CFTC No-Action Letter Regarding Swaps Calculation by Foreign Entities for SD-MSP Definitions (with Lofchie Comment)
The Division of Swap Dealer and Intermediary Oversight ("DSIO") issued a no-action letter effectively providing a temporary definition of the term "U.S. person" for purposes of the calculations necessary to determine whether an entity is an SD or an MSP. Until the end of the year, or such later date as the CFTC says otherwise, the following are to be treated as U.S. persons:
(i) A natural person who is a resident of the United States;(ii) 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;(iii) 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;(iv) An estate or trust, the income of which is subject to U.S. income tax regardless of source; or(v) An individual account (discretionary or not) when the beneficial owner is a person as described in (i) through (iv) above.
The no-action relief will apply where the counterparty to such swap is not a person as described in (i) through (v) above, regardless of whether that counterparty's obligations under the swap are guaranteed by a person that is described in (i) through (v) above.
Similar relief is also provided concerning certain swap transactions by certain foreign entities when the counterparty is a foreign branch of one of the persons described in (i) through (v) above that intends to register as a swap dealer by March 31, 2013.
Each non-U.S. person is permitted to rely on its counteparty's representations as to its status as a non-U.S. person. A non-U.S. person may also rely on the representation of a counterparty that it intends to register as a swap dealer by the end of March.
Lofchie Comment: Here is a quote from the letter: "[I]t has come to the attention of the Division, based on information provided by multiple parties, that prior to the Commission's issuance of final guidance or a final exemptive order setting forth a definition of 'U.S. person,' foreign entities may adopt either potentially over-inclusive or potentially under-inclusive categorizations of their counterparties. . . . Either result would not be consistent with the Commission's intent, in issuing the Proposed Cross-Border Interpretive Guidance for public comment, to establish a uniform and consistent standard . . ."In other words, the CFTC has learned through conversations with "multiple parties" (how many I wonder?) that where the CFTC has failed to adopt any rules, no one knows what the rules are (since they don't in fact exist), or what the rules will be (since they have not been determined), or just what they should do, and different parties therefore end up interpreting the "rules" (or absence thereof) in different ways. I find this statement somewhat comic-although perhaps one does not want the country's financial regulators to have such a dry sense of humor.
See: CFTC Letter 12-22 Regulations 1.3(ggg)(4) and 1.3(hhh); No-Action.