On December 10, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission promulgated the final rule implementing the prohibitions and limitations imposed on banking entities by Section 13 of the Bank Holding Company Act of 1956, known as the “Volcker Rule.” Click here for a general overview of the Volcker Rule.
Since the first published proposal in 2011, we have tracked initiatives and developments regarding a possible European financial tax that would apply to derivatives, among other types of financial transactions.[1] Despite the publication of a European Commission (“EC”) directive in February 2013 that would apply to eleven participating member-states, the scope and implementation of a financial transaction tax continues to be fiercely debated. Among other things, the proposed directive would, after an initial “transitional” period, impose a tax rate of at least 0.01% of the notional amount on derivative transactions.
On November 21, 2013, PricewaterhouseCoopers LLC released a study—commissioned by 27 trade groups in the financial industry—that, based on existing literature surrounding a financial transaction tax, questioned the benefits of such a tax and highlighted its potential to negatively impact financial markets, as well as economic growth.[2] With respect to the derivatives market, the study noted that the EC’s impact assessment estimated that a financial transaction tax would reduce trading volumes by between 70% and 90%.[3] The study further noted that certain commentators have predicted that the tax could have a substantial (or, for some product types, profound) impact on the bid-offer spreads of derivative transactions.[4]
Most recently, it has been reported that the participating member-states have been discussing the implementation of a more narrow and modest tax, including one with more robust exemptions. However, a revised proposal has not yet been published.
[1] See “Financial Transaction Tax Developments” posted on August 26, 2013; “Financial Transaction Tax Developments” posted on June 11, 2013; “Financial Transaction Tax” posted on February 15, 2012; and “Europe Proposes Financial Transaction Tax” posted on October 15, 2011.
[2] PricewaterhouseCoopers LLC, Financial transaction tax: the impacts and arguments, November 21, 2013 (available at: https://www.pwc.fr/fr/assets/files/pdf/2013/11/pwc_ftt_litterature_review.pdf).
[3] Id. at 24.
[4] Id.
On December 20, 2013, the Commodity Futures Trading Commission (“CFTC”) approved substituted compliance in the European Union and five other jurisdictions for a range of “entity-level” and “transaction-level” requirements of Dodd-Frank.[1] Pursuant to a substituted compliance determination, certain swap counterparties generally may comply with the requirements of a jurisdiction (e.g., those of the European Market Infrastructure Regulation in Europe) in lieu of comparable Dodd-Frank requirements. READ MORE
On January 3, 2014, the Commodity Futures Trading Commission (“CFTC”) issued a no-action letter further delaying until September 15, 2014 the effectiveness of a November 14, 2013 advisory regarding the applicability of certain Dodd-Frank requirements to activities that occur in the United States (the “Advisory”).[1] A previous no-action letter, issued on November 26, 2013, had delayed the effectiveness of the Advisory until January 14, 2014.[2]
The Advisory generally provides that a non-U.S. swap dealer registered with the CFTC must comply with “transaction-level” requirements[3] of Dodd-Frank when entering into a swap with a non-U.S. person if the swap is “arranged, negotiated, or executed by personnel or agents” of the non-U.S. swap dealer located in the United States.[4]
In conjunction with the issuance of this latest no-action letter, the CFTC also issued a notice of request for public comment on all aspects of the Advisory.[5]
[1] CFTC Letter No. 14-01, Re: Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers (January 3, 2014); CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).
[2] CFTC Letter No. 13-71, Re: No-Action Relief: Certain Transaction-Level Requirements for Non-U.S. Swap Dealers (November 26, 2013).
[3] The “transaction-level” requirements include: (i) required clearing and swap processing; (ii) margining (and segregation) for uncleared swaps; (iii) mandatory trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards. These requirements are separated into “Category A” and “Category B” requirements, the latter of which includes solely external business conduct standards.
[4] See CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).
[5] Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States (available at: https://www.cftc.gov/PressRoom/PressReleases/pr6818-14).
On December 5, 2013, the Internal Revenue Service issued final regulations and proposed regulations under section 871(m), which address withholding on certain equity-linked notional principal contracts and other financial instruments. These regulations are targeted at derivatives referencing U.S. stocks in which non-U.S. persons receive a “dividend equivalent” while arguably avoiding U.S. withholding tax but will impact many common corporate transactions, including merger and acquisition transactions and equity based compensation arrangements. Click here to read more about this recent development.
On December 4, 2013, the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, Inc., and the Institute of International Bankers filed a lawsuit challenging the CFTC’s final cross-border guidance issued in July of 2013 (the “Guidance”).[1] The amended complaint[2] primarily argues that, in issuing the Guidance, the CFTC issued “a sweeping, international compliance directive that it characterized as mere ‘guidance,’”[3] instead of promulgating an actual rule governing the extraterritorial reach of the rules under Title VII of the Dodd-Frank Act that complied with the requirements of the Administrative Procedure Act (“APA”) and the Commodity Exchange Act (“CEA”), such as cost-benefit analysis.[4] Put simply, the plaintiffs argue that the CFTC “purposefully circumvented the congressionally-required procedures for CFTC rulemaking.”[5] Despite its purported status as mere non-binding guidance, the amended complaint notes that the CFTC has repeatedly made clear that the Guidance is intended to bind the CFTC staff and the public in the manner of a rule.[6] The amended complaint further argues that, in promulgating many Title VII rules (such as the clearing requirement rule and the swap data repository reporting rule), despite public comments, the CFTC failed to address how those rules would apply extraterritorially and failed to consider the costs and benefits of the application of the rules to foreign entities and entities engaged in cross-border transactions.[7]
Use of the “end-user exception” to the Dodd-Frank clearing requirements for swaps subject to a clearing determination by the Commodity Futures Trading Commission (“CFTC”) requires that the end-user, among other things, not be a “financial entity” under the Commodity Exchange Act (“CEA”).[1] The definition of “financial entity” encompasses, among other persons, commodity pools.[2] In turn, the CEA defines a “commodity pool” as “any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests[.]”[3] The Dodd-Frank Act expanded the scope of such “commodity interests” to include “swaps,”[4] which has broadened the term significantly. Moreover, the CFTC has long interpreted the requirement that an enterprise be operated “for the purpose” of trading in commodity interests quite broadly, such that almost any trading in swaps or other commodity interests could bring an entity within the definition of a commodity pool.[5] Recently the CFTC stated, “any swaps activities undertaken by a [commodity pool operator] would result in that entity being required to register because there would be no de minimis exclusion for such activity. As a result, one swap contract would be enough to trigger the registration requirement.”[6] Additionally, the CFTC recently noted that “it is the staff’s position that wholly owned subsidiaries of commodity pools trading in derivatives are themselves commodity pools.”[7] Therefore, taken together, these provisions and guidance suggest that an entity that is a wholly owned subsidiary of a commodity pool and enters into a swap may itself constitute a “commodity pool” and, therefore, would not be eligible to use the end-user exception to the clearing requirement. READ MORE
