Extraterritoriality of the Dodd-Frank Act Table of contents - PowerPoint PPT Presentation

Extraterritoriality of the Dodd-Frank Act

Table of contents Background Abstract Requirements for non-U.S. SDs and MSPs Requirements for non-U.S. SDs Requirements for non-U.S. MSPs Substituted compliance Proposed cross-border exemptive order

Background The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) has been enacted to address the deficiencies in the regulatory system that contributed to the financial crisis in the fall of 2008 Title VII of the Dodd-Frank Act has amended the Commodity Exchange Act (“CEA”) to overhaul the structure and oversight of the over-the-counter derivatives market that previously had been subject to little or no oversight

Background Title VII has established a new statutory framework for comprehensive regulation of financial institutions that participate in the swaps market as Swap Dealers (“SDs”) or Major Swap Participants (“MSPs”), which must register and are subject to greater oversight and regulation On June 29, 2012, the U.S. Commodity Futures Trading Commission (“CFTC”) has published its proposed interpretive guidance and policy statement regarding the cross-border application of the swaps provisions of the CEA

Abstract As a general matter, Title VII applies extraterritorially to the overseas activities of swap dealers with non-U.S. persons 3 major exceptions, however: � The external business conduct rules will not be applied to transactions entered into by non-U.S. branches of a U.S. bank or non-U.S. subsidiaries & affiliates with non-U.S. persons � If a branch or entity is operating in a non-U.S. jurisdiction that has a comparable compliance regime, the branch or entity would be permitted to comply with that regime instead of Title VII � A “ de minimis exception” for emerging markets branches of U.S. banks that in the aggregate constitute less than 5% of the bank’s notional derivatives

Requirements for non-U.S. SDs and MSPs A non-U.S. branch or agency of a U.S. person would also be considered to be a U.S. person: � the SD and MSP registration requirements would apply to both principal entity and its non-U.S. branches or agencies A non-U.S. affiliate or subsidiary of a U.S. person would be considered to be a non-U.S. Person

Requirements for non-U.S. SDs (1/2) A non-U.S. person who engages in more than a de minimis level of swap dealing with a U.S. person would be required to register as SD Non-U.S. SD determination: If a non U.S. Dealer does not engage in the swap as part of a “regular business”: Application of the de minimis threshold is not required: non U.S. Dealer is not an SD � If a non U.S. Dealer does engage in the swap as part of a “regular business” & its counterparty is a U.S. person, or If a non U.S. Dealer does engage in the swap as part of a “regular business” & its counterparty is not a U.S. person but its obligations are guaranteed by a U.S. person: Include the notional value of the swap in the calculation of the aggregate notional amount of the � non-U.S. Dealer’s swap

Requirements for non-U.S. SDs (2/2) Non-U.S. SD determination: If a non U.S. Dealer does engage in the swap as part of a “regular business” & its counterparty is not a U.S. person & its obligations are not guaranteed by a U.S. person, Or If a non U.S. Dealer does engage in the swap as part of a “regular business” & its counterparty is a non-U.S. branch of a U.S. registered SD, Exclude the notional value of the swap from the calculation of the aggregate notional amount of � the non-U.S. Dealer’s swaps.

Requirements for non-U.S. MSPs (1/2) If a non-U.S. person holds swap positions above the thresholds identified in the final CFTC rule defining the term MSP, such non- U.S. Swap Participant would be required to register as an MSP Non-U.S. MSP Determination: If the non-U.S. person’s obligations under the swap are guaranteed by a U.S. person & the other party to the swap is a U.S. person, or If the non-U.S. person’s obligations under the swap are not guaranteed by a U.S. person & the other party to the swap is not a U.S. person: � Exclude the notional value of the swap from the calculation of the aggregate notional amount of the non-U.S. person’s swap positions

Requirements for non-U.S. MSPs (2/2) Non-U.S. MSP Determination: If the non-U.S. person’s obligations under the swap are not guaranteed by a U.S. person & the other party to the swap is a U.S. person, or If the non-U.S. person’s obligations under the swap are guaranteed by a U.S. person & the other party to the swap is not a U.S. person: � Include the notional value of the swap in the calculation of the aggregate notional amount of the non-U.S. person’s swap positions

Substituted compliance (1/2) A non-U.S. person may request permission to comply with its home jurisdiction’s requirements instead of the requirements under the Dodd-Frank Act The CFTC proposes to examine the regulatory requirements to which non-U.S. SDs and non-U.S. MSPs are subject by using an outcomes based approach to determine whether these requirements are designed to meet the same regulatory objectives of the Dodd-Frank Act

Substituted compliance (2/2) Where the foreign regime does not achieve the objectives of the Dodd- Frank Act, the CFTC proposes to recognize substituted compliance only to the extent that the foreign regulations are determined to be comparable and sufficiently comprehensive Relevant factors that the CFTC could take in to consideration: � The scope and objectives of the non-U.S. regulations � The comprehensiveness of requirements of the non-U.S. regulations � The comprehensiveness of the non-U.S. regulator’s supervisory program � The authority of the non-U.S. regulator to support and enforce its oversight of the non-U.S. SD or non-U.S. MSP

Proposed cross-border exemptive order The CFTC has released a proposed exemptive order to provide temporary relief from compliance with some regulatory requirements regarding swaps activity under the Dodd-Frank Act The order allows non-U.S. SDs and non-U.S. MSPs to delay compliance with certain entity and transaction requirements with respect to swaps activity with non-U.S. counterparties. The order provides temporary relief for U.S. SDs and MSPs from compliance with certain entity requirements until January 1, 2013 The proposed order adopts the “entity-level requirements” & “transaction-level requirements” approach from the proposed cross-border guidance

Proposed cross-border exemptive order Entity-level requirements Category 1 Category 2 Capital adequacy Reporting to an SDR Chief compliance officer Large trader reporting for physical commodity swaps Risk management Swap data recordkeeping

Proposed cross-border exemptive order Transaction-level requirements Category A Category B Risk Mitigation and Transparency Sales Practices Clearing and swap processing External business conduct standards Margining (and segregation) for uncleared swaps Trade execution Trade confirmation Swap trading relationship documentation Real-time public reporting Trade confirmation Daily trading records

Proposed cross-border exemptive order Application to non-U.S. SDs & MSPs Entity-level requirements: Category 1 requirements Category 2 requirements delayed until July 2013 Trades with U.S. persons No delay Other trades Delayed until July 2013

Proposed cross-border exemptive order Application to non-U.S. SDs & MSPs Transaction-level requirements Category A requirements Category B requirements Trades with U.S. persons Trades with U.S. persons No delay No delay Trades with non-U.S. persons guaranteed by Trades with non-U.S. persons (including U.S..persons those guaranteed by a U.S. person) May comply with local rules until July 2013 Category B requirements do not apply, as per proposed interpretive guidance Substituted compliance required thereafter Trades with other non-U.S. persons N/A, as per proposed interpretive guidance

Proposed cross-border exemptive order Application to non-U.S. branches of U.S. SDs & MSPs Entity-level requirements: no delay Transaction-level requirements: Categories A & B Trades with U.S. persons No delay Trades with non-U.S. persons May comply with local rules until July 2013 Substituted compliance required thereafter

Proposed cross-border exemptive order Application to U.S. SDs & MSPs Entity-level requirements: no delay Transaction-level requirements: Categories A & B Trades with U.S. persons No delay Trades with non-U.S. persons May comply with local rules until July 2013 Substituted compliance required thereafter

Proposed cross-border exemptive order Application to U.S. SDs & MSPs Entity-level requirements: Category 1 requirements Category 2 requirements Delayed until January 1, 2013 No delay Transaction-level requirements: no delay