On March 10, 2015, the Commodity Futures Trading Commission (“CFTC”) published a request for public comment on the costs and benefits associated with the cross-border application of certain of its rules promulgated under Title VII of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).1 Comments must be submitted by May 11, 2015.
Title VII of Dodd-Frank granted the CFTC a broad mandate to regulate the swaps markets, and pursuant to this authority, the CFTC subsequently adopted a number of complex rules. In July 2013, the CFTC published an important release titled “Interpretive Guidance and Policy Statement Regarding Compliance Wwith Certain Swap Regulations” (the “Cross-Border Guidance”), which represented the CFTC’s positions regarding the application, under the swaps-specific jurisdictional provision of the Commodity Exchange Act (i.e., Section 2(i)), of its swaps rules to cross-border activities. Several months after the CFTC issued the Cross-Border Guidance, the CFTC staff issued Advisory 13-69 (the “Advisory”), in which the staff further asserted CFTC cross-border jurisdiction over swaps activities between non-U.S. persons where certain conduct occurs inside the United States. The Advisory was not well-received by the swaps industry, either domestically or abroad, and on January 16, 2014, the CFTC issued a request for public comment regarding, among other things, whether the CFTC should adopt the Advisory as CFTC guidance.2 In the interim, three industry organizations filed a legal challenge to the Cross-Border Guidance and the cross-border application of the CFTC’s substantive swaps rules, which was largely rejected by the U.S. District Court for the District of Columbia in September 2014.3
Although the court did not favor the legal challenge generally, it remanded eight swaps-related rulemakings to the CFTC to address “inadequacies” in the CFTC’s cost and benefit analysis in those rulemakings.4 The court directed the CFTC to address explicitly whether the costs and benefits the CFTC identified in those rulemakings apply to activities outside the United States, and to address any differences that may exist. Importantly, the court’s remand of these rulemakings neither suspended the rules’ efficacy nor directly affected the Cross-Border Guidance. However, in reaching its decision the court characterized the Cross-Border Guidance as a non-binding document that represents “nothing more than the CFTC’s privileged viewpoint in the legal debate over the extraterritorial scope of the Title VII [r]ules.” The court further stated that market participants “remain completely free to ignore the [Cross-Border Action’s] writing on the wall.”
The CFTC’s request for comment represents a response to the U.S. district court’s remand order. Specifically, the CFTC is requesting public comment on whether there are costs or benefits of certain swap rules, as applied to business activities outside the United States, that differ from the costs or benefits of the rules as applied to activities within the United States. The CFTC has indicated that, in addition to making any necessary changes to the cost-benefit analyses in response to comments, it will consider proposing changes to the rules themselves based on information developed in the comment process and other relevant considerations. The request for comment presents an unexpected formal opportunity for market participants, especially participants with non-U.S. operations or affiliates or that otherwise engage in swap activity outside the United States, to provide their views on the important topic of the cross-border application of the CFTC’s swaps rules.
1 The CFTC’s release is available here: http://www.gpo.gov/fdsys/pkg/FR-2015-03-10/pdf/2015-05413.pdf.
2 The CFTC has yet to do so. Pending such action, the CFTC staff has now deferred the compliance date with respect to the Advisory until September 30, 2015.
3 The three industry organizations were the International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (SIFMA) and the Institute of International Bankers (IIB). The court’s opinion is available here: D.C. District Court Opinion. An article analyzing the opinion authored by several Sidley attorneys is available here: http://www.sidley.com/publications/the-duck-that-broke-the-camels-back-11-01-2014.
4 The eight remanded rulemakings are: Real-Time Public Reporting of Swap Transactions Data, 77 FR 1182 (January 9, 2012); Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136 (January 13, 2012); Registration of Swap Dealers and Major Swap Participants, 77 FR 2613 (January 19, 2012); Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflict of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (April 3, 2012); Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant,” and “Eligible Contract Participant,” 77 FR 30596 (May 23, 2012); Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps, 77 FR 35200 (June 12, 2012); Confirmations, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (September 11, 2012); and Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476 (June 4, 2013).
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
|Nathan A. Howell
|Kenneth A. Kopelman
|Michael S. Sackheim
|Joseph E. Schwartz
Investment Funds, Advisers and Derivatives Practice
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