and

MSP for which there is no prudential regulator to

comply with the Commission’s margin regulations.

In contrast, the segregation requirements in section

4s(1) do not use a bifurcated approach—that is, all

swap dealers and MSPs are subject to the

Commission’s regulations regarding notice and

third party custodians for margin collected for

uncleared swaps.

380

See 7 U.S.C. 2(h)(8).

381

See Process for a Designated Contract Market

or Swap Execution Facility To Make a Swap

Available to Trade, Swap Transaction Compliance

and Implementation Schedule, and Trade Execution

Requirement Under the Commodity Exchange Act,

78 FR 33606 (Jun. 4, 2013).

382

See also Confirmation, Portfolio

Reconciliation, Portfolio Compression, and Swap

Trading Relationship Documentation Requirements

for Swap Dealers and Major Swap Participants; 77

FR 55904 (Sept. 11, 2012) (‘‘Final Confirmation

Rules’’).

383

The requirement under section 4s(i) relating to

trade confirmations is a Transaction-Level

Requirement. Accordingly, Commission regulation

23.504(b)(2) requires a swap dealer’s and MSP’s

swap trading relationship documentation to include

all confirmations of swaps, will apply on a

transaction-by-transaction basis.

384

See also Final Confirmation Rules, 77 FR

55964.

385

See id.

under Commission regulation 50.50;

375

or (ii) both counterparties are eligible for

and elect an inter-affiliate exemption

under Commission regulation 50.52.

376

To elect either the End-User Exception

or the Inter-Affiliate Exemption, the

electing party or parties and the swap

must meet certain requirements set forth

in the regulations.

Closely connected with the clearing

requirement are the following swap

processing requirements: (i)

Commission regulation 23.506, which

requires swap dealers and MSPs to

submit swaps promptly for clearing; and

(ii) Commission regulations 23.610 and

39.12, which establish certain standards

for swap processing by DCOs and/or

swap dealers and MSPs that are clearing

members of a DCO.

377

Together,

required clearing and swap processing

requirements promote safety and

soundness of swap dealers and MSPs,

and mitigate the credit risk posed by

bilateral swaps between swap dealers or

MSPs and their counterparties.

378

ii. Margin and Segregation

Requirements For Uncleared Swaps

Section 4s(e) of the CEA requires the

Commission to set margin requirements

for swap dealers and MSPs that trade in

swaps that are not cleared.

379

The

margin requirements ensure that

outstanding current and potential future

risk exposures between swap dealers

and their counterparties are

collateralized, thereby reducing the

possibility that swap dealers or MSPs

take on excessive risks without having

adequate financial backing to fulfill

their obligations under the uncleared

swap. In addition, with respect to swaps

that are not submitted for clearing,

section 4s(l) requires that a swap dealer

or MSP notify the counterparty of its

right to request that funds provided as

margin be segregated, and upon such

request, to segregate the funds with a

third-party custodian for the benefit of

the counterparty. In this way, the

segregation requirement enhances the

protections offered through margining

uncleared swaps and thereby provides

additional financial protection to

counterparties. The Commission is

working with foreign and domestic

regulators to develop and finalize

appropriate regulations for margin and

segregation requirements.

iii. Trade Execution

Integrally linked to the clearing

requirement is the trade execution

requirement, which is intended to bring

the trading of swaps that are required to

be cleared and are made available to

trade onto regulated exchanges or

execution facilities. Specifically, section

2(h)(8) of the CEA provides that unless

a clearing exception applies and is

elected, a swap that is subject to a

clearing requirement must be executed

on a DCM or SEF, unless no such DCM

or SEF makes the swap available to

trade.

380

Commission regulations

implementing the process for a DCM or

SEF to make a swap available to trade

were published in the Federal Register

on June 4, 2013.

381

Under Commission

regulations 37.10 and 38.12,

respectively, a SEF or DCM may submit

a determination for Commission review

that a mandatorily cleared swap is

available to trade based on enumerated

factors. By requiring the trades of

mandatorily cleared swaps that are

made available to trade to be executed

on an exchange or an execution

facility—each with its attendant pre-

and post-trade transparency and

safeguards to ensure market integrity—

the trade execution requirement furthers

the statutory goals of financial stability,

market efficiency, and enhanced

transparency.

iv. Swap Trading Relationship

Documentation

CEA section 4s(i) requires each swap

dealer and MSP to conform to

Commission standards for the timely

and accurate confirmation, processing,

netting, documentation and valuation of

swaps. Pursuant thereto, Commission

regulation 23.504(a) requires swap

dealers and MSPs to ‘‘establish,

maintain and enforce written policies

and procedures’’ to ensure that the swap

dealer or MSP executes written swap

trading relationship documentation.

382

Under Commission regulation 23.504(b),

the swap trading relationship

documentation must include, among

other things: All terms governing the

trading relationship between the swap

dealer or MSP and its counterparty;

credit support arrangements; investment

and re-hypothecation terms for assets

used as margin for uncleared swaps; and

custodial arrangements.

383

Further, the

swap trading relationship

documentation requirement applies to

all swaps with registered swap dealers

and MSPs. In addition, Commission

regulation 23.505 requires swap dealers

and MSPs to document certain

information in connection with swaps

for which exceptions from required

clearing are elected.

384

Swap

documentation standards facilitate

sound risk management and may

promote standardization of documents

and transactions, which are key

conditions for central clearing, and lead

to other operational efficiencies,

including improved valuation.

v. Portfolio Reconciliation and

Compression

CEA section 4s(i) directs the

Commission to prescribe regulations for

the timely and accurate processing and

netting of all swaps entered into by

swap dealers and MSPs. Pursuant to

CEA section 4s(i), the Commission

adopted regulations (23.502 and

23.503), which require swap dealers and

MSPs to perform portfolio reconciliation

and compression, respectively, for all

swaps.

385

Portfolio reconciliation is a

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386

For example, the reduced transaction count

may decrease operational risk as there are fewer

trades to maintain, process, and settle.

387

See Confirmation, Portfolio Reconciliation,

and Portfolio Compression Requirements for Swap

Dealers and Major Swap Participants, 75 FR 81519

(Dec. 28, 2010) (‘‘Confirmation NPRM’’).

388

See 7 U.S.C. 2(a)(13). See also Real-Time

Public Reporting of Swap Transaction Data, 77 FR

1182, 1183 (Jan. 9, 2012) (‘‘Final Real-Time

Reporting Rule’’).

389

Part 43 defines a ‘‘publicly reportable swap

transaction’’ as (i) any swap that is an arm’s-length

transaction between two parties that results in a

corresponding change in the market risk position

between the two parties; or (ii) any termination,

assignment, novation, exchange, transfer,

amendment, conveyance, or extinguishing of rights

or obligations of a swap that changes the pricing of

a swap. See Final Real-Time Reporting Rule, 77 FR

1182.

390

Final Swap Dealer and MSP Recordkeeping

Rule, 77 FR at 20205.

391

See Final Real-Time Reporting Rule, 77 FR at

1183.

392

7 U.S.C. 6s(i).

393

See also Final Confirmation Rules, 77 FR

55904.

394

In addition, the Commission notes that

regulation 23.504(b)(2) requires that the swap

trading relationship documentation of swap dealers

and MSPs must include all confirmations of swap

transactions.

395

See Final Swap Dealer and MSP

Recordkeeping Rule, 77 FR 20128.

396

See 7 U.S.C. 6s(h). See also External Business

Conduct Rules, 77 FR at 9822–9829.

397

See note 351, supra.

post-execution risk management tool to

ensure accurate confirmation of a

swap’s terms and to identify and resolve

any discrepancies between

counterparties regarding the valuation

of the swap. Portfolio compression is a

post-trade processing and netting

mechanism that is intended to ensure

timely, accurate processing and netting

of swaps.

386

Regulation 23.503 requires

all swap dealers and MSPs to establish

policies and procedures for terminating

fully offsetting uncleared swaps, when

appropriate, and periodically

participating in bilateral and/or

multilateral portfolio compression

exercises for uncleared swaps with

other swap dealers or MSPs or

conducted by a third party.

387

The rule

also requires policies and procedures for

engaging in such exercises for uncleared

swaps with non-swap dealers and non-

MSPs upon request. Further,

participation in multilateral portfolio

compression exercises is mandatory for

dealer-to-dealer trades.

vi. Real-Time Public Reporting

Section 2(a)(13) of the CEA directs the

Commission to promulgate rules

providing for the public availability of

swap transaction and pricing data on a

real-time basis.

388

In accordance with

this mandate, the Commission

promulgated part 43, which provides

that all ‘‘publicly reportable swap

transactions’’ must be reported and

publicly disseminated, and which

establishes the method, manner, timing

and particular transaction and pricing

data that must be reported by parties to

a swap transaction.

389

Additionally, the

Commission adopted regulation 23.205,

which directs swap dealers and MSPs to

undertake such reporting and to have

the electronic systems and procedures

necessary to transmit electronically all

information and data required to be

reported in accordance with part 43.

390

The real-time dissemination of swap

transaction and pricing data supports

the fairness and efficiency of markets

and increases transparency, which in

turn improves price discovery and

decreases risk (e.g., liquidity risk).

391

vii. Trade Confirmation

Section 4s(i) of the CEA

392

requires

that each swap dealer and MSP must

comply with the Commission’s

regulations prescribing timely and

accurate confirmation of swaps. The

Commission has adopted regulation

23.501, which requires, among other

things, a timely and accurate

confirmation of swap transactions

(which includes execution, termination,

assignment, novation, exchange,

transfer, amendment, conveyance, or

extinguishing of rights or obligations of

a swap) among swap dealers and MSPs

by the end of the first business day

following the day of execution.

393

Timely and accurate confirmation of

swaps—together with portfolio

reconciliation and compression—are

important post-trade processing

mechanisms for reducing risks and

improving operational efficiency.

394

viii. Daily Trading Records

Pursuant to CEA section 4s(g), the

Commission adopted regulation 23.202,

which requires swap dealers and MSPs

to maintain daily trading records,

including records of trade information

related to pre-execution, execution, and

post-execution data that is needed to

conduct a comprehensive and accurate

trade reconstruction for each swap. The

final rule also requires that records be

kept of cash or forward transactions

used to hedge, mitigate the risk of, or

offset any swap held by the swap dealer

or MSP.

395

Accurate and timely

recordkeeping regarding all phases of a

swap transaction can serve to greatly

enhance a firm’s internal supervision, as

well as the Commission’s ability to

detect and address market or regulatory

abuses or evasion.

b. Category B: External Business

Conduct Standards

Pursuant to CEA section 4s(h), the

Commission has adopted external

business conduct rules, which establish

business conduct standards governing

the conduct of swap dealers and MSPs

in dealing with their counterparties in

entering into swaps.

396

Broadly

speaking, these rules are designed to

enhance counterparty protection by

significantly expanding the obligations

of swap dealers and MSPs towards their

counterparties. Under these rules, swap

dealers and MSPs will be required,

among other things, to conduct due

diligence on their counterparties to

verify eligibility to trade, provide

disclosure of material information about

the swap to their counterparties,

provide a daily mid-market mark for

uncleared swaps and, when

recommending a swap to a

counterparty, make a determination as

to the suitability of the swap for the

counterparty based on reasonable

diligence concerning the counterparty.

E. Categorization of Entity-Level and

Transaction-Level Requirements

As noted above, even before the

Commission published the Proposed

Guidance, a number of commenters

recommended that the Commission, in

interpreting the cross-border

applicability of the Dodd-Frank Act

swaps provisions, should distinguish

between requirements that apply at an

entity level (i.e., to the firm as a whole)

as compared to those that apply at a

transactional level (i.e., to the

individual swap transaction or trading

relationship).

397

The Commission agrees

with such commenters, and generally

expects that it may apply its policies

differently depending on the category

(Entity-Level or Transaction-Level) or

sub-category (First or Second Category

of Entity-Level Requirements or

Category A or B of the Transaction-Level

Requirements) into which such

requirement falls, subject to its further

consideration of all of the relevant facts

and circumstances.

After giving further consideration to

the categorization in the Proposed

Guidance, including comments received

in this area, this Guidance makes a few

minor modifications to the proposed

categorization of Entity-Level and

Transaction-Level Requirements, as

described below.

1. Categorization Under the Proposed

Guidance

The Proposed Guidance separated the

Entity-Level Requirements into two

subcategories. The first included capital

adequacy, chief compliance officer, risk

management, and swap data

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398

See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug.

27, 2012) at 2; Clearing House (Aug. 27, 2012) at

22.

399

See, e.g., SIFMA (Aug. 27, 2012) at A4, A34,

A35; Credit Suisse (Aug. 27, 2012) at 10;

Association for Financial Markets in Europe

(AFME) (Aug. 24, 2012) at 8–9.

400

Credit Suisse (Aug. 27, 2012) at 10.

401

ISDA (Aug. 27, 2012) at 11. Similarly,

Australian Bankers stated that the real-time public

reporting and trade execution requirements should

be treated in the same manner as the external

business conduct standards and have no

application to transactions involving a non-U.S.

swap dealer and its non-U.S. counterparties.

Australian Bankers (Aug. 27, 2012) at 5. See also

SIFMA (Aug. 27, 2012) at A37 (stating that real-time

public reporting should be treated in the same way

as external business conduct standards and, in

particular, should not apply to non-U.S. swap

entities or non-U.S. branches for transactions with

non-U.S. persons).

402

See also The Clearing House (Aug. 27, 2012)

at 22 (stating that no pre- or post-trade transparency

rules or conflict of interest rules should apply to

transactions with non-U.S. counterparties. These

rules should be treated similarly to the external

business conduct rules—excluded from the

Transaction-Level and Entity-Level categories, and

not applied at all to transactions between a non-

U.S. entity (including a non-U.S. branch of a U.S.

entity) and its non-U.S. counterparty, regardless of

whether that counterparty is guaranteed by, or a

conduit for, a U.S. person).

403

IIB (Aug. 27, 2012) at 17, 32–33. IIB further

stated that application of these pre- and post-trade

requirements to swaps between non-U.S. persons

outside the United States would raise ‘‘serious,

unprecedented’’ concerns relating to the

sovereignty of foreign markets. IIB (Aug. 27, 2012)

at 34.

404

Letter from Sen. Levin at 11–12.

405

Id.

406

Sumitomo (Aug. 24, 2012) at 3.

407

IATP (Aug. 27, 2012) at 7.

408

Letter from Sen. Levin at 11–12.

409

Id.

recordkeeping, all of which relate to

risks to a firm as a whole. The second

proposed subcategory included SDR

Reporting and Large Trader Reporting,

which relate directly to the

Commission’s market oversight.

The Proposed Guidance separated the

Transaction-Level Requirements into

two subcategories, ‘‘Category A’’ and

‘‘Category B.’’ The ‘‘Category A’’

Transaction-Level Requirements relate

to risk mitigation and transparency: (1)

Clearing and swap processing; (2)

margining and segregation for uncleared

swaps; (3) trade execution; (4) swap

trading relationship documentation; (5)

portfolio reconciliation and

compression; (6) real-time public

reporting; (7) trade confirmation; and (8)

daily trading records.

The ‘‘Category B’’ Transaction-Level

Requirements—the external business

conduct standards—are those

requirements that may not be necessary

to apply to swaps between non-U.S.

persons taking place outside the United

States. With respect to these swaps, the

Commission believes that foreign

regulators may have a relatively stronger

supervisory interest in regulating sales

practices concerns than the

Commission.

2. Comments

Commenters generally supported the

division of Dodd-Frank’s swaps

provisions (and Commission regulations

thereunder) into Entity-Level and

Transaction-Level Requirements.

398

Certain of these commenters, however,

made specific recommendations for

reclassification of some of these

Requirements.

a. Reporting and Trade-Execution

Requirements

With regard to reporting and trade-

execution requirements, a number of

commenters argued that all forms of

swaps reporting, including SDR

Reporting and Large Trader Reporting,

should be treated as Transaction-Level

Requirements and thereby could be

eligible for substituted compliance for

certain transactions with non-U.S.

counterparties.

399

In their view, SDR

Reporting—like real-time public

reporting—is implemented on a swap-

by-swap basis and more closely linked

to market transparency than risk

mitigation. Credit Suisse noted that the

Commission’s bifurcated approach to

SDR Reporting and real-time public

reporting creates unnecessary

complications. It argued that both sets of

reporting requirements should apply to

a non-U.S. swap dealer only when

dealing with U.S. persons (excluding

foreign branches of U.S. swap

dealers).

400

ISDA believed that real-time public

reporting and trade execution should be

treated like the external business

conduct rules. It argued that these rules

relate to pre-trade price discovery and

market structure and client

protections.

401

Similarly, J.P. Morgan

commented that the real-time public

reporting and trade execution

requirements should not apply to

transactions between non-U.S. swap

dealers or non-U.S. MSPs and non-U.S.

counterparties, arguing that these

requirements do not reduce market risk

but rather promote price competition.

402

IIB stated that the Commission should

treat mandatory trade execution, real-

time public reporting and daily trading

records as ‘‘Category B’’ Transaction-

Level Requirements, since these

requirements are intended to give

customers enhanced access to the best

pricing and affect not only individual

counterparties but the overall market.

403

On the other hand, Senator Levin

stated that reporting and trade execution

requirements should be applied broadly

to all swaps of non-U.S. swap dealers

and non-U.S. MSPs that are affiliates of

U.S. financial institutions, so as to

provide transparency regarding their

swap activities and to protect the U.S.

financial system.

404

He stated that

standard trade execution helps to ensure

that complex swaps are properly

booked, and reporting discourages

‘‘below-the-radar’’ transactions

involving complex swaps.

405

b. Swap Trading Relationship

Documentation, Portfolio Reconciliation

and Compression, Daily Trading

Records and External Business Conduct

Standards

Sumitomo stated that certain

Transaction-Level Requirements,

including swap trading relationship

documentation, portfolio reconciliation

and compression, daily trading records,

and external business conduct

standards, should instead be classified

as Entity-Level Requirements. It

contended that these are not logically

linked to particular transactions and

would be required to be conducted on

a daily basis per counterparty.

406

IATP

stated that portfolio compression and

reconciliation requirements are critical

to a firm’s central risk mitigation

functions and therefore should be

classified as Entity-Level Requirements.

This commenter also argued that

margin, segregation and other

requirements for swaps that are so

designated by non-U.S. affiliates of U.S.

persons as to be unclearable should be

regulated under the Entity-Level

Requirements.

407

Similarly, Senator Levin stated that

clearing, margin and portfolio

reconciliation and compression

requirements and external business

conduct standards should be applied to

all swaps of non-U.S. swap dealers and

non-U.S. MSPs that are affiliates of U.S.

financial institutions.

408

In the Senator’s

view, margin requirements are critical

safeguards against rapidly increasing

losses, portfolio reconciliation and

compression procedures help to

maintain an accurate understanding of

the size and nature of a firm’s swaps

positions, and external business

conduct standards encourage integrity

in the swaps markets.

409

Societe

Generale also stated that rules relating

to confirmation processing and portfolio

reconciliation and compression should

be categorized as Entity-Level

Requirements, explaining that these all

relate to the functioning of a swap

dealer’s ‘‘back office’’ operations and are

tied to its trading systems. As a result,

implementing confirmation rules, for

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410

SocGen (Aug. 8, 2012) at 6 (stating that banks

with a centralized booking model will face

technological difficulties in applying confirmation

processing and portfolio reconciliation and

compression rules only with respect to U.S.

persons, and that a requirement to apply these rules

to all customers (even non-U.S. persons) is

inconsistent with international comity). See also

Australian Bankers (Aug. 27, 2012) at 5 (stating that

portfolio reconciliation and compression

requirements should be categorized as Entity-Level

Requirements, as they are critical to risk mitigation

and back-office functions).

411

IIB (Aug. 27, 2012) at 32–33.

412

IIB (Aug. 27, 2012) at 32. This would render

internal conflicts of interest requirements

applicable only in connection with personnel of its

research department or clearing unit preparing

research reports for use with, or providing clearing

services to, respectively, U.S. persons.

413

SIFMA (Aug. 27, 2012) at A35–36.

414

By way of illustration, consistent with the

purpose of the capital requirement, which is

intended to reduce the likelihood and cost of a

swap dealer’s default by requiring a financial

cushion, a swap dealer’s or MSP’s capital

requirements would be set on the basis of its overall

portfolio of assets and liabilities.

example, for swaps with U.S. persons

only is ‘‘extremely difficult from a

technological standpoint.’’

410

IIB recommended that the daily

trading records requirements

(Commission regulation 23.202) be

categorized as a Category B Transaction-

Level Requirement. It reasoned that this

rule is most relevant when a non-U.S.

swap dealer or non-U.S. MSP is trading

with a U.S. person to whom it owes U.S.

sales practice obligations and for whom

the Commission’s interest in addressing

market abuses is highest. It also noted

that the obligation to make and retain

records of pre-execution oral

conversations, a principal element of

the rule, is most likely to give rise to

conflicts with foreign privacy laws.

411

c. Internal Conflicts of Interest

Requirement

IIB noted that the internal conflicts of

interest requirement (Commission

regulation 23.605) is categorized as an

Entity-Level Requirement in the

Proposed Guidance. It stated that

internal research conflicts of interest

procedures are intended to promote the

integrity of research reports to

customers, and that internal clearing

conflicts of interest procedures are

intended to promote client access to

better pricing on execution and clearing.

As a result, IIB views the Commission’s

interest in applying these requirements

to non-U.S. clients as minimal and

recommends that the internal conflicts

of interest requirement be categorized as

a new ‘‘Category B’’ Entity-Level

Requirement.

412

d. Position Limits and Anti-

Manipulation Rules

SIFMA stated that position limits and

anti-manipulation rules, which were not

addressed in the Proposed Guidance,

should be categorized as Transaction-

Level Requirements and, therefore, be

eligible for relief in some circumstances.

They argued that these rules have a

close nexus to market transparency, as

opposed to risk mitigation of a firm’s

failure.

413

3. Commission Guidance

In general, the Commission would

apply the Dodd-Frank provisions

differently depending on the category

(Entity-Level or Transaction-Level) or

sub-category (First or Second Category

of Entity-Level Requirements or

Category A or B of the Transaction-Level

Requirements) into which such

requirement falls. Therefore, the

Commission has carefully reviewed

comments on the classification of the

Entity-Level Requirements and

Transaction-Level Requirements, as well

as comments regarding whether and

how Entity-Level and Transaction-Level

Requirements should apply to swaps

between various types of counterparties,

and under what circumstances the

Commission’s policy should

contemplate that various swaps should

generally be eligible for substituted

compliance, or provide that certain of

the Commission’s requirements would

generally not apply.

After careful consideration, the

Commission would generally treat

swaps requirements as Entity-Level

Requirements and Transaction-Level

Requirements largely in accordance

with the Proposed Guidance, with

certain minor modifications described

below.

a. Entity-Level Requirements

Consistent with CEA section 2(i), the

Commission would treat the following

requirements as Entity-Level

Requirements, as proposed: Capital

adequacy, chief compliance officer, risk

management, swap data recordkeeping,

SDR Reporting, and Large Trader

Reporting.

At the core of a robust internal risk

controls system is the firm’s capital—

and particularly, how the firm identifies

and manages its risk exposure arising

from its portfolio of activities.

414

Equally foundational to the financial

integrity of a firm is an effective internal

risk management process, which must

be comprehensive in scope and reliant

on timely and accurate data regarding

its swap activities. To be effective, such

a system must have a strong and

independent compliance function.

These internal controls-related

requirements—namely, the

requirements related to chief

compliance officer, risk management,

swap data recordkeeping—are designed

to serve that end. Given their functions,

the Commission’s policy is that these

requirements should be applied on a

firm-wide basis to effectively address

risks to the swap dealer or MSP as a

whole, and should be classified as

Entity-Level Requirements.

SDR Reporting and Large Trader

Reporting relate more closely to market

transparency and to the Commission’s

market surveillance program. Among

other things, data reported to SDRs will

enhance the Commission’s

understanding of concentrations of risks

within the market, as well as promote a

more effective monitoring of risk

profiles of market participants in the

swaps market. Large Trader Reporting,

along with an analogous reporting

system for futures contracts, is essential

to the Commission’s ability to conduct

effective surveillance of markets in U.S.

physical commodity futures and

economically equivalent swaps. Given

the functions of these reporting

requirements, the Commission’s view is

that each requirement generally should

be applied across swaps, irrespective of

the counterparty or the location of the

swap, in order to ensure that the

Commission has a comprehensive and

accurate picture of market activities.

Otherwise, the intended value of these

requirements would be significantly

compromised, if not undermined.

Therefore, the Commission’s policy is to

generally treat SDR Reporting and Large

Trader Reporting as Entity-Level

Requirements.

The Commission did not address in

the Proposed Guidance whether

position limits and anti-manipulation

provisions should fall in the Entity-

Level or Transaction-Level

Requirements category. It is the

Commission’s view that these

provisions relate more to market

integrity, as opposed to the financial

integrity of a firm, and it is essential that

they apply regardless of the

counterparty’s status (U.S. person or

not) in order to fully achieve the

underlying purpose of these respective

provisions. Accordingly, these

requirements are outside the scope of

this Guidance. However, the monitoring

of position limits under Commission

regulation 23.601 is included in the

Entity-Level Requirements under this

Guidance.

After considering the input of market

participants and others through the

comment process, and giving further

consideration to how the language in

CEA section 2(i) should be interpreted

for purposes of applying the Entity-

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415

In addition, as noted in section G below,

reflecting its interpretation of CEA section 2(i), the

Commission generally contemplates that U.S. swap

dealers and MSPs would comply in full with the

Entity-Level Requirements (regardless of whether

the Entity-Level Requirements are classified as

being in the First Category or Second Category),

without substituted compliance available. This

interpretation also applies to swaps with U.S. swap

dealers or U.S. MSPs that are affiliates of non-U.S.

persons.

416

As explained in section G below, the

Commission’s policy is that where a swap dealer or

MSP is a U.S. person, all of the entity-level

requirements would generally apply in full (without

substituted compliance available), regardless of the

type of counterparty.

417

See section G, infra, for additional information

on the application of the Entity-Level

Requirements.

Level Requirements and permitting

substituted compliance, the

Commission’s policy is to treat the

Entity-Level Requirements in

subcategories largely as proposed.

As explained above, Entity-Level

Requirements ensure that registered

swap dealers and MSPs implement and

maintain a comprehensive and robust

system of internal controls to ensure the

financial integrity of the firm, and in

turn, the protection of the financial

system. In this respect, the Commission

has strong supervisory interests in

applying the same rigorous standards, or

comparable and comprehensive

standards, to non-U.S. swap dealers and

non-U.S. MSPs whose swap activities or

positions are substantial enough to

require registration under the CEA.

Requiring such swap dealers and MSPs

to rigorously monitor and address the

risks they incur as part of their day-to-

day businesses would lower the

registrants’ risk of default—and

ultimately protect the public and the

financial system.

Therefore, the Commission

contemplates that non-U.S. swap

dealers and non-U.S. MSPs will comply

with all of the First Category of Entity-

Level Requirements. In addition,

consistent with principles of

international comity, substituted

compliance may be available for these

Entity-Level Requirements in certain

circumstances, as explained further

below. In contrast, with regard to Entity-

Level Requirements in the Second

Category, substituted compliance

should generally be available only

where the counterparty is a non-U.S.

person.

415

i. The First Category—Capital

Adequacy, Chief Compliance Officer,

Risk Management, and Swap Data

Recordkeeping (Except for Certain

Recordkeeping Requirements)

The Commission’s policy generally is

to treat the requirements related to

capital adequacy, chief compliance

officer, risk management, and swap data

recordkeeping (except swap data

recordkeeping relating to complaints

and marketing and sales materials under

Commission regulations 23.201(b)(3)

and 23.201(b)(4), respectively) in the

First Category. These requirements

address and manage risks that arise from

a firm’s operation as a swap dealer or

MSP. Collectively, they constitute a

firm’s first line of defense against

financial, operational, and compliance

risks that could lead to a firm’s default.

The First Category is identical to the

first subcategory proposed by the

Commission in the Proposed Guidance,

except that the Commission’s policy is

to treat swap data recordkeeping under

part 43 and part 46 of the Commission’s

regulations and swap data

recordkeeping related to complaints and

marketing and sales materials under

Commission regulations 23.201(b)(3)

and 23.201(b)(4) as part of the ‘‘Second

Category’’ of Entity-Level Requirements.

As noted above, for Entity-Level

Requirements in the First Category,

substituted compliance generally would

be available for a non-U.S. swap dealer

or non-U.S. MSP (including one that is

an affiliate of a U.S. person) regardless

of whether the counterparty is a U.S.

person or a non-U.S. person.

416

contrast, for Entity-Level Requirements

in the Second Category, substituted

compliance generally would be

available for a non-U.S. swap dealer or

MSP only where the counterparty is a

non-U.S. person.

ii. The Second Category—SDR

Reporting, Certain Swap Data

Recordkeeping Requirements and Large

Trader Reporting

The Commission’s policy retains SDR

Reporting in the Second Category, as

proposed. SDR Reporting furthers the

goals of the Dodd-Frank Act to reduce

systemic risk, increase transparency and

promote market integrity. Specifically,

data reported to SDRs under the SDR

Reporting rules provide the Commission

with information necessary to better

understand and monitor concentrations

of risk, as well as risk profiles of

individual market participants for

cleared and uncleared swaps.

The Commission believes that

retaining SDR Reporting in the Second

Category would be appropriate.

Consistent with section 2(i), the

Commission’s policy is that U.S. swap

dealers or MSPs (including those that

are affiliates of a non-U.S. person)

generally should comply in full with all

of the Entity-Level Requirements,

including SDR Reporting. Further, non-

U.S. swap dealers and non-U.S. MSPs

(including those that are affiliates of a

U.S. person), generally should comply

with SDR Reporting, and substituted

compliance should be available (to the

extent applicable) only where the swap

counterparty is a non-U.S. person,

provided that the Commission has

direct access (including electronic

access) to the relevant swap data that is

stored at the foreign trade repository.

417

The Commission contemplates

treating swap data recordkeeping related

to complaints and marketing and sales

materials under Commission regulations

23.201(b)(3) and 23.201(b)(4) as part of

the ‘‘Second Category’’ because, in the

Commission’s view, non-U.S. swap

dealers and non-U.S. MSPs (including

those that are affiliates of a U.S. person)

generally should comply with SDR

Reporting. Further, substituted

compliance should be available for non-

U.S. swap dealers or MSPs, to the extent

applicable, only where the swap

counterparty is a non-U.S. person.

Large Trader Reporting furthers the

goals of the Dodd-Frank Act to reduce

systemic risk, increase transparency and

promote market integrity. Large Trader

Reporting, in conjunction with the

Commission’s large trader reporting

system for futures contracts, is essential

to the Commission’s ability to conduct

effective surveillance of markets in U.S.

physical commodity futures and

economically equivalent swaps. Given

the regulatory function of Large Trader

Reporting, the Commission’s policy is to

apply these requirements to non-U.S.

persons whose trading falls within its

scope to the same extent as U.S.

persons. Accordingly, as discussed

further in section G below, the

Commission would not recognize

substituted compliance in place of

compliance with Large Trader

Reporting.

b. Transaction-Level Requirements

As previously noted, whether a

particular Dodd-Frank Act requirement

should apply on a transaction-by-

transaction basis in the context of cross-

border activity for purposes of section

2(i) of the CEA requires the exercise of

some degree of judgment. Nevertheless,

bearing in mind principles of

international comity, the Commission

anticipates that, in general, the

Transaction-Level Requirements may be

applied on a transaction-by-transaction

basis.

The Commission’s policy

contemplates treating as Transaction-

Level Requirements all of the

requirements that the Commission

proposed to include. Thus, the

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418

Substituted compliance is discussed in section

F, infra. The application of the Category A

Transaction-Level Requirements and eligibility for

substituted compliance is discussed in section

IV.G.4. The application of the Category B

Transaction-Level Requirements is discussed in

section IV.G.5. The application of certain CEA

provisions and certain Entity and Transaction-Level

Requirements to non-registrants is discussed in

section IV.H.

419

See generally Final Real-Time Reporting Rule,

77 FR at 1250–1266; Swap Data Recordkeeping and

Reporting Requirements, 77 FR 2136, 2210–2224

(Jan. 13, 2012) (‘‘Final Data Rules’’). Part 43 applies

to reports of swap transaction and pricing data to

a registered SDR, in order that the SDR can publicly

disseminate such data pursuant to part 43 and

Appendix A to part 43 as soon as technologically

practicable after execution of the publicly

reportable swap. Final Real-Time Reporting Rule,

77 FR 1249. Under part 45, counterparties report

creation data for the swap—including all primary

economic terms (‘‘PET’’) data and confirmation

data—as well as continuation data also as soon as

technologically practicable. See Final Data Rules,

77 FR at 2149–2151, 2199–2202.

420

See Final Real-Time Reporting Rule, 77 FR

1237 (Jan. 9, 2012) (noting that ‘‘ . . . coordination

is expected to reduce costs by allowing reporting

parties, SEFs and DCMs to send one set of data to

an SDR for the purpose of satisfying the

requirements of both rules.’’); id. at 1210 (noting

that ’’ . . . although reporting parties may use the

same data stream for reporting regulatory data and

real-time data, Commission regulation 43.4(d)(2)

clarifies the intent of the Proposing Release: The

reporting requirements for SEFs, DCMs and

reporting parties for real-time public reporting

purposes are separate from the requirement to

report to an SDR for regulatory reporting

purposes.’’).

421

Final Data Rules, 77 FR 2150, 2182. If SDR

Reporting and real-time public reporting do not

both apply to a swap transaction, market

participants that have connected to registered SDRs

and employed single stream reporting infrastructure

and systems may be required to change such

systems to bifurcate the part 43 and part 45 data

sets, which are generated and transmitted in a

single report. The Commission understands that

such bifurcation could occur due to the manner

with which Transaction-Level and Entity-Level

requirements apply to the particular swap

transaction.

422

Real-Time Public Reporting of Swap

Transaction Data, 77 FR 1217. See also Final Data

Rules, 77 FR at 2182.

Transaction-Level Requirements are: (1)

Required clearing and swap processing;

(2) margining and segregation for

uncleared swaps; (3) trade execution; (4)

swap trading relationship

documentation; (5) portfolio

reconciliation and compression; (6) real-

time public reporting; (7) trade

confirmation; (8) daily trading records;

and (9) external business conduct

standards.

The Commission contemplates

treating the Transaction-Level

Requirements in two subcategories,

designated as Category A and Category

B, largely as proposed. Generally, these

categories reflect how the Commission

generally contemplates applying various

Transaction-Level Requirements to

various types of counterparties, and in

guiding the consideration of when

substituted compliance will be available

under this Guidance.

418

i. The Category A Transaction-Level

Requirements

The ‘‘Category A’’ Transaction-Level

Requirements relate to risk mitigation

and transparency, and included the first

eight Transaction-Level requirements

referenced above.

The Commission does not believe it

would be appropriate to treat, as

suggested by commenters, swap trading

relationship documentation, portfolio

reconciliation and compression, daily

trading records and external business

conduct standards as Entity-Level

Requirements. The Commission

recognizes that firms may find a certain

degree of operational efficiency in

applying these requirements on a firm-

wide basis. On the other hand, the

Commission expects that treatment of

these as Transaction-Level

Requirements should allow for greater

flexibility in terms of whether and how

Dodd-Frank requirements apply. For

example, under the Proposed Guidance,

the Commission would not interpret

section 2(i) generally to apply the Dodd-

Frank’s clearing requirement to a swap

between a non-U.S. swap dealer and a

non-U.S. counterparty. In the

Commission’s judgment, allowing swap

trading relationship documentation,

portfolio reconciliation and

compression and external business

conduct standards to be applied on a

transaction basis would not undermine

the underlying regulatory objectives

and, yet, will give due recognition to the

home jurisdiction’s supervisory interest.

Consistent with this rationale, the

Commission would treat margin,

segregation, and related requirements as

Transaction-Level Requirements.

The Commission also is retaining the

trade execution requirement, as

proposed, in Category A. The trade

execution requirement is intended to

bring the trading of mandatorily cleared

swaps that are made available to trade

onto regulated exchanges or execution

facilities. By requiring the trades of

mandatorily cleared swaps that are

made available to trade to be executed

on an exchange or an execution

facility—each with its attendant pre-

and post-trade transparency and

safeguards to ensure market integrity—

the trade execution requirement furthers

the statutory goals of promoting

financial stability, market efficiency and

enhanced transparency.

The Commission’s policy will treat

real-time public reporting as a

Transaction-Level Requirement.

However, for the reasons discussed

below, the Commission clarifies that it

does not intend that its policy would

preclude a market participant from

applying real-time public reporting with

respect to swap transactions that are not

necessarily subject to this Transaction-

Level Requirement if doing so would be

more efficient for the market

participant.

Part 43 of the Commission’s

regulations and part 45 of the

Commission’s regulations, respectively,

prescribe the data fields that are to be

included in real-time public reporting

and SDR Reporting reports with respect

to a reportable swap transaction.

419

The Commission understands from

commenters that in certain

circumstances, reporting part 43 and

part 45 data for the same swap

transaction in separate reports (‘‘two

stream reporting’’) could accommodate

market participants that have a

transactional structure and/or systems

that are designed or suited to send

separate submissions.

420

However, the

Commission also recognizes that in

other circumstances, permitting market

participants to include part 43 and part

45 data for the same swap transaction in

a single report (‘‘single stream

reporting’’) could optimize efficiency.

421

The Commission anticipated that

reporting parties might elect to use one

data reporting stream for both SDR

Reporting and real-time public reporting

under part 45 and part 43 respectively,

to reduce costs and optimize efficiency,

and many market participants have

chosen to build and integrate single

stream reporting systems.

422

The

Commission is aware that, as

commenters have stated, categorizing

SDR Reporting under part 45 as an

Entity-Level requirement and real-time

public reporting under part 43 as a

Transaction-Level requirement could, in

certain circumstances, negate the

benefits of single stream reporting, and

could present challenges to market

participants who have built single

stream reporting infrastructure.

In view of these concerns, the

Commission would, in general, treat

real-time public reporting as a

Transaction-Level Requirement.

However, the Commission does not

intend that its policy would preclude a

market participant from applying real-

time public reporting with respect to

swap transactions that are not

necessarily subject to this Transaction-

Level Requirement if, for example, this

would allow the market participant to

realize efficiency gains from single

stream reporting or otherwise as

discussed above.

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423

The application of the Category B Transaction-

Level Requirements to swap dealers and MSPs is

discussed in section IV.G.5.

424

See, e.g., SIFMA, (Aug. 27, 2012) at 3, A46;

State Street (Aug. 27, 2012) at 3; Global Financial

Markets Association (‘‘GFMA’’) (Aug. 27, 2012) at

2; Association for Financial Markets in Europe

(‘‘AFME’’) (Aug. 27, 2012) at 2; J.P. Morgan (Aug.

13, 2012) at 5; Australian Bankers (Aug. 27, 2012)

at 2; Japanese Bankers Association (Aug. 27, 2012)

at 3; Comissao de Valores Mobiliarios (‘‘CVM’’)

(Aug. 27, 2012) at 2.

425

See, e.g., FSR (Aug. 27, 2012) at 6–7.

426

See IATP (Aug. 27, 2012) at 11–12; IIAC (Aug.

27, 2012) at 2, 9–11.

427

See IATP (Aug. 27, 2012) at 11–12.

428

See, e.g., ICI (Aug. 23, 2012) at 7–11; Capital

Markets (Aug. 24, 2012) at 5–6.

429

See Deutsche Bank, Aug. 27, 2012 at 5–6;

Lloyds (Aug. 24, 2012) at 2.

430

See Australian Securities and Investments

Commission; Hong Kong Monetary Authority;

Monetary Authority of Singapore; Reserve Bank of

Australia; Securities and Futures Commission,

Hong Kong (Aug. 27, 2012) at 3–4.

431

See CEWG (Aug. 27, 2012) at 7; CVM (Aug. 27,

2012) at 2; ICI (Aug. 23, 2012) at 9; IIB (Aug. 27,

2012) at 38–39; Hong Kong Banks (Aug. 27, 2012)

at 2, 10, 14, 15; Korea Federation of Banks (‘‘Korea

Banks’’) (Aug. 27, 2012) at 2–3; The Clearing House

(Aug. 27, 2012) at 3–4, 31–35.

ii. The Category B Transaction-Level

Requirements (External Business

Conduct Standards)

As proposed, the Commission’s policy

will treat external business conduct

standards as a ‘‘Category B’’

Transaction-Level Requirement for

purposes of the general application of

this Transaction-Level Requirement to

various categories of swap

counterparties.

423

External business

conduct standards are oriented toward

customer-protection. Among other

obligations, the external business

conduct rules generally require

registrants to conduct due diligence on

their counterparties to verify eligibility

to trade (including eligible contract

participant status), refrain from

engaging in abusive market practices,

provide disclosure of material

information about the swap to their

counterparties, provide a daily mid-

market mark for uncleared swaps and,

when recommending a swap to a

counterparty, make a determination as

to the suitability of the swap for the

counterparty based on reasonable

diligence concerning the counterparty.

In the Commission’s view, such rules

have an attenuated link to, and are

distinguishable from, market-oriented

protections such as the trade execution

mandate. Additionally, the Commission

believes that the foreign jurisdictions in

which non-U.S. persons are located are

likely to have a significant interest in

the type of business conduct standards

that would be applicable to transactions

with such non-U.S. persons within their

jurisdiction. Because the Commission

believes that foreign regulators may

have a relatively stronger supervisory

interest in regulating sales practices

concerns related to swaps between non-

U.S. persons taking place outside the

United States than the Commission, the

Commission believes that generally it is

appropriate that the business conducts

standards of the home jurisdiction,

rather than those established by the

Commission, apply to such transactions

between non-U.S. persons.

After reviewing the comments on

internal conflicts of interest procedures,

the Commission has given consideration

to whether to treat internal conflicts of

interest rules relating to clearing under

Commission regulation 23.605 under

Category B of the Transaction-Level

Requirements. The Commission

considered the view of commenters that

stated that this particular requirement is

generally more akin to the external

business conduct standards and, as

such, can reasonably be expected to be

narrowly targeted to apply only with

respect to U.S. clients, without

undermining the regulatory benefits

associated with the rule. However,

because the Commission believes that

internal conflicts of interest related to

clearing should be applied on a firm-

wide basis, the Commission’s policy is

that this requirement generally should

be treated as an Entity-Level

Requirement as proposed.

The Commission also has considered

whether internal conflicts of interest

procedures relating to research should

be treated as Entity-Level Requirements

as proposed. These informational and

supervisory firewalls are designed to

ensure that research reports are free

from undue influence by the firm’s

trading personnel. As a practical matter,

it is generally difficult, if not

impossible, to establish and maintain

such safeguards on a transaction or

client basis. Because the Commission

believes that these firewalls, in order to

achieve their regulatory purpose, should

be applied on a firm-wide basis, the

Commission’s policy is that internal

conflicts of interest procedures relating

to research generally should be treated

as Entity-Level Requirements.

F. Substituted Compliance

1. Proposed Guidance

In the Proposed Guidance, the

Commission stated that a cross-border

policy that allows for flexibility in the

application of the CEA while ensuring

the high level of regulation

contemplated by the Dodd-Frank Act

and avoiding potential conflicts

between U.S. regulations and foreign

law is consistent with principles of

international comity. To that end, the

Commission set forth a general

framework for substituted compliance.

Under this ‘‘substituted compliance’’

regime, the Commission may determine

that certain laws and regulations of a

foreign jurisdiction are comparable to

and as comprehensive as a

corresponding category of U.S. laws and

regulations. If the Commission makes

such a determination, then an entity or

transaction in that foreign jurisdiction

that is subject to the category of U.S.

laws and regulations for which

comparability is determined will be

deemed to be in compliance therewith

if that entity or transaction complies

with the corresponding foreign laws and

regulations.

2. Comments

Several commenters urged the

Commission to use a principles-based

approach and to review the legal regime

as a whole, rather than evaluate

comparability on an issue-by-issue

basis.

424

A commenter supported the

Commission’s view that comparable

does not mean identical, and urged the

Commission to place an emphasis on

shared principles and mutual

recognition.

425

Some commenters stated that foreign

jurisdiction laws and regulations are

unlikely to be identical to those in the

United States and that they thus support

the Commission’s proposed ‘‘outcomes

based approach’’ to evaluating whether

foreign regulatory requirements meet

Dodd-Frank normative objectives.

426

One of these commenters stated that in

some cases foreign regulators would be

faced with several challenges, noting

that in ‘‘light touch’’ or principle-based

regulatory jurisdictions, commodity

derivatives data collection and

surveillance is weak or even non-

existent, as is concomitant

enforcement.

427

Commenters stressed the need to

avoid imposing duplicative or

conflicting regulatory requirements

which could result in unnecessary

costs.

428

Commenters urged the

Commission to engage in a dialogue

with other regulators

429

and to build on

work done at the international level.

430

Some commenters expressed the view

that substituted compliance should not

require Commission approval if the

applicable foreign regulator promulgates

applicable regulations in accordance

with G20 commitments, or that a

presumption that foreign rules are

comparable should apply if the rules are

consistent with G20 principles.

431

Some

commenters urged the Commission to

take what they described as an

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432

See Australian Securities and Investments

Commission; Hong Kong Monetary Authority;

Monetary Authority of Singapore; Reserve Bank of

Australia; Securities and Futures Commission,

Hong Kong (Aug. 27, 2012) at 2–3.

433

See Deutsche Bank (Aug. 27, 2012) at 6.

434

See European Commission (Aug. 24, 2012) at

435

See, e.g., Financial Services Authority (United

Kingdom) (Aug. 24, 2012) at 3.

436

See IIB (Aug. 27, 2012) at 40; American

Bankers Association, (Aug. 27, 2012) at 2; IATP

(Aug. 27, 2012) at 11.

437

See American Bankers Association (Aug. 27,

2012) at 2.

438

See IATP (Aug. 27, 2012) at 11–13.

439

See ESMA (Aug. 27, 2012) at 3–4.

440

See Japan FSA and Bank of Japan (Aug. 13,

2012) at 2–3.

441

See SIFMA (Aug. 27, 2012) at 3, A46; Futures

Industry Association (FIA), (Aug. 27, 2012) at 5–7.

442

See IATP (Aug. 27, 2012) at 2–3.

443

See Tradeweb Markets LLC (Aug. 27, 2012) at

444

See SIFMA (Aug. 27, 2012) at A48; Deutsche

Bank (Aug. 27, 2012) at 6.

445

See, e.g., CFA Institute (Aug. 27, 2012) at 3;

Financial Services Authority (United Kingdom)

(Aug. 24, 2012) at 3; Barclays (Aug. 27, 2012) at 2;

ICAP Group (Aug. 27, 2012) at 2; IIB (Aug. 27, 2012)

at 39.

446

See Greenberger (Aug. 27, 2012) at 20–24.

447

See Greenberger (Aug. 27, 2012) at 3, 19,

22–23.

448

See Greenberger (Aug. 27, 2012) at 19.

449

See Public Citizen (Aug. 27, 2012) at 13, 16,

19.

450

See Better Markets (Aug. 27, 2012) at 10.

451

See, e.g., Better Markets (Aug. 27, 2012) at 10–

11; Public Citizen (Aug. 27, 2012) at 13, 16, 19.

452

See Deutsche Bank (Aug. 27, 2012) at 6.

453

See Japanese Bankers Association (Aug. 27,

2012) at 10.

454

See IATP (Aug. 27, 2012) at 6–7.

‘‘equivalence approach’’ similar to EMIR

in the European Union,

432

by making

substituted compliance determinations

based on recognition of ‘‘equivalent’’

jurisdictions and not of individual

firms.

433

The European Commission

stated that EU firms dealing with U.S.

counterparties would always be subject

to the Dodd-Frank Act, while U.S. firms

dealing with EU counterparties could

not be subject to EU rules if the EU

decides to grant equivalence to the

United States. The European

Commission stated that it is difficult to

understand why comparable foreign

legislation in the EU should not be

sufficient.

434

Commenters, including foreign

regulators, requested that the

Commission more clearly outline the

circumstances under which a particular

foreign jurisdiction would be acceptable

for substituted compliance purposes.

435

Commenters stressed the need for

comparability determinations to be

transparent.

436

One commenter stated

that comparability determinations

should allow for notice and

comment.

437

Another commenter stated

that there should be a procedure for

appeals, that memoranda of

understanding (‘‘MOUs’’) should form

the framework for comparability

determinations, and that the

Commission should develop a process

for periodic review of comparability

determinations.

438

Some commenters found the

Commission’s proposed approach to

substituted compliance too narrow or

limiting. The European Securities and

Markets Authority (‘‘ESMA’’) stated that

when equivalence or substituted

compliance is granted for an entire

jurisdiction, registration should not be a

prerequisite before substituted

compliance can apply. ESMA also

stated that the Commission’s approach

is quite limited because it is applied not

uniformly but ‘‘chapter by chapter,’’

which ESMA represents contradicts

what they described as EMIR’s concepts

of equivalence and mutual

recognition.

439

Japan FSA and Bank of

Japan expressed concern that the scope

of application of substituted compliance

is too narrow and requested that it be

extended to avoid overlap or conflict

with foreign regulations.

440

Other

commenters stated that the approach

being taken toward substituted

compliance was narrow and not in

accordance with comity.

441

However,

another commenter stated that

substituted compliance procedures are

an inferior option to direct compliance

with Commission regulations. This

commenter stated that the Commission

does not violate principles of

international comity by extending the

cross-border application to cover how

‘‘U.S. persons’’ operate in foreign

jurisdictions, particularly when those

jurisdictions lack the laws and/or

regulatory capacity to prevent damage to

the U.S. economy resulting from

counterparty defaults originating in

foreign affiliate swaps.

442

Another commenter stated that

substituted compliance should be

expanded to a broader category of swap

transactions, specifically, to the trade

execution requirement.

443

Some commenters urged the

Commission to clarify which law is

‘‘substituted’’ for U.S. law and allow

swap entities to determine which

jurisdictions’ laws apply where it could

be more than one.

444

Some commenters expressed concern

regarding the timing of reform in other

jurisdictions, urging the Commission to

delay substituted compliance

implementation or provide a grace

period for these jurisdictions.

445

Some commenters urged the

Commission not to allow substituted

compliance or to use it only sparingly,

pointing out the risks of substituted

compliance by the Commission. For

example, one commenter contended

that substituted compliance fails to

ensure rigorous regulation of derivatives

markets and so should not be allowed

for foreign subsidiaries of U.S. parents

as these subsidiaries pose a severe risk

to the U.S. economy.

446

This commenter

also stated that substituted compliance

should only be used in ‘‘rare

circumstances’’ and only after such

rules in foreign jurisdictions have come

into existence,

447

stating that the

Commission ‘‘cannot, through its use of

comity, consider other countries’

interests to the total derogation of

Congress’s intent to protect U.S.

taxpayers.’’

448

Citizen and taxpayer

groups contended that substituted

compliance should not be permitted

when the swap transaction is with a

U.S. counterparty,

449

including

subsidiaries of a U.S. person.

450

Commenters also urged that, to the

extent substituted compliance is

permitted, a rigorous approach be

applied, including examining the

history of enforcement in a foreign

jurisdiction, the ability to revoke

substituted compliance where

necessary, the ability of the public to

comment on substituted compliance

applications, periodic review of the

application of substituted compliance

and a requirement that the applicant

immediately inform the Commission of

any material changes in its

jurisdiction.

451

With regard to SDR Reporting, some

commenters disagreed with the

Commission that a foreign trade

repository must allow Commission

access to information to be considered

comparable, arguing that comparability

should be based solely on the foreign

jurisdiction’s regulatory regime,

452

that access is unnecessary where swaps

are between non-U.S. counterparties.

453

In contrast, another commenter stated

that open access to foreign swap data

repositories is necessary to ensure that

foreign surveillance of transaction-level

swaps data flow requirements is

comparable and comprehensive.

454

International regulators have

continued to express commitment to the

Pittsburgh G20 reforms of OTC

derivatives regulation, including a

commitment to harmonize cross-border

regulations and allow for substituted

compliance or equivalence

arrangements when appropriate.

However, no international consensus

has emerged regarding the

implementation of such reforms or the

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455

See letter to Treasury Secretary Lew regarding

cross-border OTC derivatives regulation from

Deputy Prime Minister Taro Aso, Minister of State

for Finance Services, Government of Japan;

Commissioner Michel Barnier, Commissioner for

Internal Markets and Services, European

Commission; Minister Pravin Gordhan, Minister of

Finance, Government of South Africa; Minister

Guido Mantega, Ministry of Finance, Government of

Brazil; Minister Pierre Moscovici, Ministry of

Finance, Government of France; Chancellor George

Osborne, Chancellor of the Exchequer, Government

of the United Kingdom; Minister Wolfgang

Scha

uble, Ministry of Finance, Government of

Germany; Minister Anton Siluanov, Minister of

Finance, Government of Russia; and Minister

Eveline Widmer-Schlumpf, Finance Minister,

Government of Switzerland (‘‘Nine International

Regulators’’) (Apr. 18, 2013). See also letter to

Treasury Secretary Lew from Sens. Kirsten E.

Gillibrand, Thomas R. Carper, Kay R. Hagan, Heidi

Heitkamp, Michael F. Bennet, and Charles E.

Schumer (June 26, 2013) (advocating domestic and

international harmonization of derivatives

regulation).

456

Id.

457

See letter to Nine International Regulators

from ActionAid International; AFL–CIO (American

Federation of Labor And Congress of Industrial

Organizations); Americans for Financial Reform;

Berne Declaration; Center of Concern; The Centre

for Research on Multinational Corporations

(SOMO); Centre national de coope

ration au

veloppement, CNCD–11.11.11; CGIL—Italian

General Confederation of Labour; Consumer

Federation of America; Global Progressive Forum;

IBON International; The International Institute for

Monetary Transformation; Institute for Agriculture

and Trade Policy (IATP); Institute for Policy

Studies, Global Economy Project; Jubilee Debt

Campaign, UK; Kairos Europe (Brussels);

Missionary Oblates—USP (Washington, DC);

Oxfam; Red Latinoamericana sobre Deuda,

Desarrollo y Derechos—LATINDADD; Stamp Out

Poverty; Tax Justice Network; UBUNTU Forum;

War on Want; WEED (World Economy, Ecology,

and Development); and World Development

Movement (Jul. 1, 2013).

458

Id.

459

Id.

460

Id.

461

Under Commission regulations 23.203 and

23.606, all records required by the CEA and the

Commission’s regulations to be maintained by a

registered swap dealer or MSP shall be maintained

in accordance with Commission regulation 1.31 and

shall be open for inspection by representatives of

the Commission, the United States Department of

Justice, or any applicable prudential regulator.

In the January Order, the Commission noted that

an applicant for registration as a swap dealer or

MSP must file a Form 7–R with the National

Futures Association and that Form 7–R was being

modified at that time to address existing blocking,

privacy or secrecy laws of foreign jurisdictions that

applied to the books and records of swap dealers

and MSPs acting in those jurisdictions. See 78 FR

at 871–872 n. 107. The modifications to Form 7–

R were a temporary measure intended to allow

swap dealers and MSPs to apply for registration in

a timely manner in recognition of the existence of

the blocking, privacy, and secrecy laws. The

Commission clarifies that the change to Form 7–R

impacts the registration application only and does

not modify the Commission’s authority under the

CEA and its regulations to access records held by

registered swap dealers and MSPs. Commission

access to a registrant’s books and records is a

fundamental regulatory tool necessary to properly

monitor and examine each registrant’s compliance

with the CEA and the regulations adopted pursuant

thereto. The Commission has maintained an

ongoing dialogue on a bilateral and multilateral

basis with foreign regulators and with registrants to

address books and records access issues and may

consider appropriate measures where requested to

do so.

462

The types of offices which the Commission

would consider to be a ‘‘foreign branch’’ of a U.S.

bank, and the circumstances in which a swap is

with such foreign branch, are discussed further in

section IV.C.3, supra.

circumstances under which substituted

compliance should be permitted. In an

April 18, 2013 letter to Treasury

Secretary Lew, nine international

financial regulators expressed concern

about fragmentation in the OTC

derivatives market as a result of lack of

regulatory coordination, noting that

‘‘[a]n approach in which jurisdictions

require that their own domestic

regulatory rules be applied to their

firms’ derivatives transactions taking

place in broadly equivalent regulatory

regimes abroad is not sustainable.’’

455

The letter expressed concern that such

an approach would lead the global

derivatives market to ‘‘recede into

localized and less efficient structures,

impairing the ability of business across

the globe to manage risk.’’ The letter

also suggested, among other things, that

cross-border rules be adopted that

would not result in duplicative or

conflicting requirements through

substituted compliance or equivalence

arrangements, and that a reasonable

transition period and measures be

provided to foreign entities to ensure a

smooth transition.

456

A group of 25 organizations from

numerous nations responded by

asserting that the letter to Treasury

Secretary Lew ‘‘appears to place a

higher priority on preventing

‘fragmentation’ in global financial

markets than on effective management

of global financial risks.’’

457

Emphasizing that the global financial

crisis of 2008–2009 caused ‘‘mass

unemployment, home foreclosures, and

cutbacks in key public services,’’ these

organizations argued that ‘‘[s]ince G–20

nations have not yet met their 2009

Pittsburgh commitment to put in place

effective derivatives regulation by the

close of 2012, the first priority should be

to complete this crucial element of

financial oversight.’’

458

Although these

organizations recognized the challenge

of effectively regulating the global

financial markets, they asserted that

‘‘the path to addressing these challenges

does not lie in further delays that

prevent any nation from acting until

every jurisdiction globally has agreed on

a similar approach.’’

459

Instead, these

organizations urged the international

community ‘‘to coordinate around a

shared high level of financial oversight,

and in the meantime to support the

efforts of individual nations to ensure

that the scope of their financial

regulation properly captures all

transactions, wherever conducted, that

affect the safety and stability of each

national financial system.’’

460

3. Overview of the Substituted

Compliance Regime

Once registered, a non-U.S. swap

dealer or non-U.S. MSP would become

subject to all of the substantive

requirements under Title VII of the

Dodd-Frank Act that apply to registered

swap dealers or MSPs. In other words,

the requirements under Title VII of the

Dodd-Frank Act related to swap dealers

and MSPs apply to all registered swap

dealers and MSPs, irrespective of where

they are based.

Consistent with CEA section 2(i) and

comity principles, the Commission’s

policy generally is that eligible entities

may comply with a substituted

compliance regime under certain

circumstances, subject, however, to the

Commission’s retention of its

examination authority

461

and its

enforcement authority. To the extent

that the substituted compliance regime

applies, the Commission generally

would permit a non-U.S. swap dealer or

MSP, U.S. bank that is a swap dealer or

MSP with respect to its foreign

branches,

462

or non-U.S. non-registrant

that is a guaranteed or conduit affiliate,

as applicable, to substitute compliance

with the requirements of the relevant

home jurisdiction’s law and regulations

(or in the case of foreign branches of a

bank, the foreign location of the branch)

in lieu of compliance with the attendant

Entity-Level Requirements and/or

Transaction-Level Requirements under

the CEA and Commission regulations,

provided that the Commission finds that

such home jurisdiction’s requirements

(or in the case of foreign branches of a

bank, the foreign location of the branch)

are comparable with and as

comprehensive as the corollary area(s)

of regulatory obligations encompassed

by the Entity- and Transaction-Level

Requirements. Significantly, the

Commission will rely upon an

outcomes-based approach to determine

whether these requirements achieve the

same regulatory objectives of the Dodd-

Frank Act. An outcomes-based approach

in this context means that the

Commission is likely to review the

requirements of a foreign jurisdiction for

rules that are comparable to and as

comprehensive as the requirements of

the Dodd-Frank Act, but it will not

require that the foreign jurisdiction have

identical requirements to those

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463

For example, under part 30 of the

Commission’s regulations, if the Commission

determines that compliance with the foreign

regulatory regime would offer comparable

protection to U.S. customers transacting in foreign

futures and options and there is an appropriate

information-sharing arrangement between the home

supervisor and the Commission, the Commission

has permitted foreign brokers to comply with their

home regulations (in lieu of the applicable

Commission regulations), subject to appropriate

conditions. See, e.g., Foreign Futures and Options

Transactions, 67 FR 30785 (May 8, 2002); Foreign

Futures and Options Transactions, 71 FR 6759 (Feb.

9, 2009).

Upon promulgating part 30, the Commission

stated that it ‘‘intends to monitor closely the

application of this regulatory scheme for the offer

and sale of foreign futures and foreign options in

the U.S. and to make adjustments in these rules, as

necessary, based, in part, on it experience in

administering the exemptive procedure [i.e., 30.10

relief] as well as other requests for interpretations

of the provisions herein.’’ Foreign Futures and

Foreign Options Transactions, 52 FR 28980, 28993

(Aug. 5, 1987). For example, the Commission has

expanded part 30 to allow 30.10-exempt foreign

brokers to act as introducing brokers for the purpose

of executing linked U.S. transactions on behalf of

U.S. customers under certain circumstances. The

Commission also promulgated regulation 30.12 to

allow unlicensed ‘‘local’’ brokers located outside

the United States to execute trades through the

customer omnibus account of an FCM or 30.10

exempt foreign broker, again under certain

circumstances. The Commission expects that the

substituted compliance process contemplated by

this Guidance may similarly evolve.

464

As stated in note 88, for purposes of this

Guidance, the terms ‘‘home jurisdiction’’ or ‘‘home

country’’ are used interchangeably and refer to the

jurisdiction in which the person or entity is

established, including the European Union. Further,

the Commission clarifies that where a non-U.S.

swap dealer (or non-U.S. MSP), or a non-U.S. non-

registrant that is a guaranteed or conduit affiliate,

transacts outside the home jurisdiction, substituted

compliance is available and they may comply with

the comparable and comprehensive requirements of

the home jurisdiction, provided that they comply

with such requirements in that other jurisdiction.

465

The Commission recognizes that substantial

progress has been made in other jurisdictions

towards implementing OTC derivatives reform. For

example, EMIR requires financial counterparties,

including hedge funds, to clear OTC derivatives

contracts subject to the clearing obligation through

a central counterparty registered or recognized in

accordance with EMIR. EMIR also requires such

entities to comply with EMIR’s risk mitigation

techniques for uncleared OTC derivatives contracts;

risk mitigation techniques include, confirmation,

portfolio reconciliation, compression, valuation and

dispute resolution. Lastly, EMIR requires financial

counterparties to report all derivatives contracts to

a trade repository registered or recognized in

accordance with EMIR.

466

The Commission notes that, of the 35

provisionally registered non-U.S. swap dealers as of

July 12, 2013, all but one of them are banking

entities that are subject to prudential supervision by

banking supervisors in their home jurisdictions or

affiliates of such banks. By comparison, 19 of the

provisionally registered U.S. swap dealers and

MSPs are not regulated by a prudential supervisor

or the SEC.

467

The Commission notes that such alternatives

are available for both Entity- and Transaction-Level

Requirements, but are more likely appropriate for

Entity-Level Requirements.

established under the Dodd-Frank Act.

This approach builds on the

Commission’s longstanding policy of

recognizing comparable regulatory

regimes based on international

coordination and comity principles with

respect to cross-border activities

involving futures (and options on

futures).

463

The Commission anticipates

that its approach also will require close

consultation, cooperation, and

coordination among the Commission

and relevant foreign regulators regarding

ongoing compliance efforts. To date, the

Commission notes that it has engaged in

many multilateral and bilateral

consultations and efforts to coordinate

on the substance of OTC derivatives

reform efforts.

In part, because many foreign

jurisdictions have been implementing

OTC derivatives reforms in an

incremental manner, the Commission’s

comparability determinations may be

made on a requirement-by-requirement

basis, rather than on the basis of the

foreign regime as a whole. For example,

many jurisdictions have moved more

quickly to implement reporting to trade

repositories, and so the Commission

may focus first on comparability with

those requirements. In addition, in

making its comparability

determinations, the Commission may

include conditions that take into

account timing and other issues related

to coordinating the implementation of

reform efforts across jurisdictions.

A non-U.S. swap dealer or non-U.S.

MSP, a U.S. bank that is a swap dealer

or MSP with respect to its foreign

branches, or non-U.S. non-registrant

that is a guaranteed or conduit affiliate,

to the extent applicable under this

Guidance, may comply with regulations

in its home jurisdiction (or in the case

of foreign branches of a bank, the

foreign location of the branch) to the

extent that the Commission determines

that these requirements are comparable

to, and as comprehensive as, the

corollary areas of the CEA and

Commission regulations.

464

As noted

above, however, the home jurisdiction’s

requirements do not have to be identical

to the Dodd-Frank Act requirements.

Moreover, the Commission notes,

however, that entities relying on

substituted compliance may be required

to comply with certain of the Dodd-

Frank Act requirements where

comparable and comprehensive

regulation in their home jurisdiction (or

in the case of foreign branches of a bank,

the foreign locations of the branches) are

determined to be lacking.

465

In evaluating whether a particular

category of foreign regulatory

requirement(s) is comparable and

comprehensive to the applicable

requirement(s) under the CEA and

Commission regulations, the

Commission will take into consideration

all relevant factors, including but not

limited to, the comprehensiveness of

those requirement(s), the scope and

objectives of the relevant regulatory

requirement(s), the comprehensiveness

of the foreign regulator’s supervisory

compliance program, as well as the

home jurisdiction’s authority to support

and enforce its oversight of the

registrant. In this context, comparable

does not necessarily mean identical.

Rather, the Commission would evaluate

whether the home jurisdiction’s

regulatory requirement is comparable to

and as comprehensive as the

corresponding U.S. regulatory

requirement(s).

In response to comments requesting

greater clarity with respect to the

substituted compliance determinations,

the Commission notes that a

comparability analysis would begin

with a consideration of the regulatory

objectives of a foreign jurisdiction’s

regulation of swaps and swaps market

participants. In this regard, the

Commission will first look to foreign

regulator’s swap-specific regulations.

The Commission recognizes, however,

that jurisdictions may not have swap-

specific regulations in some areas, and

instead may have regulatory or

supervisory regimes that achieve

comparable and comprehensive

regulatory objectives as the Dodd-Frank

Act requirements, but on a more

general, entity-wide, or prudential,

basis.

466

In addition, portions of a

foreign regulatory regime may have

similar regulatory objectives, but the

means by which these objectives are

achieved with respect to swaps market

activities may not be clearly defined, or

may not expressly include specific

regulatory elements that the

Commission concludes are critical to

achieving the regulatory objectives or

outcomes required under the CEA and

the Commission’s regulations. In these

circumstances, the Commission

anticipates that, as part of its broader

efforts to consult and coordinate with

foreign jurisdictions, it will work with

the regulators and registrants in these

jurisdictions to consider alternative

approaches that may result in a

determination that substituted

compliance applies.

467

The approaches used will vary

depending on the circumstances

relevant to each jurisdiction. One

example would include coordinating

with the foreign regulators in

developing appropriate regulatory

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The Commission anticipates that non-U.S.

swap dealers and MSPs may require additional time

after a Substituted Compliance Determination in

order to phase in compliance with the relevant

requirements of the jurisdiction in which the non-

US swap dealer or MSP is established. The

Commission and its staff intend to address the need

for any further transitional relief at the time that the

subject Substituted Compliance Determination is

made.

469

A finding of comparability may not be

possible for a number of reasons, including the fact

that the foreign jurisdiction has not yet

implemented or finalized particular requirements.

470

As previously noted, where the counterparty

to a swap with a foreign branch is a non-U.S. person

(whether or not such non-U.S. person is guaranteed

or otherwise supported by, or is an affiliate conduit

of, a U.S. person), the Commission continues to be

of the view that compliance with comparable and

comprehensive requirements in the foreign

jurisdiction should be permitted in light of the

supervisory interest of the foreign jurisdiction in

the swaps transacted in that jurisdiction, together

with the fact that foreign branches of U.S. swap

dealers or U.S. MSPs are subject generally to direct

or indirect oversight by U.S. regulators because they

are part of a U.S. person. As discussed further in

section IV.F.3, supra, the Commission’s recognition

of substituted compliance would be based on an

evaluation of whether the requirements of the home

jurisdiction are comparable and comprehensive to

the applicable requirement(s) under the CEA and

Commission regulations based on a consideration of

all relevant factors, including among other things:

(i) The comprehensiveness of the foreign regulator’s

supervisory compliance program and (ii) the

authority of such foreign regulator to support and

enforce its oversight of the registrant’s branch or

agency with regard to such activities to which

substituted compliance applies.

471

The Commission may, as it deems appropriate

and necessary, conduct an on-site examination of

the applicant, as well as consult with the

applicant’s home regulator regarding the status of

the applicant. For certain matters, the Commission

may request an opinion of counsel.

changes or new regulations, particularly

where changes or new regulations

already are being considered or

proposed by the foreign regulators or

legislative bodies. As another example,

the Commission may, after consultation

with the appropriate regulators and

market participants, include in its

substituted compliance determination a

description of the means by which

certain swaps market participants can

achieve substituted compliance within

the construct of the foreign regulatory

regime. The identification of the means

by which substituted compliance is

achieved would be designed to address

the regulatory objectives and outcomes

of the relevant Dodd-Frank Act

requirements in a manner that does not

conflict with a foreign regulatory regime

and reduces the likelihood of

inconsistent regulatory obligations. For

example, the Commission may specify

that swap dealers and MSPs in the

jurisdiction undertake certain

recordkeeping and documentation for

swap activities that otherwise is only

addressed by the foreign regulatory

regime with respect to financial

activities generally. In addition, the

substituted compliance determination

may include provisions for summary

compliance and risk reporting to the

Commission to allow the Commission to

monitor whether the regulatory

outcomes are being achieved. By using

these approaches, in the interest of

comity, the Commission would seek to

achieve its regulatory objectives with

respect to the Commission’s registrants

that are operating in foreign

jurisdictions in a manner that works in

harmony with the regulatory interests of

those jurisdictions.

468

4. Process for Comparability

Determinations

Any comparability analysis will be

based on a comparison of specific

foreign requirements against specific

related CEA provisions and Commission

regulations in 13 categories of regulatory

obligations and will consider the factors

described above. After receiving a

submission from an applicant, the

resulting comparability determination

would be made by the Commission with

regard to each of the 13 categories of

regulatory obligations, as appropriate.

More specifically, the Commission

could determine that a particular set of

foreign laws and regulations provides a

sufficient basis for an affirmative

finding of comparability with respect to

a relevant area of regulatory obligations.

Where no comparability determination

can be made,

469

the non-U.S. swap

dealer or non-U.S. MSP, U.S. bank that

is a swap dealer or MSP with respect to

its foreign branches, or non-registrant, to

the extent applicable under this

Guidance, may be required to comply

with the applicable Entity- or

Transactional-Level requirements under

the CEA and Commission regulations.

Anyone who is eligible for substituted

compliance may apply, either

individually or collectively, as may

foreign regulators. Persons who may

request a comparability determination

include: (i) Foreign regulators, (ii) an

individual non-U.S. entity, or group of

non-U.S. entities; (iii) a U.S. bank that

is a swap dealer or MSP with respect to

its foreign branches;

470

or (iv) a trade

association, or other group, on behalf of

similarly-situated entities. Persons

requesting a comparability

determination may want to coordinate

their application with other market

participants and their home regulators

to simplify and streamline the process.

Once a comparability determination is

made for a jurisdiction, it will apply for

all entities or transactions in that

jurisdiction to the extent provided in

the determination, as approved by the

Commission.

Generally, the Commission would

expect that the applicant, at a minimum,

state with specificity the factual and

legal basis for requesting that the

Commission find that a particular set of

foreign laws and regulations is

comparable to, and as comprehensive

as, particular Dodd-Frank Act

requirements as described above;

include with specificity all applicable

legislation, rules, and policies; and

provide an assessment whether the

objectives of the two regulatory regimes

are comparable and comprehensive.

471

If the applicant is a registered swap

dealer or MSP, it also would generally

be helpful to understand the capacity in

which the applicant is licensed with the

applicant’s regulator(s) in its home

country and whether the applicant is in

good standing.

The Commission expects that the

comparability analysis process would,

in most cases, involve consultation with

the regulators in each jurisdiction for

which a substituted compliance

application has been submitted so that

the Commission may better analyze the

compliance regime of a jurisdiction.

Consultations are particularly important

in the near future because many

jurisdictions are in the process of

finalizing and implementing their

derivatives reforms incrementally and

the Commission’s comparability

determinations may need to take into

account the timing of regulatory reforms

that have been proposed or finalized,

but not yet implemented.

Further, the Commission expects that,

in connection with a determination that

substituted compliance is appropriate, it

would enter into an appropriate MOU or

similar arrangement between the

Commission and the relevant foreign

regulator(s). Existing information-

sharing and/or enforcement

arrangements would be indicative of a

foreign supervisor’s ability to share

information and otherwise work with

the Commission. However, going

forward, the Commission and relevant

foreign supervisor(s) would need to

establish supervisory MOUs or other

arrangements that provide for

information sharing and cooperation in

the context of supervising swap dealers

and MSPs. The Commission

contemplates that such a supervisory

MOU would establish the type of

coordination activities that would

continue on an ongoing basis between

the Commission and the foreign

supervisor(s), including topics such as

procedures for confirming continuing

oversight activities, access to

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472

As previously noted, the Commission observes

that under section 4s(j)(3) and (4) of the CEA and

Commission regulation 23.606, a registered swap

dealer or MSP must make all records required to be

maintained in accordance with Commission

regulation 1.31 available to the Commission

promptly upon request to representatives of the

Commission. The Commission reserves this right to

access records held by registered swap dealers and

MSPs, including those that are non-U.S. persons

who may comply with the Dodd-Frank

recordkeeping requirement through substituted

compliance. See also 7 U.S.C. 6s(f); 17 CFR 23.203.

473

In this regard, the Commission has started

working with foreign regulators to prepare for such

arrangements.

474

Section 727 of the Dodd Frank Act added to

the CEA new section 2(a)(13)(G), which requires all

swaps, whether cleared or uncleared, to be reported

to registered SDRs. Section 21 of the CEA, added

by section 728 of the Dodd Frank Act, directs the

Commission to prescribe standards that specify the

data elements for each swap that shall be collected

and maintained by each registered SDR. Part 45 of

the Commission’s regulations establishes swap data

recordkeeping and SDR reporting requirements;

part 46 establishes similar requirements for pre-

enactment and transition swaps (collectively,

‘‘historical swaps’’).

475

As noted above, EMIR requires financial

counterparties, including hedge funds, to clear OTC

derivatives contracts subject to the clearing

obligation through a CCP registered or recognized

in accordance with EMIR.

476

Registration of Foreign Boards of Trade, 76 FR

80674, 80681–80682 (Dec. 23, 2011) (the PFMIs are

the successor standards to the Recommendations

for Central Counterparties (‘‘RCCPs’’), which were

issued jointly by the Committee on Payment and

Settlement Systems (‘‘CPSS’’) and the Technical

Committee of IOSCO).

477

Inter-Affiliate Exemption, 78 FR at 21784

(adopting 17 CFR 50.52(b)(4)(i)(E)).

information,

472

on-site visits, and

notification procedures in certain

situations.

473

The Commission expects that an

applicant would notify the Commission

of any material changes to information

submitted in support of a comparability

determination (including, but not

limited to, changes in the relevant

supervisory or regulatory regime) as the

Commission’s comparability

determination may no longer be valid.

Within four years of issuing any

Substituted Compliance Determination,

the Commission will reevaluate its

initial determination to ascertain

whether any changes should be made to

its finding and shall reissue the relevant

Commission action, conditionally or

unconditionally, as it deems

appropriate.

SDR Reporting and real-time public

reporting would generally be eligible for

substituted compliance, as outlined

above, but only if the Commission has

direct access to all of the reported swap

data elements that are stored in a foreign

trade repository. The Commission

intends that direct access would

generally include, at a minimum, real

time, direct electronic access to the data

and the absence of any legal

impediments to the Commission’s

access to the data. Due to the technical

nature of this inquiry, a comparability

evaluation for SDR Reporting and real-

time public reporting would generally

entail a detailed comparison and

technical analysis. The Commission

notes that while direct access to swap

data is a threshold matter to be

addressed in a comparability evaluation,

a more particularized analysis would

generally be necessary to determine

whether the data stored in a foreign

trade repository provides for effective

Commission use, in furtherance of the

regulatory purposes of the Dodd-Frank

Act.

Comparability determinations for SDR

Reporting and real-time public reporting

would generally take into account

whether the Commission may

effectively access and use data stored in

foreign trade repositories, both in

isolation and when compared to and

aggregated with swap data from other

foreign trade repositories, as well as

registered SDRs. At a minimum,

effective use would generally require

that the data elements stored in foreign

trade repositories are sufficient to

permit comparison and aggregation, and

that all transactions with comparable

required data elements, otherwise

required to be reported to a registered

SDR, are available in the foreign trade

repository.

5. Conflicts Arising Under Privacy and

Blocking Laws

Potential and actual conflicts between

the Commission’s regulations and the

privacy and blocking laws of some non-

U.S. jurisdictions may, in certain

circumstances, limit or prohibit the

disclosure of data that is required to be

reported under the Dodd-Frank Act and

implementing regulations.

474

For

example, the Commission’s part 45 and

part 46 swap data reporting rules

establish swap data recordkeeping and

SDR reporting requirements applicable

to reporting counterparties. Among

other requirements, these rules

prescribe certain reporting data fields

for all swaps subject to the

Commission’s jurisdiction, including

the identity of each counterparty to a

swap. The privacy laws of some non-

U.S. jurisdictions may, however, restrict

or prohibit the disclosure by a reporting

party or registrant of a non-reporting

party’s identity. In some jurisdictions,

this privacy restriction may be

overcome if the counterparty consents

to the disclosure. In others, the

restriction may take the form of a

blocking statute which acts as an

absolute prohibition to the disclosure of

information, creating a direct conflict

with the requirements of the Dodd-

Frank Act.

The Commission recognizes that,

notwithstanding the importance of swap

data to its mandate under the Dodd-

Frank Act, its regulations may be in

conflict with the blocking, privacy, and/

or secrecy laws of other jurisdictions.

The Commission is mindful of the

challenges presented by such

circumstances and continues to work on

a bilateral and multilateral basis with

foreign regulators to address these

issues. Where appropriate, the

Commission may consider reasonable

alternatives that allow the Commission

to fulfill its mandate while respecting

the regulatory interests of other

jurisdictions. In that regard, where a real

conflict of laws exists, the Commission

strongly encourages regulators and

registrants to consult directly with its

staff.

6. Clearing

a. Clearing Venues

With respect to acceptable clearing

venues, the Commission notes that

section 2(h)(1) of the CEA provides that

swaps subject to the clearing

requirement must be submitted for

clearing to a registered DCO or a DCO

that is exempt from registration under

the CEA.

475

The Commission has previously

recognized the role of foreign-based

clearing organizations, including in the

context of FBOTs. Specifically, in the

final rules pertaining to Registration of

Foreign Boards of Trade, the

Commission required that an FBOT, in

order to be registered, clear through a

clearing organization that either is

registered with the Commission as a

DCO or observes the Principles for

Financial Market Infrastructures

(‘‘PFMIs’’).

476

Other relevant

requirements in the FBOT final rules

include, among other things, that the

clearing organization be in good

regulatory standing in its home country.

In addition, in the final rules adopting

the Inter-Affiliate Exemption, the

Commission permitted eligible affiliated

counterparties that are located in certain

jurisdictions to satisfy a condition to

electing the exemption (requiring

counterparties to clear their swaps with

third-parties) by clearing the swap

through a registered DCO or a clearing

organization that is subject to

supervision by appropriate government

authorities in the clearing organization’s

home country and that has been

assessed to be in compliance with the

PFMIs.

477

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478

Specifically, section 5b(h) of the CEA provides

that ‘‘[t]he Commission may exempt, conditionally

or unconditionally, a derivatives clearing

organization from registration under this section for

the clearing of swaps if the Commission determines

that the [DCO] is subject to comparable,

comprehensive supervision and regulation by the

Securities and Exchange Commission or the

appropriate government authorities in the home

country of the organization.’’ 7 U.S.C. 7a–1(h). See

also Core Principles and Other Requirements for

Swap Execution Facilities, 78 FR 33476, 33591 (Jun.

4, 2013) (adopting 17 CFR 37.701) (‘‘Part 37 SEF

Regulations’’).

479

Id. at 33534.

480

The PFMIs were developed with significant

input and public comment from market

participants, and benefited from broad participation

of market regulators and prudential supervisors

from multiple nations. The PFMIs were approved

by both IOSCO’s Technical Committee and the

CPSS and published in April 2012.

481

The Commission recognizes that certain DCOs

registered with the Commission also may be

authorized, licensed, or recognized by a foreign

authority. The Commission continues to work on a

bilateral basis with such non-US authorities with

respect to issues of central counterparty

supervision. The Commission also participates in

multilateral discussions with its foreign

counterparts through a number of international

groups.

482

See Clearing Exemption for Swaps Between

Certain Affiliated Entities, 78 FR 21749;

Commission regulation 50.52(b)(4)(i).

483

As such term is defined in Commission

regulation 50.52(a).

484

See Clearing Requirement Determination, 77

FR 74284.

485

See End-User Exception to the Clearing

Requirement for Swaps, 77 FR 42560.

486

If the Foreign End-User is an issuer of

securities under, or required to file reports pursuant

to, the Securities Exchange Act of 1934 (‘‘SEC

Filer’’), then the Foreign End-User must obtain the

approval to enter into uncleared swaps from an

appropriate committee of the SEC Filer’s board of

directors (or governing body). See section 2(j) of the

CEA. The Commission considers a counterparty

controlled by an SEC Filer to be an SEC Filer itself

for the purposes of the end-user exception. See 77

FR 42570.

487

In these situations, the counterparties should

comply with laws of the foreign jurisdiction. See

Commission regulations 50.52(b)(4)(i)(B) and (D).

488

Foreign End-Users may look to Commission

regulation 50.50(c) in order to determine whether

a swap hedges or mitigates commercial risk.

489

This guidance is only applicable to

Commission regulation 50.52(b)(4)(i)(C); all other

persons electing the End-User Exception must

comply with the requirements of section 2(h)(7) of

the CEA and Commission regulation 50.50.

More recently, in the final rulemaking

adopting Core Principles and Other

Requirements for Swap Execution

Facilities, the Commission noted that

under section 5b(h) of the CEA it has

discretionary authority to exempt DCOs,

conditionally or unconditionally, from

the applicable DCO registration

requirements.

478

Thus, the Commission

has discretion to exempt from

registration DCOs that, at a minimum,

are subject to comparable and

comprehensive supervision by another

regulator. The Commission further

noted that it had not yet exercised its

discretionary authority to exempt DCOs

from registration. The Commission

explained that, notwithstanding that

there were no exempt DCOs at that time,

certain swaps executed on a SEF could

be cleared at an exempt DCO, if and

when the Commission determined to

exercise its authority to exempt DCOs

from applicable registration

requirements, at which time the

Commission would likely address,

among other things, the conditions and

limitations applicable to clearing swaps

for customers subject to section 4d(f) of

the CEA.

479

The conditions that may have to be

met for a clearing organization to be

eligible to qualify as an exempt DCO

could include, among other things: (i)

The Commission having entered into an

appropriate memorandum of

understanding or similar arrangement

with the relevant foreign supervisor in

the clearing organization’s home

country and (ii) the clearing

organization having been assessed to be

in compliance with the PFMIs.

480

The

use of the PFMIs, an international

standard that is substantially similar to

the requirements for registered DCOs

under part 39 of the Commission’s

regulations, would be consistent with

the Commission’s determination in the

context of FBOTs.

481

The Commission notes that its

exemptive authority under CEA section

5b(h) is entirely discretionary.

Accordingly, the Commission is not

compelled to exempt any clearing

organization from the DCO registration

requirements, even upon a finding that

a facility is ‘‘subject to comparable,

comprehensive supervision and

regulation’’ by another regulator.

b. Foreign End-Users

One of the conditions of the Inter-

Affiliate Exemption, known as the

‘‘treatment of outward-facing swaps’’

condition, generally requires the

clearing of swaps between affiliated

counterparties and their unaffiliated

counterparties.

482

Pursuant to

Commission regulation 50.52(b)(4)(i)(C),

eligible affiliate counterparties

483

can

satisfy the treatment of outward-facing

swaps condition by complying with the

requirements of an exception or

exemption under section 2(h)(7) of the

CEA or part 50 of the Commission’s

regulations. Pursuant to section 2(h)(7)

of the CEA, also known as the end-user

exception, a counterparty to a swap that

is subject to the clearing requirement

484

may elect not to clear the swap provided

that such counterparty meets the

conditions of section 2(h)(7)(A)(i)–(iii)

of the CEA and the attendant

regulations.

485

For the purposes of the Inter-Affiliate

Exemption, consistent with section 2(i),

the Commission will permit a non-U.S.

person eligible affiliate counterparty to

satisfy Commission regulation

50.52(b)(4)(i)(C) for swaps entered into

with an unaffiliated non-US person that

is not otherwise subject to the CEA

(‘‘Foreign End-User’’), under certain

circumstances. The Foreign End-User

may elect the end-user exception as if

the provisions of sections 2(h)(7)(A)(i)

and (ii) of the CEA apply to the Foreign

End-User and the Foreign End-User

elects not to clear the swap.

486

Accordingly, a Foreign End-User may

elect not to clear a swap if (1) the

Foreign End-User and non-US person

eligible affiliate counterparty are not

located in a foreign jurisdiction in

which the Commission has determined

that a comparable and comprehensive

clearing requirement exists and that the

exceptions and/or exemptions thereto

are comparable and comprehensive;

487

(2) the Foreign End-User is not a

financial entity as provided in section

2(h)(7)(A)(i) of the CEA; and (3) the

Foreign End-User enters into the swap

to hedge or mitigate commercial risk as

provided in section 2(h)(7)(A)(ii) of the

CEA.

488

In the interests of international

comity, the Commission will not require

the Foreign End-User to satisfy the

provisions of section 2(h)(7)(A)(iii) of

the CEA which require the end-user to

notify the Commission how it generally

meets its financial obligations

associated with entering into non-

cleared swaps.

489

G. Application of the Entity-Level and

Transaction-Level Requirements to

Swap Dealers and MSPs

This section sets forth the

Commission’s policy on application of

the Entity-Level and Transaction-Level

Requirements to swap dealers and

MSPs, including when swaps generally

would be eligible for substituted

compliance.

1. Comments

As noted in section E above,

commenters generally supported the

division of Dodd-Frank’s swaps

provisions (and Commission regulations

thereunder) into Entity-Level and

Transaction-Level Requirements for

purposes of this Guidance. Certain of

these commenters, however, made

specific recommendations for

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490

See section E, supra.

491

See SIFMA (Aug. 27, 2012) at A36. See also

State Street (Aug. 27, 2012) at 2; IIB (Aug. 27, 2012)

at 27–28; The Clearing House (Aug. 27, 2012) at 4,

27.

492

See Public Citizen (Aug. 27, 2012) at 13

(arguing that substituted compliance should not be

permitted when the swap involves a U.S.

counterparty and that Transaction-Level

Requirements should be required for counterparties

that are non-U.S. persons). See also IATP (Aug. 27,

2012) at 7–8 (recommending that Transaction-Level

Requirements apply to transactions between non-

U.S. swap dealers or MSPs and a U.S. person who

is not a swap dealer or MSP).

493

See IIAC (Aug. 27, 2012) at 8.

494

See, e.g., Clearing House (Aug. 27, 2012) at

22–24 (arguing that pre- and post-trade

transparency rules should not apply to interactions

with non-U.S. customers); SIFMA (Aug. 27, 2012)

at A37 (stating that real-time public reporting

requirements would be inappropriate for swaps

involving only non-U.S. counterparties).

495

See Australian Bankers (Aug. 27, 2012) at 5,

A8.

496

See SIFMA (Aug. 27, 2012) at A38.

497

See Australian Bankers (Aug. 27, 2012) at 4,

A10. See also IIAC (Aug. 27, 2012) at 8 (agreeing

that external business conduct standards should not

apply to swaps between non-U.S. swap dealers and

MSPs and non-U.S. counterparties (whether or not

guaranteed by a U.S. person)).

498

See Restatement secs. 403(2)(a)–(c), 403(2)(e).

499

See Restatement secs. 403(2)(d), 403(2)(f).

500

See Restatement sec. 403(2)(g).

reclassification of some of these

requirements.

490

In addition, some commenters

addressed perceived disparities in the

application of Transaction-Level

Requirements to U.S. swap dealers,

stating that transactions between U.S.

swap dealers and non-U.S.

counterparties should be eligible for

substituted compliance for Transaction-

Level Requirements so as to avoid

putting U.S. swap dealers at a

competitive disadvantage.

491

Other commenters supported the

Commission’s proposed application of

the Transaction-Level Requirements to

the transactions of U.S. persons with

non-U.S. persons.

492

One commenter

stated that the Transaction-Level

Requirements should apply to

transactions by registered swap dealers

and MSPs with U.S. persons.

493

Several commenters objected to the

applicability of certain Transaction-

Level Requirements to transactions

between two non-U.S. parties.

494

One

commenter stated that Transaction-

Level Requirements should never apply

to swaps between counterparties that

are both non-U.S. persons.

495

With respect to external business

conduct standards, one commenter

stated that these standards should not

apply to swaps between U.S. swap

entities and non-U.S. persons because

the Commission’s supervisory interest

in these transactions are less implicated

when the counterparty is a non-U.S.

person.

496

Other commenters also stated

that the external business conduct

standards should not apply to

transactions between two non-U.S.

persons.

497

2. Commission Guidance

The Commission has carefully

considered the comments on Entity-

Level and Transaction-Level

Requirements. With regard to U.S. swap

dealers and U.S. MSPs, the

Commission’s policy is that they

generally would be expected to comply

in full with all of the Entity-Level

Requirements and Transaction-Level

Requirements, without substituted

compliance available. The

Commission’s policy would apply

regardless of whether the counterparty

to the swap is a U.S. person or non-U.S.

person. This is consistent with the

Commission’s traditional approach to

registered FCMs, wherein a person, once

registered as an FCM, is subject to the

full panoply of regulations applicable to

such registrants, without distinctions

based on whether the counterparties are

U.S. or non-U.S. counterparties.

Further, the Commission believes that

its cross-border policy and

interpretation with respect to U.S. swap

dealers and MSPs must be informed by

the purposes of the Dodd-Frank Act. As

discussed earlier, the Dodd-Frank Act

was enacted to reduce systemic risk,

increase transparency, and promote

market integrity within the financial

system by, among other things,

providing for the comprehensive

regulation of swap dealers and MSPs. In

doing so, Congress understood the

highly integrated nature of the global

swaps business, with regard to both

individual firms and the market at large,

and that risk to U.S. firms and in turn,

U.S. financial markets may arise

anywhere in the world.

In view of the policy goals underlying

the Dodd-Frank Act swaps reforms, the

Commission’s view is that U.S. swap

dealers and MSPs should be fully

subject to the robust oversight

contemplated by the Dodd-Frank Act,

without regard to whether their

counterparty is a U.S. or non-U.S

person. These firms are conducting their

swap dealing business within the

territory of the United States. That some

of their business may be directed to

foreign clients does not diminish the

Commission’s obligation to ensure that

swaps between U.S. swap dealers and

MSPs and their counterparties are

subject to Dodd-Frank’s financial

safeguards and transparency

requirements, to the fullest extent.

Therefore, in the Commission’s view,

substituted compliance is incompatible

with the Commission’s ability to

effectively discharge its statutory

responsibilities.

For substantially the same reasons,

the Commission believes that full U.S.

regulation of U.S. swap dealers and

MSPs, even when they transact swaps

with non-U.S. counterparties, is a

reasonable exercise of U.S. jurisdiction

under the principles of foreign relations

law. Among the factors supporting this

exercise of U.S. jurisdiction are the links

between the U.S. swap dealers and

MSPs and their swap activities to U.S.

commerce, and the generally accepted

importance of regulating the activities of

these entities both to the United States

and the international financial

system.

498

In addition, having an agency

of the U.S. government serve as the

primary regulator of U.S. entities is

generally consistent with normal

expectations and with traditions of the

international system.

499

To the extent

that other countries have an interest in

regulating transactions with their

nationals, the Commission notes that

the U.S. regulatory scheme for swap

dealers and MSPs does not preclude

other countries from imposing their

regulations if they consider it necessary

for transactions affecting their

interests.

500

As discussed below, the

Commission will work with other

regulators to avoid, and resolve where

necessary, direct conflicts, as well as to

reduce unnecessary burdens. The

Commission observes that very few

conflicts between the foreign regimes

and Dodd-Frank Act requirements have

been identified as part of many

multilateral and bilateral consultations

between staff of the CFTC and their

foreign counterparts. For these

purposes, conflict means that actions

required for compliance under one

jurisdiction’s law are prohibited under

the other jurisdiction’s law, or

compliance with the regulations of both

jurisdictions is otherwise impossible.

With regard to non-U.S. swap dealers

or MSPs (including those that are

affiliates of a U.S. person), the

Commission’s policy is that these firms

should be subject to all of the Entity-

Level Requirements, but under certain

circumstances substituted compliance

should be available (except with regard

to Large Trader Reporting). The

Commission’s policy with regard to the

application of Transaction-Level

Requirements to non-U.S. swap dealers

or MSPs, and the availability of

substituted compliance, depends in part

on the type of counterparty to the swap

transaction.

The foreign branch of a U.S. bank that

is a swap dealer or MSP is expected to

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501

The types of offices the Commission would

consider to be a ‘‘foreign branch’’ of a U.S. bank,

and the circumstances in which a swap is with such

foreign branch, are discussed further in section C,

supra.

502

See 17 CFR 23.201(b)(3), (4).

503

As noted in the Proposed Guidance, the

Commission anticipates that non-U.S. swap dealers

and non-U.S. MSPs will likely have their principal

swap business in their home jurisdiction. In these

circumstances, the Commission notes that the home

regulator would have a primary relationship to the

swap dealer or MSP, which, coupled with the firm-

wide focus of the Entity-Level Requirements,

supports generally making the non-U.S. registrant

eligible for substituted compliance. Therefore,

consistent with the Proposed Guidance, the

Commission believes that it is appropriate to make

non-U.S. swap dealers and MSPs eligible for

substituted compliance with respect to Entity-Level

Requirements in the First Category where the non-

U.S. swap dealers or non-U.S. MSPs are subject to

comparable regulation in their home jurisdiction.

504

‘‘Swaps activities’’ are defined in Commission

regulation 23.600(a)(7).

comply in full with the Entity-Level

Requirements, without substituted

compliance available, because it is not

a separate legal entity.

501

In some

circumstances the Commission’s policy

is that a foreign branch of a U.S. swap

dealer or MSP would be expected to

comply in full with Category A

Transaction-Level Requirements where

its counterparty is a U.S. person.

However, as further explained below,

substituted compliance would generally

be available to a foreign branch of a U.S.

bank with regard to Category A

Transaction-Level Requirements where

the counterparty to a swap transaction

is a non-U.S. person or a foreign branch

of a U.S. bank that is a swap dealer or

MSP. In addition, the Commission’s

policy with regard to the application of

the Category B Transaction-Level

Requirements is explained below.

Below, the Commission describes its

policies regarding how Entity-Level and

Transaction-Level Requirements should

apply to both U.S. and non-U.S. swap

dealers and MSPs, and to foreign

branches of a U.S. banks that are swap

dealers and MSPs, as well as the

circumstances under which substituted

compliance would be available.

3. Application of the Entity-Level

Requirements to Swap Dealers and

MSPs

In this section, the Commission

discusses its policy regarding the

application of the Entity-Level

Requirements to swap dealers and MSPs

in cross-border transactions under its

interpretation of 2(i), as well as the

circumstances under which such swaps

would be eligible for substituted

compliance.

Section a discusses the Commission’s

view on the application of Entity-Level

Requirements to swaps with U.S. swap

dealers and U.S. MSPs, including

subsidiaries and affiliates of non-U.S.

persons, and foreign branches of U.S.

swap dealers or U.S. MSPs, under CEA

section 2(i).

Section b discusses the Commission’s

view on the application of Entity-Level

Requirements to swaps with non-U.S.

swaps dealers and MSPs, including

subsidiaries and affiliates of U.S.

persons.

The Commission’s policy on

application of the Entity-Level

Requirements to swap dealers and

MSPs, as well as substituted

compliance, is discussed below and

summarized in Appendix C to this

Guidance, which should be read in

conjunction with the rest of the

Guidance.

a. To U.S. Swap Dealers and MSPs

As explained above, U.S. swap

dealers and U.S. MSPs generally would

be expected to comply in full with all

of the Entity-Level Requirements,

without substituted compliance

available. The Commission’s policy

generally would apply regardless of

whether the counterparty to the swap is

a U.S. person or non-U.S. person.

Because under this Guidance the term

‘‘U.S. person’’ includes corporations,

partnerships, limited liability

companies, and other legal entities (as

discussed above), the foregoing

interpretation also applies to affiliates of

non-U.S. persons that are U.S. swap

dealers or U.S. MSPs. It also applies to

U.S. banks that are swap dealers or

MSPs when the swap is with their

foreign branch. In this case, because a

foreign branch of a U.S. bank is an

integral part of the U.S. principal entity

and has no separate legal existence, and

the U.S. principal bank is the entity that

registers as a swap dealer or MSP, under

the Commission’s interpretation of CEA

section 2(i), the U.S. bank (principal

entity) would be the party ultimately

responsible for compliance with the

Entity-Level Requirements for the entire

legal entity.

b. To Non-U.S. Swap Dealers and MSPs

Consistent with CEA section 2(i), the

Commission would expect non-U.S.

swap dealers and non-U.S. MSPs to

comply with all of the Entity-Level

Requirements. This policy also applies

to foreign affiliates of a U.S. person that

are independently required to register as

swap dealers or MSPs and to comply

with applicable Dodd-Frank Act

requirements.

However, in considering whether

substituted compliance is available to a

non-U.S. swap dealer or MSP with

respect to particular Entity-Level

Requirements, the Commission would

consider it relevant whether the Entity-

Level Requirement is classified in the

First Category or Second Category (and

with respect to the Second Category,

whether the counterparty is a U.S.

person).

The Commission recognizes that non-

U.S swap dealers or MSPs are likely to

have their principal swap business in

their home jurisdiction, and in

consideration of international comity

principles, is interpreting CEA section

2(i) such that such non-U.S swap

dealers or MSPs generally would be

eligible for substituted compliance with

regard to Entity-Level Requirements in

the First Category (i.e., capital adequacy,

chief compliance officer, risk

management, and swap data

recordkeeping, except certain aspects of

swap data recordkeeping relating to

complaints and marketing and sales

materials

502

503

With respect to Entity-Level

Requirements in the First Category, as

noted by commenters on the Proposed

Guidance, an affiliate of a U.S. swap

dealer that is guaranteed by such U.S.

swap dealer (or guaranteed by a U.S.-

based parent or other affiliate of such

swap dealer) may under certain

circumstances be required to register as

a swap dealer based on its swap dealing

activity solely with non-U.S. persons,

including those non-U.S. persons that

are neither guaranteed affiliates or

affiliate conduits of U.S. persons.

Commenters have represented that some

corporate groups may be required to

affiliates as swap dealers, even though

such affiliates provide swap dealing

services only to non-U.S. markets, and

that many of such guaranteed affiliates

exist only because the law of the local

jurisdiction requires that a subsidiary be

incorporated in the jurisdiction in order

to enter into swaps with counterparties

located in such jurisdiction. The

Commission recognizes that certain

structural conditions required to comply

with the regulatory obligations of swap

dealers may be burdensome for a

corporate group with many of these

guaranteed affiliates due to the

requirement that such obligations be

complied with at the individual entity

level (e.g., Commission regulations

§§ 3.3 (Chief compliance officer), 23.600

(Risk Management Program for swap

dealers and major swap participants),

23.601 (Monitoring of position limits),

23.602 (Diligent supervision), 23.603

(Business continuity and disaster

recovery), and 23.606 (General

information: Availability for disclosure

and inspection)).

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504

‘‘Swaps activities’’ are defined in Commission

regulation 23.600(a)(7).

505

See 17 CFR 23.201(b)(3), (4).

506

See id.

507

As the Commission noted in the Proposed

Guidance, data reported to SDRs is critical to ensure

that the Commission has a comprehensive and

accurate picture of swap dealers and MSPs that are

its registrants, including the gross and net

counterparty exposures of swaps of all swap dealers

and MSPs, to the greatest extent possible. Therefore,

the Commission’s view is that non-U.S. swap

dealers and non-U.S. MSPs generally should be

expected to report all of their swaps to a registered

SDR. At the same time, the Commission recognized

the interests of foreign jurisdictions with respect to

swaps between a non-U.S. swap dealer or non-U.S.

MSP with a non-U.S. counterparty. Therefore, the

Commission would interpret section 2(i) so that

swaps between non-U.S. swap dealers or MSPs with

non-U.S. counterparties generally are eligible for

substituted compliance with regard to SDR

Reporting, but only if the Commission has direct

access to all of the reported swap data elements that

are stored at a foreign trade repository.

508

In the Proposed Guidance, the Commission

included all of the swap data recordkeeping

requirements of regulations 23.201 and 23.203 in

the proposed first subcategory of Entity-Level

Requirements. 77 FR at 41225. In this Guidance,

swap data recordkeeping related to complaints and

marketing and sales materials under regulations

23.201(b)(3) and 23.201(b)(4), respectively, are

being moved from the First Category to the Second

Category because the Commission does not believe

that substituted compliance generally should be

available for requirements relating to complaints

and marketing and sales materials where the

counterparty is a U.S. person. This policy pertains

equally to swaps with foreign affiliates of a U.S.

person that are required to independently register

as swap dealers and to comply with applicable

Entity-Level Requirements.

Specifically, the Commission notes

that Commission regulations §§ 3.3

(Chief compliance officer), 23.600 (Risk

Management Program for swap dealers

and major swap participants), 23.601

(Monitoring of position limits), 23.602

(Diligent supervision), 23.603 (Business

continuity and disaster recovery), and

23.606 (General information:

Availability for disclosure and

inspection) mandate that each swap

dealer in a corporate group under

common control individually establish

policies, procedures, governance

structures, reporting lines, operational

units, and systems specified in the

rules. Thus, the Commission would

consider relief, subject to appropriate

conditions and restrictions to be

determined, that would permit

guaranteed affiliates in a corporate

group under common control that do

not enter into swaps with U.S. persons

to comply with such regulations by

establishing consolidated policies,

procedures, governance structures,

reporting lines, operational units, and

systems, thereby increasing operational

efficiencies and lessening the economic

burden on these groups with respect to

their guaranteed affiliates that do not

directly face U.S. persons when

engaging in swaps activities.

504

The

Commission notes, however, that any

such relief would require a consolidated

program to manage the risks of the

included guaranteed affiliates on an

individual, rather than a net, basis.

The Commission encourages

interested parties to contact the Director

of the Division of Swap Dealer and

Intermediary Oversight to discuss the

necessary conditions and restrictions of

appropriate relief.

The Commission clarifies that, in the

interest of international comity and for

the purpose of permitting efficiencies in

compliance programs, it would remain

open to considering (or directing its staff

to consider) relief, subject to appropriate

conditions and restrictions to be

determined, that would permit

guaranteed affiliates in a corporate

group under common control (that do

not enter into swaps with U.S. persons

or U.S. guaranteed affiliates or affiliate

conduits of U.S. persons) to comply

with certain of such regulations on a

consolidated or group basis. The

Commission notes, however, that any

such relief would require a consolidated

program to manage the risks of the

included guaranteed affiliates on an

individual, rather than a net, basis.

With respect to one of the Entity-

Level Requirements in the Second

Category, SDR Reporting (i.e., SDR

Reporting and swap data recordkeeping

related to complaints and marketing and

sales materials),

505

the Commission

interprets CEA section 2(i) such that

swap dealers or MSPs that are not U.S.

persons generally would be eligible for

substituted compliance only with

respect to swaps where the counterparty

is a non-U.S. person that is not a

guaranteed or conduit affiliate.

With respect to the other Entity-Level

Requirement in the Second Category

(i.e., swap data recordkeeping related to

complaints and marketing and sales

materials),

506

the Commission interprets

CEA section 2(i) such that swap dealers

or MSPs that are not U.S. persons

generally would be eligible for

substituted compliance only with

respect to swaps where the counterparty

is a non-U.S. person. However, as

explained below, with respect to Large

Trader Reporting, the Commission’s

policy would not recognize substituted

compliance in place of compliance with

Large Trader Reporting.

Specifically, with respect to SDR

Reporting, the Commission interprets

CEA section 2(i) such that substituted

compliance may be available to non-

U.S. swap dealers and non-U.S. MSPs

(whether or not such swap dealers or

MSPs are affiliates of or are guaranteed

by U.S. persons) for swaps with non-

U.S. counterparties, provided that the

Commission has direct access

(including electronic access) to the

relevant swap data that is stored at the

foreign trade repository. The

Commission believes that this ensures

that the Commission will have access to

information that is critical to its

oversight of these entities even where

substituted compliance with regard to

SDR Reporting would be applicable

under this Guidance.

507

However, the

Commission interprets section 2(i) as

applied to these requirements such that

substituted compliance generally would

not be available for non-U.S. swap

dealers and non-U.S. MSPs (whether or

not such swap dealers or MSPs are

guaranteed by U.S. persons) with

respect to swaps with U.S.

counterparties. The Commission

believes that in general, application of

these requirements, without eligibility

for substituted compliance, is

appropriate given its strong supervisory

interest in a swap between a registered

swap dealer or MSP and a U.S.

counterparty.

However, with regard to the SDR

reporting requirements, for the future,

the Commission has agreed to continue

to work collaboratively and to consider

any unforeseen implementation effects

that might arise in the application of our

respective rules. The Commission will

continue discussions with other

international partners with a view to

establishing a more generalized system

that would allow, on the basis of these

countries’ implementation of the G–20

commitments, an extension of the

treatment the EU and the CFTC will

grant to each other.

With regard to certain aspects of swap

data recordkeeping that relate to

complaints and marketing and sales

materials, the Commission interprets

CEA section 2(i) such that non-U.S.

swap dealers or non-U.S. MSPs

generally would be eligible for

substituted compliance with respect to

swaps with non-U.S. counterparties.

508

To the extent that swap data reported

to a foreign trade repository would

include data regarding the physical

commodity swaps covered by Large

Trader Reporting, the Commission—

even if provided with direct access to

such data—would still likely be

required to convert it to ‘‘futures

equivalent’’ positional data in order to

render it comparable to the data

obtained through Large Trader

Reporting, which contemplates

conversion by the entity required to

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509

Large Trader Reporting provides the

Commission with data regarding large positions in

swaps that are linked, directly or indirectly, to a

discrete list of U.S.-listed physical commodity

futures contracts, in order to enable the

Commission to implement and conduct effective

surveillance of these economically equivalent

swaps and futures. To facilitate surveillance efforts

and the monitoring of trading across the swaps and

futures markets, swaps positions must be converted

to equivalent positions of the related U.S. futures

contract (‘‘futures equivalents’’) for reporting

purposes; reportable thresholds are also defined in

terms of ‘‘futures equivalents.’’

510

Some of the Transaction-Level and Entity-

Level Requirements also are applicable to market

participants that are not swap dealers or MSPs,

which are referred to herein as non-registrants. See

section H, infra, for a discussion of the

Commission’s interpretation of how these

requirements would apply to non-registrants under

CEA section 2(i).

511

The categorization of Transaction-Level

Requirements into Categories A and B is discussed

in section E, supra. See Appendix B for a

descriptive list of the Category A and Category B

requirements and Appendix D for a table

summarizing the application of the Category A

Transaction-Level Requirements to Swap Dealers

and MSPs.

512

See the Proposed Guidance, 77 FR 1218.

513

Consistent with the foregoing rationale, the

Commission takes the view that a U.S. branch of a

non-U.S. swap dealer or MSP would be subject to

Transaction-Level requirements, without

substituted compliance available. As discussed

above, a branch does not have a separate legal

identity apart from its principal entity. Therefore,

the Commission considers a U.S. branch of a non-

U.S. swap dealer or non-U.S. MSP to be a non-U.S.

person (just as the Commission considers a foreign

branch of a U.S. person to be a U.S. person).

Nevertheless, the Commission also recognizes its

strong supervisory interest in regulating the dealing

activities that occur with the United States,

irrespective of the counterparty (just as the

Commission allows for substituted compliance for

foreign branches in certain instances to take into

account the strong supervisory interest of local

regulators).

report data to the Commission.

509

Given

that Large Trader Reporting is intended

to enable the Commission, in a prompt

and efficient manner, to identify

significant traders in the covered

physical commodity swaps and to

collect data on their trading activity in

order to reconstruct market events, the

time and resources expended by the

Commission in conversion could

significantly impede its market

surveillance efforts.

The Commission notes further that its

interpretation of CEA section 2(i) to

permit substituted compliance with

comparable and comprehensive regimes

in certain circumstances recognizes the

interests of foreign jurisdictions with

respect to swaps between non-U.S.

persons. Large Trader Reporting,

however, reflects a very specific interest

of the Commission in conducting

effective surveillance of markets in

swaps that have been determined to be

economically equivalent to certain U.S.-

listed physical commodity futures

contracts. In light of this specific

Commission interest—which is reflected

in the particularized scope and

methodology of Large Trader

Reporting—and in light of the

anticipated impediments to obtaining

directly comparable positional data

through any foreign swap data reporting

regime, the Commission’s policy would

not recognize substituted compliance in

place of compliance with Large Trader

Reporting.

4. Application of the ‘‘Category A’’

Transaction-Level Requirements to

Swap Dealers and MSPs

This section discusses the

Commission’s guidance on the

application of the Category A

Transaction Level Requirements to the

parties to a swap where one of the

parties is a registered swap dealer or

MSP,

510

including when substituted

compliance may be available to various

types of counterparties.

As noted above, the Category A

Transaction Level Requirements

include: (1) Required clearing and swap

processing; (2) margining and

segregation requirements for uncleared

swaps; (3) trade execution; (4); swap

trading relationship documentation; (5)

portfolio reconciliation and

compression; (6) real-time public

reporting; (7) trade confirmation; and (8)

daily trading records.

511

The Commission’s policy on

application of the Category A

Transaction-Level Requirements is

summarized in Appendix D to this

Guidance, which should be read in

conjunction with the rest of the

Guidance.

a. Swaps With U.S. Swap Dealers and

MSPs

As explained above, where one of the

counterparties to a swap is a U.S. swap

dealer or U.S. MSP, under the

Commission’s interpretation of CEA

section 2(i), the Commission would

generally expect the parties to the swap

to comply with Category A Transaction-

Level Requirements with respect to the

transaction, without regard to whether

the other counterparty to the swap is a

U.S. person or a non-U.S. person.

Because the Commission interprets

section 2(i) so that the term ‘‘U.S.

person’’ would include any legal entity

organized or incorporated under the

laws of the United States or having its

principal place of business in the

United States, this interpretation also

would apply where one of the parties to

the swap is a U.S. swap dealer or U.S.

MSP that is an affiliate of a non-U.S.

person.

512

In addition, because the

Commission considers a foreign branch

of a U.S. person to be a part of the U.S.

person, the foregoing interpretation also

applies to swaps with foreign branches

of a U.S. bank that is a swap dealer or

MSP (although in some circumstances

substituted compliance may be available

as explained below).

Further, as explained above, with

regard to substituted compliance, where

one of the counterparties to a swap is a

U.S. swap dealer or U.S. MSP (including

those that are affiliates of a non-U.S.

person), other than a foreign branch of

a U.S. bank that is a swap dealer or

MSP, the Commission’s policy is that

substituted compliance generally would

not be available for the Category A

Transaction-Level Requirements,

without regard to whether the other

counterparty is a U.S. person or a non-

U.S. person. The Commission has a

strong supervisory interest in ensuring

that the Category A Transaction-Level

Requirements apply to swaps with a

U.S. swap dealer or MSP.

513

Similarly, under the Commission’s

interpretation of 2(i), where a swap is

between a foreign branch of a U.S. bank

that is a swap dealer or MSP, on the one

hand, and a U.S. person on the other,

the Commission’s policy is that

substituted compliance generally would

not be available with respect to the

Category A Transaction-Level

Requirements. In this case, the

Commission also has a strong

supervisory interest in ensuring that the

Category A Transaction-Level

Requirements fully apply to the

transaction because it views the swap

transaction as being between two U.S.

persons. The Commission believes that

this approach is appropriate in light of

the Commission’s strong supervisory

interests in entities that are part or an

extension of a U.S. swap dealer or U.S.

MSP.

However, where a swap is between

two foreign branches of U.S. banks that

are both swap dealers or MSPs, the

Commission believes that the interests

of foreign regulators in applying their

transaction-level requirements to a swap

taking place in their jurisdiction,

together with the fact that foreign

branches of U.S. swap dealers or U.S.

MSPs are subject generally to direct or

indirect oversight by U.S. regulators,

weigh in favor of allowing substituted

compliance with comparable and

comprehensive foreign regulatory

requirements (to the extent applicable).

In addition, where a swap is between

the foreign branch of a U.S. bank that is

a swap dealer or MSP, on the one hand,

and a non-U.S. person on the other

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514

Market participants or regulators in all of these

jurisdictions have submitted requests for

Substituted Compliance Determinations.

515

Under the Commission’s futures regulatory

regime, any person located outside the U.S. that

seeks to serve as an intermediary to U.S. persons

trading on a U.S. designated contract market or in

foreign futures and option contracts is required to

with related regulations, absent the availability of

an exemption from registration (e.g., relief pursuant

to Commission regulation 30.10 in the foreign

futures and option context).’’ See, e.g., Commission

regulation 30.4.

516

However, non-U.S. swap dealers and MSPs

must satisfy the daily trading record requirement

found in Commission regulation 23.202(a)(1).

517

Pursuant to Commission regulations 37.702

and 38.601, each SEF and DCM must coordinate

with each DCO to which it submits transactions for

clearing in the development of rules and procedures

to facilitate prompt and efficient transaction

processing to meet the requirements of Commission

regulation 39.12(b)(7). Commission regulation

39.12(b)(7)(ii) requires a DCO to accept or reject

swaps executed on a SEF or DCM for clearing ‘‘as

quickly after execution as would be technologically

practicable if fully automated systems were used.’’

See also 17 CFR 23.506(a); 39.12(b)(7)(iii); Final

Customer Documentation Rules, 77 FR at 21306–

21310. As stated in the Final Customer

Documentation Rules, these rules, taken as a whole,

‘‘require SEFs, DCMs, swap dealers, MSPs, and

DCOs to coordinate in order to facilitate real time

acceptance or rejection of trades for clearing.’’ Id.

at 21296.

518

CEA section 2(h)(8)(A) provides that

transactions in swaps subject to the trade execution

mandate must be executed on a registered DCM or

SEF, or a SEF that has been exempted from

registration. The Commission clarifies that the

trading mandate under CEA section 2(h)(8)(A) is

satisfied by trading on a registered DCM or SEF or

a SEF that has been exempted from registration.

519

Parties that execute a swap transaction on a

DCM or SEF meet their real-time public reporting

obligations by operation of a set of Commission

regulations that essentially delegate the obligations

to the DCM or SEF on which the transaction was

executed, and the SDR to which the DCM or SEF

reports the transaction. Specifically, Commission

regulation 43.3(a)(2) provides that a party to a

publicly reportable swap transaction satisfies its

real-time reporting obligations by executing a

publicly reportable swap transaction on or pursuant

to the rules of a registered SEF or DCM. In turn,

Commission regulation 43.3(b)(1) requires a SEF or

DCM to transmit swap transaction and pricing data

to a registered SDR, as soon as technically

practicable after the publicly reportable swap

transaction has been executed on or pursuant to the

rules of such trading platform or facility. Finally,

Commission regulation 43.3(b)(2) requires a

registered SDR to ensure that swap transaction and

pricing data is publicly disseminated, as soon as

technologically practicable after such data is

received from a registered SEF or DCM.

520

See Commission regulation 23.501(a)(4)(i)

(‘‘Any swap transaction executed on a swap

execution facility or designated contract market

shall be deemed to satisfy the requirements of this

section, provided that the rules of the swap

execution facility or designated contract market

establish that confirmation of all terms of the

transactions shall take place at the same time as

execution’’); 37.6(b); Part 37 SEF Regulations, 78 FR

at 33585 (‘‘A swap execution facility shall provide

Continued

(regardless of whether the non-U.S.

person is a guaranteed or conduit

affiliate), as a policy matter, the

Commission believes that substituted

compliance should be available (if

otherwise applicable). In this case, even

though the Commission considers the

foreign branch of a U.S. person to be a

U.S. person, the Commission believes

that the interests of foreign regulators in

applying their transaction-level

requirements to a swap taking place in

their jurisdiction, together with the fact

that foreign branches of U.S. swap

dealers or U.S. MSPs are subject

generally to direct or indirect oversight

by U.S. regulators because they are part

of a U.S. person, may weigh in favor of

allowing substituted compliance with

comparable and comprehensive foreign

regulatory requirements (to the extent

applicable) where the counterparty to

the foreign branch is a non-U.S. person.

In a modification to the Proposed

Guidance, where a swap between the

foreign branch of a U.S. swap dealer or

U.S. MSP and a non-U.S. person (that is

not a guaranteed or conduit affiliate)

takes place in a foreign jurisdiction

other than Australia, Canada, the

European Union, Hong Kong, Japan, or

Switzerland,

514

the Commission’s

policy is to interpret CEA section 2(i) so

that counterparties may comply with

the transaction-level requirements

applicable to entities domiciled or doing

business in the foreign jurisdiction

where the foreign branch is located,

rather than the Transaction-Level

Requirements that would otherwise be

applicable, if two elements are present.

First, the aggregate notional value

(expressed in U.S. dollars and measured

on a quarterly basis) of the swaps of all

U.S. swap dealer’s foreign branches in

foreign jurisdictions other than

Australia, Canada, the European Union,

Hong Kong, Japan, or Switzerland does

not exceed five percent of the aggregate

notional value (expressed in U.S. dollars

and measured on a quarterly basis) of all

of the swaps of the U.S. swap dealer.

Second, the U.S. person maintains

records with supporting information to

verify that the first element is present,

as well as to identify, define, and

address any significant risk that may

arise from the non-application of the

Transaction-Level Requirements. The

Commission believes this policy is

appropriate because U.S. swap dealers’

dealing activities through branches or

agencies in jurisdictions other than the

six jurisdictions referenced above,

though not significant in many cases,

may be nevertheless an integral element

of their global business. The

Commission notes that this exception is

not available in the six jurisdictions

referenced above because the

Commission has received, or expects to

receive in the near term, a request for

substituted compliance determinations

for transactions in these jurisdictions.

Although the foreign branch of a U.S.

registrant would not register separately

as a swap dealer or MSP, the

Commission interprets 2(i) in a manner

that would permit the U.S. registrant to

task its foreign branch to fulfill its

regulatory obligations with respect to

the Category A Transaction-Level

Requirements. The Commission would

generally consider compliance by the

foreign branch to constitute compliance

with these Transaction-Level

Requirements. However, under the

Commission’s interpretation of 2(i), the

U.S. person (principal entity) would

remain responsible for compliance with

the Category A Transaction-Level

Requirements.

b. Swaps With Non-U.S. Swap Dealers

and Non-U.S. MSPs

Under the Commission’s

interpretation of CEA section 2(i), where

a swap is between a non-U.S. swap

dealer or non-U.S. MSP (including an

affiliate of a U.S. person), on the one

hand, and a U.S. person (other than a

foreign branch of a U.S. swap dealer or

MSP), on the other, the Commission

would generally expect the parties to

comply with Category A Transaction-

Level Requirements with respect to the

transaction.

515

The Commission notes, however, that

where a swap is executed anonymously

between any non-U.S. person, whether

a swap dealer or an MSP, and a U.S.

person (other than a foreign branch of a

U.S. swap dealer or MSP) on a

registered DCM or SEF and cleared, the

non-U.S. person will generally be

considered to have satisfied each of the

eight Category A Transaction-Level

Requirements that apply to such a swap

transaction as a consequence of being so

executed on a DCM or SEF. Thus,

neither the non-U.S. person (nor its U.S.

person counterparty) will need to take

any further steps to comply with the

Category A Transaction-Level

Requirements in connection with such a

transaction.

516

In making this determination, the

Commission observes that where a

cleared swap transaction is executed

anonymously on a registered DCM or

SEF, certain independent requirements

that apply to DCM and SEF transactions

generally, pursuant to the CEA or the

Commission’s regulations, will ensure

that four of the eight Category A

Transaction-Level Requirements will be

met for such transactions—required

clearing and swap processing,

517

trade

execution,

518

real-time public

reporting,

519

and trade confirmation.

520

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each counterparty to a transaction that is entered on

or pursuant to the rules of the swap execution

facility with a written record of all of the terms of

the transaction which shall legally supersede any

previous agreement and serve as confirmation of the

transaction. The confirmation of all terms shall take

place at the same time as execution . . . ’’).

521

See 17 CFR 23.504(a)(1) (‘‘The requirements of

this section [swap trading relationship

documentation] shall not apply to . . . swaps

executed on a board of trade designated as a

contract market under section 5 of the Act or to

swaps executed anonymously on a swap execution

facility under section 5h of the Act, provided that

such swaps are cleared by a derivatives clearing

organization . . .’’); 23.502(d) (‘‘Nothing in this

section [portfolio reconciliation] shall apply to a

swap that is cleared by a derivatives clearing

organization’’); 23.503(c) (‘‘Nothing in this section

[portfolio compression] shall apply to a swap that

is cleared by a derivatives clearing organization.’’).

522

See 17 CFR 23.202.

523

The Commission is of the view that CEA

section 2(i) should not be interpreted to apply the

daily trading records requirements, with the

exception of those found in Commission regulation

23.202(a)(1).

524

However, a non-U.S. swap dealer or non-U.S.

MSP must satisfy the daily trading record

requirement found in Commission regulation

23.202(a)(1).

525

As discussed above, pursuant to Commission

regulation 48.7(c)(1)(ii), all contracts, including

swaps, made available in the U.S. by a registered

FBOT must be cleared. The clearing organization

must be either a DCO or must observe international

clearing standards: The RCCP or the successor

standards, PFMI.

526

See discussion of clearing at section IV.F.6,

supra. The Commission clarifies that the trading

mandate under CEA section 2(h)(8)(A) is satisfied

by trading on a registered FBOT.

527

Pursuant to Commission regulation 48.8(a)(9),

the registered FBOT must ensure that all transaction

data relating to each swap transaction, including

price and volume, are reported as soon as

technologically practicable after execution of the

swap transaction to a SDR that is either registered

with the Commission or has an information sharing

arrangement with the Commission. While

Commission regulation 43(b)(2) requires that an

SDR ensure that swap transaction and pricing data

is publicly disseminated as soon as technologically

practicable after such data is received from a

registered SEF, DCM or reporting party, it does not

specifically require public dissemination of swap

transaction and pricing data from the FBOT.

Therefore, in order for the FBOT to ensure that the

real-time public reporting requirement is satisfied,

the FBOT must either report the data to the public

itself or enter into an arrangement with the SDR to

which the data are reported pursuant to which the

SDR agrees to publicly disseminate the data as soon

as technologically practicable.

528

The Commission is of the view that CEA

section 2(i) should not be interpreted to apply the

daily trading records requirements, with the

exception of those found in Commission regulation

23.202(a)(1).

529

Where one of the parties to the swap is a

conduit affiliate, the Commission would generally

expect the parties to the swap only to comply with

(to the extent that the Inter-Affiliate Exemption is

elected), the conditions of the Inter-Affiliate

Exemption, including the treatment of outward-

facing swaps condition in Commission regulation

50.52(b)(4)(i). In addition, the part 43 real-time

reporting requirements must be satisfied.

For a combination of reasons, the

Commission also believes that the four

remaining Transaction-Level

Requirements do not, or should not,

apply to cleared, anonymous DCM or

SEF transactions. So, for instance, the

fact that the DCM or SEF swap

transaction will be cleared, obviates the

need for margining or segregation

requirements applicable to uncleared

swaps. Two other Category A

Transaction-Level Requirements—swap

trading relationship documentation and

portfolio reconciliation and

compression—would not apply because

the Commission regulations that

establish those requirements make clear

that they do not apply to cleared DCM

or SEF transaction.

521

The last

requirement—the daily trading records

requirement

522

—would only be

applicable to the non-U.S. swap dealer

and only with regard to pre-trade

execution swaps. However, because the

non-U.S. swap dealer will have no

information about its counterparty

where the swap is executed

anonymously, the Commission is of the

view that, as a matter of international

comity, CEA section 2(i) should not be

interpreted to apply all of the daily

trading records requirements to such a

swap.

523

In addition, the Commission is

interpreting CEA section 2(i) such that,

where a swap between a non-U.S.

person, regardless of its swap dealer or

MSP status, and a U.S. person is

executed anonymously on an FBOT

registered with the Commission

pursuant to part 48 and cleared the non-

U.S. person will generally be considered

to have satisfied the Category A

Transaction-Level Requirements that

pertain to such a swap transaction.

Some of the requirements will be

satisfied by requirements levied by

regulation on the FBOT and some will

be satisfied because a registered FBOT

is analogous to a DCM and is subject to

comprehensive supervision and

regulation in its home country that is

comparable to that exercised over a

DCM by the Commission. Thus, neither

the non-U.S. person (nor its U.S. person

counterparty) will need to take any

further steps to satisfy the applicable

Category A Transaction-Level

Requirements in connection with such a

transaction.

524

In making this determination, the

Commission observes that where a

cleared swap transaction is executed

anonymously on a registered FBOT, the

FBOT, similar to a DCM, based on

certain independent requirements that

apply to DCM transactions generally

pursuant to the CEA or the

Commission’s regulations, will ensure

that two of the eight Category A

Transaction-Level Requirements will be

satisfied for such transactions: Required

clearing and swap processing

525

and

trade execution.

526

The Commission

notes that while the real-time reporting

requirement will be satisfied for cleared

swaps executed anonymously on a DCM

by operation of the Commission’s real-

time reporting regulations, absent

further affirmative actions by an FBOT,

the real-time public reporting

requirements will not be satisfied

through FBOT execution alone.

527

For a combination of reasons,

including the fact that the swap will be

cleared, the Commission also is of the

view that the remaining Transaction-

Level Requirements do not apply to

such transactions executed on a

registered FBOT. For instance, the fact

that the swap will be cleared, as

required by regulation 48.7(c)(1)(ii),

renders inapplicable the margining or

segregation requirements for uncleared

swaps. As the Commission observed

above with respect to swaps executed

anonymously on DCMs, certain of the

other Category A Transaction-Level

Requirements would not apply to the

swap. Consistent with this

determination, three of the other

Category A Transaction-Level

Requirements—swap trading

relationship documentation, portfolio

reconciliation and compression and

trade confirmation—would not apply to

the swap executed on a registered FBOT

because the underlying Commission

regulations themselves do not apply

those requirements to cleared DCM or

SEF transactions. The last

requirement—the daily trading records

requirement—would only be applicable

to the non-U.S. swap dealer and only

with regard to pre-trade execution

swaps. However, because the non-U.S.

swap dealer will have no information

about its counterparty where the swap

is executed anonymously on a registered

FBOT, the Commission is of the view

that, as a matter of international comity,

CEA section 2(i) should be interpreted

such that certain of the daily trading

records requirements also would not

apply to the swap.

528

In addition, for the reasons discussed

in the next two sections, where a swap

is between a non-U.S. swap dealer or

non-U.S. MSP, on the one hand, and a

non-U.S. person that is a guaranteed or

conduit affiliate, on the other, under the

Commission’s interpretation of 2(i), the

Commission would generally expect the

parties to comply with the Category A

Transaction-Level Requirements.

529

However, where a swap is between a

non-U.S. swap dealer or non-U.S. MSP

(including an affiliate of a U.S. person),

on the one hand, and a non-U.S. person

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530

Thus, for example, a swap between a

registered non-U.S. swap dealer and a German

person would not be subject to Category A

Transaction-Level Requirements.

531

Where the counterparty to a non-U.S. swap

dealer or non-U.S. MSP is an international financial

institution such as the World Bank, the Commission

also generally would not expect the parties to the

swap to comply with the Category A Transaction-

Level Requirements, even if the principal place of

business of the international financial institution

were located in the United States.

For this purpose, the Commission would consider

the international financial institutions to be the

institutions listed as such in the Final Entities

Rules, 77 FR at 30692 n. 1180, which include the

International Monetary Fund, International Bank for

Reconstruction and Development, International

Development Association, International Finance

Corporation, Multilateral Investment Guarantee

Agency, the Inter-American Development Bank, and

the Inter-American Investment Corporation. Even

though some or all of these international financial

institutions may have their principal place of

business in the United States, the Commission

would generally not consider the application of the

Category A Transaction-Level Requirements to be

warranted, for the reasons of the traditions of the

international system discussed in the Final Entities

Rules.

532

See Restatement secs. 403(2)(a) (effect on

territory of regulating state), 403(2)(c) (importance

of regulated activity to the regulating state); 403

cmt. b (weight to be given to reasonableness factors

depends on circumstances).

533

See No-Action Relief for Registered Swap

Dealers and Major Swap Participants from Certain

Requirements under Subpart I of Part 23 of

Commission Regulations in Connection with

Uncleared Swaps Subject to Risk Mitigation

Techniques under EMIR, CFTC Letter No. 13–45

(Jul. 11, 2013) (‘‘Risk Mitigation Letter’’).

534

The Risk Mitigation Letter provides an

example of when requirements in a foreign

jurisdiction would be essentially identical to Dodd-

Frank requirements. See id.

535

See Proposed Guidance, 77 FR 41288.

that is not a guaranteed or conduit

affiliate, on the other, under the

Commission’s interpretation of 2(i), the

Commission would not expect the

parties to the swap to comply with the

Category A Transaction-Level

Requirements.

530

In this case, the

Commission believes that generally

there may be a relatively greater

supervisory interest on the part of

foreign regulators with respect to

transactions between two counterparties

that are non-U.S. persons so that

application of the Category A

Transaction-Level Requirements may

not be warranted.

531

With regard to substituted

compliance, where a swap is between a

non-U.S. swap dealer or non-U.S. MSP

(including an affiliate of a U.S. person),

on the one hand, and a U.S. person

(other than a foreign branch of a U.S.

bank swap dealer or U.S. MSP), on the

other, the Commission’s policy is that

substituted compliance would generally

not be available for the Category A

Transaction-Level Requirements. The

Commission believes that this approach

is appropriate in this case because the

Commission has a strong interest in

ensuring that the swap fully complies

with the Category A Transaction Level

Requirements, without substituted

compliance. A number of related

reasons support this conclusion. As

discussed above, a major purpose of

Title VII is to control the potential harm

to U.S. markets that can arise from risks

that are magnified or transferred

between parties via swaps. As also

discussed above, swaps between U.S.

persons and non-U.S. persons

inherently raise the possibility of such

risk magnification and transfer. The

Category A Transaction Level

Requirements are designed to constrain

such risk magnification and transfer.

The United States thus has a strong

interest in applying the Dodd-Frank Act

requirements, rather than substitute

requirements adopted by non-U.S.

authorities, to swaps with U.S. persons.

Exercise of U.S. jurisdiction with

respect to the Category A Transaction

Level Requirements over swaps between

U.S. persons and non-U.S. persons is a

reasonable exercise of jurisdiction

because of the strong U.S. interest in

minimizing the potential risks that may

flow to the U.S. economy as a result of

such swaps.

532

Even though substituted compliance

is not available with respect to swaps

between a non-U.S. swap dealer or non-

U.S. MSP, on the one hand, and a U.S.

person (other than a foreign branch of a

U.S. bank swap dealer or U.S. MSP), on

the other, a market participant would be

deemed in compliance with the relevant

Dodd-Frank requirements where it

complies with requirements in its home

jurisdiction that are essentially identical

to the Dodd-Frank requirements.

Whether the home jurisdiction’s

requirements are essentially identical to

the corollary Dodd-Frank requirements

would be evaluated on a provision-by-

provision basis. The Commission

intends that a finding of essentially

identical generally would be made

through Commission action but in

appropriate cases could be made

through staff no-action.

Based on the foregoing principles, the

Commission staff issued a no-action

letter related to risk mitigation.

533

The

Commission staff found that the

Commission and the EU have

essentially identical rules in important

areas of risk mitigation for the largest

counterparty swap market participants.

Specifically, the Commission staff

determined that under the European

Market Infrastructure Regulation

(EMIR), the EU has adopted risk

mitigation rules that are essentially

identical to certain provisions of the

Commission’s business conduct

standards for swap dealers and major

swap participants. In areas such as

confirmation, portfolio reconciliation,

portfolio compression, valuation, and

dispute resolution, the Commission staff

found that the respective regimes are

essentially identical. The Commission

staff determined that where a swap/OTC

derivative is subject to concurrent

jurisdiction under US and EU risk

mitigation rules, compliance under

EMIR will achieve compliance with the

relevant Commission rules because they

are essentially identical.

534

However, where the swap is between

a non-U.S. swap dealer or non-U.S. MSP

(including an affiliate of a U.S. person)

and a foreign branch of a U.S. bank that

is a swap dealer or MSP, as a policy

matter, the Commission believes that

substituted compliance should be

available for the Category A

Transaction-Level Requirements, to the

extent applicable. Under substituted

compliance, a counterparty can choose

to follow a foreign jurisdiction’s rules

even though those rules are not

essentially identical, provided that the

regime is comparable and

comprehensive. The Commission

believes that international comity

principles support taking this more

flexible approach where the transaction,

although it involves a U.S. person, takes

place in a foreign jurisdiction.

In addition, where a swap is between

a non-U.S. swap dealer or non-U.S. MSP

(including an affiliate of a U.S. person),

on the one hand, and a non-U.S. person

that is a guaranteed or conduit affiliate,

on the other, substituted compliance

may be available to satisfy the Category

A Transaction Level Requirements, to

the extent applicable, as discussed in

the next two sections.

c. Swaps With a Non-U.S. Person

Guaranteed by a U.S. Person

i. Proposed Guidance

In the Proposed Guidance, with

respect to swaps between a non-U.S.

swap dealer or non-U.S. MSP, on the

one hand, and a non-U.S. counterparty

on the other hand, the Commission

proposed to interpret CEA section 2(i)

such that a non-U.S. swap dealer or

non-U.S. MSP would be expected to

comply with the Category A

Transaction-Level Requirements for

swaps where the non-U.S.

counterparty’s performance is

guaranteed, or otherwise supported by,

a U.S. person.

535

In consideration of

international comity principles, the

Commission further proposed to

interpret CEA section 2(i) so as to

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536

See id.

537

See IATP (Aug. 27, 2012) at 3–4.

538

See AFR (Aug. 14, 2012) at 1–2.

539

See Australian Bankers (Aug. 27, 2012) at A8.

540

See Sumitomo (Aug. 24, 2012) at 3. Sumitomo

added that, at a minimum, the Commission should

exclude swaps obligations in excess of a capped

guaranty. Id.

541

See CEWG (Aug. 27, 2012) at 6–7.

542

See IIB (Aug. 27, 2012) at 14–15.

543

Id. at 15–16.

544

See Citi (Aug. 27, 2012) at 4–9.

545

See IIB (Aug. 27, 2012) at 20.

546

Id. See also Sullivan & Cromwell (Aug. 13,

2012) at 7 (‘‘the counterparty should be considered

a non-U.S. person for purposes of the regulatory

requirements, provided that the transactions are not

being conducted by the non-U.S. persons as an

evasion’’); The Clearing House (Aug. 27, 2012) at 17

(stating that ‘‘[a]ny guaranteed entity of a U.S.

Person should only include ‘shell’ entities that have

transferred substantially all of their market and

credit risk to a U.S. Person (excluding non-financial

entities) or any entities created to evade U.S. swaps

rules.’’); Citi (Aug. 27, 2012) at 4–9 (‘‘. . . Title VII

should not apply to non-U.S. subsidiaries on the

basis of guarantees . . . where such subsidiaries are

bona fide companies.’’).

547

See Sullivan & Cromwell (Aug. 13, 2012) at 15.

548

See IIB (Aug. 27, 2012) at 17–18.

549

Id. at 15–16, 18–19.

550

Id. at 4.

551

Id. at 16–17.

552

Id. at 15–16.

553

See End Users Coalition (Aug. 27, 2012) at 3

(Commission’s proposal may disadvantage non-U.S.

affiliates of U.S. end-users whose non-U.S.

counterparties may require guarantees to do

business); Citi (Aug. 27, 2012) at 4–9 (applying

Transaction-Level Rules in these circumstances

would place U.S. multinationals at a severe

competitive disadvantage relative to foreign-based

corporations, as their subsidiaries abroad would

have to either forgo parent support or comply with

different transaction-level rules than those of the

local market); IIB (Aug. 27, 2012) at 18 (non-U.S.

persons that register as swap dealers due to their

trading with U.S. persons would be disadvantaged

vis-a

-vis non-U.S. firms that do not have a U.S.

permit substituted compliance for these

Transaction-Level Requirements.

The Commission explained that it

proposed to interpret section 2(i) in this

manner because, where a non-U.S.

counterparty’s swaps obligations are

guaranteed by a U.S. person, the risk of

non-performance by the counterparty

rests with the U.S. person that is the

guarantor of performance or payment. If

the non-U.S. person defaults on its

obligations under the swaps, then the

U.S. person guarantor will be held

responsible (or would bear the cost) to

settle those obligations. In

circumstances in which a U.S. person

ultimately bears the risk of non-

performance of a counterparty to a swap

with a non-U.S. swap dealer or non-U.S.

MSP, the Commission noted its strong

regulatory interest in performance by

both parties to the swap, and hence

proposed to apply these Transaction-

Level Requirements.

536

ii. Comments

Some commenters concurred in the

Commission’s emphasis on a guarantee

by a U.S. person as an interpretive

guidepost. IATP, for example, stated

that ‘‘the U.S. person’s guarantee is a

crucial criterion for the Commission’s

determination of whether a non-U.S.

person would be subject to compliance

with Dodd-Frank or whether substituted

compliance would be appropriate.’’

537

Similarly, AFR, in commenting on the

Proposed Order, expressed concern

about U.S. taxpayer exposure to ‘‘foreign

affiliates of U.S. banks whose liabilities

are guaranteed (implicitly or explicitly)

by the parent company.’’

538

Other commenters, by contrast, stated

that: (1) The Transaction-Level

Requirements should never apply to

swaps between counterparties that are

both non-U.S. persons;

539

(2) the

Commission should exclude the swap

dealing transactions of a non-U.S.

person where the counterparties to the

swaps are, themselves, non-U.S.

persons, irrespective of whether such

counterparties’ obligations are

guaranteed by the U.S. person;

540

and

(3) section 2(i) does not provide a legal

basis for jurisdiction over a swap

between non-U.S. persons based on a

guaranty by a U.S. person because

guarantees ‘‘do not alter the location of

activity.’’

541

In a similar vein, IIB stated

that the Commission’s proposed

treatment of guarantees based on its

concern that the U.S. guarantor is

exposed to risks incurred by one of its

non-U.S. affiliates, ‘‘is unduly

broad.’’

542

IIB explained that guarantees are a

very common way for U.S.

multinational corporations (both

financial and non-financial) to provide

credit support for their non-U.S.

subsidiaries. According to IIB, parent

credit support enables these subsidiaries

to hedge their risks cost-effectively in

the markets in which they operate,

thereby reducing the cost of risk

management and therefore the costs of

operations.

543

Citi noted that ordinary

course parent support commitments,

general payment guarantees and capital

maintenance commitments are often

necessary to enter foreign banking

markets. It added that U.S.

multinationals also guarantee

obligations of local subsidiaries so that

their subsidiaries can effectively hedge

risks in local markets.

544

IIB argued that these arrangements

‘‘are in stark contrast to circumstances

where an unregulated foreign ‘shell’

affiliate is used for purposes of entering

into significant swap dealing activity

outside the scope of Dodd-Frank and

systematically transferring the market

and credit risks arising from the activity

to a U.S. affiliate.’’

545

Accordingly, IIB

maintained that application of

Transaction-Level Requirements where

a non-U.S. counterparty to a non-U.S.

swap dealer or non-U.S. MSP is

guaranteed by a U.S. person is

unnecessary because the Commission

already has adopted an anti-evasion rule

to address such schemes.

546

Commenters stated that in many

instances, the Commission’s concerns

about a guarantee by a U.S. person can

be addressed as a safety and soundness

matter by the Federal Reserve Board

when it supervises both the guarantor

and its subsidiaries; further, where the

U.S. providing a guarantee is itself a

swap dealer or MSP, it also will be

subject to Title VII requirements.

547

a related vein, the Commission was

urged to adopt an exception from its

proposed treatment of a non-U.S.

counterparty with a guarantee from a

U.S. person if either: (1) The

counterparty is subject to U.S. capital

requirements or comparable foreign (i.e.,

Basel-compliant) capital requirements;

or (2) the guarantor is a U.S. bank

holding company.

548

IIB also stated that the Commission

should tie the application of Title VII

requirements to the cross-border

activities of U.S.-guaranteed foreign

subsidiaries to the significance of the

risk to the United States arising from the

underlying guaranteed activity—that is,

where the existence of a guarantee gives

rise to direct and significant risks to the

United States.

549

Otherwise, IIB stated,

‘‘the level of risk to the United States is

too contingent, remote or low to justify

application of U.S. regulation in the face

of strong and more direct non-U.S.

regulatory interests.’’

550

Under such an

approach, IIB stated, the Commission

should adopt an exception from its

proposed treatment of a non-U.S.

counterparty with a guarantee from a

U.S. person if the non-U.S. counterparty

is not a financial entity and is entering

into the transaction for hedging or risk

mitigation purposes.

551

particularly, IIB posited, if the level of

the non-U.S. counterparty’s swap

activity is insubstantial in relation to its

net equity, or if the aggregate potential

liability of the U.S. guarantor with

respect to the non-U.S. counterparty’s

swap activity is insubstantial in relation

to the net equity of the guarantor, then

the risk to the United States will not be

significant and Transaction-Level

Requirements should not be applied.

552

Many of the comments on this topic

stated that the Commission’s proposal

in this regard would result in adverse

competitive consequences.

553

Others,

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swap dealing business because only the former

would be obligated to comply with the Transaction-

Level Requirements for swaps with U.S.-guaranteed

counterparties); Sullivan & Cromwell (Aug. 13,

2012) at 6 (Title VII should not apply to the non-

U.S. operations and activities of an entity simply

because it has a U.S. parent that provides a

guarantee because this would impose duplicative

regulation and unnecessary costs on non-U.S.

operations that are already subject to local foreign

rules and regulations).

554

See Hong Kong Banks (Aug. 27, 2012) at 4–

555

See, e.g., ISDA (Aug. 10, 2012) at 10.

556

See Citi (Aug. 27, 2012) at 4–9.

557

Id. See also CEWG (Aug. 27, 2012) at 4–5

(recommending that the Commission ‘‘undertake a

more thorough regulatory analysis with respect to

guarantees of swaps obligations’’).

558

See Hong Kong Banks at 4–5.

559

See CEWG (Aug. 27, 2012) at 4–5.

560

See Final Swap Definition, 77 FR at 48225–

48227. The interpretation herein applies only to a

swap that is not a security-based swap or a mixed

swap.

561

Id. at 48226 n.186.

562

See Final Entities Rules, 77 FR at 30689 (‘‘[A]n

entity’s swap or security-based swaps positions in

general would be attributed to a parent, other

affiliate or guarantor for purposes of major

participant analysis to the extent that counterparties

to those positions would have recourse to that other

entity in connection with the position. Positions

would not be attributed in the absence of

recourse.’’).

563

The Commission agrees with commenters who

stated that Transaction-Level Requirements should

not apply if a non-U.S. swap dealer or non-U.S.

MSP relies on a written representation by a non-

U.S. counterparty that its obligations under the

swap are not guaranteed with recourse by a U.S.

person. Such an approach is consistent with

Commission practice in other contexts such as the

external business conduct rules.

though, objected that Transaction-Level

Requirements should not apply to

entities guaranteed by U.S. persons

because non-U.S. counterparties will

likely be unwilling to agree to the legal

documents necessary to comply with

those requirements.

554

And others

stated that the proposed interpretation

will not achieve the objective of

mitigating counterparties’ exposure to

the credit risks of swap dealers because

the U.S. guarantor’s exposure in this

scenario is to the credit risk of the

guaranteed non-U.S. counterparty, not

to the non-U.S. swap dealer that is

transacting with that guaranteed non-

U.S. counterparty.

555

Citi commented that if Transaction-

Level Requirements were to be applied

to swaps of non-U.S. persons whose

obligations were guaranteed by a U.S.

person, then U.S.-based firms may be

forced to remove parent support from

their overseas subsidiaries in order to

remain competitive. It argued that this

would cause significant additional

capital, resources, and personnel to be

moved abroad so that these non-U.S.

subsidiaries could manage swap risk on

a stand-alone basis which, it averred,

would fragment and harm the safety and

soundness of U.S.-based firms, U.S.

swaps markets, and the U.S.

economy.

556

Accordingly, it urged the

Commission to further study the issue of

guarantees before finalizing its cross-

border guidance.

557

One commenter requested that the

Commission clarify the scope of a

‘‘guarantee’’ that can trigger application

of Transaction-Level Requirements in

these circumstances.

558

Another

objected to the scope of the term

‘‘guarantee’’ if it were defined to include

not only a guarantee of payment or

performance of swaps obligations, but

also other formal arrangements to

support the ability of a person to

perform its obligations (such as liquidity

puts and keepwell agreements).

559

iii. Commission Guidance

Under this Guidance, with respect to

swaps between a non-U.S. swap dealer

or non-U.S. MSP (including an affiliate

of a U.S. person) on the one hand, and

a non-U.S. counterparty on the other

hand where the non-U.S. counterparty’s

performance is guaranteed (or otherwise

supported by) a U.S. person, the

Commission would generally expect the

parties to the swap to comply with all

of the Category A Transaction-Level

Requirements. The Commission believes

that this policy is warranted in light of

the significant regulatory interest in

managing and reducing the risks to U.S.

firms, markets and commerce from such

transactions. Further, this policy is

based on the Commission’s view that

the failure to apply Category A

Transaction-Level Requirements to such

swaps could leave a significant gap in

the regulation of risks presented by

swap activities undertaken by U.S.

firms. However, as proposed, the

Commission’s policy contemplates that

substituted compliance (to the extent

applicable) could satisfy the Category A

Transaction-Level Requirements that

otherwise might apply to such swaps, as

further discussed below.

In response to commenters that

requested clarification of the nature of

the guarantee of a non-U.S. counterparty

by a U.S. person that will trigger the

application of Transaction-Level

Requirements to swaps with non-U.S.

swap dealers or non-U.S. MSPs, the

Commission references the approach set

forth in the final rule further defining

the term ‘‘swap,’’ among others.

560

That

is, for this purpose, a guarantee of a

swap is a collateral promise by a

guarantor to answer for the debt or

obligation of a counterparty obligor

under a swap.

561

Thus, to the extent that

the non-U.S. swap dealer or non-U.S.

MSP would have recourse to the U.S.

guarantor in connection with its swaps

position, the Commission would

generally expect such non-U.S. swap

dealer or MSP to comply with the

Category A Transaction-Level

Requirements for such a guaranteed

swap (although substituted compliance

may satisfy compliance with such

requirements to the extent it is

applicable, as discussed above). This

interpretation also is consistent with the

interpretation related to the MSP

definition that the Commission set forth

in the Final Entities Rules.

562

Conversely, where a non-U.S. swap

dealer or non-U.S. MSP enters into a

swap with a non-U.S. counterparty that

does not have a guarantee as so

described from a U.S. person and is not

an affiliate conduit, the Commission’s

view is that the Transaction-Level

Requirements should not apply.

563

Considerations relevant to application

of the Transaction-Level Requirements

also relate to persons guaranteeing

swaps obligations. As noted in the

proposal, the Transaction-Level

Requirements with respect to required

clearing and swap processing, margin

(and segregation), and portfolio

reconciliation and compression can

serve to significantly mitigate risks to

the swap dealer’s counterparties, and by

extension, the risk to the U.S. person

guaranteeing the non-U.S.

counterparty’s obligations under the

swap. Other Transaction-Level

Requirements—trade confirmation,

swap trading relationship

documentation, and daily trading

records—protect the counterparties to

the swap, and thus also protect a U.S.

person that guarantees a non-U.S.

counterparty’s obligations under the

swap, by ensuring that swaps are

properly documented and recorded.

In the Commission’s view, because

Congress directed that the trade

execution requirement apply to swaps

that are subject to the clearing

requirement and made available to

trade, it is appropriate for the trade

execution requirement to apply to those

cross-border swaps that are subject to

the clearing mandate and are made

available to trade. The Commission

believes that both requirements—the

clearing mandate and trade execution

requirement—are of fundamental

importance to the management and

reduction of risks posed by swap

activities of market participants.

Requiring swaps to be traded on a

regulated exchange or execution facility

provides market participants with

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564

Accordingly, the Commission disagrees with

commenters who objected to the proposed

interpretation on the ground that it would not

advance the goal of mitigating the risk of credit

exposure of the guarantor U.S. person to the non-

U.S. swap dealer or non-U.S. MSP. The

Transaction-Level Requirements also serve to

protect against risk to the guarantor U.S. person by

reducing the likelihood that its obligations under

the guarantee will be called upon in the first

instance.

565

See Final Swap Definition, 77 FR 48225–

48226.

566

See generally note 532 and related discussion,

supra.

567

Id. at 48226.

568

AIG Report, supra note 5, at 20.

569

CEA section 4s(e)(1) provides that each

registered swap dealer and MSP for which there is

a prudential regulator shall meet such minimum

capital requirements as the applicable prudential

regulator shall prescribe, but that each registered

swap dealer and MSP for which there is not a

prudential regulator shall meet such minimum

capital requirements as the Commission shall

prescribe.

greater pre- and post-trade transparency.

Real-time public reporting improves

price discovery by requiring that swap

and pricing data be made publicly

available. Taken together, the trade

execution and real-time public reporting

Transaction-Level Requirements

provide important information to

market participants and regulators with

resulting efficiency in the marketplace.

This, in turn, facilitates risk

management which benefits swap

counterparties and also serves to reduce

the likelihood that a U.S. guarantor will

be called upon to satisfy a non-U.S.

counterparty’s swaps obligations.

564

Further, in the Final Swap Definition,

the Commission found that a guarantee

of a swap is a term of that swap that

affects the price or pricing attributes of

that swap. The Commission therefore

concluded that when a swap has the

benefit of a guarantee, the guarantee is

an integral part of that swap. The

Commission explained that typically

when a swap counterparty uses a

guarantee as credit support for its swaps

obligations, the guarantor’s resources

are added to the analysis of the swap

because ‘‘the market will not trade with

that counterparty at the same price, on

the same terms, or at all without the

guarantee.’’

565

For all the foregoing reasons, the

Commission disagrees with commenters

that asserted that it should not, or lacks

the legal authority to, interpret CEA

section 2(i) as to apply to swaps where

one counterparty is a non-U.S. swap

dealer or a non-U.S. MSP and the other

counterparty is a non-U.S. person whose

obligations under the swap are

guaranteed by a U.S. person. Where a

U.S. person provides a guarantee of a

non-U.S. counterparty’s swaps

obligations for which there is recourse

to the U.S. person, where that guarantee

is a term of the swap and affects the

price or pricing attributes of that swap,

and where the Transaction-Level

Requirements serve to protect and

mitigate risk to that U.S. person

guarantor, the Commission believes that

such swaps, either individually or in the

aggregate, have a direct and significant

connection with activities in, or effect

on, U.S. commerce.

The application of Dodd-Frank Act

requirements to swaps of non-U.S.

persons whose swaps obligations are

guaranteed by U.S. persons is also

consistent with foreign relations law. As

noted in the discussion above regarding

the application of these requirements to

swaps of U.S. persons with non-U.S.

persons, a major purpose of Title VII is

to control the potential harm to U.S.

markets that can arise from risks that are

magnified or transferred between parties

via swaps. Similarly, a guarantee—

which is an integral part of a swap—can

lead to the transfer of risk from the

guaranteed non-U.S. person to the U.S.

guarantor. Because Category A

Transaction Level Requirements are

designed to mitigate such risk transfer,

the Commission believes there is a

strong interest in applying the Dodd-

Frank Act requirements to swaps of

non-U.S. persons that are guaranteed by

U.S. persons.

566

However, the

Commission also understands the

countervailing interest of home country

regulators in such swaps, and therefore

believes that substituted compliance

should generally be available in this

context.

The Commission also disagrees with

commenters that suggested that its

interpretation on this score should

apply only to certain guaranteed swaps

(e.g., not to swaps by non-financial

entities entered into for hedging or risk

mitigation purposes), or only to in

certain circumstances (e.g., where the

guaranteed non-U.S. counterparty’s

swap activity is a certain percentage of

its net equity or the aggregate potential

liability of the U.S. guarantor with

respect to the non-U.S. counterparty’s

swaps obligations is a certain percentage

of the guarantor’s net equity), or only to

a certain extent (e.g., to swaps

obligations in excess of a capped

guarantee). In the Final Swap

Definition, the Commission

acknowledged that a ‘‘full recourse’’

guarantee would have a greater effect on

the price of a swap than a ‘‘limited’’ or

‘‘partial recourse’’ guarantee, yet

nevertheless determined that the

presence of any guarantee with

recourse, no matter how robust, is price

forming and an integral part of a

guaranteed swap.

567

The Commission similarly believes

that the presence of any guarantee with

recourse by a U.S. person of the swaps

obligations of a non-U.S. counterparty to

a swap with a non-U.S. swap dealer or

non-U.S. MSP suffices to justify the

application of Transaction-Level

Requirements that swap. Therefore, as

noted above, to the extent that a non-

U.S. swap dealer or non-U.S. MSP

would have recourse to the U.S.

guarantor in connection with its swaps

position, the Commission would

generally expect such non-U.S. swap

dealer or MSP to comply with the

Category A Transaction-Level

Requirements for such a guaranteed

swap (although substituted compliance

may satisfy compliance with such

requirements to the extent it is

applicable). Although the Commission

believes all relevant facts and

circumstances should be analyzed, as a

general matter the Commission is of the

view that the purpose for which the

non-U.S. counterparty is entering into

the swap, or the net equity of the non-

U.S. counterparty or the guarantor, or

the extent of the guarantee, would

generally not warrant a different

conclusion.

Finally, the Commission disagrees

with commenters that urged it to limit

its interpretation in this regard to cases

of evasion, or to exclude from the scope

of its interpretation those swaps in

which the non-U.S. counterparty is

subject to appropriate capital

requirements or the guarantor is a U.S.

bank holding company. The events

surrounding the collapse of AIGFP

highlight how guarantees can cause

major risks to flow to the guarantor.

‘‘AIGFP’s obligations were guaranteed

by its highly rated parent company . . .

an arrangement that facilitated easy

money via much lower interest rates

from the public markets, but ultimately

made it difficult to isolate AIGFP from

its parent, with disastrous

consequences.’’

568

The Commission’s view is that the

protections and mitigation of risk

exposures afforded by the Category A

Transaction-Level Requirements would

be rendered far less effective if in the

case of swaps where one counterparty is

a non-U.S. swap dealer or a non-U.S.

MSP and the other counterparty is a

non-U.S. person guaranteed by a U.S.

person such requirements only apply

when such swaps are part of a scheme

to evade the Dodd-Frank Act. Further,

while capital requirements are an

important element of the Title VII

regime to reduce systemic risk,

569

the

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570

See Appendix B for information regarding the

Transaction-Level Requirements and the provisions

of the CEA which they implement.

571

In the Final Entities Rules, the Commission

stated that it does ‘‘not believe that it is necessary

to attribute a person’s swap or security-based swaps

positions to a parent or other guarantor if the person

is already subject to capital regulation by the CFTC

or SEC (i.e., swap dealers, security-based swap

dealers, MSPs, major security-based swap

participants, FCMs and broker-dealers) or if the

person is a U.S. entity regulated as a bank in the

United States. Positions of those regulated entities

already will be subject to capital and other

requirements, making it unnecessary to separately

address, via major participant regulations, the risks

associated with guarantees of those positions.’’ See

Final Entities Rules, 77 FR at 30689. The

Commission continued, ‘‘As a result of this

interpretation, holding companies will not be

deemed to be major swap participants as a result

of guarantees to certain U.S. entities that are already

subject to capital regulation.’’ Id. at 30689 n. 1134.

Subsequently, in the Final Swap Definition, the

Commission stated that ‘‘[a]s a result of interpreting

the term ‘swap’ (that is not a security-based swap

or mixed swap) to include a guarantee of such

swap, to the extent that a counterparty to a swaps

position would have recourse to the guarantor in

connection with the position, and based on the

reasoning set forth [in the Final Entities Rules] in

connection with major swap participants, the CFTC

will not deem holding companies to be swap

dealers as a result of guarantees to certain U.S.

entities that are already subject to capital

regulation.’’ See Final Swap Definition, 77 FR at

48266 n.188. The Commission’s conclusion that

capital compliance and prudential regulation, in

certain circumstances, can obviate the need for

registration as a swap dealer or MSP does not bear

upon, and is not inconsistent with, the

Commission’s interpretation herein that

notwithstanding capital compliance and prudential

regulation, Transaction-Level Requirements may be

applied where a non-U.S. swap dealer or non-U.S.

MSP enters into a swap with a non-U.S.

counterparty whose obligations under that swap are

guaranteed, with recourse, by a U.S. person.

572

See Proposed Guidance, 77 FR at 41229.

573

Id.

574

SIFMA (Aug. 27, 2012) at A22–23; IIB at (Aug.

27, 2012) at 20–21; Hong Kong Banks (Aug. 27,

2012) at 13.

575

SIFMA (Aug. 27, 2012) at A23. See also IIAC

(stating that the Commission should clarify the

meaning of ‘‘regularly enters into swaps with . . .

affiliates’’ and circumstances under which the

Commission would interpret the financials of a

non-U.S. counterparty to be combined with the

financial statements of the U.S. person for purposes

of applying Transaction-Level Requirements to

transactions by U.S. persons that might be using

conduits to avoid such requirements) (Aug. 27,

2012) at 8.

576

SIFMA (Aug. 27, 2012) at A22.

577

Goldman (Aug. 27, 2012) at 6. See also

Japanese Bankers Association (Aug. 27, 2012) at 11

(stating that it is difficult to determine under the

Proposed Guidance when a counterparty is a

conduit for a U.S. person, and that the conduit

provisions should not be implemented).

578

Goldman (Aug. 27, 2012) at 6. See also

Peabody (Aug. 27. 2012) at 3 (stating that applying

the Dodd-Frank requirements to swaps entered into

or booked by affiliates of commercial end-users

outside the United States to hedge or mitigate

commercial risks of activities outside the United

States will create an overlapping (and potentially

inconsistent) tangle of international laws that will

increase costs and potential liabilities associated

with such swaps, and materially undermine their

utility and risk mitigation benefits; stating further

that foreign entities wishing to avoid becoming

subject to Dodd-Frank requirements will decline to

enter into swaps with such affiliates, thereby

Continued

comprehensive regulatory structure

established by the Dodd-Frank Act goes

beyond such requirements. The CEA, as

amended by the Dodd-Frank Act, also

requires the imposition of the

Transaction-Level Requirements

570

except to the extent that section 2(i)

limits their application to cross-border

transactions or activities. Therefore, the

Commission believes that, rather than

excluding the swaps at issue from the

scope of the Title VII regulatory regime,

with the corresponding increase in risk

to U.S. persons and to the U.S. financial

system, in most cases compliance with

the Category A Transaction-Level

Requirements is appropriate where non-

U.S. swap dealers and non-U.S. MSPs

that enter into swaps with non-U.S.

counterparties guaranteed by a U.S.

person. Further, the Commission does

not believe that a different

interpretation should be taken solely

because applicable capital requirements

are satisfied.

571

In addition, the Commission believes

that this Guidance, which contemplates

a system of substituted compliance in

accordance with principles of

international harmonization, may allow

non-U.S. swap dealers and non-U.S.

MSPs to comply, in appropriate

circumstances, with their home-country

requirements when transacting with

non-U.S. counterparties whose swaps

obligations are guaranteed with recourse

by U.S. persons. The Commission

believes that the substituted compliance

regime contemplated by the Guidance

will facilitate equivalent regulatory

treatment of equivalent swaps without

undermining the swaps reforms enacted

by Congress in Title VII.

d. Swaps With a Non-U.S. Person That

is an Affiliate Conduit

i. Proposed Guidance

The Commission proposed to

interpret CEA section 2(i) such that the

Category A Transaction-Level

Requirements would apply to a swap if

at least one of the parties to the swap

is an ‘‘affiliate conduit.’’ Under the

Proposed Guidance, an affiliate conduit

exists when: (1) A non-U.S. person that

is majority-owned, directly or

indirectly, by a U.S. person; (2) the non-

U.S. person regularly enters into swaps

with one or more of its U.S. affiliates of

its U.S. person owner; and (3) the

financial results of such non-U.S.

person are included in the consolidated

financial statements of its U.S. person

owner.

572

The Commission explained

that it believed the proposed application

of Transaction-Level Requirements was

necessary because, ‘‘given the nature of

the relationship between the conduit

and the U.S. person, the U.S. person is

directly exposed to risks from and

incurred by’’ the affiliate conduit.

573

The Commission further indicated that

it was concerned that a U.S. swap dealer

or U.S. MSP would utilize affiliate

conduits to conduct swaps outside the

Dodd-Frank regulatory regime.

ii. Comments

The commenters who addressed the

Commission’s proposed approach to

affiliate conduits expressed concerns

about what they felt was an overly broad

scope of the term ‘‘affiliate conduit.’’

Several of these commenters stated that

the non-U.S. affiliate conduit concept

should be omitted from the

Guidance.

574

SIFMA stated that the term

‘‘regular’’ is too vague in that ‘‘it does

not account for the purpose of the inter-

affiliate swap, the relative amount of the

conduit’s risk transferred, the nature of

the transferred risk, or whether some or

all of the risk is transferred.’’

575

SIFMA

also commented that activities of a non-

U.S. affiliate conduit do not satisfy the

requisite nexus to the United States

under section 2(i) to justify different

treatment from other non-U.S.

counterparties. Further, SIFMA stated

that where substituted compliance is

unavailable, a non-U.S. swap dealer

transacting with an affiliate conduit is

subject to applicable Transaction-Level

Requirements, which could cause non-

U.S. swap dealers to cease doing

business with non-U.S. affiliate

conduits.

576

As an alternative, SIFMA

recommended that the proposed affiliate

conduit provision that the conduit

‘‘regularly enter into swaps’’ should be

replaced with a provision that the

conduit ‘‘regularly enter[ ] into swaps

with one or more other U.S. affiliates of

the U.S. person for the purpose of

transferring to that U.S. person all risk

of swap activity.’’

Other commenters raised similar

objections concerning the scope of the

affiliate conduit provision. Goldman

stated that the proposed description of

an affiliate conduit was so broad that

‘‘an entity could be rendered a conduit

by executing even a single trade despite

the fact that the entity otherwise would

be eligible for substituted compliance,

or would not fall within Title VII’s

jurisdiction at all.’’

577

Such a broad

definition, in Goldman’s view, will

result in competitive disparities for

foreign affiliates of U.S.-based swap

dealers and may even cover non-

financial entities attempting to hedge

risk.

578

SIFMA added that the concept

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decreasing market liquidity, increasing market risk

competition, imposing higher commercial costs,

and resulting in higher prices for customers and

downstream consumers, and would put U.S.

business at a competitive disadvantage in global

markets).

579

SIFMA (Aug. 27, 2012) at A24.

580

Hong Kong Banks (Aug. 27, 2012) at 13.

581

Peabody (Aug. 28, 2012) at 2–3.

582

SIFMA (Aug. 27, 2012) at A24. SIFMA stated

that the determination of whether a counterparty to

a swap is a non-U.S. affiliate conduit should be

made at the inception of the swap based on the

most recent updated representation from the

counterparty, which should be renewed by the

counterparty once per calendar year. Id. at A25.

583

IIB (Aug. 27, 2012) at 20–21.

584

Id. at 19.

585

See Proposed Guidance, 77 FR at 41229.

586

One market participant described the

functions of such a conduit and its relationship

with respect to other affiliates within the corporate

group in the following manner:

Many business enterprises, including [Prudential

Financial Inc., or ‘‘PFI’’], elect to operate in a

manner that assigns specific functions to related

and commonly-controlled affiliates. With regard to

swap transactions, it has long been our practice, as

an enterprise-type company with separate legal

entities that are commonly owned by PFI to use one

affiliate, Prudential Global Funding LLC (‘‘PGF’’), to

directly face the market as a ‘‘conduit’’ to hedge the

net commercial and financial risk of the various

operating affiliates within PFI. Under this practice,

only PGF (i.e., the conduit) is required to trade with

external market participants, while the internal

affiliates within PFI trade directly with the PGF.

The use of PGF as the single conduit for the various

operating affiliates within PFI diminishes the

demands on PFI’s financial liquidity, operational

assets and management resources, as affiliates

within PFI avoid having to establish independent

relationships and unique infrastructure to face the

market. Moreover, use of PGF as a conduit within

PFI permits the netting of our affiliates’ trades (e.g.,

one affiliate is hedging floating rates while another

is hedging fixed rates). This effectively reduces the

overall risk of PFI and our affiliates, and allows us

to manage fewer outstanding positions with

external market participants.

The Prudential Insurance Company of America

(Feb. 17, 2011) at 2.

587

See The Prudential Insurance Company of

America (Feb. 17, 2011); Kraft Foods (‘‘Kraft’’) (Feb.

11, 2011).

of indirect majority ownership is

imprecise and its application to non-

U.S. affiliate conduits is unclear.

579

Hong Kong Banks believed that the

conduit proposal is unnecessary since

its activities would be captured in the

registration process.

580

Peabody stated

that the application of Transaction-

Level Requirements to affiliate conduits

seemingly contradicts the Proposed

Guidance’s treatment of foreign affiliates

as non-U.S. persons.

581

If the affiliate

conduit concept remains in the

Guidance, SIFMA requested that the

Commission clarify whether or not swap

dealers may rely on a counterparty’s

representations as to its non-U.S.-

affiliate’s conduit status.

582

IIB stated that the Commission should

withdraw its proposal on affiliate

conduits and instead, where there is

clear circumvention, rely on its existing

anti-evasion authority.

583

It added that

the Commission’s proposal for the

‘‘conduit’’ treatment of a foreign entity

that ‘‘regularly’’ engages in back-to-back

swaps with a U.S. affiliate is

unjustifiably broad. IIB also stated that

the proposed standard is inconsistent

with statutory standards for the

extraterritorial application of Title VII,

and that there is no basis to conclude

that inter-affiliate swaps create direct

and significant risk to the United States

simply because they occur

‘‘regularly.’’

584

iii. Commission Guidance

In the Proposed Guidance, the

Commission explained that it believed

the proposed application of

Transaction-Level Requirements was

necessary because, ‘‘given the nature of

the relationship between the conduit

and the U.S. person, the U.S. person is

directly exposed to risks from and

incurred by’’ the affiliate conduit.

585

The Commission further indicated that

it was concerned that a U.S. swap dealer

or U.S. MSP would utilize affiliate

conduits to conduct swaps outside the

Dodd-Frank regulatory regime.

For purposes of this policy statement,

the Commission is clarifying that an

affiliate conduit encompasses those

entities that function as a conduit or

vehicle for U.S. persons conducting

swaps transactions with third-party

counterparties. In response to comments

received, the Commission is identifying

some of the factors that the Commission

believes are relevant to determining

whether a non-U.S. person is an

‘‘affiliate conduit’’ of a U.S. person. As

explained in greater detail below,

modifications to the Proposed Guidance

with regard to the term ‘‘affiliate

conduit’’ are intended to respond to

commenters’ concerns about a lack of

clarity on the scope of the term affiliate

conduit and to better identify those non-

U.S. affiliates whose swap activities,

either individually or in the aggregate,

have a direct and significant connection

with activities in, or effect on, U.S.

commerce as a result of their

relationship with their U.S. affiliates.

Specifically, the Commission is

modifying the factors that might be

relevant to the consideration of whether

a non-U.S. affiliate of a U.S. person is

an affiliate conduit by: (1) clarifying the

meaning of ‘‘regularly enters into

swaps,’’ and in particular, the activities

of a non-U.S. counterparty that renders

it an affiliate conduit; and (2) adding the

concept of ‘‘control.’’

As the Commission understands, it is

common for large global companies to

centralize their hedging or risk-

management activities in one or more

affiliates (informally referred to as a

‘‘treasury conduit’’ or ‘‘conduit’’). Under

this structure, the conduit may enter

into swaps with its affiliates and then

enter into offsetting swaps with third-

parties. In other cases, the conduit may

enter into swaps with third-parties as

agent for its affiliates. In either case, the

conduit functions as a vehicle by which

various affiliates engage in swaps with

third-parties (i.e., the market). This

paradigm promotes operational

efficiency and prudent risk management

by enabling a company to manage its

risks on a consolidated basis at a group

level.

586

Accordingly, based on

comments, rather than considering

whether a non-U.S. person ‘‘regularly

enters into swaps’’ with one or more of

its U.S. affiliates of its U.S. person

owner, the Commission will generally

consider whether the non-U.S. person,

in the regular course of business,

engages in swaps with non-U.S. third-

parties for the purpose of hedging or

mitigating risks faced by, or to take

positions on behalf of, its U.S. affiliates,

and enters into offsetting swaps or other

arrangements with its U.S. affiliates in

order to transfer the risks and benefits

of such swaps with third-parties to its

U.S. affiliates.

The Commission recognizes the

significant benefits associated with a

corporate group’s use of a single entity

to conduct the group’s market-facing

swap business. The Commission also

believes, though, that in this situation

the risks resulting from swaps of the

entity that faces the market as a conduit

on behalf of its affiliates in fact reside

with those affiliates; that is, while the

swaps are entered into by the conduit,

through back-to-back swaps or other

arrangements the conduit passes the

risks and benefits of those swaps to its

affiliates.

587

Where the conduit is

located outside the United States, but is

owned and controlled by a U.S. person,

the Commission believes that to

recognize the economic reality of the

situation, the conduit’s swaps should be

attributed to the U.S. affiliate(s). The

fact that the conduit is located outside

the United States does not alter the

economic reality that its swaps are

undertaken for the benefit of, and at the

economic risk of, the U.S. affiliate(s),

and more broadly, for the corporate

group that is owned and controlled by

a U.S. person. Under these

circumstances, the Commission believes

that the swap activities of the non-U.S.

conduit may meet the ‘‘direct and

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588

In this respect, it is irrelevant whether the risk

is wholly or partly transferred back to the U.S.

affiliate(s); the jurisdictional nexus is met by reason

of the trading relationship between the conduit and

the affiliated U.S. persons.

589

This is consistent with the Commission’s

approach to the determination of whether a

counterparty is a ‘‘U.S. person.’’ See section IV.A,

supra.

590

See Kraft (Feb. 11, 2011) at 3.

591

Commission regulation 1.3(ggg)(6)(i) defines

‘‘majority-owned affiliates’’ as follows:

[C]ounterparties to a swap are majority-owned

affiliates if one counterparty directly or indirectly

owns a majority interest in the other, or if a third

party directly or indirectly owns a majority interest

in both counterparties to the swap, where ‘majority

interest’ is the right to vote or direct the vote of a

majority of a class of voting securities of an entity,

the power to sell or direct the sale of a majority of

a class of voting securities of an entity, or the right

to receive upon dissolution or the contribution of

a majority of the capital of a partnership.

592

Commission regulation 1.3(ggg)(4)(i) refers to

an ‘‘entity controlling, controlled by or under

common control with the person.’’ Final Entities

Rules elaborated on this provision, stating:

For these purposes, we interpret control to mean

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 securities, by contract or

otherwise. This is consistent with the definition of

‘‘control’’ and ‘‘affiliate’’ in connection with

Exchange Act rules regarding registration

statements. See Exchange Act rule 12b–2. . . .

77 FR 30631 n. 437, and

[I]f a parent entity controls two subsidiaries

which both engage in activities that would cause

the subsidiaries to be covered by the dealer

definitions, then each subsidiary must aggregate the

swaps or security-based swaps that result from both

subsidiaries’ dealing activities in determining if

either subsidiary qualifies for the de minimis

exception.

Id. at n. 438.

593

The categorization of Transaction-Level

Requirements into Categories A and B is discussed

in section E, supra. See Appendix B for a

descriptive list of the Category A and Category B

requirements and Appendix D for a table

summarizing the application of the Category A

Transaction-Level Requirements to Swap Dealers

and MSPs. The Appendices to this Guidance should

be read in conjunction with this section and the rest

of the Guidance.

594

See Appendix E to this Guidance for a

summary of these requirements and the discussion

in section D, supra.

significant’’ jurisdictional nexus within

the meaning of CEA section 2(i).

588

Further, in order to facilitate a

consistent application of the term

affiliate conduit and to mitigate any

undue burden or complexity for market

participants in assessing affiliate

conduit status, the Commission clarifies

that its policy contemplates that a

market participant may reasonably rely

on counterparty representations as to its

non-U.S. affiliate conduit status.

589

Finally, the Commission notes in

response to commenters that an affiliate

conduit would not necessarily be

guaranteed by its parent. As one market

participant explained, ‘‘centralized

hedging centers are generally evaluated

as wholly-owned subsidiaries of the

corporate group that do not require

additional credit support, such as a

parent guaranty or collateral.’’

590

Therefore, the Commission believes that

it is reasonable and appropriate to

interpret CEA section 2(i) in a manner

that recognizes an affiliate conduit as a

separate category of counterparty whose

swaps with non-U.S. persons may be

subject to certain Transaction-Level

Requirements. Specifically, where one

of the parties to the swap is a conduit

affiliate, the Commission would

generally expect the parties to the swap

only to comply with (to the extent that

the Inter-Affiliate Exemption is elected),

the conditions of the Inter-Affiliate

Exemption, including the treatment of

outward-facing swaps condition in

Commission regulation 50.52(b)(4)(i). In

addition, the part 43 real-time reporting

requirements must be satisfied.

In summary, for the purposes of the

Commission’s interpretation of CEA

section 2(i), the Commission believes

that certain factors are relevant to

considering whether a non-U.S. person

is an ‘‘affiliate conduit.’’ Such factors

include whether:

(i) the non-U.S. person is a majority-owned

affiliate

591

of a U.S. person;

(ii) the non-U.S. person is controlling,

controlled by or under common control

592

with the U.S. person;

(iii) the financial results of the non-U.S.

person are included in the consolidated

financial statements of the U.S. person; and

(iv) the non-U.S. person, in the regular

course of business, engages in swaps with

non-U.S. third-party(ies) for the purpose of

hedging or mitigating risks faced by, or to

take positions on behalf of, its U.S.

affiliate(s), and enters into offsetting swaps or

other arrangements with its U.S. affiliate(s) in

order to transfer the risks and benefits of

such swaps with third-party(ies) to its U.S.

affiliates.

Other facts and circumstances also may

be relevant. The Commission does not

intend that the term ‘‘conduit affiliate’’

would include affiliates of swap dealers.

5. Application of the ‘‘Category B’’

Transaction-Level Requirements to

Swap Dealers and MSPs

This section discusses the

Commission’s policy on the application

of the Category B Transaction-Level

Requirements to swaps in which at least

one of the parties to the swap is a

registered swap dealer or MSP. As noted

earlier, the Category B Transaction Level

Requirements pertain to external

business conduct standards which the

Commission adopted pursuant to CEA

section 4s(b) as a Category B

Transaction-Level Requirement.

593

Consistent with the Proposed

Guidance, the Commission will

generally interpret CEA section 2(i) so

that the Category B Transaction-Level

Requirements (i.e., the external business

conduct standards) either do or do not

apply to the swap, based on the

counterparties to the swap, as explained

below. Under this interpretation,

substituted compliance is generally not

expected to be applicable with regard to

the Category B Transaction-Level

Requirements under this Guidance.

594

In considering whether Category B

Transaction-Level Requirements are

applicable, the Commission would

generally consider whether the swap is

with a:

(i) U.S. swap dealer or U.S. MSP (including

affiliates of non-U.S. persons);

(ii) foreign branch of a U.S. bank that is a

swap dealer or MSP; or

(iii) non-U.S. swap dealer or non-U.S. MSP

(including an affiliate of a U.S. person).

Specifically, as explained more

below, where a swap is with a U.S.

swap dealer or U.S. MSP, the parties to

the swap generally should be subject to

the Category B Transaction-Level

Requirements in full, regardless of

whether the other counterparty to the

swap is a U.S. person or a non-U.S.

person. However, in the case of a foreign

branch of a U.S. bank that is a swap

dealer or MSP, or a non-U.S. swap

dealer or non-U.S. MSP, the parties to

the swap should generally only be

subject to the Category B Transaction-

Level Requirements when the

counterparty to the swap is a U.S.

person (other than a foreign branch of a

U.S. bank that is a swap dealer or MSP).

Conversely, under the Commission’s

interpretation of 2(i), where a swap is

between a non-U.S. swap dealer or non-

U.S. MSP (including an affiliate of a

U.S. person) and a non-U.S.

counterparty (regardless of whether the

non-U.S. counterparty is a guaranteed or

conduit affiliate), the parties to the swap

would not be expected to comply with

the Category B Transaction-Level

Requirements. The reasons for the

Commission’s policies are discussed

below.

The application of the Category B

Transaction-Level Requirements is

summarized in Appendix E to this

Guidance, which should be read in

conjunction with the rest of this

Guidance.

a. Swaps With U.S. Swap Dealers and

U.S. MSPs

As explained above, where a swap is

with a U.S. swap dealer or U.S. MSP

(including an affiliate of a non-U.S.

person), the Commission’s policy is that

the parties to the swap should be subject

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595

For the reasons discussed in note 531, supra,

where the counterparty to the swap is an

international financial institution, the Commission

also generally would not expect the parties to the

swap to comply with the Category B Transaction-

Level Requirements, even if the principal place of

business of the international financial institution

were located in the United States.

596

See section C, supra, regarding the definition

of a foreign branch and the determination of when

a swap transaction is with a foreign branch for

purposes of this Guidance.

597

In this case, although the foreign branch

would not register separately as a swap dealer, the

Commission interprets 2(i) in a manner that would

permit the U.S. person to task its foreign branch to

fulfill its regulatory obligations with respect to the

Category B Transaction-Level Requirements. The

Commission would consider compliance by the

foreign branch or agency to constitute compliance

with these Transaction-Level Requirements.

However, under the Commission’s interpretation of

2(i), the U.S. person (principal entity) would remain

responsible for compliance with the Category B

Transaction-Level Requirements.

598

As noted above, for the reasons discussed in

note 531, where the counterparty to the swap is an

international financial institution, the Commission

also generally would not expect the parties to the

swap to comply with the Category B Transaction-

Level Requirements, even if the principal place of

business of the international financial institution

were located in the United States.

599

As discussed in greater detail above, the

Commission notes that there are no exempt DCOs

at this time. If and when the Commission

determines to exercise its authority to exempt DCOs

from applicable registration requirements, the

Commission would likely address, among other

things, the conditions and limitations applicable to

clearing swaps for customers subject to section 4d(f)

of the CEA.

600

See 17 CFR 23.402(b)–(c) (requiring swap

dealers and MSPs to obtain and retain certain

information only about each counterparty ‘‘whose

identity is known to the swap dealer or MSP prior

to the execution of the transaction’’); 23.430(e) (not

requiring swap dealers and MSPs to verify

counterparty eligibility when a transaction is

entered on a DCM or SEF and the swap dealer or

MSP does not know the identity of the counterparty

prior to execution); 23.431(c) (not requiring

disclosure of material information about a swap if

initiated on a DCM or SEF and the swap dealer or

MSP does not know the identity of the counterparty

prior to execution); 23.450(h) (not requiring swap

dealers and MSPs to have a reasonable basis to

believe that a Special Entity has a qualified,

independent representative if the transaction with

the Special Entity is initiated on a DCM or SEF and

the swap dealer or MSP does not know the identity

of the Special Entity prior to execution);

23.451(b)(2)(iii) (disapplying the prohibition on

entering into swaps with a governmental Special

Entity within two years after any contribution to an

official of such governmental Special Entity if the

swap is initiated on a DCM or SEF and the swap

dealer or MSP does not know the identity of the

Special Entity prior to execution).

to the Category B Transaction-Level

Requirements in full, regardless of

whether the counterparty is a U.S.

person or a non-U.S. person, without

substituted compliance available.

b. Swaps With Foreign Branches of a

U.S. Bank That Is a Swap Dealer or MSP

In the case of a swap with a foreign

branch of a U.S. bank that is a swap

dealer or MSP, the Commission’s policy

is that the Category B Transaction-Level

Requirements should apply only if the

counterparty to the swap is a U.S.

person (other than a foreign branch of a

U.S. bank that is a swap dealer or

MSP).

595

The Commission believes that where

a swap is between a foreign branch of

a U.S. bank that is a swap dealer or

MSP

596

and a U.S. person (other than a

foreign branch of a U.S. bank that is a

swap dealer or MSP), the swap has a

direct and significant connection with

activities in, or effect on, U.S.

commerce. Because of the significant

risks to U.S. persons and the financial

system presented by such swap

activities, under the Commission’s

interpretation of CEA section 2(i),

generally the parties to the swap should

comply with the Category B Transaction

Level Requirements. Whenever a swap

involves at least one counterparty that is

a U.S. person, the Commission believes

it has a strong supervisory interest in

regulating and enforcing Transaction-

Level Requirements, including external

business conduct standards. In this case,

the Commission believes the transaction

should be viewed as being between two

U.S. persons. For these reasons, the

Commission’s policy under section 2(i)

is that substituted compliance would

not be available.

597

However, where the swap is between

a foreign branch of a U.S. bank that is

a swap dealer or MSP, on the one hand,

and a non-U.S. person on the other

(whether or not such non-U.S. person is

a guaranteed or conduit affiliate), the

Commission believes that the interests

of the foreign jurisdiction in applying its

own transaction-level requirements to

the swap are sufficiently strong that the

Category B Transaction-Level

Requirements generally should not

apply under section 2(i). In this case,

even though the Commission considers

a foreign branch of a U.S. bank that is

a swap dealer or MSP to be a U.S.

person, the Commission believes that

because the counterparty is a non-U.S.

person and the swap takes place outside

the United States, foreign regulators

may have a relatively stronger

supervisory interest in regulating and

enforcing sales practices related to the

swap. Therefore, in light of international

comity principles, the Commission

believes that application of the Category

B Transaction-Level Requirements may

not be warranted in this case. Therefore,

under the Commission’s interpretation

of section 2(i), the parties to the swap

generally would not be expected to

comply with the Category B

Transaction-Level Requirements.

The Commission believes that, in the

context of the Category B Transaction-

Level Requirements, the same reasoning

also should apply to a swap between

two foreign branches of U.S. banks that

are each swap dealers or MSPs. Just as

the Commission would have a strong

supervisory interest in regulating and

enforcing sales practices associated with

activities taking place within the United

States, the foreign regulators would

have a similar claim to overseeing sales

practices occurring within their

jurisdiction.

Accordingly, the Commission

interprets CEA section 2(i) so that where

a swap is between the foreign branch of

a U.S. bank that is a swap dealer or

MSP, on the one hand, and either a non-

U.S. person or a foreign branch of a U.S.

bank that is a swap dealer or MSP, on

the other, the parties to the swap

generally would not be expected to

comply with the Category B

Transaction-Level Requirements.

c. Swaps With Non-U.S. Swap Dealers

and Non-U.S. MSPs

Under the Commission’s

interpretation of 2(i), where a swap is

between a non-U.S. swap dealer or non-

U.S. MSP (including an affiliate of a

U.S. person), on the one hand, and a

U.S. person, on the other, the parties to

the swap generally would be expected

to comply with the Category B

Transaction-Level Requirements.

598

the Commission’s view, in this case, the

swap should be subject to the provisions

of Title VII of the Dodd-Frank Act and

Commission implementing regulations,

including the Category B Transaction-

Level Requirements. Because of the

significant risks to U.S. persons and the

financial system presented by swap

activities outside the United States

where one of the counterparties to the

swap is a U.S. person (whether inside or

outside the United States), the

Commission believes that a U.S.

person’s swap activities with a non-U.S.

counterparty has the requisite direct and

significant connection with activities in,

or effect on, U.S. commerce under CEA

section 2(i) to apply the Category B

Transaction-Level Requirements to the

transaction.

The Commission observes that, where

a swap between a non-U.S. swap dealer

and a U.S. person is executed

anonymously on a registered DCM or

SEF and cleared by a registered DCO,

599

the Category B Transaction-Level

Requirements would not be

applicable.

600

Because a registered FBOT is

analogous to a DCM, the Commission is

of the view that the requirements

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601

See Appendix E to this Guidance for a

summary of these requirements and the discussion

in section E, supra.

602

See section IV.D, supra. Part 45 of the

Commission’s regulations requires swap

counterparties that are not swap dealers or MSPs to

keep ‘‘full, complete and systematic records,

together with all pertinent data and memoranda’’

with respect to each swap to which they are a

counterparty. See 17 C.F. R. 45.2. Such records

must include those demonstrating that they are

entitled, with respect to any swap, to make use of

the clearing exception in CEA section 2(h)(7). Swap

counterparties that are not swap dealers or MSPs

must also comply with the Commission’s

regulations in part 46, which address the reporting

of data relating to pre-enactment swaps and data

relating to transition swaps.

603

Nothing in this Guidance should be construed

to address the ability of a foreign board of trade to

offer swaps to U.S. persons pursuant to part 48 of

the Commission’s regulations.

604

See Proposed Guidance, 77 FR 41234 n. 138.

Further, in the Proposed Guidance, the Commission

stated that it believes that section 2(i) does not

require a transaction-by-transaction determination

that a particular swap outside the United States has

a direct and significant connection with activities

in, or effect on, commerce of the United States in

order to apply the swaps provisions of the CEA to

such transactions; rather, it is the aggregate of such

activities and the aggregate connection of such

activities with activities in the U.S. or effect on U.S.

commerce that warrants application of the CEA

swaps provisions to all such activities. See

Hoffmann-La Roche, 542 U.S. at 168 (responding

that respondents’ recommendation that the court

should take account of comity considerations on a

case by case basis is ‘‘too complex to prove

workable’’).

605

For the reasons discussed in note 531, supra,

one or more of the counterparties to a swap between

non-registrants is an international financial

institution, the Commission generally would not

expect the parties to the swap to comply with the

Non-Registrant Requirements, even if the principal

place of business of the international financial

institution were located in the United States.

likewise would not be applicable where

such a swap is executed anonymously

on a registered FBOT and cleared.

Conversely, under the Commission’s

interpretation of 2(i), where a swap is

between a non-U.S. swap dealer or non-

U.S. MSP (including an affiliate of a

U.S. person) and a non-U.S.

counterparty (regardless of whether the

non-U.S. counterparty is a guaranteed or

conduit affiliate), the parties to the swap

would not be expected to comply with

the Category B Transaction-Level

Requirements. The Commission believes

that regulators may have a relatively

stronger supervisory interest in

regulating the Category B Transaction-

Level Requirements related to swaps

between non-U.S. persons taking place

outside the United States than the

Commission, and that therefore

applying the Category B Transaction-

Level Requirements to these

transactions may not be warranted. The

Commission notes that just as the

Commission would have a strong

supervisory interest in regulating and

enforcing the Category B Transaction-

Level Requirements associated with

activities taking place in the United

States, foreign regulators would have a

similar claim to overseeing sales

practices for swaps occurring within

their jurisdiction.

For the reasons stated in section b

above, under the Commission’s

interpretation of section 2(i), where a

swap is between a non-U.S. swap dealer

or non-U.S. MSP (including an affiliate

of a U.S. person), on the one hand, and

the foreign branch of a U.S. bank that is

a swap dealer or MSP, on the other, the

parties to the swap generally would not

be expected to comply with the

Category B Transaction-Level

Requirements.

As noted previously, under the 2(i)

interpretations, substituted compliance

is generally not expected to be

applicable to the Category B

Transaction-Level Requirements under

this Guidance.

601

H. Application of the CEA’s Swap

Provisions and Commission Regulations

to Market Participants That Are Not

Registered as a Swap Dealer or MSP

This section sets forth the

Commission’s general policy on

application of the CEA’s swaps

provisions and Commission regulations

to swap counterparties that are not

registered as swap dealers or MSPs

(‘‘non-registrants’’), including the

circumstances under which the

counterparties would be eligible for

substituted compliance.

Several of the CEA’s swaps provisions

and Commission regulations—namely,

those relating to required clearing, trade

execution, real-time public reporting,

Large Trader Reporting, SDR Reporting,

and swap data recordkeeping

(collectively, the ‘‘Non-Registrant

Requirements’’)

602

—also apply to

persons or counterparties other than a

swap dealer or MSP. In this section, the

Commission sets forth the Commission’s

policy on application of these Non-

Registrant Requirements to cross-border

swaps in which neither counterparty is

a swap dealer or MSP (i.e., all other

market participants including ‘‘financial

entities,’’ as defined in CEA section

2(h)(7)(C)).

603

Section 1 discusses the Commission’s

policy under CEA section 2(i) with

regard to the application of the Non-

Registrant Requirements to cross-border

swaps between two non-registrants

where one (or both) of the

counterparties to the swap is a U.S.

person. Substituted compliance is not

applicable where one (or both) swap

counterparties is a U.S. person.

Section 2 discusses the Commission’s

policy under CEA section 2(i) with

regard to the application of the Non-

Registrant Requirements to cross-border

swaps between two non-registrants

where both counterparties to the swap

are non-U.S. persons. The eligibility of

various counterparties to such swaps for

substituted compliance is also

addressed in section 2.

The application of the specified

Dodd-Frank provisions and Commission

regulations specified below to swaps

between counterparties that are neither

swap dealers nor MSPs is summarized

in Appendix F to this Guidance, which

should be read in conjunction with the

rest of this Guidance.

1. Swaps Between Non-Registrants

Where One or More of the Non-

Registrants is a U.S. Person

As noted in the Proposed Guidance,

to manage risks in a global economy,

U.S. persons may need to, and

frequently do, transact swaps with both

U.S. and non-U.S. counterparties. The

swap activities of U.S. persons,

particularly those with global

operations, frequently occur outside of

U.S. borders.

With regard to cross-border swaps

between two non-registrants where one

(or both) of the counterparties to the

swap is a U.S. person (including an

affiliate of a non-U.S. person), the

Commission’s interprets CEA 2(i) such

that the parties to the swap generally

would be expected to comply with the

Non-Registrant Requirements. As the

Commission noted in the Proposed

Guidance, the risks to U.S. persons and

the U.S. financial system do not depend

on the location of the swap activities of

U.S. persons.

604

Where one or both of

the counterparties to a swap between

two non-registrants is a U.S. person, the

Commission believes that the U.S.

persons’ swap activities (whether inside

or outside the United States)—due their

presence in the U.S. and relationship to

U.S. commerce—have a direct and

significant connection with activities in,

or effect on, U.S. commerce. Therefore,

the Commission’s policy is that where a

swap transaction is between non-

registrants, and one or more of the

counterparties is a U.S. person,

generally the parties to the swap will be

expected to comply in full with the

Non-Registrant Requirements.

605

addition, where one or more of the

counterparties to a swap between non-

registrants is a U.S. person, the

Commission’s policy generally is that

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606

See Restatement §§ 403(2)(a)–(c).

607

The Commission notes that under CEA section

5b(h), the Commission has discretionary authority

to exempt DCOs, conditionally or unconditionally,

from the applicable DCO registration requirements.

Specifically, section 5b(h) of the Act provides that

‘‘[t]he Commission may exempt, conditionally or

unconditionally, a derivatives clearing organization

from registration under this section for the clearing

of swaps if the Commission determines that the

[DCO] is subject to comparable, comprehensive

supervision and regulation by the Securities and

Exchange Commission or the appropriate

government authorities in the home country of the

organization.’’ Thus, the Commission has discretion

to exempt from registration DCOs that, at a

minimum, are subject to comparable and

comprehensive supervision by another regulator.

The Commission further notes that it has not yet

exercised its discretionary authority to exempt

DCOs from registration, and that until such time as

the Commission determines to exercise such

authority, swaps subject to the clearing requirement

must be submitted to registered DCOs for clearing.

608

In addition to the End-User Exception under

CEA section 2(h)(7), which is codified in

Commission regulation 50.50, as noted above, the

Commission has adopted an exemption from

required clearing for swaps between certain

affiliated entities, codified at Commission

regulation 50.52. See Inter-Affiliate Exemption, 78

FR 21750.

609

Id. at 21765 (requiring, among other

conditions, that eligible affiliate counterparties

electing the exemption from clearing for the inter-

affiliate swap must clear their swaps with

unaffiliated counterparties, and permitting eligible

affiliate counterparties located in foreign

jurisdictions to clear such swaps pursuant to their

applicable foreign jurisdictions’ clearing regime, if

the Commission determines that such regime is

comparable and comprehensive to the U.S. clearing

mandate).

610

In particular, in the Inter-Affiliate Exemption,

the Commission permitted eligible affiliate

counterparties located outside of the U.S. to comply

with a condition of the exemption to clear their

swaps with unaffiliated counterparties (not located

in the U.S.), to the extent such swaps are subject

to the clearing requirement under section 2(h)(1) of

the CEA, by complying with the requirements of a

foreign jurisdiction’s clearing mandate, including

any exception or exemption granted under the

foreign clearing mandate, provided that the

Commission determines that: (i) such foreign

jurisdiction’s clearing mandate is comparable and

comprehensive, but not necessarily identical, to the

clearing requirement established under the CEA

and part 50 of the Commission’s regulations, and

(ii) the exception or exemption is determined to be

comparable to an exception or exemption provided

under the CEA or part 50 of the Commission’s

regulations. See 17 CFR 50.52(b)(4)(i).

substituted compliance is not available,

for the reasons discussed below.

As noted in section D above, the

Dodd-Frank Act’s required clearing and

swap processing requirements protect

counterparties from the counterparty

credit risk of their original

counterparties, which in turn, protects

against the accumulation of systemic

risk because of the risk mitigation

benefits offered by central clearing.

Similarly, the trade execution and real-

time public reporting requirements

serve to promote both pre- and post-

trade transparency which, in turn,

enhance price discovery and decrease

risk. Together, these requirements serve

an essential role in protecting U.S.

market participants and the general

market against financial losses. The

Commission cannot fully and

responsibly fulfill its charge to protect

the U.S. markets and market

participants through a substituted

compliance regime where one

counterparty is a U.S. person.

Accordingly, the Commission’s policy is

to expect full compliance with the Non-

Registrant Requirements relating to

required clearing, trade execution, and

real-time public reporting with regard to

any swaps between non-registrants

where one or both of the counterparties

is a U.S. person. For substantially the

same reasons, application of U.S.

requirements in these transactions is a

reasonable exercise of U.S. jurisdiction

under principles of foreign relations

law.

606

Large Trader Reporting provides the

Commission with data regarding large

positions in swaps with a direct or

indirect linkage to specified U.S.-listed

physical commodity futures contracts,

in order to enable the Commission to

implement and conduct effective

surveillance of these economically

equivalent swaps and futures. To

facilitate the monitoring of trading

across the swaps and futures markets,

swaps positions must be converted to

futures equivalents for reporting

purposes; reportable thresholds are also

defined in terms of futures equivalents.

As discussed in further detail in section

G above, in light of the very specific

interest of the Commission in

conducting effective surveillance of

markets in swaps that have been

determined to be economically

equivalent to U.S. listed physical

commodity futures contracts, and given

the anticipated impediments to

obtaining directly comparable positional

data through any foreign swap data

reporting regime, the Commission’s

policy is to construe CEA section 2(i) in

a manner that would not recognize

substituted compliance in lieu of

compliance with Large Trader

Reporting.

As noted in section E, data reported

under the SDR Reporting rules provide

the Commission with information

necessary to better understand and

monitor concentrations of risk, as well

as risk profiles of individual market

participants. Swap data recordkeeping

is an important component of an

effective internal risk management

process. Therefore, the Commission’s

policy is that generally both SDR

Reporting and swap data recordkeeping

should apply in full where one of the

counterparties to a swap between two

non-registrants (non-swap dealers or

non-MSPs) is a U.S. person.

As noted above, the clearing of swaps

through a DCO mitigates counterparty

credit risk and collateralizes the credit

exposures posed by swaps. Section

2(h)(1) of the CEA requires a swap to be

submitted for clearing to a registered

DCO or a DCO that is exempt from

registration under the CEA, if the

Commission has determined that the

swap is required to be cleared.

607

The

Commission has adopted a clearing

requirement determination pursuant to

the CEA and rules under part 50 of the

Commission’s regulations such that

certain classes of swaps are required to

be cleared, unless counterparties to the

swap qualify for an exception or

exemption from clearing under the CEA

or part 50 of the Commission’s

regulations.

608

In the final rules

adopting the Inter-Affiliate Exemption,

the Commission stated that a U.S.

person that enters into any swap that is

required to be cleared is subject to the

clearing requirements of the CEA and

part 50 of the Commission’s

regulations.

609

Accordingly, in the

context of this Guidance, the

Commission’s policy is that the clearing

requirement under section 2(h)(1) and

part 50 of the Commission’s regulations

applies in full to a swap where at least

one of the counterparties to the swap is

a U.S. person, without substituted

compliance available. But substituted

compliance may be available with

respect to the clearing requirement for

swaps between, on the one hand, a U.S.

swap dealer or U.S. MSP acting through

its foreign branch or a non-U.S. person

that is a guaranteed or conduit affiliate,

and on the other hand, a non-U.S. swap

dealer, non-U.S. MSP or other non-U.S.

person.

With respect to the clearing

requirement, the Commission has

previously addressed both the scope

and process of a comparability

determination, which also would apply

to the extent that substituted

compliance is applicable under this

Guidance.

610

As for the process for determining

comparability of a foreign jurisdiction’s

clearing mandate, the Commission has

also previously stated that it will review

the comparability and

comprehensiveness of a foreign

jurisdiction’s clearing mandate by

reviewing: (i) The foreign jurisdiction’s

laws and regulations with respect to its

mandatory clearing regime (i.e.,

jurisdiction-specific review) and (ii) the

foreign jurisdiction’s clearing

determinations with respect to each

class of swaps for which the

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611

The Commission further explained that

comparability will not require a regime identical to

the clearing framework established under the CEA

and the Commission regulations. Rather, the

Commission anticipates that it will make

jurisdiction-specific comparability determinations

by comparing the regulatory requirements of a

foreign jurisdiction’s clearing regime with the

requirements and objectives of the Dodd-Frank Act.

The Commission further noted that it anticipates

that the product-specific comparability

determination will necessarily be made on the basis

of whether the applicable swap is included in a

class of swaps covered under Commission

regulation 50.4.

612

The Commission’s part 20 regulations set forth

large trader reporting rules for physical commodity

swaps. See 76 FF 43851 (Jul. 22, 2011). Part 20

requires routine swaps position reports from

clearing organizations, clearing members and swap

dealers, and establishes certain non-routine

reporting requirements for large swaps traders.

Among other things, part 20 requires that a

reporting entity, as defined in Commission

regulation 20.1, disclose the identity of the

counterparty in respect of which positional

information is being reported in large swap trader

reports and associated filings. See 76 FR. 43851 at

43863–4 n.11.

613

The Dodd-Frank Act added to the CEA

provisions requiring the retention and reporting of

data related to swap transactions. Section 727 of the

Dodd-Frank Act added section 2(a)(13)(g), which

requires that all swaps, whether cleared or

uncleared, be reported to an SDR. Section 728 of

the Dodd-Frank Act added section 21(b), which

directs the Commission to prescribe standards for

swap data recordkeeping and reporting. Section 723

of the Dodd-Frank Act added section 2(h)(5), which

addresses the reporting of swap data for swaps

executed before the enactment of the Dodd-Frank

Act and swaps executed on or after the date of its

enactment. The Commission’s swap data reporting

and recordkeeping requirements are found in part

45, which establishes swap data recordkeeping and

SDR reporting requirements; and part 46, which

establishes swap data recordkeeping and SDR

reporting requirements for pre-enactment and

transition swaps (collectively, ‘‘historical swaps’’).

See 77 FR 2136 (Jan. 13, 2012) (part 45); 77 FR

35200 (June 12, 2012) (part 46). Under both part 45

and part 46 (collectively, the ‘‘swap data reporting

rules’’) reporting parties have swap data reporting

obligations. The swap data reporting rules further

prescribe certain data fields that must be included

in swap data reporting. See Appendix 1 to part 45;

Appendix 1 to part 46. For all swaps subject to the

Commission’s jurisdiction, each counterparty must

be identified by means of a single legal entity

identifier (‘‘LEI’’) in all swap data reporting

pursuant to parts 45 and 46. A reporting

counterparty, as defined in Commission regulations

45.1 and 46.1, respectively, has obligations that

include providing certain data to the SDR relating

to the primary economic terms (‘‘PET’’) of the swap,

including the LEI of the non-reporting counterparty.

614

The Commission clarifies that the trading

mandate under CEA section 2(h)(8)(A) is satisfied

by trading on a registered DCM or SEF or a SEF that

is exempt from registration.

615

The Commission clarifies that the trading

mandate under CEA section 2(h)(8)(A) is satisfied

by trading on a registered FBOT.

616

See the Proposed Guidance, 77 FR 41234–

41235.

617

See id. at 41234 n. 139, 41235.

Commission has issued a clearing

determination under Commission

regulation 50.4 (i.e., product-specific

review).

611

In determining whether an

exemption or exception under a

comparable foreign mandate is

comparable to an exception or

exemption under the CEA or part 50, the

Commission anticipates that it would

review, for comparability purposes, the

foreign jurisdiction’s laws and

regulations with respect to its

mandatory clearing regime, as well as

the relevant exception or exemption,

and would exercise broad discretion to

determine whether the requirements

and objectives of such exemption are

consistent with those under the

comparable foreign clearing regime.

The Commission is also of the view

that where a swap is executed

anonymously on a registered DCM or

SEF between two non-registrants and

cleared by a registered DCO, and one (or

both) of the counterparties to the swap

is a U.S. person, neither party to the

swap should be required to comply with

the Non-Registrant Requirements that

otherwise apply to the swap, with the

exception of Large Trader Reporting,

612

SDR Reporting, and swap data

recordkeeping.

613

The Commission

notes that in this case, the DCM or SEF

will fulfill the required clearing, trade

execution,

614

and real-time public

reporting requirements that apply to the

swap.

Further, the Commission is of the

view that where a swap is executed

anonymously between two non-

registrants on a registered FBOT and

cleared and one (or both) of the

counterparties to the swap is a U.S.

person, neither party to the swap (as is

the case when the swap is executed

anonymously on a DCM) should be

required to comply with the Non-

Registrant Requirements that otherwise

apply to the swap, with the exception of

Large Trader Reporting, SDR Reporting

and swap data recordkeeping. The

Commission notes that in this case, the

registered FBOT, as would the DCM,

will fulfill the required clearing and

trade execution requirements

615

that

apply to the swap but not, without

further action, the real-time public

reporting requirements.

The Commission expects that

derivatives markets and regulatory

regimes will continue to evolve in the

future. In order to ensure a level playing

field, promote participation in

transparent markets, and promote

market efficiency, the Commission will,

through staff no action letters, extend

appropriate time-limited transitional

relief to certain European Union-

regulated multilateral trading facilities

(MTFs), in the event that the

Commission’s trade execution

requirement is triggered before March

15, 2014. Such relief would be available

through March 15th for MTFs that have

multilateral trading schemes, a

sufficient level of pre- and post-trade

price transparency, non-discriminatory

access by market participants, and an

appropriate level of oversight. In

addition, the Commission will consult

with the European Commission in

giving consideration to extending

regulatory relief to European Union-

regulated trading platforms that are

subject to requirements that achieve

regulatory outcomes that are comparable

to those achieved by the requirements

for SEFs. Both parties will assess

progress in January 2014.

2. Swaps Between Non-Registrants That

Are Both Non-U.S. Persons

As noted above, where a swap is

between two non-U.S. persons and

neither counterparty is required to

Commission proposed interpreting CEA

section 2(i) so as not to apply the Non-

Registrant Requirements,

616

with the

exception of Large Trader Reporting.

617

Section a discusses the Commission’s

policy on application of Large Trader

Reporting to swaps between two non-

registrants that are not U.S. persons.

Section b discusses the application of

the other Non-Registrant Requirements

to swaps between two non-registrants

that are not U.S. persons, where each of

the counterparties to the swap is a

guaranteed or conduit affiliate, and the

availability of substituted compliance

for the parties to such swaps. Section c

discusses the Commission’s policy on

application of the Non-Registrant

Requirements other than Large Trader

Reporting to swaps between non-

registrants that are not U.S. persons

where neither or only one of the

counterparties is a guaranteed or

conduit affiliate.

a. Large Trader Reporting

Large Trader Reporting requires

routine positional reports from clearing

members in addition to clearing

organizations and swap dealers. As is

the case with swap dealers, routine

reports are required from clearing

members to the extent that they hold

significant positions in the swaps

subject to Large Trader Reporting—

swaps that are directly or indirectly

linked to specified U.S.-listed physical

commodity futures contracts. Routine

reporting provides essential visibility

into the trading activity of large market

participants, which enables the

Commission to conduct effective

surveillance of markets in swaps and

futures that have been determined to be

economically equivalent. Given the

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618

To the extent that they transact in the physical

commodity swaps covered by the Commission’s

Large Trader Reporting rules, non-U.S. clearing

members also should maintain the records required

by such rules.

619

As noted above, this Guidance uses the term

‘‘guaranteed or conduit affiliate’’ to refer to a non-

U.S. person that is guaranteed by a U.S. person or

that is an affiliate conduit.

620

The Commission proposed to interpret section

2(i) so that the Non-Registrant Requirements would

not apply to swaps between two non-registrants

(whether or not one or more counterparties was

guaranteed by a U.S. person), with the exception of

Large Trader Reporting. The Commission noted in

the Proposed Guidance that it intended to review

the issue of affiliate conduits. See Proposed

Guidance, 77 FR 1234–41235.

linkage of the swaps covered by Large

Trader Reporting to U.S. futures

markets, the Commission believes that

any non-U.S. clearing member that

holds positions in such swaps that are

significant enough to trigger routine

reporting obligations is engaged in

activities that have a direct and

significant connection with activities in,

or effect on, commerce of the United

States. Consistent with the Proposed

Guidance, the Commission’s policy, in

light of its interpretation of CEA section

2(i), is that any such non-U.S. clearing

member should report all reportable

positions to the Commission.

618

Large Trader Reporting also

establishes recordkeeping requirements

for traders with significant positions in

the covered physical commodity swaps.

Given the vital role that Large Trader

Reporting plays in ensuring that the

Commission has access to

comprehensive data regarding trading

activity in swaps linked to U.S. futures,

the Commission’s policy, in light of its

interpretation of CEA section 2(i), is that

non-U.S. persons with positions that

meet the prescribed recordkeeping

thresholds should comply with the

prescribed recordkeeping requirements.

The Commission notes that traders,

which are not swap dealers or clearing

members with routine Large Trader

Reporting obligations, may generally

keep books and records regarding their

transactions in the covered physical

commodity swaps and produce them for

inspection by the Commission in the

record retention format that such traders

have developed in the normal course of

their business operations.

b. Swaps Where Each of The

Counterparties Is Either a Guaranteed or

Conduit Affiliate

In contrast to the Proposed Guidance,

where a swap is between two non-

registrants that are not U.S. persons, and

each of the counterparties to the swap

is a guaranteed or conduit affiliate,

619

the parties to the swap generally should

be expected to comply with the Non-

Registrant Requirements with respect to

the transaction. However, where at least

one of the parties to the swap is an

‘‘affiliate conduit,’’ the Commission

would generally expect the parties to

the swap only to comply with (to the

extent that the Inter-Affiliate Exemption

is elected), the conditions of the Inter-

Affiliate Exemption, including the

treatment of outward-facing swaps

condition in Commission regulation

50.52(b)(4)(i). In addition, the part 43

real-time reporting requirements must

be satisfied.

The Commission has not interpreted

CEA section 2(i) so as to include a

guaranteed or conduit affiliate in the

interpretation of the term ‘‘U.S. person’’

solely because of the guarantee or

affiliation. Where each of the

counterparties to the swap are non-

registrants that are guaranteed or

conduit affiliates, the Commission

believes that the risks to U.S. persons

and to the U.S. financial system

sufficiently increase so that the

additional measure of applying the Non-

Registrant Requirements to the swap is

warranted (but with substituted

compliance available, to the extent

applicable).

620

The Commission notes

that in the case of guarantees by U.S.

persons, if there is a default by the non-

U.S. person, the U.S. guarantor

generally would be held responsible to

settle the obligations. In the case of

affiliate conduits, a non-U.S. affiliate

could effectively operate as a conduit

for the U.S. person, and could be used

to execute swaps with counterparties in

foreign jurisdictions, outside the Dodd-

Frank Act regulatory regime.

Therefore, where a swap is between

two non-registrants that are guaranteed

or conduit affiliates, the Commission

believes that the swap has a ‘‘direct and

significant connection with activities in,

or effect on, commerce of the United

States’’ within the meaning of CEA

section 2(i) so that certain Entity-Level

and Transaction-Level Requirements

would apply to the swap counterparties.

Consistent with section 2(i), however,

the Commission’s policy generally is to

make the parties to the swap eligible for

substituted compliance (except with

regard to Large Trader Reporting, and

provided that SDR Reporting would be

eligible for substituted compliance only

if the Commission has direct access to

all of the reported swap data elements

that are stored at a foreign trade

repository).

c. Swaps Where Neither or Only One of

the Parties is a Guaranteed or Conduit

Affiliate

With respect to swaps between two

non-registrants where neither or only

one party is a guaranteed or conduit

affiliate, the Commission’s policy is that

the parties to the swap generally should

not be expected to comply with the

Non-Registrant Requirements, except as

described below.

As discussed above, where a

counterparty to a swap is a guaranteed

or conduit affiliate, the risks to U.S.

persons and to the U.S. financial system

increase. In the case of guarantees by

U.S. persons, if there is a default by the

non-U.S. person, the U.S. guarantor

would be held responsible to settle the

obligations. In the case of affiliate

conduits, a non-U.S. affiliate could

effectively operate as a ‘‘conduit’’ for the

U.S. person, and could be used to

execute swaps with counterparties in

foreign jurisdictions, outside the Dodd-

Frank Act regulatory regime.

Nevertheless, the Commission also

recognizes that foreign jurisdictions may

have an interest in regulating swaps

between two non-registrants where both

counterparties to the swap are non-U.S.

persons. Therefore, consistent with

international comity principles, the

Commission would generally expect the

parties to the swap only to comply with

(to the extent that the Inter-Affiliate

Exemption is elected), the conditions of

the Inter-Affiliate Exemption, including

the treatment of outward-facing swaps

condition in Commission regulation

50.52(b)(4)(i), and Large Trader

Reporting. The Commission believes

that this policy strikes the right balance

between U.S. interests in regulating

such a swap and the interest of foreign

regulators.

V. Appendix A—The Entity-Level

Requirements

A. First Category of Entity-Level

Requirements

The First Category of Entity-Level

Requirements includes capital

adequacy, chief compliance officer, risk

management, and swap data

recordkeeping (except certain aspects of

swap data recordkeeping relating to

complaints and sales materials).

1. Capital Adequacy

Section 4s(e)(2)(B) of the CEA

specifically directs the Commission to

set capital requirements for swap

dealers and MSPs that are not subject to

the capital requirements of U.S.

prudential regulators (hereinafter

referred to as ‘‘non-bank swap dealers or

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621

See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the

CEA explicitly requires the adoption of rules

establishing capital and margin requirements for

swap dealers and MSPs, and applies a bifurcated

approach that requires each swap dealer and MSP

for which there is a U.S. prudential regulator to

meet the capital and margin requirements

established by the applicable prudential regulator,

and each swap dealer and MSP for which there is

no prudential regulator to comply with the

Commission’s capital and margin regulations. See 7

U.S.C. 6s(e). Further, systemically important

financial institutions (‘‘SIFIs’’) that are not FCMs

would be exempt from the Commission’s capital

requirements, and would comply instead with

Federal Reserve Board requirements applicable to

SIFIs, while nonbank (and non-FCM) subsidiaries of

U.S. bank holding companies would calculate their

Commission capital requirement using the same

methodology specified in Federal Reserve Board

regulations applicable to the bank holding

company, as if the subsidiary itself were a bank

holding company. The term ‘‘prudential regulator’’

is defined in CEA section 1a(39) as the Board of

Governors of the Federal Reserve System, the Office

of the Comptroller of the Currency, the Federal

Deposit Insurance Corporation, the Farm Credit

Administration, and the Federal Housing Finance

Agency. See 7 U.S.C. 1a(39). In addition, in the

proposed capital regulations for swap dealers and

MSPs, the Commission solicited comment regarding

whether it would be appropriate to permit swap

dealers and MSPs to use internal models for

computing market risk and counterparty credit risk

charges for capital purposes if such models had

been approved by a foreign regulatory authority and

were subject to periodic assessment by such foreign

regulatory authority. See Proposed Capital

Requirements, 76 FR 27802.

622

See 7 U.S.C. 6s(e)(3)(A).

623

See 7 U.S.C. 6s(e). See also Proposed Capital

Requirements, 76 FR 27802. ‘‘The Commission’s

capital proposal for [swap dealers] and MSPs

includes a minimum dollar level of $20 million. A

non-bank [swap dealer] or MSP that is part of a U.S.

bank holding company would be required to

maintain a minimum of $20 million of Tier 1

capital as measured under the capital rules of the

Federal Reserve Board. [A swap dealer] or MSP that

also is registered as an FCM would be required to

maintain a minimum of $20 million of adjusted net

capital as defined under [proposed] section 1.17. In

addition, an [swap dealer] or MSP that is not part

of a U.S. bank holding company or registered as an

FCM would be required to maintain a minimum of

$20 million of tangible net equity, plus the amount

of the [swap dealer’s] or MSP’s market risk

exposure and OTC counterparty credit risk

exposure.’’ See id. at 27817.

624

See 7 U.S.C. 6s(k).

625

7 U.S.C. 6s(j).

626

See Final Swap Dealer and MSP

Recordkeeping Rule, 77 FR 20128 (relating to risk

management program, monitoring of position

limits, business continuity and disaster recovery,

conflicts of interest policies and procedures, and

general information availability, respectively).

627

Customer Documentation Rule, 77 FR 21278.

Also, swap dealers must comply with Commission

regulation 23.608, which prohibits swap dealers

providing clearing services to customers from

entering into agreements that would: (i) Disclose the

identity of a customer’s original executing

counterparty; (ii) limit the number of counterparties

a customer may trade with; (iii) impose

counterparty-based position limits; (iv) impair a

customer’s access to execution of a trade on terms

that have a reasonable relationship to the best terms

available; or (v) prevent compliance with specified

time frames for acceptance of trades into clearing.

628

7 U.S.C. 6s(f)(1)(B).

629

7 U.S.C. 6s(g)(1).

630

17 CFR part 46; Proposed Data Rules, 76 FR

22833.

631

7 U.S.C. 2(a)(13)(G).

MSPs’’).

621

With respect to the use of

swaps that are not cleared, these

requirements must: ‘‘(1) [h]elp ensure

the safety and soundness of the swap

dealer or major swap participant; and

(2) [be] appropriate for the risk

associated with the non-cleared swaps

held as a swap dealer or major swap

participant.’’

622

Pursuant to section

4s(e)(3), the Commission proposed

regulations, which would require non-

bank swap dealers and MSPs to hold a

minimum level of adjusted net capital

(i.e., ‘‘regulatory capital’’) based on

whether the non-bank swap dealer or

MSP is: (i) also a FCM; (ii) not an FCM,

but is a non-bank subsidiary of a bank

holding company; or (iii) neither an

FCM nor a non-bank subsidiary of a

bank holding company.

623

The primary

purpose of the capital requirement is to

reduce the likelihood and cost of a swap

dealer’s or MSP’s default by requiring a

financial cushion that can absorb losses

in the event of the firm’s default.

2. Chief Compliance Officer

Section 4s(k) requires that each swap

dealer and MSP designate an individual

to serve as its chief compliance officer

(‘‘CCO’’) and specifies certain duties of

the CCO.

624

Pursuant to section 4s(k),

the Commission adopted regulation 3.3,

which requires swap dealers and MSPs

to designate a CCO who would be

responsible for administering the firm’s

compliance policies and procedures,

reporting directly to the board of

directors or a senior officer of the swap

dealer or MSP, as well as preparing and

filing with the Commission a certified

report of compliance with the CEA. The

chief compliance function is an integral

element of a firm’s risk management and

oversight and the Commission’s effort to

foster a strong culture of compliance

within swap dealers and MSPs.

3. Risk Management

Section 4s(j) of the CEA requires each

swap dealer and MSP to establish

internal policies and procedures

designed to, among other things,

address risk management, monitor

compliance with position limits,

prevent conflicts of interest, and

promote diligent supervision, as well as

maintain business continuity and

disaster recovery programs.

625

The

Commission adopted implementing

regulations (23.600, 23.601, 23.602,

23.603, 23.605, and 23.606).

626

The

Commission also adopted regulation

23.609, which requires certain risk

management procedures for swap

dealers or MSPs that are clearing

members of a derivatives clearing

organization (‘‘DCO’’).

627

Collectively,

these requirements help to establish a

robust and comprehensive internal risk

management program for swap dealers

and MSPs, which is critical to effective

systemic risk management for the

overall swaps market.

i. Swap Data Recordkeeping (Except

Certain Aspects of Swap Data

Recordkeeping Relating to Complaints

and Sales Materials)

CEA section 4s(f)(1)(B) requires swap

dealers and MSPs to keep books and

records for all activities related to their

business.

628

Sections 4s(g)(1) and (4)

require swap dealers and MSPs to

maintain trading records for each swap

and all related records, as well as a

complete audit trail for comprehensive

trade reconstructions.

629

Pursuant to

these provisions, the Commission

adopted regulations 23.201and 23.203,

which require swap dealers and MSPs

to keep records including complete

transaction and position information for

all swap activities, including

documentation on which trade

information is originally recorded.

Pursuant to regulation 23.203, records of

swaps must be maintained for the

duration of the swap plus 5 years, and

voice recordings for 1 year, and records

must be ‘‘readily accessible’’ for the first

2 years of the 5 year retention period.

Swap dealers and MSPs also must

comply with Parts 43, 45 and 46 of the

Commission’s regulations, which,

respectively, address the data

recordkeeping and reporting

requirements for all swaps subject to the

Commission’s jurisdiction, including

swaps entered into before the date of

enactment of the Dodd-Frank Act (‘‘pre-

enactment swaps’’) and swaps entered

into on or after the date of enactment of

the Dodd-Frank Act but prior to the

compliance date of the swap data

reporting rules (‘‘transition swaps’’).

630

B. Second Category of Entity-Level

Requirements

The Second Category of Entity-Level

Requirements includes SDR Reporting,

certain aspects of swap data

recordkeeping relating to complaints

and marketing and sales materials under

Commission regulations 23.201(b)(3)

and 23.201(b)(4) and Large Trader

Reporting.

1. SDR Reporting

CEA section 2(a)(13)(G) requires all

swaps, whether cleared or uncleared, to

be reported to a registered SDR.

631

CEA

section 21 requires SDRs to collect and

maintain data related to swaps as

prescribed by the Commission, and to

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632

7 U.S.C. 24a.

633

7 U.S.C. 6s(f)(1).

634

7 U.S.C. 6s(h)(1). See 7 U.S.C. 6s(h)(3).

635

Final Swap Dealer and MSP Recordkeeping

Rule, 77 FR 20128.

636

17 CFR 23.201(b)(3)(i).

637

17 CFR 23.201(b)(4).

638

7 U.S.C. 6t.

639

Large Trader Reporting for Physical

Commodity Swaps, 76 FR 43851. The rules require

routine position reporting by clearing organizations,

as well as clearing members and swap dealers with

reportable positions in the covered physical

commodity swaps. The rules also establish

recordkeeping requirements for clearing

organizations, clearing members and swap dealers,

as well as traders with positions in the covered

physical commodity swaps that exceed a prescribed

threshold. In general, the rules apply to swaps that

are linked, directly or indirectly, to either the price

of any of the 46 U.S.-listed physical commodity

futures contracts the Commission enumerates

(Covered Futures Contracts) or the price of the

physical commodity at the delivery location of any

of the Covered Futures Contracts.

640

7 U.S.C. 2(h)(1), (7).

641

77 FR 72284.

make such data electronically available

to particular regulators under specified

conditions related to confidentiality.

632

Part 45 of the Commission’s regulations

(and Appendix 1 thereto) sets forth the

specific swap data that must be reported

to a registered SDR, along with

attendant recordkeeping requirements;

and part 46 addresses recordkeeping

and reporting requirements for pre-

enactment and transition swaps

(‘‘historical swaps’’). The fundamental

goal of the part 45 rules is to ensure that

complete data concerning all swaps

subject to the Commission’s jurisdiction

is maintained in SDRs where it will be

available to the Commission and other

financial regulators for fulfillment of

their various regulatory mandates,

including systemic risk mitigation,

market monitoring and market abuse

prevention. Part 46 supports similar

goals with respect to pre-enactment and

transition swaps and ensures that data

needed by regulators concerning

‘‘historical’’ swaps is available to

regulators through SDRs. Among other

things, data reported to SDRs will

enhance the Commission’s

understanding of concentrations of risks

within the market, as well as promote a

more effective monitoring of risk

profiles of market participants in the

swaps market. The Commission also

believes that there are benefits that will

accrue to swap dealers and MSPs as a

result of the timely reporting of

comprehensive swap transaction data

and consistent data standards for

recordkeeping, among other things.

Such benefits include more robust risk

monitoring and management

capabilities for swap dealers and MSPs,

which in turn will improve the

monitoring of their current swaps

market positions.

2. Swap Data Recordkeeping Relating to

Complaints and Marketing and Sales

Materials

CEA section 4s(f)(1) requires swap

dealers and MSPs to ‘‘make such reports

as are required by the Commission by

rule or regulation regarding the

transactions and positions and financial

condition of the registered swap dealer

or major swap participant.’’

633

Additionally, CEA section 4s(h) requires

swap dealers and MSPs to ‘‘conform

with such business conduct standards

. . . as may be prescribed by the

Commission by rule or regulation.’’

634

Pursuant to those authorities, the

Commission promulgated final rules

that set forth certain reporting and

recordkeeping for swap dealers and

MSPs.

635

Commission Regulation

23.201 states that ‘‘[e]ach swap dealer

and major swap participant shall keep

full, complete, and systematic records of

all activities related to its business as a

swap dealer or major swap participant.’’

Such records must include, among other

things, ‘‘[a] record of each complaint

received by the swap dealer or major

swap participant concerning any

partner, member, officer, employee, or

agent,’’

636

as well as ‘‘[a]ll marketing

and sales presentations, advertisements,

literature, and communications.’’

637

3. Physical Commodity Large Swaps

Trader Reporting (Large Trader

Reporting)

CEA section 4t

638

authorizes the

Commission to establish a large trader

reporting system for significant price

discovery swaps (of which the

economically equivalent swaps subject

to the Commission’s part 20 rules are a

subset). Pursuant thereto, the

Commission adopted its Large Trader

Reporting rules (part 20 of the

Commission regulations), which require

routine reports from swap dealers,

among other entities, that hold

significant positions in swaps that are

linked, directly or indirectly, to a

prescribed list of U.S.-listed physical

commodity futures contracts.

639

Additionally, Large Trader Reporting

requires that swap dealers, among other

entities, comply with certain

recordkeeping obligations.

VI. Appendix B—The Transaction-

Level Requirements

The Transaction-Level Requirements

cover a range of Dodd-Frank

requirements: some of the requirements

more directly address financial

protection of swap dealers (or MSPs)

and their counterparties; others address

more directly market efficiency and/or

price discovery. Further, some of the

Transaction-Level Requirements can be

classified as Entity-Level Requirements

and applied on a firm-wide basis across

all swaps or activities. Nevertheless, in

the interest of comity principles, the

Commission believes that the

Transaction-Level Requirements may be

applied on a transaction-by-transaction

basis.

A. Category A: Risk Mitigation and

Transparency

1. Required Clearing and Swap

Processing

Section 2(h)(1) of the CEA requires a

swap to be submitted for clearing to a

DCO if the Commission has determined

that the swap is required to be cleared,

unless one of the parties to the swap is

eligible for an exception from the

clearing requirement and elects not to

clear the swap.

640

Clearing via a DCO

mitigates the counterparty credit risk

between swap dealers or MSPs and their

counterparties.

Commission regulations

implementing the first designations of

swaps for required clearing were

published in the Federal Register on

December 13, 2012.

641

Under

Commission regulation 50.2, all persons

executing a swap that is included in a

class of swaps identified under

Commission regulation 50.4 must

submit such swap to an eligible

derivatives clearing organization (DCO)

for clearing as soon as technologically

practicable after clearing, but in any

event by the end of the day of execution.

Regulation 50.4 establishes required

clearing for certain classes of swaps.

Currently, those classes include, for

credit default swaps: Specified series of

untranched North American CDX

indices and European iTraxx indices;

and for interest rate swaps: Fixed-to-

floating swaps, basis swaps, forward

rate agreements referencing U.S. Dollar,

Euro, Sterling, and Yen, and overnight

index swaps referencing U.S. Dollar,

Euro, and Sterling. Each of the six

classes is further defined in Commission

regulation 50.4. Swaps that have the

specifications identified in the

regulation are required to be cleared and

must be cleared pursuant to the rules of

any eligible DCO unless an exception or

exemption specified in the CEA or the

Commission’s regulations applies.

Generally, if a swap is subject to

Section 2(h)(1)(A) of the CEA and part

50 of the Commission’s regulations, it

must be cleared through an eligible

DCO, unless: (i) One of the

counterparties is eligible for and elects

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642

See End-User Exception to the Clearing

Requirement for Swaps, 77 FR 42560 (Jul. 19, 2012).

643

See Final Customer Documentation Rules, 77

FR 21278.

644

See section IV.H, supra, regarding the

application of required clearing rules to market

participants that are not registered as swap dealers

or MSPs, including the circumstances under which

the parties to such swaps would be eligible for

substituted compliance.

645

See 7 U.S.C. 6s(e). See also Proposed Margin

Requirements, 76 FR at 23733–23740. Section 4s(e)

explicitly requires the adoption of rules establishing

margin requirements for swap dealers and MSPs,

and applies a bifurcated approach that requires

each swap dealer and MSP for which there is a

prudential regulator to meet the margin

requirements established by the applicable

prudential regulator, and each swap dealer and

MSP for which there is no prudential regulator to

comply with the Commission’s margin regulations.

In contrast, the segregation requirements in section

4s(1) do not use a bifurcated approach—that is, all

swap dealers and MSPs are subject to the

Commission’s rule regarding notice and third party

custodians for margin collected for uncleared

swaps.

646

See 7 U.S.C. 2(h)(8).

647

78 FR 33606.

648

See 7 U.S.C. 6s(i).

649

See Final Confirmation Rules, 77 FR 55904.

650

The requirements under section 4s(i) relating

to trade confirmations is a Transaction-Level

Requirement. Accordingly, Commission regulation

23.504(b)(2) requires a swap dealer’s and MSP’s

swap trading relationship documentation to include

all confirmations of swaps, will apply on a

transaction-by-transaction basis.

651

See Final Confirmation Rules, 77 FR at 55964.

652

See id.

653

For example, the reduced transaction count

may decrease operational risk as there are fewer

trades to maintain, process, and settle.

the End-User Exception under

Commission regulation 50.50;

642

or (ii)

both counterparties are eligible for and

elect an Inter-Affiliate Exemption under

Commission regulation 50.52. To elect

either the end-user exception or the

Inter-Affiliate Exemption, the electing

party or parties and the swap must meet

certain requirements set forth in the

regulations.

Closely connected with the clearing

requirement are the following swap

processing requirements: (i)

Commission regulation 23.506, which

requires swap dealers and MSPs to

submit swaps promptly for clearing; and

(ii) Commission regulations 23.610 and

39.12, which establish certain standards

for swap processing by DCOs and/or

swap dealers and MSPs that are clearing

members of a DCO.

643

Together,

required clearing and swap processing

requirements promote safety and

soundness of swap dealers and MSPs,

and mitigate the credit risk posed by

bilateral swaps between swap dealers or

MSPs and their counterparties.

644

2. Margin and Segregation Requirements

for Uncleared Swaps

Section 4s(e) of the CEA requires the

Commission to set margin requirements

for swap dealers and MSPs that trade in

swaps that are not cleared.

645

The

margin requirements ensure that

outstanding current and potential future

risk exposures between swap dealers

and their counterparties are

collateralized, thereby reducing the

possibility that swap dealers or MSPs

take on excessive risks without having

adequate financial backing to fulfill

their obligations under the uncleared

swap. In addition, with respect to swaps

that are not submitted for clearing,

section 4s(l) requires that a swap dealer

or MSP notify the counterparty of its

right to request that funds provided as

margin be segregated, and upon such

request, to segregate the funds with a

third-party custodian for the benefit of

the counterparty. In this way, the

segregation requirement enhances the

protections offered through margining

uncleared swaps and thereby provides

additional financial protection to

counterparties. The Commission is

working with foreign and domestic

regulators to develop and finalize

appropriate regulations for margin and

segregation requirements.

3. Trade Execution

Integrally linked to the clearing

requirement is the trade execution

requirement, which is intended to bring

the trading of mandatorily cleared

swaps that are made available to trade

onto regulated exchanges or execution

facilities. Specifically, section 2(h)(8) of

the CEA provides that unless a clearing

exception applies and is elected, a swap

that is subject to a clearing requirement

must be executed on a DCM or SEF,

unless no such DCM or SEF makes the

swap available to trade.

646

Commission

regulations implementing the process

for a DCM or SEF to make a swap

available to trade were published in the

Federal Register on June 4, 2013.

647

Under Commission regulations 37.10

and 38.12, respectively, a SEF or DCM

may submit a determination for

Commission review that a mandatorily

cleared swap is available to trade based

on enumerated factors. By requiring the

trades of mandatorily cleared swaps that

are made available to trade to be

executed on an exchange or an

execution facility—each with its

attendant pre- and post-trade

transparency and safeguards to ensure

market integrity—the trade execution

requirement furthers the statutory goals

of financial stability, market efficiency,

and enhanced transparency.

4. Swap Trading Relationship

Documentation

CEA section 4s(i) requires each swap

dealer and MSP to conform to

Commission standards for the timely

and accurate confirmation, processing,

netting, documentation and valuation of

swaps.

648

Pursuant thereto, Commission

regulation 23.504(a) requires swap

dealers and MSPs to ‘‘establish,

maintain and enforce written policies

and procedures’’ to ensure that the swap

dealer or MSP executes written swap

trading relationship documentation.

649

Under Commission regulation 23.504,

the swap trading relationship

documentation must include, among

other things: all terms governing the

trading relationship between the swap

dealer or MSP and its counterparty;

credit support arrangements; investment

and re-hypothecation terms for assets

used as margin for uncleared swaps; and

custodial arrangements.

650

Further, the

swap trading relationship

documentation requirement applies to

all swaps with registered swap dealers

and MSPs. In addition, Commission

regulation 23.505 requires swap dealers

and MSPs to document certain

information in connection with swaps

for which exceptions from required

clearing are elected.

651

A robust swap

documentation standard may promote

standardization of documents and

transactions, which are key conditions

for central clearing, and lead to other

operational efficiencies, including

improved valuation and risk

management.

5. Portfolio Reconciliation and

Compression

CEA section 4s(i) directs the

Commission to prescribe regulations for

the timely and accurate processing and

netting of all swaps entered into by

swap dealers and MSPs. Pursuant to

CEA section 4s(i), the Commission

adopted regulations (23.502 and

23.503), which require swap dealers and

MSPs to perform portfolio reconciliation

and compression, respectively, for all

swaps.

652

Portfolio reconciliation is a

post-execution risk management tool to

ensure accurate confirmation of a

swap’s terms and to identify and resolve

any discrepancies between

counterparties regarding the valuation

of the swap. Portfolio compression is a

post-trade processing and netting

mechanism that is intended to ensure

timely, accurate processing and netting

of swaps.

653

Regulation 23.503 requires

all swap dealers and MSPs to participate

in bilateral compression exercises and/

or multilateral portfolio compression

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654

See 17 CFR 23.503(c); Confirmation NPRM, 75

FR 81519.

655

See 7 U.S.C. 2(a)(13). See also Real-Time

Reporting Rule, 77 FR 1183.

656

Part 43 defines a ‘‘publicly reportable swap

transaction’’ as: (i) Any swap that is an arm’s-length

transaction between two parties that results in a

corresponding change in the market risk position

between the two parties; or (ii) any termination,

assignment, novation, exchange, transfer,

amendment, conveyance, or extinguishing of rights

or obligations of a swap that changes the pricing of

a swap. See Real-Time Reporting Rule, 77 FR 1182.

Additionally, the Commission adopted regulation

23.205, which directs swap dealers and MSPs to

undertake such reporting and to have the electronic

systems and procedures necessary to transmit

electronically all information and data required to

be reported in accordance with part 43. See Final

Swap Dealer and MSP Recordkeeping Rule, 77 FR

20205.

657

See Real-Time Reporting Rule, 77 FR 1183.

658

7 U.S.C. 6s(i).

659

See Final Confirmation Rules, 77 FR 55904.

660

In addition, the Commission notes that

regulation 23.504(b)(2) requires that the swap

trading relationship documentation of swap dealers

and MSPs must include all confirmations of swap

transactions.

661

See Final Swap Dealer and MSP

Recordkeeping Rule, 77 FR 20128.

662

See 7 U.S.C. 6s(h). See also External Business

Conduct Rules, 77 FR 9822–9829.

exercises conducted by a third party.

654

The rule also requires policies and

procedures for engaging in such

exercises for uncleared swaps with non-

swap dealers and non-MSPs upon

request. Further, participation in

multilateral portfolio compression

exercises is mandatory for dealer-to-

dealer trades.

6. Real-Time Public Reporting

Section 2(a)(13) of the CEA also

directs the Commission to promulgate

rules providing for the public

availability of swap transaction and

pricing data on a real-time basis.

655

accordance with this mandate, the

Commission promulgated part 43 of its

regulations, which provide that all

‘‘publicly reportable swap transactions’’

must be reported and publicly

disseminated, and which establish the

method, manner, timing and particular

transaction and pricing data that must

be reported by parties to a swap

transaction.

656

The real-time

dissemination of swap transaction and

pricing data supports the fairness and

efficiency of markets and increases

transparency, which in turn improves

price discovery and decreases risk (e.g.,

liquidity risk).

657

7. Trade Confirmation

Section 4s(i) of the CEA

658

requires

that each swap dealer and MSP must

comply with the Commission’s

regulations prescribing timely and

accurate confirmation of swaps. The

Commission has adopted regulation

23.501, which requires, among other

things, a timely and accurate

confirmation of swap transactions

(which includes execution, termination,

assignment, novation, exchange,

transfer, amendment, conveyance, or

extinguishing of rights or obligations of

a swap) among swap dealers and MSPs

by the end of the first business day

following the day of execution.

659

Timely and accurate confirmation of

swaps—together with portfolio

reconciliation and compression—are

important post-trade processing

mechanisms for reducing risks and

improving operational efficiency.

660

8. Daily Trading Records

Pursuant to section CEA 4s(g), the

Commission adopted regulation 23.202,

which requires swap dealers and MSPs

to maintain daily trading records,

including records of trade information

related to pre-execution, execution, and

post-execution data that is needed to

conduct a comprehensive and accurate

trade reconstruction for each swap. The

final rule also requires that records be

kept of cash or forward transactions

used to hedge, mitigate the risk of, or

offset any swap held by the swap dealer

or MSP.

661

Accurate and timely

recordkeeping regarding all phases of a

swap transaction can serve to greatly

enhance a firm’s internal supervision, as

well as the Commission’s ability to

detect and address market or regulatory

abuses or evasion.

B. Category B: External Business

Conduct Standards

Pursuant to CEA section 4s(h), the

Commission has adopted external

business conduct rules, which establish

business conduct standards governing

the conduct of swap dealers and MSPs

in dealing with their counterparties in

entering into swaps.

662

Broadly

speaking, these rules are designed to

enhance counterparty protection by

significantly expanding the obligations

of swap dealers and MSPs towards their

counterparties. Under these rules, swap

dealers and MSPs will be required,

among other things, to conduct due

diligence on their counterparties to

verify eligibility to trade, provide

disclosure of material information about

the swap to their counterparties,

provide a daily mid-market mark for

uncleared swaps and, when

recommending a swap to a

counterparty, make a determination as

to the suitability of the swap for the

counterparty based on reasonable

diligence concerning the counterparty.

VII. Appendix C—Application of the

Entity-Level Requirements to Swap

Dealers and MSPs *

U.S. Swap Dealer or MSP (including an affiliate of a non-U.S. person).

Also applies when acting through a foreign branch.

Apply.

Non-U.S. Swap Dealer or MSP (including an affiliate of a U.S. person). First Category:

Substituted Compliance.

Second Category:

Apply for U.S. counterparties; Substituted Compli-

ance for SDR reporting with non-U.S. counterparties that are not

guaranteed or conduit affiliates; Substituted compliance (except for

Large Trader Reporting) with non-U.S. counterparties.

* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.

Both Entity-Level and Transaction-Level Requirements are the ultimate responsibilities of the U.S.-based swap dealer or MSP.

First Category is capital adequacy, Chief Compliance Officer, risk management, and swap data recordkeeping (except Commission regula-

tions 23.201(b)(3) and (4)).

Second Category is SDR Reporting, certain aspects of swap data recordkeeping relating to complaints and marketing and sales materials

(Commission regulations 23.201(b)(3) and (4)), and Large Trader Reporting.

Substituted compliance does not apply to Large Trader Reporting, i.e., non-U.S. persons that are subject to part 20 would comply with it in

the same way that U.S. persons comply. With respect to the SDR Reporting requirement, the Commission may make substituted compliance

available only if direct access to swap data stored at a foreign trade repository is provided to the Commission.

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations

VIII. Appendix D—Application of the

Category A Transaction-Level

Requirements to Swap Dealers and

MSPs *

(Category A includes (1) Clearing and

swap processing; (2) Margining and

segregation for uncleared swaps; (3)

Trade Execution; (4) Swap trading

relationship documentation; (5)

Portfolio reconciliation and

compression; (6) Real-time public

reporting; (7) Trade confirmation; and

(8) Daily trading records).**

U.S. Person (other

than Foreign Branch

of U.S. Bank that is a

Swap Dealer or

MSP)

Foreign Branch of

U.S. Bank that is a

Swap Dealer or MSP

Non-U.S. Person

Guaranteed by, or

Affiliate Conduit

of,

a U.S. Person

Non-U.S. Person Not

Guaranteed by, and Not

an Affiliate Conduit

of,

a U.S. Person

U.S. Swap Dealer or MSP (including an af-

filiate of a non-3U.S. person).

Apply ........................ Apply ........................ Apply ........................ Apply.

Foreign Branch of U.S. Bank that is a

Swap Dealer or MSP.

Apply ........................ Substituted Compli-

ance.

Substituted Compli-

ance.

Substituted Compliance.

Non-U.S. Swap Dealer or MSP (including

an affiliate of a U.S. person).

Apply ........................ Substituted Compli-

ance.

Substituted Compli-

ance.

Do Not Apply.

* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.

** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would expect the parties to the swap to comply with

the conditions of the Inter-Affiliate Exemption, including the treatment of outward-facing swaps condition in Commission regulation

50.52(b)(4)(i).

Factors that are relevant to the consideration of whether a non-U.S. person is an ‘‘affiliate conduit’’ include whether: (i) the non-U.S. person is

majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the

U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedg-

ing or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with

such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results

of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be rel-

evant.

Under a limited exception, where a swap between the foreign branch of a U.S. swap dealer or U.S. MSP and a non-U.S. person (that is not a

guaranteed or conduit affiliate) takes place in a foreign jurisdiction other than Australia, Canada, the European Union, Hong Kong, Japan, or

Switzerland, the counterparties generally may comply only with the transaction-level requirements in the foreign jurisdiction where the foreign

branch is located if the aggregate notional value of all the swaps of the U.S. swap dealer’s foreign branches in such countries does not exceed

5% of the aggregate notional value of all of the swaps of the U.S. swap dealer, and the U.S. person maintains records with supporting informa-

tion for the 5% limit and to identify, define, and address any significant risk that may arise from the non-application of the Transaction-Level Re-

quirements.

OTES

The swap trading relationship documentation requirement applies to all transactions with registered swap dealers and MSPs.

Participation in multilateral portfolio compression exercises is mandatory for dealer to dealer trades.

IX. Appendix E—Application of the

Category B Transaction-Level

Requirements to Swap Dealers and

MSPs *

(Category B is External Business

Conduct Standards).

U.S. Person (other

than Foreign Branch

of U.S. Bank that is a

Swap Dealer or

MSP)

Foreign Branch of

U.S. Bank that is a

Swap Dealer or MSP

Non-U.S. Person

Guaranteed by, or

Affiliate Conduit

of,

a U.S. Person

Non-U.S. Person Not

Guaranteed by, and Not an

Affiliate Conduit

of,

a U.S. Person

U.S. Swap Dealer or MSP (including an ....

affiliate of a non-U.S. person) .....................

Apply ........................ Apply ........................ Apply ........................ Apply.

U.S. Swap Dealer or MSP (when it solicits

and negotiates through a foreign sub-

sidiary or affiliate).

Apply ........................ Do Not Apply ............ Do Not Apply ............ Do Not Apply.

Foreign Branch of U.S. Bank that is a

Swap Dealer or MSP.

Apply ........................ Do Not Apply ............ Do Not Apply ............ Do Not Apply.

Non-U.S. Swap Dealer or MSP (including

an affiliate of a U.S. person).

Apply ........................ Do Not Apply ............ Do Not Apply ............ Do Not Apply.

*The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.

Factors that are relevant to the consideration of whether a non-U.S. person is an ‘‘affiliate conduit’’ include whether: (i) the non-U.S. person is

majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the

U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedg-

ing or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with

such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results

of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be

relevant.

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations

X. Appendix F—Application of Certain

Entity-Level and Transaction-Level

Requirements to Non-Swap Dealer/Non-

MSP Market Participants*

(The relevant Dodd-Frank requirements

are those relating to: clearing, trade

execution, real-time public reporting,

Large Trader Reporting, SDR Reporting

and swap data recordkeeping).**

U.S. Person (including an

affiliate of

non-U.S. person)

Non-U.S. Person

Guaranteed by, or

Affiliate Conduit

of,

a U.S. Person

Non-U.S. Person Not

Guaranteed by, or Affiliate

Conduit

of,

by U.S. Person

U.S. Person (including an affiliate of non-U.S. person) .. Apply .................................. Apply .................................. Apply.

Non-U.S. Person Guaranteed by, or Affiliate Conduit

of, a U.S. person.

Apply .................................. Substituted Compliance.

Do Not Apply.

Non-U.S. Person Not Guaranteed by, or Affiliate Con-

duit

of, U.S. Person.

Apply .................................. Do Not Apply ..................... Do Not Apply.

* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.

** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would generally expect the parties to the swap to

comply with the conditions of the Inter-Affiliate Exemption, including the treatment of outward-facing swaps condition in Commission regula-

tion 50.52(b)(4)(i).

Factors that are relevant to the consideration of whether a non-U.S. person is an ‘‘affiliate conduit’’ include whether: (i) the non-U.S. person is

majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the

U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedg-

ing or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with

such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results

of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be rel-

evant.

Substituted compliance does not apply to Large Trader Reporting, i.e., non-U.S. persons that are subject to part 20 would comply with it in

the same way that U.S. persons comply. With respect to the SDR Reporting requirement, the Commission may permit substituted compliance

only if direct access to swap data stored at a foreign trade repository is provided to the Commission.

Issued in Washington, DC, on July 17,

2013, by the Commission.

Melissa D. Jurgens,

Secretary of the Commission.

Appendices to Interpretive Guidance and

Policy Statement Regarding Compliance with

Certain Swap Regulations—Commission

Voting Summary and Statements of

Commissioners

Note: The following appendices do not

constitute a part of the Interpretive Guidance

and Policy Statement itself.

Appendix 1—Commission Voting

Summary

On this matter, Chairman Gensler and

Commissioners Chilton and Wetjen voted in

the affirmative; Commissioner O’Malia voted

in the negative.

Appendix 2—Statement of Chairman

Gary Gensler

I support the Interpretive Guidance and

Policy Statement Regarding Compliance with

Certain Swap Regulations (Guidance) and the

related phase-in exemptive order also being

adopted today. With this Commission action

another important step has been taken to

make swaps market reform a reality.

This Guidance is being adopted just shy of

the third anniversary of President Obama

signing the Dodd-Frank Act, and that law

was historic. It was an historic answer to an

historic problem: the near collapse of the

American economy driven, in part, by the

unregulated derivatives marketplace.

Congress and the President were clear in

their intention to bring transparency to this

marketplace, to lower risk to the public, and

to ensure the regulation of swap dealers and

major swap participants.

In 2008, when both the financial system

and the financial regulatory system failed the

public, Americans paid the price through the

crisis with their jobs, their pensions, and

their homes. We lost 8 million jobs in that

crisis and thousands of businesses shuttered.

The swaps market was central to the crisis

and financial institutions operating

complicated swaps businesses and offshore

entities nearly toppled the economy.

Congress responded. Americans are

remarkably resilient—but the public really

does expect us to learn from the lessons of

the crisis, and to do everything possible to

prevent this from happening to any of us

again.

It’s pretty straightforward, I think. Even

though we oversee, here at the CFTC, a

complex and sometimes difficult to

understand market (my mom consistently

asks me, ‘‘Gary, what are swaps?’’), the

questions the American people are looking

for us to answer are simple: Have we lowered

risk? Have we brought transparency to these

markets? Have we promoted competition and

openness in these markets so that end users

can get the greatest benefit when they seek

to lower their risk and focus on what they do

well—which is employing people, innovating

and moving our economy forward? That is

why reform matters.

Five years after the crisis and three years

after Dodd-Frank passed, market participants

are coming into compliance with the

common sense reforms that Congress and the

President laid out. Through Dodd-Frank and

the rules that this agency has put in place,

no longer will the markets be opaque and

dark, and we will have transparency in the

markets. In fact, throughout this year, for the

first time, the public and regulators have

benefitted from reporting to swap data

repositories and reporting to the public. And

later this year, starting actually in August,

facilities called swap execution facilities will

start so that the public can benefit from

greater openness and competition before the

transaction occurs. And by the end of this

year, there are likely to be trade execution

mandates for interest rate and credit

derivative index products, as well.

Central clearing became required for the

broader market earlier this year, with key

phase in dates to come this Fall and Winter,

as well. We have 80 swap dealers, and, yes,

two major swap participants, now

provisionally registered. As part of the

responsibilities accompanying registration,

they’re responsible for sales practice, record

keeping and other business conduct

requirements that help lower the risk to the

public.

Yesterday, we took another significant step

when we and the European Commission

announced a path forward regarding joint

understandings regarding the regulation of

cross border derivatives. I want to publicly

thank Commissioner Michel Barnier, his

Director General Jonathan Faull, and their

staffs, the staffs at the European Securities

Market Authority, and Steven Maijoor’s

leadership, for collaborating throughout the

reform process. This was a significant step

forward in harmonizing and giving clarity to

the markets as to when there might be

jurisdictional overlaps with regard to this

reform.

Today, we are considering two important

actions, the Guidance, as well as a related

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations

Cross-Border Application of Certain Swaps

Provisions of the Commodity Exchange Act, 77 FR

41214 (July 12, 2012).

7 U.S.C. 1 et seq.

phase-in exemptive order. And as you

probably have heard me say before, the

nature of modern finance is that financial

institutions commonly set up hundreds, even

thousands of legal entities around the globe.

In fact, the U.S.’s largest banks each have

somewhere between 2,000 and 3,000 legal

entities around the globe. Some of them have

hundreds of legal entities just in the Cayman

Islands alone. We have to remind ourselves

that the largest banks and institutions are

global in nature, and when a run starts on

any part of an overseas affiliate or branch of

a modern financial institution, risk comes

crashing right back to our shores.

Similarly, if it’s an EU financial institution

and it has some guaranteed affiliate in the

U.S. or overseas that gets into trouble, that

risk can flow back to their shores. That’s

why, together both we and Europe recognize

the importance of covering guaranteed

affiliates, whether they’re guaranteed

affiliates of a U.S. person or of an EU person.

There’s no question to me, at least, that the

words of Dodd-Frank addressed this (i.e., risk

importation) when they said that a direct and

significant connection with activities and/or

effect on commerce in the United States

covers these risks that may come back to us.

I want to publicly thank Chairman Barney

Frank along with Spencer Bachus, Frank

Lucas, and Collin Peterson, and their staffs

for reaching out to the CFTC and the public

to ask how to best address offshore risks that

could wash back to our economy in Dodd-

Frank.

In addition, we should not forget the actual

events over the past several years that remind

us of the risks to the U.S. that can be posed

by offshore entities:

AIG nearly brought down the U.S.

economy. Lehman Brothers had 3,300 legal

entities, including a London affiliate that was

guaranteed here in the U.S., and it had

130,000 outstanding swap transactions.

Citigroup had structured investment vehicles

that were set up in the Cayman Islands, run

out of London, and yet were central to not

one, but two bailouts of that institution. Bear

Stearns, in 2007 had two sinking hedge funds

that had to be bailed out by Bear Stearns—

and, yes, those hedge funds were organized

in the jurisdiction of the Cayman Islands.

More than a decade earlier, I was working

in my position as Assistant Secretary of the

United States Department of the Treasury. I

found myself making a call from Connecticut

to then Treasury Secretary Robert Rubin to

report that Long Term Capital Management’s

$1.2 trillion swaps book was not only going

to go down within a day or two, but that the

business—that we thought was in

Connecticut—was actually incorporated in

the Cayman Islands as a PO Box facility.

Even last year, we had yet another

reminder that branches of big U.S. banks can

bring risk back to the US. Even though they

were not the risks as large as I’ve just related,

JPMorgan Chase’s Chief Investment Office’s

credit default swaps were executed primarily

in the U.K. branch.

Each of these examples demonstrated a

direct and significant connection with

activities and/or an effect on commerce in

the United States. Congress knew this painful

history when it provided the cross border

provisions of swaps market reform. And as

market participants asked the CFTC to

provide interpretive guidance on Congress’s

word, I believe that we have had to keep this

painful history in mind. Two and a half years

ago, the CFTC started working on guidance,

which was published for notice and

comment in June 2012, and for which we

sought further input on in December 2012.

We have greatly benefitted from this public

input. The Guidance the Commission will

adopt today incorporates the public’s input

and, I think, appropriately interprets the

cross border provisions of Dodd-Frank.

There are four areas that I think really are

important:

First, the CFTC interprets the cross-border

provisions to cover swaps between non U.S.

swap dealers and guaranteed affiliates of U.S.

Persons, as well as swaps between two

guaranteed affiliates that are not swap

dealers. The guidance does, as was proposed,

recognize and embrace the concept of

substituted compliance where there are

comparable and comprehensive rules abroad.

But the history of AIG, Lehman Brothers,

Citigroup and the others, and of guaranteed

affiliates, is a strong lesson that Congress

knew when we were approaching these

issues.

Second, the definition of U.S. person in

this guidance captures offshore hedge funds

and collective investment vehicles that have

their principal place of business here in the

U.S., or that are majority owned by U.S.

persons. Addressing ourselves to guidance,

and yet forgetting the lessons of Long Term

Capital Management or Bear Stearns, is not

in my opinion what Congress wanted.

Third, under the guidance, foreign

branches, like the JPMorgan’s U.K. branch, of

U.S. swap dealers may also comply with

Dodd-Frank through substituted compliance

if they are appropriately ring-fenced—that is,

they are truly branches where employees and

the booking and the taxes are actually

offshore in the foreign branch. The Guidance

allows, if there are comparable and

comprehensive regimes overseas and

supervisory authorities overseas looking at

those branches, that those branches can avail

themselves to substituted compliance in the

manner offshore guaranteed affiliates would.

Lastly, the guidance provides that swap

dealers, foreign or U.S., transacting with U.S.

persons (whether they be in New Jersey,

Maryland, Michigan, Arkansas, Iowa—I have

to get all the right states, recognizing where

my fellow Commissioners come from)

anywhere in the United States, must comply

with Dodd-Frank’s swap market reform. The

guidance does provide, though, that U.S.

Persons can meet international people

anonymously, and not only on our exchanges

called designated contract markets, but also

on the new swap execution facilities, as well

as foreign boards of trade. International

parties trading on those platforms do not

have to worry about whether those swaps

might make them a swap dealer, or whether

they need to worry about certain transaction

level requirements. And I think that was

important to maintain and promote the

liquidity of these three very important types

of platforms—foreign boards of trade, swap

execution facilities, and designated contract

markets.

In conclusion, I will be voting in support

of the Guidance and the related phase-in

exemptive order also being adopted today.

I’ll say more about the exemptive order in my

statement of support for that document, but

I think these are both critical steps for the

Commission and swaps reform. They add to

the approximately 56 final guidance and

rules that this Commission has adopted.

We’re well over 90 percent through the

various rule and guidance writing. And the

markets are probably well towards half way

implementing these reforms. I have a deep

respect for how much work market

participants are doing to come into

compliance.

So now, 3 years after the passage of

financial reform, and a full year after the

Commission proposed guidance with regard

to the cross border application of reform, it

is time for reforms to properly apply to and

cover those activities that, as identified by

Congress in section 722(d) of the Dodd-Frank

Act, have ‘‘a direct and significant

connection with activities in, or effect on,

commerce of the United States.’’ With the

additional transitional phase-in period

provided by this Order, it is now time for the

public to get the full benefit of the

transparency and the measures to reduce risk

included in Dodd Frank reforms.

Appendix 3—Dissenting Statement of

Commissioner Scott D. O’Malia

I respectfully dissent from the Commodity

Futures Trading Commission’s (the

‘‘Commission’’ or ‘‘CFTC’’) approval of its

interpretive guidance and policy statement

(‘‘Guidance’’) regarding the cross-border

application of the swaps provisions of the

Commodity Exchange Act (‘‘CEA’’), as well

as from the Commission’s approval of a

related exemptive order (‘‘Exemptive

Order’’).

When I voted in July 2012 to issue for

public comment the proposed interpretive

guidance and policy statement (‘‘Proposed

Guidance’’),

I made clear that if I had been

asked to vote on the Proposed Guidance as

final, my vote would have been no. I then

laid out my concerns with the Proposed

Guidance, all relating to the Commission’s

unsound interpretation of section 2(i) of the

CEA,

which governs the extraterritorial

application of the CEA’s swaps provisions.

Regrettably, the Guidance fails to address

these concerns and constitutes a regulatory

overreach based on a weak foundation of thin

statutory and legal authority.

Like the Proposed Guidance, the Guidance:

(1) Fails to articulate a valid statutory

foundation for its overbroad scope and

inconsistently applies the statute to different

activities; (2) crosses the line between

interpretive guidance and rulemaking; and

(3) gives insufficient consideration to

international law and comity. These

shortcomings are compounded by serious

procedural flaws in the Commission’s

treatment of international harmonization and

substituted compliance, as well as in its

issuance of the Exemptive Order.

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations

§ 2(i).

Dodd-Frank Wall Street Reform and Consumer

Protection Act, Public Law 111–203, 124 Stat. 1376

(2010).

§ 2(i)(1).

Stated another way, section 2(i)(1) may be read

as the following: ‘‘[The CEA’s swaps provisions

enacted by the Dodd-Frank Act] may apply to

activities outside the United States only if those

activities have a direct and significant connection

with activities in, or effect on, commerce of the

United States.’’

For a recent statutory analysis of the

extraterritorial application of the Securities and

Exchange Act of 1934, see Morrison v. Nat’l

Australia Bank, 561 U.S. ll (2010).

See Appalachian Power Co. v. Envtl. Prot.

Agency, 208 F.3d 1015, 1027 (D.C. Cir. 2000)

(vacating agency guidance interpreting statutory

language with practical binding effect because it did

not define subparts of the interpreted term and

should have been promulgated as a legislative rule

under the APA).

7 U.S.C. 2(i)(2) ([The CEA’s swaps provisions

enacted by the Dodd-Frank Act] ‘‘shall not apply to

activities outside the United States unless those

activities . . . 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 enacted by the Dodd-

Frank Act]’’).

17 CFR 1.6.

5 U.S.C. 551 et seq.

See Gen. Elec. Co. v. Envtl. Prot. Agency, 290

F.3d 377, 380 (D.C. Cir. 2002) (finding that a

guidance document is final agency action);

Appalachian Power, 208 F.3d at 1020–21.

See Chrysler Corp. v. Brown, 441 U.S. 281,

302–03 (1979) (agency rulemaking with the force

and effect of law must be promulgated pursuant to

the procedural requirements of the APA).

‘‘A document will have practical binding effect

before it is actually applied if the affected private

parties are reasonably led to believe that failure to

conform will bring adverse consequences . . . .’’

Gen. Elec., 290 F.3d at 383 (quoting Anthony,

Robert A., Interpretive Rules, Policy Statements,

Guidances, Manuals, and the Like—Should Federal

Agencies Use Them to Bind the Public?, 41 Duke

L.J. 1311 (1992)) (vacating an agency’s guidance

document that the court found to have practical

binding effect and where procedures under the APA

were not followed).

A no-action letter is issued by a division of the

Commission and states that, for the reasons and

under the conditions described therein, it will not

recommend that the Commission commence an

enforcement action against an entity or group of

entities for failure to comply with obligations

imposed by the Commission.

Lack of Statutory Foundation

Section 2(i) of the CEA

as amended by the

Dodd-Frank Wall Street Reform and

Consumer Protection Act of 2010 (the ‘‘Dodd-

Frank Act’’)

provides, in part, that the

Commission’s swap authority ‘‘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

....’’

This provision is clearly a limitation

on the Commission’s authority.

It follows

that the Commission must properly articulate

how and when the ‘‘direct and significant’’

standard is met in order to apply

Commission rules to swap activities that take

place outside of the United States.

The Guidance, however, fails to do so.

Instead, it treats section 2(i) as a ready tool

to expand authority rather than as a

limitation. The statutory analysis section of

the Guidance is insufficient to support the

broad sweep of extraterritorial activities that

the Guidance contemplates would fall under

the Commission’s jurisdiction, relying

heavily on a comparison to somewhat similar

statutory language whose wholly different

context renders the comparison

unpersuasive. The Guidance makes no

mention of statutes that may be more

analogous to the CEA, such as the securities

or banking laws.

Because the ‘‘direct and

significant’’ standard is never defined, the

Guidance’s attempts to link certain

requirements imposed on market participants

to the ‘‘direct and significant’’ standard do

not establish the requisite jurisdictional

nexus.

I would also like to point out that CEA

section 2(i) contains a second clause, which

allows for the limited application of the

Commission’s swap rules to activities outside

the United States when they violate the

Commission’s anti-evasion rules.

Pursuant

to this clause, the Commission promulgated

section 1.6 under Part 1 of its regulations.

Rather than relying on section 1.6 to address

its concerns about evasion, the Commission

chose simply to reference the same concerns

in justifying its overbroad reach in the

Guidance.

With such an unsound foundation for the

Commission’s extraterritorial authority under

the ‘‘direct and significant’’ standard, I am

not surprised that the Guidance often applies

section 2(i) of the CEA inconsistently and

arbitrarily. Examples of inconsistency

abound.

For instance, just as with the Proposed

Guidance, the Guidance does not provide a

basis for its reasoning that all Transaction-

Level Requirements described in the

Guidance satisfy the ‘‘direct and significant’’

standard under section 2(i). As I stated in my

concurrence to the Proposed Guidance, trade

execution and real-time public reporting

requirements, although important for

transparency purposes, do not raise the same

systemic risk concerns that clearing and

margining for uncleared swaps do. The

Guidance acknowledges this point, but does

not go on to sufficiently explain why they

should be, and are, treated equally. The

Guidance also acknowledges that clearing

and margining, because of their implications

for systemic risk, could be classified as

Entity-Level Requirements, but it does not

explain why are they are not. The Guidance’s

failure to give meaning to the ‘‘direct and

significant’’ standard in its discussion of

these requirements is glaring.

Inconsistent application can also be seen

within a specific Transaction-Level

Requirement, for example reporting to swap

data repositories (‘‘SDRs’’). The Guidance

allows non-U.S. swap dealers (‘‘SDs’’) and

major swap participants (‘‘MSPs’’) to utilize

substituted compliance for SDR reporting of

their swaps with non-U.S. counterparties, but

it does not allow for substituted compliance

for non-U.S. SD and MSPs’ trades with U.S.

counterparties. Again, the Commission fails

here to give real meaning to ‘‘direct and

significant’’ in order to adequately explain its

reasoning for this distinction. The rationale

is even weaker given the fact that substituted

compliance is available for swaps with non-

U.S. counterparties only under the condition

that the Commission has direct access to the

relevant data at the foreign trade repository.

In either case, the Commission will have

direct access to the relevant data, whether

substituted compliance is available or not.

This raises the question: if the outcome is the

same, why is the distinction made? If it is

different, the Guidance does not explain how

or why—despite requiring data at foreign

trade repositories to be essentially the same

as data at domestic SDRs, before the

Commission even contemplates substituted

compliance for SDR reporting.

Yet another example of inconsistent

application of section 2(i) involves the

requirement of physical commodity large

swaps trader reporting (‘‘Large Trader

Reporting’’). In contrast to SDR reporting, the

Guidance does not allow substituted

compliance for Large Trader Reporting, even

for swaps between a non-U.S. registrant and

a non-U.S. counterparty. The Commission’s

flimsy rationale is that Large Trader

Reporting involves data conversion to

‘‘futures equivalent’’ units, and that it would

cost too much time and resources for the

Commission to conduct this conversion on

data that it could access in a foreign trade

repository. Here again, the ‘‘direct and

significant’’ standard is nowhere to be found.

Moreover, the Commission overstates the

burden of the ‘‘futures equivalent’’

conversion and, more generally, the

significance of Large Trader Reporting in its

oversight duties, while understating the

availability of data collected through SDR

reporting, with its eligibility for substituted

compliance, to achieve the same regulatory

objectives.

Interpretive Guidance Versus Rulemaking

The imposition of requirements on market

participants raises another of my major

concerns with the Guidance. I strongly

disagree with the Commission’s decision to

issue its position on the cross-border

application of its swaps regulations in the

form of ‘‘interpretive guidance’’ instead of

promulgating a legislative rule under the

Administrative Procedure Act (‘‘APA’’).

Simply putting the guise of ‘‘guidance’’ on

this document does not change its content or

consequences. Where agency action has the

practical effect of binding parties within its

scope, it has the force and effect of law,

regardless of the name it is given.

Legally

binding regulations that impose new

obligations on affected parties—‘‘legislative

rules’’—must conform to the APA.

On its

face, the Guidance sets out standards that it

contemplates will be regularly applied by

staff to cross-border activities in the swaps

markets. Market participants cannot afford to

ignore detailed regulations imposed upon

their activities that may result in enforcement

or other penalizing action.

This point is

underlined by the fact that, as I discuss

below, Commission staff no-action letters

have been issued in connection with

compliance obligations that have essentially

been imposed by the Guidance.

All of this

leads to the logical conclusion that the

Guidance has a practical binding effect and

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The ‘‘arbitrary and capricious’’ standard of

review of agency action under the APA is a

rationality analysis also known as the hard-look

doctrine:

Under the leading formulation of this doctrine,

‘‘the agency must examine the relevant data and

articulate a satisfactory explanation for its action

including a ‘rational connection between the facts

found and the choices made.’ ’’ The court

‘‘consider[s] whether the decision was based on a

consideration of the relevant factors and whether

there has been a clear error of judgment.’’ In

addition, the agency may not ‘‘entirely fail[ ] to

consider an important aspect of the problem,’’ may

not ‘‘offer[ ] an explanation for its decision that runs

counter to the evidence before the agency,’’ nor

offer an explanation that is ‘‘so implausible that it

could not be ascribed to a difference in view or the

product of agency expertise.’’ The agency must also

relate the factual findings and expected effects of

the regulation to the purposes or goals the agency

must consider under the statute as well as respond

to salient criticisms of the agency’s reasoning.

Stack, Kevin M., Interpreting Regulations, 111

Mich. L. Rev. 355, 378–79 (2012) (internal citations

omitted).

7 U.S.C. 19(a).

The Commission received comment letters

from, among others: Jonathan Faull, European

Commission; Steven Maijoor, European Securities

and Markets Authority; David Lawton and Stephen

Bland, UK Financial Services Authority; Pierre

Moscovici, France Ministry of Economy and

Finance, Christian Noyer, Autorite de controle

prudential, and Jacques Delmas-Marsalet, Autorite

des marches financiers; Patrick Raaflaub and Mark

Branson, Swiss Financial Market Supervisory

Authority; Masamichi Kono, Japan Financial

Services Agency, and Hideo Hayakawa, Bank of

Japan; K.C. Chan, Financial Services and Treasury

Bureau of the Hong Kong Special Administrative

Region; Belinda Gibson, Australian Securities and

Investments Commission, Malcolm Edey, Reserve

Bank of Australia, Arthur Yuen, Hong Kong

Monetary Authority, Keith Lui, Hong Kong

Securities and Futures Commission, and Teo Swee

Lian, Monetary Authority of Singapore. These and

all public comment letters on the Proposed

Guidance are available at: http://comments.cftc.gov/

PublicComments/CommentList.aspx?id=1234&ctl00

_ctl00_cphContentMain_MainContent_gv

CommentList.

Final Exemptive Order Regarding Compliance

With Certain Swap Regulations, 78 FR 858 (January

7, 2013). The document was adopted by the

Commission in December 2012 and published in

the Federal Register in January 2013.

No-Action Relief for Registered Swap Dealers

and Major Swap Participants from Certain

Requirements under Subpart I of Part 23 of

Commission Regulations in Connection with

Uncleared Swaps Subject to Risk Mitigation

Techniques under EMIR, CFTC Letter No. 13–45

(July 11, 2013).

I have set forth in note 18 some of the comment

letters that the Commission has received from

foreign supervisors and regulators. By allowing

substituted compliance to be addressed through a

no-action letter, is the Commission implying that,

e.g., the Bank of Japan should accede to, e.g.,

decisions of the CFTC Division of Swap Dealer and

Intermediary Oversight? If so, I find such

implication inappropriate.

should have been promulgated as a

legislative rule under the APA.

There are important policy and legal

considerations that weigh strongly in support

of rulemaking in accordance with the APA.

Not only do the safeguards enacted by

Congress in the APA ensure fair notice and

public participation, they help to ensure

reasoned decision-making and

accountability. In addition, the APA requires

that courts take a ‘‘hard look’’ at agency

action.

By issuing ‘‘interpretive guidance’’ instead

of rulemaking, the Commission has also

avoided analyzing the costs and benefits of

its actions pursuant to section 15(a) of the

CEA,

because the CEA requires the

Commission to consider costs and benefits

only in connection with its promulgation of

regulations and orders. Compliance with the

Commission’s swaps regulations entails

significant costs for market participants.

Avoiding cost-benefit analysis by labeling the

document as guidance is unacceptable.

In my concurrence to the Proposed

Guidance, I suggested that the Commission

should at least prepare a report analyzing the

costs attributable to the breadth of the

Commission’s new authority under CEA

section 2(i). I am disappointed, but not

surprised, that the Commission has not taken

up my suggestion.

Insufficient Consideration of Principles of

International Comity

Also in my concurrence to the Proposed

Guidance, I pointed out that the

Commission’s approach gave insufficient

consideration to principles of international

comity. The Guidance suffers from the same

shortcoming.

The Commission does describe principles

of international comity in the Guidance, as it

did in the Proposed Guidance. However,

mere citation is meaningless if

unaccompanied by adherence. With an

interpretation of section 2(i) that essentially

views the Commission’s jurisdiction as

boundless, roping in all transactions with

U.S. persons regardless of the location or the

regulations that foreign regulators may have

in place, the reality is that the Commission’s

approach is unilateral and does not give

adequate consideration to comity principles.

These principles are crucial given the

global, interconnected nature of today’s

swaps markets. Properly considering these

principles—in addition to indicating respect

for the international system and the

legitimate interests of other jurisdictions—

strengthens, not weakens, the Commission’s

ability to effectively regulate swaps markets.

On the Path Forward to Harmonization, But

a Flawed Process

In order to implement principles of

international comity and develop a

harmonized global regulatory system that is

both effective and efficient, I have

consistently called for meaningful

cooperation with foreign regulators. I initially

did so in my concurrence to the Proposed

Guidance, and the necessity of greater

collaboration was subsequently driven home

by the number and tone of comment letters

on the Proposed Guidance submitted by

foreign regulators.

Then, when the

Commission finalized a cross-border

exemptive order last December with an

expiration date of July 12,

in my concurring

statement I again urged the Commission and

foreign regulators to engage in meaningful,

substantive discussions.

I am pleased that over the past several

months, this engagement has taken place and

progress has been made toward

harmonization. However, we are not where

we need to be: many outstanding issues and

questions remain, from data privacy

concerns, to the implications of other

jurisdictions still finalizing their regulations,

to a lack of a clear, consistent and transparent

framework for substituted compliance. It

would have made sense for these issues to be

addressed in the Guidance—but they are not.

The looming July 12 expiration of the

December exemptive order and the resulting

time crunch cannot reasonably be cited as the

reason for this failure, because July 12 is an

artificial date; it could have been pushed

back in order to reach the right outcome with

the right process.

Instead, while we are moving toward a

workable outcome on harmonization, the

process by which we are getting there is

patently unacceptable. The most glaring

example of this flawed process is this week’s

publication of a Commission staff no-action

letter allowing substituted compliance for

certain of the Transaction-Level

Requirements.

It boggles the mind to think

that a staff letter issued by a single division,

with no input from the Commission, would

be used as the vehicle for addressing such a

major issue.

Making matters worse, this no-

action letter is outside the scope of a

forthcoming Commission decision regarding

the comparability of European rules. And the

relief is not time-limited, thereby creating an

effect similar to a rulemaking. Consequently,

this indefinite exclusion not only

preemptively overrides a Commission

decision, but it also seems to provide relief

beyond that contemplated by the Guidance,

which calls for a re-evaluation of all

substituted compliance determinations

within four years of the initial determination.

Unfortunately, this is not the first instance

in recent times of staff no-action letters being

used to issue Commission policy. Not only

are they an improper tool to get around

formal Commission action, their prolific use

is a reflection of the ad-hoc, last-minute

approach that has been far too prevalent

lately at the Commission. I cannot emphasize

this enough: the Commission must stop this

approach and get back to issuing policy in a

more formal, open and transparent manner.

Substituted Compliance

In my discussions with fellow regulators

abroad and international regulatory bodies, it

is clear that there are varying degrees of

reforms being developed and implemented in

respective jurisdictions: some are comparable

to U.S. regulations and some are less

stringent, but there are some that exceed the

Commission’s own requirements. I would

have preferred the Commission to take the

past year following the release of the

Proposed Guidance to engage our

international colleagues and to involve the

International Organization of Securities

Commissions (‘‘IOSCO’’) in order to resolve

the issue of harmonizing our rules. Under

this approach, we could finalize our

guidance upon completion of the

international harmonization process,

allowing us to take into account any

shortcomings in that process. Instead, we

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Section 4(c) of the CEA grants the Commission

the authority to ‘‘exempt any agreement, contract,

or transaction (or class thereof) that is otherwise

subject to subsection (a) (including any person or

class of persons offering, entering into, rendering

advice or rendering other services with respect to,

the agreement, contract, or transaction). . . .’’ 7

U.S.C. 6(c). Section 4(a) applies to ‘‘any person to

offer to enter into, to enter into, to execute, to

confirm the execution of, or to conduct any office

or business anywhere in the United States, its

territories or possessions, for the purpose of

soliciting, or accepting any order for, or otherwise

dealing in, any transaction in, or in connection

with, a contract for the purchase or sale of a

commodity for future delivery (other than a contract

which is made on or subject to the rules of a board

of trade, exchange, or market located outside the

United States, its territories or possessions). . . .’’

7 U.S.C. 6(a).

The Exemptive Order claims, unconvincingly,

that it falls under a good-cause exception to notice-

and-comment requirements provided for by the

APA under section 553(b)(B): ‘‘Except when notice

and hearing is required by statute, this subsection

does not apply . . . (B) when the agency for good

cause finds (and incorporates the finding and a brief

statement of reasons therefore in the rules issued)

that notice and public procedure thereon are

impracticable, unnecessary, or contrary to the

public interest.’’ 5 U.S.C. 553(b)(B) (emphasis

added). However, section 4(c) of the CEA clearly

provides that the Commission may grant exemptive

relief only by ‘‘rule, regulation, or order after notice

and opportunity for hearing’’ (emphasis added). 7

U.S.C. 6(c). The APA further provides under section

559 that it does not ‘‘limit or repeal additional

requirements imposed by statute or otherwise

recognized by law.’’ 5 U.S.C. 559. The CEA also

grants emergency powers to the Commission under

exigent circumstances. See, e.g., 7 U.S.C. 12a(9). In

addition, courts have narrowly construed the good-

cause exception and placed the burden of proof on

the agency. See Tenn. Gas Pipeline Co. v. Fed.

Energy Regulatory Comm’n, 969 F.2d 1141 (D.C.

Cir. 1992); Guardian Fed. Sav. & Loan Ass’n v. Fed.

Sav. & Loan Ins. Corp., 589 F.2d 658, 663 (D.C. Cir.

1978).

See, e.g., 7 U.S.C. 6s(d)(2) (‘‘The Commission

may not prescribe rules imposing prudential

requirements on swap dealers or major swap

participants for which there is a prudential

regulator.’’); 7 U.S.C. 6b–1(b) (‘‘The prudential

regulators shall have exclusive authority to enforce

the provisions of section 4s(e) with respect to swap

dealers or major swap participants for which they

are the prudential regulator.’’)

In a recent op-ed article James Giddens, the

bankruptcy trustee for MF Global’s U.S.-registered

entities, points out that serious concerns regarding

the harmonization, or lack thereof, of bankruptcy

regimes were identified during the resolution of

Lehman Brothers in 2008 (he was then the

liquidation trustee for Lehman Brothers’s U.S.

broker-dealer), only for similar failings to appear

with MF Global. He urges clearer and more

consistent cross-border rules regarding the

protection of customer money in advance of any

future multinational financial company meltdown.

Giddens, James, How to Avoid the Next MF Global

Surprise: Change Cross-Border Rules to Stop Raids

on U.S. Customer Accounts, Wall St. J., July 9, 2013.

have chosen the reverse order: to impose

statutorily weak guidance, with all its no-

action riders and exemptions, with only the

promise of further negotiations with our

foreign counterparts.

Given the way the Commission has

proceeded up to this point, it is my hope that

the harmonization work lying ahead will be

undertaken in a more transparent manner

and not done through the abused no-action

process that lacks any formal Commission

process or oversight. Further, I hope that the

process of substituted compliance will offer

the opportunity for other regulatory bodies to

engage directly with the full Commission, so

that we can better understand how our rules

and theirs will work and can minimize the

likelihood of regulatory retaliation and

inconsistent, duplicative, or conflicting rules.

I believe the Commission has worked too

hard to develop principles and standards that

will encourage greater transparency, open

access to clearing and trading and improved

market data to let them go to waste due to

a lack of global regulatory harmonization.

I want to work with other home country

regulators to ensure there is not an

opportunity for entities to exploit regulatory

loopholes. The stark reality is that this

Commission is not the global regulatory

authority and does not have the resources to

support such a mission. Therefore, our best

and most effective solution is to engage in a

fully transparent discussion on substituted

compliance and to do so immediately.

Exemptive Order

In an effort to mitigate the broad reach of

the Guidance and accommodate its last-

minute finalization, and in a moment of

humility, the Commission has agreed to

delay the application of certain elements of

the Commission’s swaps regulations with its

approval of the Exemptive Order. The

Exemptive Order provides relief ranging from

75 days (for application of the expanded U.S.

person definition, for example) to December

21, 2013 (for Entity-Level and Transaction-

Level Requirements for non-U.S. SDs and

MSPs in certain jurisdictions). The

Commission is issuing the Exemptive Order

pursuant to section 4(c) of the CEA.

Even though the Exemptive Order goes into

effect immediately, the Commission has

included a post hoc 30-day comment period.

I support the additional time that the

Exemptive Order provides for market

participants to comply with the

Commission’s last-minute Guidance, but I

cannot support a final order that blatantly

ignores the APA-mandated comment periods

for Commission action, especially when I

advocated for a relief package that would

have provided for public comment over a

month ago.

Additional Concerns

In addition to the above, the Guidance

leaves me concerned in a number of other

areas. I am concerned about whether the

definition of U.S. person contained herein

provides the necessary clarity for market

participants, particularly as its enumerated

prongs are explicitly deemed to form a non-

exhaustive list. I question whether the

Commission has done enough to harmonize

its cross-border approach with that of the

Securities and Exchange Commission (which

is being issued through notice-and-comment

rulemaking instead of interpretive guidance,

I should note), in particular with regard to

the definitions of U.S. person and foreign

branches. I also am concerned about whether

the Guidance creates an uneven playing field

for U.S. firms, which would be a plainly

unacceptable outcome to me. I am concerned

that the Guidance is overlapping,

duplicative, and perhaps even contradictory

with other provisions in the Dodd-Frank Act

that mitigate systemic risk and allocate

responsibility for administering its complex

and comprehensive regulatory regime to

multiple agencies under Title I, Title II, and

even within Title VII.

In addition, I am

concerned that the Guidance practically

ignores the hugely important matter of

protecting customer funds, specifically in

connection with bankruptcies, which has

critical cross-border implications as vividly

demonstrated by the recent collapse of MF

Global.

Finally, I am concerned about

whether in overreaching to rope in entities

into U.S. jurisdiction that would more

appropriately be regulated elsewhere

pursuant to an effective system of substituted

compliance, the Guidance will have the

perverse effect of creating more risk to the

U.S. system and more risk to U.S. taxpayers.

Conclusion

For an administrative agency, good

government combines good substance—based

on a faithful, appropriate reading of the

guiding statute—and good process. The

Guidance falls woefully short on both counts.

Therefore, I respectfully dissent from the

decision of the Commission to approve the

Guidance and Exemptive Order for

publication in the Federal Register.

[FR Doc. 2013–17958 Filed 7–25–13; 8:45 am]

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