J. Christopher Giancarlo, the acting chairman of the CFTC, has diverged from other U.S. federal regulators, signaling he favors “regulatory sandboxes” in which fintech companies may experiment with new ideas. Unlike the Office of the Comptroller of the Currency and the Federal Reserve, Mr. Giancarlo’s approach is to “do no harm” to early-stage technology such as blockchain, and is in line with proposals by regulators in the U.K. and Singapore, among other fintech hubs.
In a recent Bloomberg BNA article, Nikiforos Mathews, partner and global co-head of Derivatives at Orrick, Herrington & Sutcliffe, gives his take on the acting chairman’s position, noting that “I see a focus on trying to understand the technology and its potential benefits and fostering the advancement of the fintech sector in a way that it’s under the watchful eye of the regulators,” and suggesting that the agency may designate technology focused specialists to work with fintech innovators such that there is “breathing room” for growth and experimentation. “At the end of the day, with early regulatory involvement, regulators are going to understand the market better and put out smarter rules,” Mathews said.
From the time Regulation AT was initially proposed by the Commodity Futures Trading Commission (“CFTC”) over a year ago, the CFTC has solicited and considered numerous comment letters, held a public roundtable, supplemented the proposed regulation, and, on January 23, 2017, extended the comment period for that supplemental proposal. However, although the substance of the regulation has evolved in certain respects, its future remains uncertain. READ MORE
Internal Revenue Code Section 871(m) and the regulations thereunder treat “dividend equivalent payments” on certain equity derivatives as dividends from sources within the United States.  That is, federal withholding tax applies to such payments made to non-U.S. parties. READ MORE
Blockchain and distributed ledger technology (“DLT”) applications outside of the bitcoin context are attracting the attention of financial entities, prompting regulators to become increasingly focused on these possible applications. Recently, for example: (i) potential financial and securities applications of DLT were discussed in depth at a “FinTech Forum” held at the Securities and Exchange Commission (“SEC”); (ii) the Federal Reserve Board published a paper titled “Distributed Ledger Technology in Payments, Clearing, and Settlement”; and (iii) the Financial Industry Regulatory Authority (“FINRA”) published a paper titled “Distributed Ledger Technology: Implications of Blockchain for the Securities Industry.” Each of these recent developments is discussed in turn below. READ MORE
On January 12, the Commodity Futures Trading Commission (“CFTC”) unanimously approved the proposal of numerous amendments to CFTC Regulation 1.31, the regulation that sets forth the recordkeeping requirements for records required to be kept under the U.S. Commodity Exchange Act (the “Act”) and the CFTC’s regulations, including with respect to swaps. The proposed amendments are largely intended to modernize and make technology-neutral the form and manner in which regulatory records are kept.
The last major revision of Regulation 1.31 was made in 1999, when records were largely kept in paper form and before the prevalence of advanced electronic information systems.  Through the proposed amendments, the CFTC intends to update, reorganize and, effectively, re-write Regulation 1.31, while maintaining its ability to examine and inspect required records. READ MORE
On October 13, 2016, the Commodity Futures Trading Commission (the “CFTC”) approved an Order delaying for one year the reduction of the threshold for determining whether an entity constitutes a “swap dealer” for purposes of the U.S. Commodity Exchange Act. Currently, persons are not considered to be swap dealers unless their swap dealing activity in aggregate gross notional amount measured over the prior 12-month period exceeds a de minimis threshold of $8 billion. This threshold had been scheduled to automatically decline to $3 billion on December 31, 2017, but the Order extended that date to December 31, 2018, absent further action from the CFTC. READ MORE
On September 28, 2016, the Commodity Futures Trading Commission (the “CFTC”) unanimously approved the expansion of currencies of interest rate swaps subject to mandatory clearing under the U.S. Commodity Exchange Act (the “Act”). Subjecting standardized swaps to central clearing is intended to decrease risk in the financial system and has been a primary goal of global regulators for several years.
Section 2(h) of the Act makes it unlawful for any person to engage in a swap that is required to be centrally cleared unless that swap is submitted to a derivatives clearing organization (a “DCO”) that is either registered under the Act or exempt from registration under the Act. This same section of the Act sets forth the process through which the CFTC is to make determinations of whether a swap, or group, category, type or class of swaps should be subject to mandatory clearing. READ MORE
In September 2016, the International Swaps and Derivatives Association, Inc. (“ISDA”) published a wide-ranging white paper entitled “The Future of Derivatives Processing and Market Infrastructure.” The white paper proposes a “path forward” from the new regulatory ecosystem created in response to the financial crisis and the resulting compliance burden on market participants.
As described in the white paper, tight time frames for complying with regulatory requirements prevented market participants in various jurisdictions from making necessary changes to compliance, operational risk management, and other processes in an optimal manner. The resulting complex workflows have created challenges. The white paper’s proposals are intended to foster a “standardized, efficient, robust and compliant ecosystem that supports the needs of an array of market participants.” In particular, the white paper identifies three key areas for improvement: (i) standardization; (ii) collaboration; and (iii) technology. READ MORE
Orrick attorneys authored an article, titled “Proposed Regulations Under §385 Classifying Interests in a Corporation,” addressing Section 385 regulations proposed by the Internal Revenue Service and the U.S. Treasury Department to address the excessive use of debt to reduce the U.S. tax base. The article was published in the Tax Management International Journal and is available here.
Orrick attorneys authored an overview of Regulation Automated Trading (known as “Regulation AT”) proposed by the Commodity Futures Trading Commission (“CFTC”) in the May/June 2016 issue of the Journal of Taxation and Regulation of Financial Institutions. The “overarching goal” of proposed Regulation AT is to update the CFTC’s rules in response to the development and prevalence of electronic trading. The article is titled “Regulation Automated Trading in Derivatives: An Overview of the CFTC’s Proposed Regulation AT” and is available here.