CFTC Adopts Final Cross-Border Swap Rulemaking; Staff Issues No-Action Relief for ANE Transactions

By a vote of 3-2, on July 23, the Commodity Futures Trading Commission adopted its Final Cross-Border Swaps Rulemaking (Final Cross-Border Rule), which codifies several parts of the CFTC’s existing interpretive guidance and policy statement on the subject. Among other things, the Final Cross-Border Rule establishes key definitions, some of which are revised definitions of existing terms used in the interpretive guidance (e.g., the definition of “U.S. Person”) and others which are new. The rule also addresses which cross-border swaps must be considered for the purposes of the swap dealer registration threshold.

Most notably, it formally withdraws the 2013 CFTC staff advisory applying the CFTC’s transactional requirements to swaps between non-US persons that are arranged, negotiated and executed by US personnel (ANE Transactions). As a result, non-US swap dealers do not have to apply certain transaction-level requirements, including certain external business conduct requirements. In conjunction with the CFTC’s adoption of the Final Cross-Border Rule, staff from the CFTC’s Divisions of Swap Dealer and Intermediary Oversight, Clearing and Risk, and Market Oversight issued no-action relief from the application of the CFTC’s mandatory clearing, mandatory trading and real-time public reporting requirements to ANE Transactions. In the Final Cross-Border Rule, the CFTC stated its intention to address the application of the remaining transaction-level requirements to ANE Transactions in future cross-border rulemakings.

While the Final Cross-Border Rule takes effect 60 days after publication in the Federal Register, swap dealers must comply with the rule’s various new requirements (such as new recordkeeping requirements) 365 days after publication in Federal Register.

More information on the Final Cross-Border Rule is available here.

More information on No-Action Letter 20-21 is available here.

CFTC Proposes Margin Requirements for Uncleared Swaps

At an open meeting on July 22, the Commodity Futures Trading Commission heard presentations on three proposals for changes to the margin requirements for uncleared swaps. The proposed changes, which originate from recommendations made by the Margin Subcommittee of the CFTC Global Markets Advisory Committee (GMAC), are as follows:

1. A proposal to amend the definition of Material Swaps Exposure (MSE) to change the calculation of MSE from June, July and August of the prior year to March, April and May of the then current year, with the initial margin start date in every year after 2022 being changed to September 1. This change will synchronize the CFTC rules with the Basel Committee on Banking Supervision and the International Organization of Securities Commissions framework.

2. A proposal to codify certain no-action relief by allowing separate minimum transfer amounts of up to $50,000 for each separately managed account of an entity. The CFTC is also proposing to allow the minimum transfer amounts to be split between initial margin and variation margin.

3. A proposal to amend Rule 23.154(a) to codify No-Action Letter 19-29 and allow small swap dealers to rely on the initial margin models of a larger swap dealer counterparty.

The CFTC did not vote on these proposals, but Chairman Tarbert signaled that they will become official notices of proposed rulemakings in the not too distant future. No written description of the proposals is available.

The GMAC recommendations are available here.

CFTC Adopts Final Capital Requirements for Swap Dealers

On July 22, the Commodity Futures Trading Commission adopted rules (Final Rules) that set minimum financial capital requirements for swap dealers (SDs) and major swap participants (MSPs) that are not subject to prudential regulation (each, a “Covered Swap Entity” or CSE). The capital requirements were originally proposed in 2016, as explained in more detail here.

The core financial requirement is capital equal to the greatest of $20 million or 8 percent (and in some cases, 2 percent) of the initial margin required on the CSE’s cleared and uncleared swaps, security-based swaps, futures and foreign futures, but the rules permit or require different types of CSEs to adopt different approaches to meeting these requirements.

1. A CSE can generally elect one of three approaches to computing its regulatory capital:

   1. the “Bank-Based Approach,” which is based on maintaining minimum levels of common equity tier 1 capital, as defined under the rules for bank holding companies, or tier 2 capital (subject to certain limitations);

   2. the “Net Liquid Assets Approach,” which is based on having minimum net capital computed in accordance with the rules for futures commissions merchants (FCMs), registered broker-dealers, and security-based swap dealers; or

   3. the “Tangible Net Worth Capital Approach,” which is available to CSEs predominantly engaged in non-financial activities that are subsidiaries of parent entities that are commercial enterprises.

2. A CSE that is an FCM must meet existing FCM net capital requirements (as amended by the Final Rules).

3. An SD organized and domiciled outside the United States may follow the capital adequacy requirements of its home jurisdiction if the CFTC has made a capital comparability determination with respect to those non-US rules.

4. An SD that is also a broker-dealer registered with the Securities and Exchange Commission and approved as an alternative net capital firm may simply comply with its existing SEC capital requirements.

5. The only requirement applicable to a major swap participant is that the MSP must maintain a positive tangible net worth.

The Final Rules specify that a CSE must always meet any greater regulatory capital requirements imposed on it by any registered futures association of which it is a member, but the only such association currently in existence is the National Futures Association (NFA), which does not currently set capital requirements for SDs or MSPs. The specific eligibility and capital requirements are explained in further detail in the chart below.

Note that this table is a modified version of a table that appears in the Final Rules.

The Final Rules also amend capital requirements for dually registered SDs and FCMs to provide specific capital deductions for market risk and credit risk for swaps and security-based swaps entered into by an FCM. The Final Rules also incorporate additional amendments, such as rules (1) permitting certain entities dually-registered with the SEC to file a Financial and Operational Combined Uniform Single Report (an SEC FOCUS Report) in lieu of CFTC financial reports; (2) requiring certain CFTC registrants to file notices of certain defined events; and (3) requiring notices of bulk transfers to be electronically filed with the CFTC within a defined period of time.

The rules take effect 60 days after publication in the Federal Register.

More information on the Final Rules is available here.

Katten is planning to publish an advisory providing more detailed coverage of the Final Rules.