On November 18, 2015, the Commodity Futures Trading Commission (“CFTC”) issued for public comment the Swap Dealer De Minimis Exception Preliminary Report (the “Preliminary Report”).^[1]  The de minimis exception from the swap dealer (“SD”) registration requirement currently provides an $8 billion threshold (in aggregate gross notional swap dealing activity measured over the prior 12-month period).^[2]  The $8 billion threshold, however, was intended as a “phase-in” amount under the Dodd-Frank Act, and is scheduled to decrease to $3 billion on December 31, 2017, unless the CFTC takes prior action to set a different termination date or to modify the de minimis exception.^[3]  The Preliminary Report was issued by the CFTC to assess the de minimis exception and to allow public comment on the relevant policy considerations. Following publication of, and public comment on, a subsequent “final report,” the CFTC may either extend the phase-in period or issue a notice of proposed rulemaking to modify the de minimis exception.^[4] READ MORE →

In August, the Commodity Futures Trading Commission (“CFTC”) proposed a rule amending certain reporting requirements to better accommodate the reporting of cleared swaps.^[1]  The CFTC reporting regime, as it currently exists, was “premised upon the existence of one continuous swap.”^[2]  However, cleared swaps generally involve the acceptance of a swap (i.e., the “alpha” swap) by a derivatives clearing organization (“DCO”) for clearing and the replacement of that swap by equal and opposite swaps (i.e., “beta” and “gamma” swaps), with the DCO as the counterparty to each such swap.  The proposed rule defines “original swap” as “a swap that has been accepted for clearing by a derivatives clearing organization” and “clearing swap” as “a swap created pursuant to the rules of a derivatives clearing organization that has a derivatives clearing organization as a counterparty, including any swap that replaces an original swap that was extinguished upon acceptance of such original swap by the derivatives clearing organization for clearing.”^[3] READ MORE →

In July, the CFTC proposed a rule for the application of its uncleared swap margin requirements to cross-border swap transactions.^[1]  The CFTC recognized that a cross-border framework for margin “necessarily involves consideration of significant, and sometimes competing, legal and policy considerations.”  However, in developing the proposed rule, it noted that it was attempting to balance those considerations to effectively address the risks posed to the safety and soundness of swap dealers and major swap participants, while also establishing a workable framework.^[2]  The following table provides a high-level, general summary of the framework under the proposed rule:

1 = U.S. swap dealer^[3]
2 = Non-U.S. swap dealer (including, but not limited to, (i) a U.S. branch of such non-U.S. swap dealer or (ii) a non-U.S. swap dealer that is consolidated in the financial results of a U.S. parent) that is guaranteed by U.S. person
3 = Non-U.S. swap dealer that (1) is a U.S. branch of such non-U.S. swap dealer or is consolidated in the financial results of a U.S. parent and (2) is not guaranteed by U.S. person
4 = Non-U.S. swap dealer that (1) neither is a U.S. branch of such non-U.S. swap dealer nor is consolidated in the financial results of any U.S. parent and (2) is not guaranteed by U.S. person
5 = U.S. non-swap dealer
6 = Non-U.S. non-swap dealer that is guaranteed by U.S. person
7 = Non-U.S. non-swap dealer that is not guaranteed by U.S. person

A = CFTC rules are applicable
NA = CFTC rules are not applicable
SC_X = CFTC rules are applicable but substituted compliance is available with respect to the initial margin that Party X posts (but not the initial margin that Party X collects or variation margin)
SC_Y = CFTC rules are applicable but substituted compliance is available with respect to the initial margin that Party Y posts (but not the initial margin that Party Y collects or variation margin)
SC = CFTC rules are applicable but substituted compliance is available

The following clarifications should be noted:

• Each of the above references to a “swap dealer” refers to a non-bank swap dealer registered with the CFTC. (The prudential regulators – i.e., the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Farm Credit Administration, and the Federal Housing Finance Agency – have jurisdiction over the margin requirements applicable to bank swap dealers.)
• The proposed rule defines ‘‘guarantee’’ as an arrangement pursuant to which one party to a swap transaction with a non-U.S. counterparty has rights of recourse against a U.S. person guarantor (whether such guarantor is affiliated with the non-U.S. counterparty or is an unaffiliated third party) with respect to the non-U.S. counterparty’s obligations under the relevant swap transaction.^[4]
• Substituted compliance is available only in a jurisdiction whose laws the CFTC has deemed comparable. Otherwise, substituted compliance would not be available and the CFTC rules would apply.
• U.S. or non-U.S. status is determined by a particular “U.S. person” definition included in the proposed rule, rather than by the definition used in the CFTC’s cross-border guidance from July 2013.^[5] The definition included in the proposed rule is generally similar to the “U.S. person” definition used by the Securities and Exchange Commission in the context of security-based swaps.

^[1] Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 80 Fed. Reg. 41,376 (July 14, 2015).  The CFTC swap margin requirements have been re-proposed and are not yet final.  A prior posting in Derivatives in Review (available here) addressed the CFTC’s re-proposed margin rules.

^[2] See id. at 41,382, 41,401.

^[3] Although this table, for purposes of simplicity, does not refer to major swap participants, the proposed rule would apply to swap dealers and major swap participants in the same way.

^[4] Id. at 41,384.

^[5] Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45,292 (July 26, 2013).

On May 7, 2015, the Commodity Futures Trading Commission (“CFTC”) published in the Federal Register a proposed rule (the “Proposed Rule”) that would reduce the reporting and recordkeeping burdens of end-users engaging in commodity trade options.^[1]

Under the Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“CEA”), the definition of “swap” includes commodity options.^[2]  However, the CFTC issued an interim final rule in April 2012 exempting qualifying commodity options (“trade options”) from most swap regulations, subject to certain specified conditions (the “Trade Option Exemption”).^[3]  For a commodity option to qualify for the Trade Option Exemption, the commodity option must involve a nonfinancial commodity (i.e., either an exempt commodity, such as energy and metals, or an agricultural commodity) and the parties to the option must satisfy the following three-part test: (i) the offeror of the option is either an “eligible contract participant” (generally, a non-financial entity entering into a swap for purposes of hedging or mitigating commercial risk) or a commercial participant (a producer, processor, commercial user of, or merchant handling, the underlying physical commodity that is entering into the option solely related to its business as such); (ii) the offeree of the option is a commercial participant; and (iii) the parties intend to physically settle the option so that, if exercised, the option would result in the sale of a nonfinancial commodity for immediate (i.e., spot) or deferred (i.e., forward) shipment or delivery.

A commodity option that meets the foregoing test nevertheless may remain subject to certain regulatory requirements under the CEA, including: reporting and recordkeeping; large trader reporting; position limits; certain recordkeeping, reporting, and risk management duties applicable to swap dealers (“SDs”) and major swap participants (“MSPs”); capital and margin for SDs and MSPs; and any applicable antifraud and anti-manipulation provisions.

Under the Trade Option Exemption, trade options must be reported to a registered swap data repository if either: (i) one of the counterparties is registered as an SD or MSP; or (ii) both parties to the trade option are end-users but at least one of the parties has been required to report non-trade option swaps during the 12 months prior to the trade option being entered into.  If neither end-user party has had to report non-trade options during this 12-month period, then each end-user must: (i) file by March 1 a Form TO reporting each trade option entered into in the previous calendar year; and (ii) notify the CFTC, through an email to TOreportingrelief@cftc.gov, no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year.  Under CFTC No-Action Letter No. 13-08 (“No-Action Letter 13-08”), however, even an end-user that has had to report non-trade options during the 12 months prior to the trade option being entered into generally need not comply with the reporting requirements, provided that such end-user complies with the foregoing items (i) and (ii).^[4]

The Trade Option Exemption also requires an end-user to keep basic business records (i.e., “full, complete and systematic records, together with all pertinent data and memoranda, with respect to each swap in which they are a counterparty”^[5]) and potentially requires counterparties to create and maintain “unique swap identifiers” and “unique product identifiers” for each swap and to record the “legal entity identifier” of each counterparty.^[6]  However, No-Action Letter 13-08 generally clarified that an end-user need not create and maintain “unique swap identifiers” and “unique product identifiers” for each swap and record the “legal entity identifier” of each counterparty, provided that: (i) if the end-user’s counterparty is an SD or MSP, the end-user obtains and provides to its counterparty a legal entity identifier; and (ii) the end-user notifies the CFTC, through an email to TOreportingrelief@cftc.gov, no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year.

The Proposed Rule would relax reporting and recordkeeping obligations under the Trade Option Exemption and No-Action Letter 13-08 by no longer requiring end-users to file a Form TO in connection with otherwise unreported trade options.^[7]  End-users would continue to be required to notify the CFTC no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year, but could reduce their monitoring burden by providing an “alternative notice” that they reasonably expect to exceed this $1 billion threshold.^[8]  End-users would continue to be subject to basic recordkeeping requirements and be required to obtain and provide to a counterparty a legal entity identifier if that counterparty is an SD or MSP.^[9]  However, under the Proposed Rule, end-users would not be required to identify their trade options in all recordkeeping by means of either a unique swap identifier or unique product identifier.^[10]

^[1] Trade Options, 80 Fed. Reg. 26,200 (May 7, 2015).

^[2] See CEA Section 1a(47)(A)(i) (defining “swap” to include “[an] option of any kind that is for the purchase or sale, or based on the value, of 1 or more . . . commodities . . . .”

^[3] Commodity Options, 77 Fed. Reg. 25,320 (April 27, 2012).

^[4] CFTC No-Action Letter No 13-08 (April 5, 2013) (available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-08.pdf).

^[5] 17 CFR § 45.2(a).

^[6] See id. at 3-4.

^[7] Proposed Rule at 26,203.

^[8] Id. at 26,203-04.

^[9] Id. at 26,204.

^[10] Id.

On May 4, 2015, the Division of Clearing and Risk of the Commodity Futures Trading Commission (the “CFTC”) issued a no-action letter (the “Letter”)^[1] clarifying that securitization special purpose vehicles (“SPVs”) that are wholly-owned by, and consolidated with, a “captive finance company” are eligible for the “end-user exception” in connection with clearing determinations issued by the CFTC under Section 2(h) of the Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“CEA”).  The auto securitization industry, including Ford Motor Credit Company LLC, has been particularly focused on the interpretive relief provided by the Letter.^[2] READ MORE →