SIFMA AMG and IAA Request Relief for Foreign Intermediaries from CFTC Oversight
Commentary by Steven Lofchie
SIFMA Asset Management Group ("SIFMA AMG") and the Investment Adviser Association ("IAA" and, collectively, the "Associations") requested no-action relief from the CFTC's Division of Swap Dealer and Intermediary Oversight. The relief would permit commodity pool operators, commodity trading advisors and introducing brokers located outside the United States ("foreign intermediaries") to enter into uncleared swaps on behalf of non-U.S. customers without being required to register with the CFTC.
The Associations explained that CFTC Rule 3.10(c)(3)(i) exempts foreign intermediaries from CFTC registration where they enter into CFTC-regulated products on behalf of non-U.S. customers if the product is submitted for clearing through a CFTC-registered futures commission merchant ("FCM"). The Associations observed that, prior to the Dodd-Frank Act, the clearing condition was included in the exemption when the only products subject to the CFTC's jurisdiction were exchange-traded futures and commodity options cleared through a CFTC-registered FCM.
However, the Associations noted, when the CFTC amended the Rule following enactment of the Dodd-Frank Act to include swaps, the CFTC did not limit the clearing requirement to those swaps that are subject to a mandatory clearing determination by the CFTC. The Associations argued that this oversight could have the unintended effect of preventing foreign intermediaries relying on Rule 3.10(c)(3)(i) from entering into uncleared swaps, even though these swaps are not subject to a mandatory clearing determination. The Associations argued that this conclusion cannot be correct, since the CFTC is subject to specific standards under Section 2(h) of the CEA when determining whether a swap should be cleared, and the amendments to Rule 3.10(c)(3)(i) were not intended to impose a separate clearing requirement on foreign intermediaries. The Associations seek no-action relief to permit foreign intermediaries to enter into uncleared swaps on behalf of their non-U.S. customers in reliance on Rule 3.10(c)(3)(i).
In addition to seeking no-action relief, the Associations stated, they also intended to petition the CFTC for a rulemaking to amend CFTC Rule 3.10(c)(3)(i) in order to address this issue.
Commentary
This seems to be an obvious error in the regulatory requirements, since no policy whatsoever requires a non-U.S. advisor who provides advisory services to non-U.S. clients to register simply because that advisor purchases a U.S. product. The advisory scheme is intended to regulate the relationship between the advisor and the advisor's client, both of whom operate outside the United States. There is no logic in applying it just because an advisor purchases a product that has a U.S. nexus.