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CFTC Approves Phased Compliance Proposal for Certain Swap Regulations

June 29, 2012 - The Commodity Futures Trading Commission (Commission) today voted to propose a phased compliance program regarding certain swaps to non-U.S. swap dealers, non-U.S. major swap participants, U.S. swap dealers, U.S. major swap participants, and foreign branches of U.S. swap dealers and U.S. major swap participants.

In order to ensure an orderly transition to the Dodd-Frank Act the Commission released for public comment a phased compliance regarding certain entity-level requirements (Entity-Level Requirements) and transaction-level requirements (Transaction-Level Requirements) subject in each case to specified conditions. The vote was conducted via a seriatim vote of the commission and was passed by a vote of 5 to 0. The Comment period is open for 30 days after the publication in the Federal Register.

Background

The proposed phased compliance would become effective on the compliance date for registration of swap dealers and major swap participants and expire: (i) for non-U.S. swap dealers, non-U.S. major swap participants, foreign branches of U.S. swap dealers, and foreign branches of U.S. major swap participants, 12 months following the publication of the proposal; and (ii) for U.S. swap dealers and U.S. major swap participants, January 1, 2013.

During the relevant phased compliance period and subject to specified conditions in the proposal:

  • Regarding Entity-Level Requirements, non-U.S. swap dealers, non-U.S. major swap participants, U.S. swap dealers and U.S. major swap participants would be afforded additional time to prepare for the application of such requirements.
  • Regarding Transaction-Level Requirements, non-U.S. swap dealers, non-U.S. major swap participants, foreign branches of U.S. swap dealers, and foreign branches of U.S. major swap participants would be able to comply only with the regulations as may be required in the home jurisdiction or location of the relevant entity.

Conditions for Proposed Phased Compliance

Non-U.S. swap dealers, non-U.S. major swap participants, foreign branches of U.S. swap dealers, and foreign branches of U.S. major swap participants seeking to avail of the proposed phased compliance would be required to:

  • As applicable, file an application to register as a swap dealer or as a major swap participant with the National Futures Association (NFA); and
  • Within 60 days of applying for registration, submit to the NFA a compliance plan addressing how it plans to comply, in good faith, with all applicable requirements under the CEA. At a minimum, such plan would provide, for each Entity-Level and Transaction-Level Requirement, a description of: (i) whether the non-U.S. swap dealer or non-U.S. major swap participant plans to comply with each of the Entity-Level and Transaction-Level Requirements that are in effect at such time or plans to seek a comparability determination and rely on compliance with one or more of the requirements of the home jurisdiction, as applicable; and (2) to the extent that the non-U.S. swap dealer or non-U.S. major swap participant would seek to comply with one or more of the requirement(s) of the home jurisdiction, a description of such requirement(s).

Comments Received by the Commission Regarding Cross-Border Activities

The Commission has received numerous comments during the Dodd-Frank Act rulemaking process from interested parties concerning the application of Title VII of the Dodd-Frank Act and the Commission’s implementing regulations thereunder to the cross-border activities of non-U.S. and U.S. market participants. The key issues raised by the commenters include (i) the nature of the connections to the United States that would require a non-U.S. person to register as a swap dealer or major swap participant under the CEA and the Commission’s regulations; (ii) which Dodd-Frank Act requirements apply to the swap activities of non-U.S. persons, U.S. persons, and their branches, agencies, subsidiaries and affiliates outside of the United States; and (iii) to the extent that Dodd-Frank Act requirements would apply, the circumstances under which the Commission would consider permitting a non-U.S. person to comply with the regulatory regime of its foreign jurisdiction instead of complying with the Dodd-Frank Act and the Commission’s regulations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which amended the Commodity Exchange Act (CEA) and established a new regulatory framework for swaps. In enacting this legislation, Congress sought to address the deficiencies in the regulatory system that contributed to the financial crisis of 2008 by reducing systemic risk, increasing transparency, and promoting market integrity within the financial system.

Section 722(d) of the Dodd-Frank Act amends the CEA to add section 2(i) which states that the provisions added to the CEA by Title VII of the Dodd-Frank Act shall not apply to activities outside the United States unless those activities: (1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) 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.

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