CFTC Provides Limited Swaps Relief for Sales of EU-Listed Warrants
Commentary by Nihal Patel and Steven Lofchie
The CFTC Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight issued no-action relief for swaps margin and reporting requirements related to the sale of EU-listed warrants.
The relief was granted to an unidentified non-U.S. swap dealer that has a listed warrants program that includes certain foreign exchange- and commodity-linked warrants that could be considered "swaps" for purposes of the CEA. According to the relief, the firm indicated that the relevant warrants, among other things, (i) are of a small outstanding amount and "are not a source of systemic" risk; (ii) contain transfer restrictions "designed" to prevent offer/sale/resale by U.S. persons; (iii) are "comprehensively regulated as securities in the EU"; (iv) are "frequently" traded anonymously on exchange and cleared in Europe; and (v) typically are conducted so that the firm receiving the relief does not know when a holder has sold a warrant.
Among other things, the CFTC relief is subject to the following conditions: (i) the firm is (generally) unable to identify the warrant holder (except where the holder is a brokerage client of the firm or its affiliates); (ii) the warrants are not cleared by a CFTC-regulated "clearing organization" or "derivatives clearing organization"; (iii) the firm informs the CFTC if the mark-to-market value of the warrants exceeds a certain [X] threshold; (iv) the warrants are reported pursuant to the revised EU Markets in Financial Instruments Directive in Europe; and (v) offering and transfer restrictions are imposed that are "designed" to prevent the offer, sale or resale of the warrants to U.S. persons (as defined by the CFTC for swaps purposes generally, including for margin purposes).
Commentary
This is an interesting no-action letter that raises a number of policy questions. While the relief seems merited, the process is problematic.
The letter - very generally - seems to indicate that certain common transactions in listed instruments may be excluded from "swap" regulation for limited purposes, if: (i) the issuer is non-U.S. entity that is registering with the CFTC as a swap dealer solely because of Brexit-related restructuring; (ii) the instruments are issued offshore by an offshore entity and are generally restricted to purchase by offshore entities; and (iii) the issuer engages in the transactions only up to a [redacted] threshold. All of this detail seems both unnecessary and unfair. Other firms that are in the warrant business - or are contemplating entering into the warrant business - should be able to look, even if not to specific rules, to some kind of regulatory guidelines as to when they might be able to avail themselves of similar relief.
Commentary
Is it really necessary for the CFTC to impose any conditions on the sale, by a European-regulated firm to European investors, of products that are regulated effectively as securities under European law? The letter demonstrates two obvious problems with the current state of the law: (i) jurisdictional overreach and (ii) the illogic of the silo-ization of the treatment of different types of financial instruments (e.g., warrants on securities are regulated (or not) in one manner, and warrants on currencies are regulated in a different manner (or even prohibited)).