Dodd-Frank Legislation and Financial Reform

SIFMA v. CFTC Cross-Border Lawsuit Dismissed

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The U.S. District Court for the District of Columbia dismissed, with certain exceptions, the lawsuit filed by the Securities Industry and Financial Markets Association and others challenging the CFTC’s final cross-border guidance (the “Guidance”) issued in July 2013 and the extraterritorial application of the various CFTC rulemakings under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Title VII Rules”).[1] The court held that the Guidance was not a legislative rule but rather was, in part, a policy statement and, in part, an interpretive rule and, therefore, generally not subject to judicial review under the Administrative Procedure Act.[2] This holding was based largely on the court’s finding that the Guidance “reads like a non-binding policy statement and has been neither characterized nor treated in practice as binding by the CFTC.”[3]

The court also concluded that the CFTC has discretion to define the extraterritorial reach of the Title VII Rules through case-by-case adjudication rather than by rulemaking, and therefore the CFTC was not required to address within each Title VII Rule the scope of that Rule’s extraterritorial application.[4] However, the court agreed with the plaintiffs that the CFTC was required but failed to consider adequately the costs and benefits of the extraterritorial applications of certain of the Title VII Rules.[5] Without vacating them, the court remanded those rules – specifically, the Real-Time Reporting,[6] Daily Trading Records,[7] Portfolio Reconciliation and Documentation,[8] Entity Definition,[9] Swap Entity Registration,[10] Risk Management,[11] Chief Compliance Officer,[12] SDR Reporting,[13] Historical SDR Reporting,[14] and SEF Registration Rules[15] – to the CFTC to conduct an adequate cost-benefit analysis under 7 U.S.C. § 19(a).[16]

[1] Sec. Indus. & Fin. Mkts. Ass’n., et al., v. CFTC, 13-CV-1916 slip op. (D.D.C. Sept. 14, 2014) (the “Opinion”).

[2] Id. at 71-72.

[3] Id. at 69.

[4] See id. at 76.

[5] See id. at 80.

[6] Real-Time Public Reporting of Swap Transaction Data, 77 Fed. Reg. 1,182 (January 9, 2012) (codified at 17 C.F.R. Part 43).

[7] Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 Fed. Reg. 20,128, 20,133 (April 3, 2012) (codified at 17 C.F.R. § 23.202).

[8] Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 Fed. Reg. 55,904 (September 11, 2012) (codified at 17 C.F.R. §§ 23.500-506).

[9] Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, 77 Fed. Reg. 30,596 (May 23, 2012) (codified in various sections of 17 C.F.R.).

[10] Registration of Swap Dealers and Major Swap Participants, 77 Fed. Reg. 2,613 (January 19, 2012) (codified at 17 C.F.R. §§ 23.21-22).

[11] Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 Fed. Reg. 20,128, 20,205-11 (April 3, 2012) (codified at 17 C.F.R. §§ 23.600-606).

[12] Id. at 20,200-01 (codified at 17 C.F.R. §§ 3.3).

[13] Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2,136 (January 13, 2012) (codified at 17 C.F.R. Part 45).

[14] Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps, 77 Fed. Reg. 35,200 (June 12, 2012) (codified at 17 C.F.R. Part 46).

[15] Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,476 (June 4, 2013) (codified at 17 C.F.R. Part 37).

[16] See the Opinion at 91-92.

SEC Adopts Cross-Border Rules

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On June 25, the Securities and Exchange Commission (“SEC”) adopted a final rule and interpretive guidance[1] (the “Final Rule”) to address the application of certain provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) to cross-border security-based swap activities. Generally, the Final Rule does not, itself, impose obligations on market participants, but, rather, is definitional and may determine the cross-border scope of the SEC’s eventual implementation of certain security-based swaps requirements under Dodd-Frank. Certain significant provisions of the Final Rule are discussed below. READ MORE →

Extension of Certain Dodd-Frank No-Action Relief

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On May 1, 2014, the Commodity Futures Trading Commission (“CFTC”) established a phased compliance timeline for the implementation of the trade execution requirement[1] currently applicable to certain interest rate swaps and credit default swaps executed as part of a “package transaction.”[2]  Earlier this year, the CFTC had provided no-action relief that would have required all swaps that are part of a package transaction to be traded either on a designated contract market or on a swap execution facility after May 15, 2014.[3] READ MORE →

CFTC Establishes Expedited Process for Relief for Certain Delegating CPOs

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On May 12, 2014, the Commodity Futures Trading Commission (“CFTC”) issued guidance[1] (the “CPO Guidance”) establishing the circumstances under which it intends to provide registration no-action relief through a streamlined process where a commodity pool operator (“CPO”) has delegated investment management authority with respect to a commodity pool to another person registered as a CPO.  The CFTC had historically received requests for, and in some cases issued, such no-action relief, but without the benefit of a streamlined approach.

A CPO is generally defined under the U.S. Commodity Exchange Act to include a person engaged in a business that is of the nature of a commodity pool or similar form of enterprise and who markets interests in a commodity pool and solicits, accepts or receives customer funds for investment in the pool for the purpose of trading in “commodity interests.”  Pursuant to modifications made in connection with Dodd-Frank, “commodity interests” are now defined to include swaps.[2]

In the CPO Guidance, the CFTC included a form of request for no-action relief, which provides for certifications and acknowledgements to be made by both the delegating and designated CPOs.  Significantly, the delegating CPO is to represent that the applicable “criteria” for relief, as set forth in the CPO Guidance, are met.  Similarly, the designated CPO is to acknowledge that it meets all the applicable “criteria.”  These criteria include, inter alia, that: (i) the delegation of investment management authority has been made (from the delegating CPO to the designated CPO) with respect to the commodity pool pursuant to a “legally binding document”; (ii) the designated CPO is registered as a CPO; (iii) there is a business reason for the designated CPO being a separate entity from the delegating CPO that is not solely to avoid registration by the delegating CPO; and (iv) the books and records of the delegating CPO with respect to the commodity pool are maintained by the designated CPO in accordance with CFTC Regulation 1.31.

[1] CFTC Staff Letter No. 14-69, Requesting Registration No-Action Relief on an Expedited Basis for Commodity Pool Operators who Delegate Certain Activities to a Registered Commodity Pool Operator under Certain Circumstances (May 12, 2014).

[2] See 7 U.S.C. 1a(11)(A)(i)(I).  The corresponding definition of “commodity pool” was amended to read, in relevant part, “any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any . . . swap.”  7 U.S.C. § 1a(10) (emphasis added).

Collateral Segregation Notices for Uncleared Swaps

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Consistent with a final rule issued by the Commodity Future Trading Commission last year (the “IM Segregation Rule”),[1] registered swap dealers have begun to notify counterparties prior to the execution of uncleared swaps that counterparties may require that any initial margin be “segregated,” that is, held at an independent custodian in an individual account separate from margin posted by other swap dealer counterparties. READ MORE →

Dodd-Frank Trade Execution Developments

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In February 2014, certain categories of interest rate swaps and index credit default swaps became subject to the trade execution requirement under Dodd-Frank.  As a result, those product types may no longer be traded bilaterally over-the-counter but, rather, must be executed on a swap execution facility (“SEF”) or designated contract market (“DCM”), unless an exemption or exception applies.  A product type becomes subject to the trade execution requirement when (i) it is required to be cleared under a CFTC clearing determination[1] and (ii) a SEF or DCM has made it “available to trade” (i.e., the SEF or DCM must demonstrate that it lists or offers that swap for trading on its trading system or platform and has considered various factors such as “whether there are ready and willing buyers and sellers”), as approved by the CFTC.[2]  If, however, a particular swap qualifies for an exemption or exception from the Dodd-Frank clearing requirement, it generally will be exempt or excepted from the trade execution requirement as well. READ MORE →

No-Action Relief Relating to the Inter-Affiliate Exemption Under Dodd-Frank

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On March 6, 2014, the Commodity Futures Trading Commission (“CFTC”) issued two no-action letters relating to the April 2013 inter-affiliate exemption from the clearing requirement (the “Inter-Affiliate Exemption”).[1]  Pursuant to the Inter-Affiliate Exemption, the clearing requirement generally will not apply to any swap for which either (i) the counterparties have a common majority-owning parent or (ii) one counterparty is a majority owner of the other (“Eligible Affiliate Counterparties”), provided that certain additional requirements are met.[2]  One such requirement is that each Eligible Affiliate Counterparty, whether or not a U.S. person, clear all outward-facing swaps to which the clearing requirement applies[3] (“Designated Swaps”) or be eligible for an exception or exemption from clearing.[4]  Consequently, a non-U.S. Eligible Affiliate Counterparty that elects to use the Inter-Affiliate Exemption may be required to clear its outward-facing Designated Swaps with non-U.S. counterparties that otherwise, pursuant to the CFTC Cross-Border Guidance,[5] would not be subject to CFTC jurisdiction.  However, the Inter-Affiliate Exemption provided that, subject to certain conditions described below, the requirement that outward-facing swaps be cleared would not apply until March 11, 2014.[6] READ MORE →

Volcker Rule: An Overview and Highlights of Certain Key Provisions

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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.

CFTC Substituted Compliance Determinations and No-Action Letters

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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 →

Further Delay of and Request for Comments on November 14, 2013 Staff Advisory Regarding Application of CFTC Regulations to U.S. Activities of Non-U.S. Swap Dealers

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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).