CFTC Clarifies Temporary Application of
Swap Regulations and Delays Some
Swap-Related Requirements

October 13, 2012

Over the past two days, the CFTC staff has released a series of Q&As, FAQs and no-action documents that provide relief or clarity to market participants regarding the implications of the definition of “swap” becoming effective on October 12, 2012.  We are analyzing these documents but wanted to raise the following key points to you immediately:

  • Solely for purposes of the swap dealer de minimis threshold calculation and the major swap participant calculation, from now until the earlier of December 31, 2012 or the effective date of a definition of “U.S. person” in a final CFTC cross-border exemptive order, Person A, a non-U.S. person, should only count a swap with the following types of counterparties:  
    1. A natural person who is a resident of the United States
    2. 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 organized or incorporated under the laws of the United States
    3. A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is exclusively for foreign employees of such entity
    4. An estate or trust, the income of which is subject to U.S. income tax regardless of source, or
    5. An individual account (discretionary or not) where the beneficial owner is a person described in (i) through (iv) above.

    Person A does not need to count a swap dealing transaction with a counterparty that is not described in (i)-(v) above, even if the swap is guaranteed by a person that is described above.

In relying on this relief, Person A may rely on a representation from its counterparty that the counterparty is not described by (i)-(v) above.  A person described in (i)-(v) is not eligible for this relief. 

  • Note that this is similar to the definition of “U.S. person” in the CFTC’s proposed cross-border guidance, but does not capture an entity that would be a U.S. person under the proposed definition by virtue of having its principal place of business in the United States and modifies the pension plan prong of the proposed definition accordingly.  It also excludes prongs (ii)(B), (iv) and (v) of the cross-border guidance proposed definition and makes other related technical changes.  The CFTC staff emphasizes that the definition above is not a temporary “U.S. person” definition and is only relevant for purposes of counting towards the swap dealer and major swap participant registration requirements.
  • In addition to the above, for the same time period, Person A, a non-U.S. person, does not need to count swap transactions with a non-U.S. branch of a U.S. person towards its swap dealer de minimis threshold or its major swap participant calculation as long as that non-U.S. branch represents to Person A its intention to register as a swap dealer by March 31, 2013.  This representation does not need to be obtained before execution of the swap.
  • The CFTC is not providing relief on the treatment of foreign exchange swaps and foreign exchange forwards as “swaps.”  However, if the Treasury Secretary exempts such instruments from the definition of “swap” before December 31, 2012, foreign exchange swaps and foreign exchange forwards may be excluded retroactively from the determination of whether an entity is a swap dealer or major swap participant.  Even if an exemption is issued, however, foreign exchange forward and foreign exchange swap activity may be relevant to the timing of the swap dealer registration requirement for a particular entity.  An entity that enters into swaps other than foreign exchange swaps and foreign exchange forwards in connection with dealing activities in excess of the de minimis threshold by December 31, 2012 would need to include its foreign exchange swap and foreign exchange forward dealing activities to determine the date by which it must apply to be registered as a swap dealer.
  • The CFTC staff provided reassurance that, between October 12, 2012 and December 31, 2012, it does not intend to recommend enforcement against a swap dealer or a major swap participant that follows its internal policies and procedures that are reasonably designed to ensure that all swaps are appropriately classified for purposes of the de minimis threshold or major swap participant calculations.
  • The definition of eligible contract participant in effect prior to October 12, 2012, as well as the related temporary relief provided in the CFTC’s July 2011 effective date order and its extensions, may be relied upon through December 31, 2012.  Thus, representations regarding ECP or related status based on the pre-Dodd-Frank definition will be sufficient until December 31, 2012.
  • Securitization vehicles and REITs that satisfy conditions specified in the relevant no-action letters are outside the definition of “commodity pool” under Section 1a(10) of the Commodity Exchange Act and CFTC Regulation 4.10.  For securitization vehicles that cannot meet the conditions for relief, the CFTC staff notes that it is open to discussions to consider whether or not such vehicles may be properly considered to be a commodity pool or whether other relief, such as treatment as an exempt pool, may be appropriate. 
  • A person that is an introducing broker, commodity pool operator, commodity trading advisor, an associated person of any of those or an associated person of a futures commission merchant, floor broker or floor trader will not be required to register with the CFTC until December 31, 2012, if the person is required to register solely by virtue of swaps activities or activities in connection the transition of certain swaps currently cleared by ICE and NYMEX to futures and options.

The no-action and interpretive guidance issued by the CFTC staff during the past few days contains additional details and conditions relating to the relief described above, as well as additional types of relief relating to the October 12 date. The documents can be found on the CFTC’s website.


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