In a November 23rd Federal Register publication, the CFTC 1) proposed rules to establish registration requirements for swap dealers and major swap participants – collectively referred to in the rule proposal as “swaps entities” – and 2) sought comments in respect of those rules, as well as the extraterritorial application of the swap dealer (SD) and major swap participant (MSP) registration requirements.
In this posting, TSR has summarized these proposed rules for our readers. We will do this once at the beginning – the proposed rules – some amendments to existing rules and some new – are CFTC Rule 3.10, CFTC Rule 3.2, CFTC Rule 3.21, CFTC Rule 3.31, CFTC Rule 3.33, CFTC Rule 23.21, CFTC Rule 23.22, and CFTC Rule 170.16. Now, we will not mention the rule cites again, since as always we are committed to providing you with a meaningful, applied summary.
Public comments on the proposed rules are due to the CFTC on or before January 24, 2011.
The Proposed Registration Process
The CFTC has proposed the application of the Commodity Exchange Act’s existing registration scheme for other regulated entities – futures commission merchants, introducing brokers, retail foreign exchange dealers, commodity pool operators and commodity trading advisors – to swaps entities.
If adopted as proposed, the registration process for a swaps entity will involve the filing of two forms:
Form 7-R: A swaps entity would be required to file a CFTC Form 7-R on behalf of itself through an online registration system administered by the National Futures Association (“NFA”). The information required to be submitted on a Form 7-R is fairly basic, identifying information – entity’s full legal name and form of organization, business address, business records location, branch office location, principals, contact information and any disciplinary history.
Form 8-R: The swaps entity would also be required to submit a Form 8-R to provide information to the NFA regarding the entity’s “principals”- controlling directors or officers; 10% voting shareholder; or any other person that contributed 10% or more of the entity’s capita). The information provided in this form allows the NFA to conduct a background check to ensure that the entity’s principals do not have a disqualifying criminal history or regulatory background.
The proposed rules would also establish a process for withdrawing from registration or correcting and updating information submitted on a previously filed Form 7-R or 8-R.
Timing of Registration Process: Phased Implementation
To implement the registration requirements in the least disruptive manner as possible, the CFTC is proposing what it describes as a “phased implementation” of the requirements. This approach is being taken to accommodate timing potentially conflicting timing issues under Title VII of Dodd-Frank:
1) No later than July 21, 2011, the CFTC must promulgate rules to provide for the registration of swaps entities; and
2) The CFTC is permitted to adopt many of the regulatory and compliance requirements that will apply to swaps entities after July 21, 2011. (As background, these requirements were established by Congress pursuant to Section 4s of Title VII and, as a result, are referred to in the rule proposal as, the “Section 4s Requirements. ” Generally, the requirements will directly and significantly affect many areas of a swap entity’s operations, including capital and margin levels, daily trading requirements, business conduct standards, documentation standards, trading duties, retention of a chief compliance offer, and segregation of customer collateral.)
To reconcile the potential conflict, the proposed rules allow swaps entities to register as early as April 15, 2011 on a provisional basis, subject to the requirement that they timely establish compliance with the various Section 4s Requirements.
Extraterritorial Application of Swaps Entity Registration Requirements
Breathe easy (or not): no rules were promulgated – YET. However, comments were invited on extraterritorial applications of the swaps entity registration requirements. Specifically, the CFTC must determine the circumstances under which a person engaged in swap dealing activities outside of the U.S. will be required to register as a SD. (As a related aside, Societe General submitted a recent comment letter that may be of particular interest, if you are a non-U.S. bank that engages in swap dealing activities.) Of note, in this regard, is the statement that:
The [CFTC] generally would not require a person to register as a swap dealer if their only connection to the U.S. was that the person uses a U.S. registered swap execution facility, designated clearing organization or designated contract market in connection with their swap dealing activities, or reports swaps to a U.S. registered swap data repository. On the other hand, a person outside the U.S. who engages in swap dealing activities and regularly enters into swaps with U.S. persons would likely be required to register as a swap dealer.
As we shared in our July 2010 teleseminar, one starting point for the implementation of extraterritorial aspects of Dodd-Frank may be the registration standards summarized by the NFA in respect of a non-U.S. FCM, IB, RFED, CPO or CPA and in response to the question, “If my firm is not based in the United States, what requirements does it have?”
With respect to MSP registration, the landscape differs a bit – specifically, the definition of an MSP under Title VII is focused on the degree of risk that an entity’s swaps pose to U.S. counterparties and the U.S. market. To this end the dirty words – interstate commerce – have reared their head. Here is what the CFTC had to say (and is requesting comment on):
[T]he analysis of whether a non-U.S. entity should register as an MSP would turn upon, among other things, swap positions with U.S. counterparties (including the use of a U.S. [ central counterparty] or that involve U.S. mails or any means or instrumentality of interstate commerce.
In short, that is a potentially broad application of the MSP registration requirement to non-U.S. entities. At a minimum, we believe that there are strong policy arguments to the effect that the interstate commerce standard should be modified by the fact that Section 2(i) of the CEA mandates that Title VII’s provisions (including the registration requirements for swaps entities) shall not apply to activities outside the U.S. unless those activities “have a direct and significant connection with activities in, or effect on, commerce of the Unites States” (emphasis added). If not modified, then we are back to where we started – that is a potentially broad application of the MSP registration requirement to non-U.S. entities.
The proposal also requests comments on the division of responsibility for regulatory oversight as between the NFA and the CFTC. Which of the two should oversee which aspects of the Section 4s Requirements?
Comments Due By
January 24, 2011 – that is less than three months before the earliest permissible registration date of April 15, 2011 – wow, that’s fast.
Good reading, good night. TSR