A comprehensive guide to the new rule, which largely supersedes prior CFTC guidance that had informed market practice for over seven years.
On November 13, 2020, the US Commodity Futures Trading Commission’s (CFTC’s) final rule on the cross-border application of aspects of the swaps regulatory regime under the Commodity Exchange Act (CEA) (the Cross-Border Rule) became effective.
The Cross-Border Rule addresses (i) the cross-border application of the registration thresholds for swap dealers (SDs) and major swap participants (MSPs) and (ii) the categorization and cross-border application of certain regulatory requirements applicable to those entities and previously addressed in CFTC guidance. The Cross-Border Rule also addresses key definitions, such as the terms “US person” and “guarantee,” and replaces the previous “conduit affiliate” category with a new “significant risk subsidiary” concept. Additionally, the Cross-Border Rule formalizes a process and standard of review for the CFTC’s grant of comparability determinations regarding a foreign jurisdiction’s regulation of SDs/MSPs for substituted compliance purposes.
Overall, the Cross-Border Rule evinces a trend towards simplification and harmonization with the cross-border provisions of the US Securities and Exchange Commission’s (SEC’s) security-based swap (SBS) regulations (the SBS Cross-Border Rule). With that said, the Cross-Border Rule does not address all of the regulatory requirements covered by prior CFTC guidance, and further separate rulemakings are expected in the future. The Cross-Border Rule makes clear that existing CFTC guidance and staff no-action relief remains effective with respect to regulatory requirements not addressed in the Cross-Border Rule or not otherwise specifically revoked. In this regard, and as discussed further below, contemporaneously with the Cross-Border Rule, CFTC staff revoked a prior advisory and provided relief to non-US SDs with respect to certain regulatory requirements for transactions with non-US counterparties that are “arranged, negotiated, or executed” on their behalf by US personnel (the 2020 ANE No-Action Relief).
This Client Alert provides a detailed summary of the Cross-Border Rule to aid market participants as they gear up for compliance.