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CFTC Addresses Cross-Border Matters, Post-Trade Name Give-up and DCO Requirements

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

At an open meeting, the CFTC voted to (i) approve a final rule amending regulations governing derivatives clearing organizations ("DCOs"), (ii) propose a prohibition on "post-trade name give-up" at swap execution facilities and (iii) propose new cross-border rules governing registration requirements applicable to swap dealers and major swap participants. (The text of the various rulemaking activities has not been published on the CFTC site at the time of this article's publication.)

Cross-Border Swap Dealers and Major Swap Participants.

In a 3 to 2 vote (with CFTC Commissioners Dan M. Berkovitz and Rostin Behnam dissenting), the CFTC voted to propose new cross-border rules addressing the registration thresholds and other requirements concerning swap dealer and major swap participants. According to the Commissioners' statements, the proposal would, among other things, (1) add a new definition of "U.S. person" intended to be harmonized with SEA Rule 3a71-3, (2) significantly change the counting requirements for non-U.S. subsidiaries of U.S. firms, including by adding a new category called "significant risk subsidiary," (3) provide "full relief" for transactions "arranged, negotiated, or executed" in the United States by non-U.S. persons, (4) add a definition of "guarantee" that requires the "explicit recourse" of a counterparty to a U.S. person and (5) revise the standards for substituted compliance determinations.

DCO Regulations.

The CFTC unanimously approved amending its DCO regulations to, among other things, (i) modify certain risk management and reporting obligations, (ii) clarify the meaning of certain provisions, (iii) simplify processes for registration and reporting, and (iv) codify existing staff relief and guidance. According to Mr. Berkovitz, the CFTC chose not to address at this time whether to require a DCO to have a default committee with member participation that would convene upon a "substantial or complex default."

Prohibition on "Post-Trade Name Give-up."

The CFTC unanimously approved a proposal to prohibit requiring "post-trade name give-up" practices for swaps that are anonymously executed on a swap execution facility ("SEF") and are intended to be cleared. Additionally, SEFs would be required to implement and enforce rules that prohibit a person from putting into effect such a disclosure. The proposal follows a request for comments issued by the CFTC in November 2018. CFTC Chairman Heath Tarbert and Mr. Berkovitz and Mr. Behnam issued a joint statement in support of the proposal, referring to post-trade name give-up as a "vestige of the old bilateral over-the-counter derivatives market." CFTC Commissioner Brian Quintenz voted for the proposal but suggested that it was lacking in data analysis, and urged market participants to comment on whether ending the practice would have the intended effects.

The five CFTC Commissioners provided concurring and dissenting speeches, respectively, on the final rule and two proposals. The Commissioners' statements can be found here.

Commentary

The cross-border proposal would be the CFTC's second attempt to implement rules to replace the ill-conceived cross-border guidance that has been in place for over six years. The Commissioners addressed issues that have long been controversial.

The CFTC appears to be moving in the direction of placing less emphasis on activities occurring and risk incurred overseas by non-U.S. entities. The changes could be significant for non-U.S. derivatives market participants - those currently registered may find registration to be unnecessary, and those not registered may find it easier to manage their trading books to stay under the de minimis thresholds. Entities not engaged in dealing may also find the changes significant. A modified definition of "U.S. person" could result in more customers that will not subject overseas dealers to U.S. regulatory requirements (e.g., margin), which requirements may then be indirectly imposed on such customers.

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