Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 71946-71975 [2016-24905]

Download as PDF 71946 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1 and 23 RIN 3038–AE54 Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants Commodity Futures Trading Commission. ACTION: Proposed rule; interpretations. AGENCY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is publishing for public comment proposed rules and interpretations (‘‘Proposed Rule’’) addressing the cross-border application of certain swap provisions of the Commodity Exchange Act (‘‘CEA’’). Specifically, the proposed rule defines key terms for purposes of applying the CEA’s swap provisions to cross-border transactions and addresses the crossborder application of the registration thresholds and external business conduct standards for swap dealers and major swap participants, including the extent to which they would apply to swap transactions that are arranged, negotiated, or executed using personnel located in the United States. DATES: Comments must be received on or before December 19, 2016. ADDRESSES: You may submit comments, identified by RIN number 3038–AE54, by any of the following methods: • CFTC Web site: https:// comments.cftc.gov. Follow the instructions for submitting comments through the Comments Online process on the Web site. • Mail: Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. • Hand Delivery/Courier: Same as Mail, above. • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. Please submit your comments using only one method. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https:// www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from asabaliauskas on DSK3SPTVN1PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 disclosure under the Freedom of Information Act (‘‘FOIA’’), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the CFTC’s regulations, 17 CFR 145.9. The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of a submission from https://www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the notice will be retained in the public comment file and will be considered as required under all applicable laws, and may be accessible under the FOIA. FOR FURTHER INFORMATION CONTACT: Paul Schlichting, Assistant General Counsel, (202) 418–5884, pschlichting@cftc.gov; Laura B. Badian, Assistant General Counsel, (202) 418–5969, lbadian@ cftc.gov; or Elise Bruntel, Counsel, (202) 418–5577, ebruntel@cftc.gov; Office of the General Counsel, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations 1. Assessment Costs 2. Cross-Border Application of the Swap Dealer Registration Threshold a. U.S. Persons and U.S. Guaranteed Entities b. Foreign Consolidated Subsidiaries c. Other Non-U.S. Persons 3. Cross-Border Application of the Major Swap Participant Registration Thresholds 4. Monitoring Costs 5. Registration Costs 6. Programmatic Costs 7. Cross-Border Application of External Business Conduct Requirements 8. Section 15(a) Factors a. Protection of Market Participants and the Public b. Efficiency, Competitiveness, and Financial Integrity of the Markets c. Price Discovery d. Sound Risk Management Practices e. Other Public Interest Considerations 9. Appendix to Cost-Benefit Considerations VIII. Preamble Summary Tables Table A—Cross-Border Application of the Swap Dealer De Minimis Threshold Table B—Cross-Border Application of the Major Swap Participant Registration Thresholds Table C—Cross Border Application of the External Business Conduct Standards Table of Contents I. Background I. Background A. Scope of Rulemaking B. Current Market Structure II. Definitions A. U.S. Person B. Foreign Consolidated Subsidiary (‘‘FCS’’) III. ANE Transactions A. Background B. Commission’s Views Regarding ANE Transactions C. Proposed Interpretation Regarding the Scope of ANE Transactions IV. Cross-Border Application of the Swap Dealer Registration Threshold A. U.S. Persons and U.S. Guaranteed Entities B. Foreign Consolidated Subsidiaries C. Other Non-U.S. Persons 1. U.S. Counterparties That Are U.S. Persons or U.S. Guaranteed Entities 2. Counterparties That Are FCSs 3. Other Non-U.S. Counterparties 4. Swaps Executed Anonymously on a SEF, DCM, or FBOT and Cleared D. Aggregation Requirement E. Summary V. Cross-Border Application of the Major Swap Participant Registration Thresholds A. U.S. Persons, U.S. Guaranteed Entities, and Foreign Consolidated Subsidiaries B. Other Non-U.S. Persons C. Attribution Requirement D. Summary VI. Cross-Border Application of the External Business Conduct Standards for Swap Dealers and Major Swap Participants VII. Related Matters A. Scope of Rulemaking In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’ or ‘‘Dodd-Frank’’) 1 amended the Commodity Exchange Act (‘‘CEA’’) 2 to establish a new regulatory framework for swaps. Added in the wake of the 2008 financial crisis, which highlighted the potential for crossborder swap activities to have a substantial impact on the U.S. financial system, the new swap provisions expressly apply to activities that have a direct and significant connection with activities in, or effect on, U.S. commerce or that contravene Commission rules or regulations necessary or appropriate to prevent evasion.3 In response to requests from market participants, the Commission published PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 1 Public Law 111–203, 124 Stat. 1376 (2010). U.S.C. 1 et seq. 3 See 7 U.S.C. 2(i). Section 2(i) of the CEA states that the provisions of that chapter relating to swaps that were enacted by the Wall Street Transparency and Accountability Act of 2010 (including any rule prescribed or regulation promulgated under that Act) shall not apply to activities outside the United States unless those activities (1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of that chapter that was enacted by the Wall Street Transparency and Accountability Act of 2010. 27 E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS a policy statement and interpretive guidance regarding the cross-border application of the swap provisions of the CEA.4 The Guidance offered an interpretation of the term ‘‘U.S. person’’ and a general, non-binding framework for the cross-border application of many substantive Dodd-Frank requirements, including requirements for swap dealers (‘‘SDs’’) and major swap participants (‘‘MSPs’’) (collectively, ‘‘SD/MSPs’’). Given the complex and dynamic nature of the global swap market, the Guidance was intended as a flexible and efficient way to provide the Commission’s views on cross-border issues raised by commenters, allowing the Commission to adapt in response to changes in the global regulatory and market landscape.5 The Commission accordingly stated that it would review and modify its cross-border policies as the global swaps market continues to evolve and consider codifying the crossborder application of Dodd-Frank swap provisions in future rulemakings, as appropriate.6 In this release, the Commission is proposing to codify a central element of the Dodd-Frank regulatory framework for SDs and MSPs, incorporating various aspects of the Commission’s recent cross-border rulemaking regarding the margin requirement,7 including the definitions of ‘‘U.S. person’’ and ‘‘guarantee’’ and the concept of a Foreign Consolidated Subsidiary (‘‘FCS’’). Specifically, the Proposed Rule addresses when U.S. and non-U.S. persons, including FCSs and those whose swap obligations are guaranteed by a U.S. person, would be required to include their cross-border swap dealing transactions or swap positions in their SD or MSP registration threshold calculations, respectively,8 and the 4 See Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26, 2013) (‘‘Guidance’’). 5 Id. at 45297, n.39. 6 See id. The Commission notes that at the time that the Guidance was adopted, it was tasked with regulating a market that grew to a global scale without any meaningful regulation. Developing a regulatory framework to fit that market is necessarily an iterative process, one that requires adapting and responding to rapid and continual changes in the market. Therefore, the Commission expects that this proposed rulemaking will be followed by additional rulemakings affecting the cross-border application of the Commission’s swap regulations. 7 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants— Cross-Border Application of the Margin Requirements, 81 FR 34818 (May 31, 2016) (‘‘CrossBorder Margin Rule’’). 8 See proposed rule § 1.3(ggg)(7) and 1.3(nnn). The SD and MSP registration thresholds are codified at 17 CFR 1.3(ggg)(4) and 1.3(hhh) through (mmm), respectively. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 extent to which SD/MSPs would be required to comply with the Commission’s business conduct standards governing their conduct with swap counterparties (‘‘external business conduct standards’’) in cross-border transactions.9 The Proposed Rule also addresses issues related to a Commission request for comment on a 2013 staff advisory, which discussed the staff’s view of the application of certain Dodd-Frank swap provisions to non-U.S. SDs if they use personnel located in the United States.10 Specifically, the Proposed Rule addresses situations in which swap transactions are arranged, negotiated, or executed using personnel located in the United States (‘‘ANE transactions’’), including the types of activities that would fall within the scope of ANE transactions and the extent to which the SD registration threshold and external business conduct standards apply to ANE transactions. As part of the proposed rule, the Commission is also proposing to define the key terms of ‘‘U.S. person’’ and ‘‘Foreign Consolidated Subsidiary’’ for broad cross-border application in a manner consistent with how the terms were defined in the Cross-Border Margin Rule.11 If adopted, the Commission intends that these definitions would be relevant not only within the context of the proposed rule, but for purposes of any subsequent rulemakings specifically addressing the cross-border application of other substantive Dodd-Frank requirements, unless the context or a specific rule or regulation otherwise requires. The Commission believes that applying a single definition for these terms throughout the Commission’s crossborder framework going forward would benefit market participants by eliminating complexity associated with 9 See proposed rule § 23.452. The Commission’s external business conduct standards are codified in 17 CFR part 23, subpart H (17 CFR 23.400 through 23.451). 10 See Request for Comment on Application of Commission Regulations to Swaps Between NonU.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States, 79 FR 1347 (Jan. 8, 2014) (‘‘Request for Comment’’); CFTC Staff Advisory No. 13–69, Applicability of Transaction-Level Requirements to Activity in the United States (Nov. 14, 2013) (‘‘Staff Advisory’’), available at https://www.cftc.gov/idc/groups/public/ @lrlettergeneral/documents/letter/13-69.pdf. As stated therein, the Staff Advisory represented the views of the Division of Swap Dealer and Intermediary Oversight (‘‘DSIO’’) only, and not necessarily those of the Commission or any other office or division thereof. Id. at 2. 11 See proposed rule § 1.3(aaaaa); Cross-Border Margin Rule, 81 FR 34818; 17 CFR 23.160(a). PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 71947 the use of different definitions for different Dodd-Frank rules. The Proposed Rule does not address the cross-border application of any substantive Dodd-Frank requirements beyond the SD/MSP registration thresholds and external business conduct standards. The Commission expects to address the cross-border application of other Dodd-Frank requirements, including the availability of substituted compliance, in subsequent rulemakings. B. Current Market Structure In determining how the Commission’s SD/MSP registration thresholds should apply to market participants in crossborder transactions and the extent to which the Dodd-Frank swap requirements should apply to ANE transactions, the Commission was informed by its understanding of the current market practices of global financial institutions. Financial groups that are active in the swap market typically operate in multiple market centers 12 and carry out swap activity with counterparties around the world using a number of different operational structures. A financial group’s business model, including its booking practices and how it carries out market-facing activities, reflects a range of business and regulatory considerations, which are weighed differently by, and have different effects on, each group. Despite its geographic expanse, a global financial group effectively operates as a single business, with a highly integrated network of business lines and services conducted through various branches or affiliated legal entities that are under the control of the parent entity. While each branch or affiliate may serve a unique purpose, they are highly interdependent and inextricably linked, with affiliated entities within the corporate group providing financial or credit support for each other, such as in the form of a guarantee or the ability to transfer risk through inter-affiliate trades.13 A financial group may reflect all of its swaps in the financial statements of one entity (the ‘‘booking entity’’), realizing netting and operational benefits, a practice referred to as ‘‘central booking.’’ In this case, the booking entity retains all the risk associated with 12 Data from swap data repositories (‘‘SDR data’’) indicate that the global swap market has several market centers, including New York, London, and Tokyo. 13 Even in the absence of an explicit arrangement or guarantee, the parent entity may, for reputational or other reasons, choose or be compelled to assume the risk incurred by its affiliates, branches, or offices located overseas. E:\FR\FM\18OCP3.SGM 18OCP3 71948 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS each swap, creating one swap portfolio. Alternatively, a financial group may book swaps in several different affiliates depending on the jurisdiction where the counterparty is located or, alternatively, where the financial group manages a particular type of risk or product. In the latter case, the swaps will be reflected in the financial statements of different affiliates. The risks related to the swaps, however, may not remain in the entity in which the swap is booked. Using arrangements such as inter-affiliate transactions or assignments, the risks related to a swap may be transferred to different entities within an affiliated group while the entity at which the swap is booked remains unchanged.14 Regardless of a financial group’s booking practices, it typically engages in sales or trading functions in one or more market centers. Performing sales and trading functions in global market centers provides the financial group with access to counterparties in that jurisdiction. The financial group’s presence in a particular market center also enables the group to more effectively engage in swaps in that locale on behalf of affiliates in other jurisdictions that are servicing counterparties in those jurisdictions.15 In this highly-integrated corporate structure, where financial groups engage in swap dealing activity with counterparties located in multiple jurisdictions, it is not uncommon for a swap to be traded through an affiliate in one jurisdiction (the ‘‘market-facing affiliate’’) and booked and risk-managed in another (the ‘‘booking affiliate’’). In such cases, a particular affiliate may become the market-facing affiliate because its trading desk has expertise in relevant products or because it has an established client network in the relevant jurisdiction or market hub.16 However, although each affiliate carries out a distinct function in a given swap transaction, together they operate as an integrated dealing business. Large U.S. financial services firms emphasize the importance of operating globally through a unified structure. For example, Goldman Sachs explains that one of its core businesses ‘‘serves our clients who come to the firm to buy and sell financial products, raise funding and manage risk. We do this by acting as a market maker and offering market expertise on a global basis . . . . Through our global sales force, we maintain relationships with our clients, receiving orders and distributing investment research, trading ideas, market information and analysis. As a market maker, we provide prices to clients globally across thousands of products in all major asset classes and markets . . . . Much of this connectivity between the firm and its clients is maintained on technology platforms and operates globally wherever and whenever markets are open for trading.’’ 17 Morgan Stanley explains that it provides financial services to clients globally, primarily through subsidiaries incorporated in the U.S., Europe and Asia, and it ‘‘trades, invests and makes markets globally in listed swaps and futures and OTC cleared and uncleared swaps, forwards, options and other derivatives . . . .’’ 18 Citigroup, one of the largest U.S. bank holding companies, describes its global presence as ‘‘trading desks in over 30 countries and market access in 70 countries.’’ 19 Citigroup also states that it manages its risk exposures from its activities across all these countries via its ‘‘Centralized Risk Desk.’’ 20 In sum, the current swap market is global in scale and characterized by a high level of interconnectedness among 14 The extent to which swap risk may be transferred without changing the booking entity may depend on relevant accounting rules, legal requirements, and other factors. Swap activities may also be carried out through branches located in separate jurisdictions rather than, or in addition to, affiliates that are domiciled in separate jurisdictions. 15 From discussions with market participants, the Commission understands that financial groups typically prefer to operate their swap businesses and manage swap portfolios in the jurisdiction where the swap and the underlying asset have the deepest and most liquid markets. In operating their swap dealing businesses in these market centers, financial groups seek to take advantage of expertise in products traded in those centers and obtain access to greater liquidity, permitting them to more efficiently price such products or otherwise compete more effectively in the global swap market, including in jurisdictions different from the market center in which the swap is traded. 16 The market-facing affiliate may in turn employ either its own personnel or the personnel of another affiliate or unaffiliated agent. Market-facing entities may use unaffiliated agents in order to conduct swap dealing activity anonymously or to provide clients with access to market hubs where they do not have their own operations. 17 See The Goldman Sachs Group, Inc. 2013 Annual Report on Form 10–K at 3 (describing Institutional Client Services business, which includes swaps and other derivatives trading), available at https://www.goldmansachs.com/ investor-relations/financials/archived/10k/docs/ 2013-10-k.pdf. 18 See Morgan Stanley 2013 Annual Report on Form 10–K at 3, available at https:// www.morganstanley.com/about-us-ir/shareholder/ 10k2013/10k2013.pdf. 19 See Global Equities, Citigroup, discussion of equities product line (accessed Sept. 29, 2016), available at https://www.citibank.com/icg/global_ markets/product_solutions/global_equities/ index.jsp. While this description is in the context of equities trading and not necessarily swaps, it illustrates the integrated nature of the global operations of these firms and their affiliates and subsidiaries in different countries. 20 See id. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 market participants, with transactions negotiated, executed, and arranged between counterparties in different jurisdictions, (and booked and managed in still other jurisdictions). These market realities suggest that a crossborder framework that focuses only on the domicile of the market participant or location of counterparty risk would fail to effectively advance the policy objectives of the Dodd-Frank swap reforms, which were aimed at increasing market transparency and counterparty protections and mitigating the risk of financial contagion in the swap market.21 At the same time, the Commission is also mindful that its policy choices should aim to enhance market efficiency and competition and the overall functioning of the global swap market. Accordingly, as described in detail below, in developing the Proposed Rule the Commission has strived to implement a cross-border framework that would achieve the important goals of the Dodd-Frank Act while mitigating any unnecessary burdens and avoiding disruption to market practices to the extent possible. II. Definitions The Commission is proposing to define the key terms of ‘‘U.S. person’’ and ‘‘Foreign Consolidated Subsidiary’’ for purposes of applying the DoddFrank swaps provisions to cross-border transactions. Whether a market participant is a U.S. person or a Foreign Consolidated Subsidiary would, for instance, affect how the SD/MSP registration thresholds apply under the proposed rule.22 If adopted, these definitions would also be relevant for purposes of any subsequent rulemakings specifically addressing the cross-border application of other substantive DoddFrank requirements, unless the context or a specific rule or regulation otherwise requires. A. U.S. Person Under the Proposed Rule, a ‘‘U.S. person’’ would be defined as follows: • Any natural person who is a resident of the United States (proposed § 1.3(aaaaa)(5)(i)); 21 Nor would such a framework be consistent with CEA section 2(i), which provides that DoddFrank’s swap provisions and the Commission’s regulations thereunder apply to cross-border transactions under certain circumstances. See Secs. Indus. & Fin. Mkts. Ass’n v. CFTC, 67 F. Supp. 3d 373, 425–26 & n.35 (D.D.C. 2014). 22 Consistent with the reliance standard articulated in the Commission’s external business conduct rules, see 17 CFR 23.402(d), market participants would be allowed to reasonably rely on counterparty representations with respect to each of these definitions unless they have information that would cause a reasonable person to question the accuracy of the representation. E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS • Any estate of a decedent who was a resident of the United States at the time of death (proposed § 1.3(aaaaa)(5)(ii)); • Any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of entity similar to any of the foregoing (other than an entity described in proposed paragraph (aaaaa)(5)(iv) or (v) of § 1.3) (‘‘legal entity’’), in each case that is organized or incorporated under the laws of the United States or that has its principal place of business in the United States, including any branch of the legal entity 23 (proposed § 1.3(aaaaa)(5)(iii)); • Any pension plan for the employees, officers or principals of a legal entity described in proposed paragraph (aaaaa)(5)(iii) of § 1.3, unless the pension plan is primarily for foreign employees of such entity (proposed § 1.3(aaaaa)(5)(iv)); • Any trust governed by the laws of a state or other jurisdiction in the United States, if a court within the United States is able to exercise primary supervision over the administration of the trust (proposed § 1.3(aaaaa)(5)(v)); • Any legal entity (other than a limited liability company, limited liability partnership or similar entity where all of the owners of the entity have limited liability) that is owned by one or more persons described in proposed paragraphs (aaaaa)(5)(i) through (v) of § 1.3 who bear(s) unlimited responsibility for the obligations and liabilities of the legal entity, including any branch of the legal entity (proposed § 1.3(aaaaa)(5)(vi)); and • Any individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in proposed paragraphs (aaaaa)(5)(i) through (vi) of § 1.3 (proposed § 1.3(aaaaa)(5)(vii)).24 23 The Commission notes that the reference in proposed § 1.3(aaaaa)(5)(iii) and (vi) (indicating that legal entities would include any branch of the legal entity) is intended to make clear that the definition includes both foreign and U.S. branches of an entity. The Commission further notes that a branch does not have a legal identity apart from its principal entity. The proposed language is not intended to introduce any additional criteria for determining an entity’s U.S. person status. 24 See proposed rule § 1.3(aaaaa)(5). See also proposed rule § 1.3(aaaaa)(2) (defining ‘‘non-U.S. person’’ as any person that is not a U.S. person); 17 CFR 23.160(a)(10) (defining U.S. person for purposes of the Cross-Border Margin Rule). The Commission notes that an affiliate or a subsidiary of a U.S. person that is organized or incorporated in a non-U.S. jurisdiction would not be deemed a U.S. person solely by virtue of its affiliation with a U.S. person. As used herein, the term ‘‘U.S. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 In line with commenter requests, this definition mirrors the definition of ‘‘U.S. person’’ recently adopted in the context of the Cross-Border Margin Rule.25 As stated therein, the Commission believes that this definition offers a clear, objective basis for determining which individuals or entities should be identified as U.S. persons and that harmonizing with the definition in the Cross-Border Margin Rule is not only appropriate, but will reduce compliance costs for market participants in the long run. The proposed U.S. person definition is generally consistent with the U.S. person interpretation set forth in the Guidance, with certain exceptions.26 Notably, the proposed definition does not include a commodity pool, pooled account, investment fund, or other collective investment vehicle that is majority-owned by one or more U.S. persons (‘‘U.S. majority-owned fund prong’’).27 The Commission understands that identifying and tracking a fund’s beneficial ownership may pose a significant challenge in certain circumstances. Although the U.S. owners of such funds may be adversely impacted in the event of a counterparty default, the Commission believes that, on balance, the majorityownership test should not be included in the definition of U.S. person.28 In the interest of providing legal certainty, the proposed definition also does not include a catchall provision, thereby limiting the definition of ‘‘U.S. person’’ to persons enumerated in the rule.29 counterparty’’ refers to a swap counterparty that is a ‘‘U.S. person’’ under the Proposed Rule. 25 See 17 CFR 23.160(a)(10). See also CrossBorder Margin Rule, 81 FR at 34823–24. Unless expressly stated otherwise herein, the description of the U.S. person definition in the Cross-Border Margin Rule, including the Commission’s interpretation of the principal place of business test regarding funds, would also apply in the context of the Proposed Rule. 26 See Guidance, 78 FR at 45308–17 (setting forth the interpretation of ‘‘U.S. person’’ for purposes of the Guidance). 27 See id. at 45313–14 (discussing the U.S. majority-ownership prong for purposes of the Guidance). The Guidance interpreted ‘‘majorityowned’’ in this context to mean the beneficial ownership of more than 50 percent of the equity or voting interests in the collective investment vehicle. See id. at 45314. 28 Note that a fund fitting within the majority U.S. ownership prong may also be a U.S. person within the scope of paragraph (iii) of the Proposed Rule (entities organized or having a principal place of business in the United States). As the Commission clarified in the Cross-Border Margin Rule, whether a pool, fund or other collective investment vehicle is publicly offered only to non-U.S. persons and not offered to U.S. persons would not be relevant in determining whether it falls within the scope of the proposed U.S. person definition. See Cross-Border Margin Rule, 81 FR at 34824 n.62. 29 See Guidance, 78 FR at 45316 (discussing the inclusion of the prefatory phrase ‘‘include, but not PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 71949 Finally, consistent with the CrossBorder Margin Rule, paragraph (vi) of the proposed U.S. person definition includes legal entities where one or more U.S. person owner(s) bear unlimited responsibility for the obligations and liabilities of the legal entity (‘‘unlimited U.S. responsibility prong’’). This paragraph represents a modified version of a similar concept from the Guidance, which interpreted ‘‘U.S. person’’ to include a legal entity ‘‘directly or indirectly majority-owned’’ by one or more U.S. person(s) that bear unlimited responsibility for the legal entity’s liabilities and obligations.30 Upon further consideration, the Commission believes that the amount of equity the U.S. owner(s) have in this legal entity would not be relevant because the U.S. person owner(s), by definition, serve as a financial backstop for all of the legal entity’s obligations and liabilities regardless of whether they are majority or minority owners.31 In consideration of principles of international comity, the Commission proposes that the term ‘‘U.S. person’’ would not include international financial institutions. Consistent with Commission precedent,32 the Commission interprets ‘‘international financial institutions’’ to include ‘‘international financial institutions’’ as defined in 22 U.S.C. 262r(c)(2) and institutions defined as ‘‘multilateral development banks’’ in the Proposal for the Regulation of the European Parliament and of the Council on OTC Derivative Transactions, Central Counterparties and Trade Repositories, Council of the European Union Final Compromise Text, Article 1(4a(a)) (March 19, 2012).33 be limited to’’ in the interpretation of ‘‘U.S. person’’ in the Guidance). 30 See id. at 45312–13 (discussing the unlimited U.S. responsibility prong for purposes of the Guidance). 31 See Cross-Border Margin Rule, 81 FR at 34823– 24. 32 See Guidance, 78 FR at 45353 n.531 (incorporating the interpretation of ‘‘international financial institutions’’ included in Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant,’’ 77 FR 30596, 30692 n.1180 (May 23, 2012) (‘‘Entities Rule’’)). 33 The two definitions overlap but together include the following: The International Monetary Fund, International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, International Development Association, International Finance Corporation, Multilateral Investment Guarantee Agency, African Development Bank, African Development Fund, Asian Development Bank, Inter-American Development Bank, Bank for Economic Cooperation and Development in the Middle East and North Africa, Inter-American Investment Corporation, Council of Europe Development Bank, Nordic E:\FR\FM\18OCP3.SGM Continued 18OCP3 71950 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules Request for Comment. The Commission invites comment on all aspects of the Proposed Rule, including on whether and in what respects the Commission should further harmonize the U.S. person definition in the Proposed Rule to either the interpretation of U.S. person included in the Guidance or the U.S. person definition adopted by the Securities Exchange Commission (‘‘SEC’’) in rule 3a71–3(a)(4) under the Securities Exchange Act of 1934 (‘‘Exchange Act’’).34 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS B. Foreign Consolidated Subsidiary (‘‘FCS’’) Under the Proposed Rule, the term ‘‘Foreign Consolidated Subsidiary’’ identifies a non-U.S. person that is consolidated for accounting purposes with an ultimate parent entity that is a U.S. person (a ‘‘U.S. ultimate parent entity’’). Consistent with the CrossBorder Margin Rule, the proposed rule would define ‘‘Foreign Consolidated Subsidiary’’ to mean a non-U.S. person in which an ultimate parent entity that is a U.S. person has a controlling financial interest, in accordance with U.S. generally accepted accounting principles (‘‘U.S. GAAP’’), such that the U.S. ultimate parent entity includes the Investment Bank, Caribbean Development Bank, European Investment Bank and European Investment Fund. Note that the International Bank for Reconstruction and Development, the International Finance Corporation and the Multilateral Investment Guarantee Agency are parts of the World Bank Group. The Commission’s proposal is generally similar to the position adopted by the SEC, which excluded from its U.S. person definition the International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies and pension plans, and any other similar international organizations, their agencies and pension plans. See 17 CFR 240.3a71–3(a)(4)(iii); Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based Swap Participant’’ Definitions to Cross-Border Security-Based Swap Activities; Republication, 79 FR 47278, 47306 (Aug. 12, 2014) (‘‘SEC Cross-Border Rule’’). 34 Exchange Act rule 3a71–3(a)(4), 17 CFR 240.3a71–3(a)(4), defines ‘‘U.S. person’’ to mean any natural person resident in the United States; any partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States; any account (whether discretionary or non-discretionary) of a U.S. person; or any estate of a decedent who was a resident of the United States at the time of death. Exchange Act rule 3a71–3(a)(4) defines ‘‘principal place of business’’ to mean the location from which the officers, partners, or managers of the legal person primarily direct, control, and coordinate the activities of the legal person. It also provides that, with respect to an externally managed investment vehicle, this location is the office from which the manager of the vehicle primarily directs, controls, and coordinates the investment activities of the vehicle. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 non-U.S. person’s operating results, financial position and statement of cash flows in the U.S. ultimate parent entity’s consolidated financial statements, in accordance with U.S. GAAP.35 The proposed rule would define the term ‘‘ultimate parent entity’’ to mean the parent entity in a consolidated group in which none of the other entities in the consolidated group has a controlling interest, in accordance with U.S. GAAP.36 The proposed FCS definition offers a clear, bright-line test for identifying non-U.S. persons whose swap activities present a greater supervisory interest relative to other non-U.S. market participants, due to the nature and extent of the FCS’s relationship with its U.S. ultimate parent. As described above, the nature of modern finance is such that large financial institutions typically conduct their business operations through a highly integrated network of business lines and services conducted through multinational branches or subsidiaries that are under the control of the ultimate parent entity. Under this structure, U.S. and non-U.S. derivatives trading functions as a single enterprise, using funds, risk management, information systems and trading personnel across the entire consolidated entity in the most efficient manner in effectuating coordinated trading strategies, with the profits and losses from global trading operations aggregated in the consolidated financial statements of the ultimate parent entity. The Commission believes that the FCS definition appropriately encompasses those entities within this consolidated group that are subject to the financial control, and directly impact the financials, of the U.S. ultimate parent entity. First, consolidation under U.S. GAAP is predicated on the financial control of the reporting entity.37 Therefore, an 35 See proposed rule § 1.3(aaaaa)(1). See also 17 CFR 23.160(a)(1) (defining ‘‘Foreign Consolidated Subsidiary’’ for purposes of the Cross-Border Margin Rule). The Cross-Border Margin Rule defined the term ‘‘Foreign Consolidated Subsidiary’’ as limited to SDs and MSPs subject to the Commission’s margin requirements (‘‘Covered Swap Entities’’ or ‘‘CSEs’’), using the term to distinguish non-U.S. CSEs with a U.S. ultimate parent entity from other non-U.S. CSEs. 81 FR at 34826–27. The proposed FCS definition similarly but more broadly distinguishes any non-U.S. person that is consolidated with a U.S. ultimate parent entity from other non-U.S. persons, regardless of whether it is a CSE. 36 See proposed rule § 1.3(aaaaa)(3). See also 17 CFR 23.160(a)(6) (defining ‘‘ultimate parent entity’’ for purposes of the Cross-Border Margin Rule). 37 There are two consolidation models. First, entities are subjected to the variable interest entity (‘VIE’) model. If the VIE model is not applicable, then entities are subjected to the voting interest model. Under the VIE model, a reporting entity has PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 entity within a financial group that is consolidated with its parent entity for accounting purposes in accordance with U.S. GAAP is subject to the financial control of that parent entity. Second, as the Commission previously stated, by virtue of consolidation with its parent entity’s financial statement under U.S. GAAP, an FCS’s swap activity creates direct risk to the U.S. parent.38 That is, as a result of consolidation, the financial position, operating results, and statement of cash flows of an FCS are included in the financial statements of its U.S. ultimate parent and therefore affect the financial condition, risk profile, and market value of the parent. Because of that relationship, risks taken by FCSs can have a direct effect on the U.S. ultimate parent entity. Furthermore, the FCS’s counterparties generally look to both the FCS and its U.S. ultimate parent for fulfillment of the FCS’s obligations under the swap, even without any explicit guarantee.39 In many cases, the Commission believes that the counterparty would not enter into the transaction with the subsidiary (or would not do so on the same terms), and the subsidiary would not be able to engage in a swaps business, absent this close relationship with the parent entity. Under these circumstances, the Commission believes that it is appropriate to require FCSs to include relevant swaps for the SD/MSP registration calculation like a U.S. person (and U.S. Guaranteed Entity).40 a controlling financial interest in a VIE if it has: (a) The power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. Under the voting interest model, a controlling financial interest generally exists if a reporting entity has a majority voting interest in another entity. In certain circumstances, the power to control may exist when one entity holds less than a majority voting interest (e.g., because of contractual provisions or agreements with other shareholders). See Financial Accounting Standards Board, Accounting Standards Codification 810, Consolidation. 38 Cross-Border Margin Rule, 88 FR at 34826–27. 39 As Moody’s Ratings states in a description of its bank assessment methodology, ‘‘most [financial] groups can be expected to support banking entities within their consolidation.’’ See Moody’s Investors Service, Cross-Border Application of the Swap Dealer De Minimis Exception (Sept. 9, 2014) at 66, available at https://www.moodys.com/microsites/ gbrm2014/RFC.pdf. 40 The Commission notes that there are some important differences between a U.S. Guaranteed Entity and an FCS. See Cross-Border Margin Rule, 81 FR at 34827 (noting that, in contrast to U.S. Guaranteed CSEs, in the event of an FCS’s default, the U.S. ultimate parent entity does not have a legal obligation to fulfill the obligations of the FCS. Rather that decision would depend on the business judgment of its parent). See also supra note 35 (describing the definition of FCS in the context of the Cross-Border Margin Rule). E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules A failure to treat these entities the same in this context could provide a U.S. financial group with an opportunity to avoid SD or MSP registration by conducting relevant swap activities through unregistered entities. However, as in the Cross-Border Margin Rule, the Commission would not necessarily treat FCSs the same as a U.S. person (or U.S. Guaranteed Entity) in the context of other Dodd-Frank swap provisions.41 The Commission also recognizes that other affiliates, even though they are not consolidated with the U.S. ultimate parent entity for accounting purposes, could likewise be distinguished from other non-U.S. persons given the nature of their relationship with the U.S. person and the U.S. market.42 The Commission believes that the consolidation test provides a workable definition that is tailored to focus on those affiliates that present greater supervisory concerns (relative to other non-U.S. persons). Request for Comment. The Commission seeks comment on all aspects of the Proposed Rule’s definition of ‘‘Foreign Consolidated Subsidiary’’ including on whether the proposed FCS definition appropriately captures persons that raise greater supervisory concerns relative to other non-U.S. persons whose swap obligations are not guaranteed by a U.S. person. If not, please explain and provide an alternative(s). III. ANE Transactions asabaliauskas on DSK3SPTVN1PROD with PROPOSALS A. Background In November 2013, DSIO issued a staff advisory providing that a non-U.S. swap dealer that regularly uses personnel or agents located in the United States to arrange, negotiate, or execute a swap with a non-U.S. person (‘‘Covered Transactions’’) would generally be required to comply with the ‘‘Transaction-Level Requirements,’’ as the term was used in the Guidance.43 In 41 Although the proposed rule is focused on the cross-border application of the registration thresholds and external business conduct standards for SD/MSPs, the Commission expects to address how other substantive Dodd-Frank swap requirements (including the trading and clearing mandates and reporting requirements) would apply to FCSs in cross-border transactions in subsequent rulemakings. In doing so, the Commission will give due consideration to whether, and the extent to which, substituted compliance should be made available to FCSs’ swap transactions. 42 In particular, the Commission recognizes that, even absent consolidated financial statements, a U.S. parent entity may, for reputational reasons, determine that they must support their non-U.S. affiliates at times of crisis, with direct risk implications for the U.S. parent and U.S. market. 43 See supra note 10. See also Guidance, 78 FR at 45333 (providing that the Transaction-Level Requirements include (i) Required clearing and VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 January 2014, the Commission published a request for comment on all aspects of the Staff Advisory, including (1) the scope and meaning of the phrase ‘‘regularly arranging, negotiating, or executing’’ and what characteristics or factors distinguish ‘‘core, front-office’’ activity from other activities; (2) whether the Commission should adopt the Staff Advisory as Commission policy, in whole or in part; and (3) whether substituted compliance should be available for non-U.S. swap dealers with respect to Covered Transactions.44 The Commission received seventeen comment letters in response to the Request for Comment.45 Most commenters challenged the Staff Advisory as inconsistent with CEA section 2(i) 46 or international comity.47 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). 44 See Request for Comment, 79 FR at 1348–49. 45 See American Bankers Association Securities Association (‘‘ABASA’’) (Mar. 10, 2014); Americans for Financial Reform (‘‘AFR’’) (Mar. 10, 2014); Barclays Bank PLC (‘‘Barclays’’) (Mar. 10, 2014); Chris R. Barnard (‘‘Barnard’’) (Mar. 8, 2014); Better Markets Inc. (‘‘Better Markets’’) (Mar. 10, 2014); Coalition for Derivatives End-Users (‘‘Coalition’’) (Mar. 10, 2014); Commercial Energy Working Group (‘‘CEWG’’) (Mar. 10, 2014); European Commission (Mar. 10, 2014); European Securities and Markets Authority (‘‘ESMA’’) (Mar. 13, 2014); Institute for Agriculture and Trade Policy (‘‘IATP’’) (Mar. 10, 2014); Institute of International Bankers (‘‘IIB’’) (Mar. 10, 2014); International Swaps and Derivatives Association, Inc. (‘‘ISDA’’) (Mar. 7, 2014); Investment Adviser Association (‘‘IAA’’) (Mar. 10, 2014); Japanese Bankers Association (‘‘JBA’’) (Mar. 7, 2014); Japan Financial Markets Council (‘‘JFMC’’) (Mar. 4, 2014); Securities Industry and Financial Markets Association, Futures Industry Association, and Financial Services Roundtable (‘‘SIFMA/FIA/FSR’’) (Mar. 10, ´ ´ ´ ´ 2014); Societe Generale (‘‘SG’’) (Mar. 10, 2014). The associated comment file is available at https:// comments.cftc.gov/PublicComments/ CommentList.aspx?id=1452&ctl00_ctl00_ cphContentMain_MainContent_ gvCommentListChangePage=1_50. Although the comment file includes records of 22 comments, five were either duplicate submissions or not responsive to the Request for Comment. 46 See, e.g., IAA at 2 n.4; IIB at 4–5 (transactions between two non-U.S. persons present no risk to the U.S. financial system and therefore do not have a ‘‘direct and significant’’ nexus to U.S. commerce); ISDA at 3–4, 10–13 (challenging the Commission’s interpretation of ‘‘direct and significant’’); JFMC at 3; SIFMA/FIA/FSR at A–2–A–3 (section 2(i) should be interpreted in light of the Dodd-Frank goal of mitigating risk); SG at 8. Accord European Commission (the Staff Advisory does not clearly articulate how the standard it sets out is consistent with section 2(i)). 47 See, e.g., European Commission at 2 (the unavailability of substituted compliance would seem to depart from the G20 commitment to defer to foreign regulators when appropriate); IIB at 5–6; ISDA at 8–9; IAA at 4 (failure to grant substituted compliance reflects a lack of coordination with foreign regulators, leading to a less efficient use of regulatory resources and the potential for PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 71951 They emphasized that the risk associated with Covered Transactions lies outside the United States 48 and that non-U.S. swap dealers involve U.S. personnel primarily for the convenience of their global customers.49 They also characterized the Staff Advisory as impractical or unworkable, describing its key language (‘‘regularly arranging, negotiating, or executing swaps’’ and ‘‘performing core, front-office activities’’) as vague, open to broad interpretation, and potentially capturing activities that are merely ‘‘incidental’’ to the swap transaction.50 They further argued that if the Staff Advisory were adopted as Commission policy, nonU.S. swap dealers would close U.S. branches and relocate personnel to other countries (or otherwise terminate agency contracts with U.S.-based agents) in order to avoid Dodd-Frank swap regulation or having to interpret and apply the Staff Advisory, thereby increasing market fragmentation.51 A few commenters, however, supported the Staff Advisory.52 They argued that the Commission has jurisdiction over swap activities duplicative or conflicting regulations); JFMC at 3; SIFMA/FIA/FSR at A–13. 48 See, e.g., Barclays at 3 n.11; IIB at 4–5; ISDA at 6–7; SIFMA/FIA/FSR at 2, A–9–A–10; SG at 2 (adopting the Staff Advisory would extend the Commission’s regulations ‘‘to swaps whose risk lies totally offshore’’ and that do not pose a high risk to the U.S. financial system). 49 See, e.g., Coalition at 2 (non-U.S. SDs use U.S. personnel to arrange, negotiate, or execute swaps because they have particular subject matter expertise for or due to the location of their clients across time zone); European Commission at 1; IIB at 7–8 n.18; IAA at 2; ISDA at 4; JFMC at 2–3; SIFMA/FIA/FSR at A–4; SG at 3 (a non-U.S. SD may use salespersons in the United States if the Covered Transaction is linked to a USD instrument). 50 See, e.g., Barclays at 4–5; European Commission at 3 (whether negotiation of a Master Agreement by U.S. middle office staff would trigger application of the Staff Advisory is unclear); IAA at 5 (‘‘[T]he terms ‘arranging’ and ‘negotiating’ are overly broad and may encompass activities that are incidental to a swap transaction,’’ such as providing market or pricing information); SIFMA/FIA/FSR at A–12 (arranging and negotiating trading relationships and legal documentation are ‘‘middleand back-office operations’’ and should not be included); SG at 7–8 (‘‘regularly’’ is an arbitrary concept that cannot be made workable, and programming trading systems to interpret ‘‘arranging, negotiating, or executing’’ on a trade-bytrade basis would not be feasible). 51 See, e.g., ABASA at 2 (adopting the Staff Advisory would ‘‘impose unnecessary compliance burdens on swap market participants, encourage them to re-locate jobs and activities outside the United States to accommodate non-U.S. client demands, and fragment market liquidity’’); Coalition at 3 (emphasizing the impact on non-U.S. affiliates of U.S. end users, such as increased hedging costs and reduced access to registered counterparties); IIB at 7–8; ISDA at 4; JFMC at 3; SG at 8–9. See also IAA at 3 (expressing concern that non-U.S. clients may avoid hiring U.S. asset managers to avoid application of the Staff Advisory). 52 See AFR; Better Markets; IATP. E:\FR\FM\18OCP3.SGM 18OCP3 71952 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS occurring inside the United States 53 and expressed concern that the Commission’s failure to assert such jurisdiction would create a substantial loophole, allowing U.S. financial firms to operate in the United States without Dodd-Frank oversight by merely routing swaps through a non-U.S. affiliate.54 They further argued that arranging, negotiating, or executing swaps are functions normally performed by brokers, traders, and salesperson and are ‘‘economically central to the business of swap dealing.’’ 55 They added the focus on the ‘‘regular’’ use of personnel located in the United States to perform such core dealing activities would exclude ‘‘entirely incidental’’ interactions with U.S. personnel from triggering Dodd-Frank oversight.56 Commenters that disagreed with the Staff Advisory nevertheless offered a few suggestions for its modification, should the Commission determine to adopt it, including offering substituted compliance for Covered Transactions 57 or otherwise limiting the scope of applicable requirements.58 Certain commenters, for instance, recommended 53 See AFR at 2 (CEA section 2(i) clearly sets the statutory jurisdiction of CFTC rules to include all activities conducted inside the United States); Better Markets at 3 (the Staff Advisory ‘‘represents the only reasonable interpretation of Congress’s mandate to regulate swaps transactions with a ‘direct and significant connection with activities in, or effect on, commerce of the United States’’’); IATP at 1 (‘‘It should be self-evident that the swaps activities in the United States of non-U.S. persons fall under the Commission’s jurisdiction.’’). 54 See AFR at 3 (failure to adopt the Staff Advisory ‘‘could mean that U.S. firms operating in the U.S. would face different rules for the same transactions as compared to competitor firms also operating in the very same market and location, perhaps literally next door, who had arranged to route transactions through a nominally foreign subsidiary’’); Better Markets at 3 (allowing registered swap dealers to book transactions overseas but otherwise handle the swap inside the United States would ‘‘create a gaping loophole,’’ resulting in ‘‘keystroke off-shoring of the bookings, but otherwise the on-shoring of the core activities associated with the transaction’’). 55 See AFR at 2–3, 5; Better Markets at 5 (brokers, structurers, traders, and salesmen ‘‘collectively comprise the general understanding of the core front office’’). 56 See AFR at 2–3, 5 (terms ‘‘‘arranging, negotiating, or executing’ would appear to exclude purely clerical and incidental functions such as notating or recording the sale of a swap for consolidated risk management or bookkeeping purposes’’). See also id. at 5 (definition of ‘‘regularly’’ should be tied to an expectation that U.S. personnel are available on request to arrange, negotiate, and execute swaps). 57 See, e.g., Coalition at 5; ESMA at 1; IAA at 3– 4; ISDA at 9–10; SIFMA/FIA/FSR at A–13, SG at 6– 7. 58 See, e.g., Barclays at 3 n.11 (transaction-level requirements focused on risk mitigation, market integrity, or transparency should not apply to Covered Transactions); Barnard at 2 (transactionlevel requirements should not apply to Covered Transactions with non-U.S. counterparties that are not guaranteed or conduit affiliates); IIB at 9–10. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 that the applicable requirements be limited to pre-trade disclosure requirements (e.g., disclosure of material information), arguing that applying relationship-wide external business conduct rules would require wholesale amendments to relationship documentations even where the specific communication is not material to the overall trading relationship.59 B. Commission’s Views Regarding ANE Transactions After considering the views of commenters on the Staff Advisory in response to the Commission’s Request for Comment, the Commission is setting forth its views on whether persons engaged in ANE transactions or transactions arising from this activity fall within the scope of the Dodd-Frank Act. The Commission’s analysis is guided by the definition of ‘‘swap dealer’’ under the CEA and Commission regulations. Under both the CEA and Commission regulations, whether a person is a ‘‘swap dealer’’ is a functional test that focuses on whether the person engages in particular types of activities involving swaps.60 In general, the swap dealer definition encompasses persons that engage in any of the following types of activity: (1) Holding oneself out as a dealer in swaps; (2) making a market in swaps; (3) regularly entering into swaps with counterparties as an ordinary course of business for one’s own account; or (4) engaging in any activity causing oneself to be commonly known in the trade as a dealer or market maker in swaps.61 Commission regulations further define the term to include specific activities indicative of acting as a swap dealer, such as (1) providing liquidity by accommodating demand for or facilitating interest in the swap, holding oneself out as willing to enter into swaps, or being known in the 59 See, e.g., Barclays at 3 (‘‘Applying the pre-trade disclosure requirements promotes the Commission’s interests in regulating activities of U.S. based personnel or agents of Commission registered entities and in protecting counterparties. Such concerns may be raised by the activities of such individuals even if the risk arising from those swaps transactions is borne by entities outside the United States.’’); IIB at 10–12 (‘‘Non-U.S. counterparties may reasonably expect the protection of the sales practice rules applicable in the jurisdiction of the personnel responsible for committing the non-U.S. swap dealer to the swap.’’); SIFMA/FIA/FSR at A–10–A–12 (‘‘[O]nly direct communications by personnel located in the United States with counterparties that commit the SD to the execution of the transaction should trigger application of the requirements under the Staff Advisory.’’ (Emphasis omitted)). 60 See 7 U.S.C. 1a(49); 17 CFR 1.3(ggg); Entities Rule, 77 FR at 30598. 61 See Entities Rule, 77 FR at 30597; 7 U.S.C. 1a(49)(A); 17 CFR 1.3(ggg)(1). PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 industry as being available to accommodate demand for swaps; (2) advising a counterparty as to how to use swaps to meet the counterparty’s hedging goals, or structuring swaps on behalf of a counterparty; (3) having a regular clientele and actively advertising or soliciting clients in connection with swaps; (4) acting in a market maker capacity on an organized exchange or trading system for swaps, and (5) helping to set the prices offered in the market rather than taking those prices, although the fact that a person regularly takes the market price for its swaps does not foreclose the possibility that the person may be a swap dealer.62 Neither the statutory definition of ‘‘swap dealer’’ nor the Commission’s further definition of that term turns solely on risk to the U.S. financial system. Consistent with the focus of the ‘‘swap dealer’’ definition on a person’s activity, the Commission does not believe that the location of counterparty credit risk associated with a dealing swap—which, as discussed above, is easily and often frequently moved across the globe—should be determinative of whether a person’s dealing activity falls within the scope of the Dodd-Frank Act or whether the Commission has a regulatory interest in the dealing activity. The appropriate inquiry also considers whether a nonU.S. person is engaged in the United States in any of the indicia of dealing activity set forth in the definition of ‘‘swap dealer.’’ In the Commission’s view, and as further explained below, arranging, negotiating, or executing swaps are functions that fall within the scope of the ‘‘swap dealer’’ definition. That the counterparty risks may reside primarily outside the United States is not determinative. To the extent that a person uses personnel located in the United States (whether its own personnel or personnel of an agent) to arrange, negotiate, or execute its swap dealing transactions, the Commission believes that such person is conducting a substantial aspect of its swap dealing activity within the United States and therefore, falls within the scope of the Dodd-Frank Act. The Commission further believes that to the extent that ANE transactions raise regulatory concerns of the type that the Dodd-Frank Act is intended to address, applying specific Dodd-Frank swap requirements to ANE transactions may be appropriate. In establishing a comprehensive regulatory regime for swaps under the Dodd-Frank Act, Congress intended to advance several 62 See E:\FR\FM\18OCP3.SGM Entities Rule, 77 FR at 30608. 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules fundamental policy objectives, including reducing risk, increasing market transparency and promoting market integrity within the financial system. A person that, in connection with its dealing activity, engages in market-facing activity using personnel located in the United States is conducting a substantial aspect of its dealing business in the United States.63 Even if the financial risks are borne by entities residing outside the United States, this activity indicates a level of involvement, and intention to participate, in the U.S. swap market that may raise concerns regarding customer protection, market transparency and financial contagion intended to be addressed by the Dodd-Frank Act. Accordingly, it would undermine the policy objectives of the Dodd-Frank Act to deem persons that, in connection with their dealing activity, engage in ANE transactions or transactions arising from this activity to fall entirely outside the scope of the Dodd-Frank Act solely because the transactions involve two non-U.S. counterparties. In making a determination as to whether a particular Dodd-Frank swap requirement (including those specifically applicable to swap dealers) should apply to an ANE transaction, the Commission would consider the extent to which the underlying regulatory objectives would be advanced in light of other policy considerations, including the potential for undue market distortions and international comity. As indicated above, the Proposed Rule addresses the application of the SD registration threshold and external business conduct standards to ANE transactions. The Commission intends to address application of other DoddFrank swap requirements to ANE transactions in subsequent cross-border rulemakings as necessary and appropriate. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS C. Proposed Interpretation Regarding the Scope of ANE Transactions For purposes of the proposed rule, the Commission uses the terms ‘‘arrange’’ and ‘‘negotiate’’ to refer to market-facing activity normally associated with sales and trading, as opposed to internal, back-office activities, such as ministerial or clerical tasks, performed by 63 As discussed above, the financial group affiliate may use the trading desk of an affiliate that possesses expertise in relevant products or personnel of an affiliate with an established client network in relevant market hubs. The financial group affiliate may also use the personnel of an unaffiliated agent to conduct its swap dealing activity, typically where it is seeking to trade anonymously or to provide clients with access to market hubs where it does not have its own operation. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 personnel not involved in the actual sale or trading of the relevant swap.64 Accordingly, the terms would not encompass activities such as swap processing, preparation of the underlying swap documentation (including negotiation of a master agreement and related documentation), or the mere provision of research information to sales and trading personnel located outside the United States. In line with Commission precedent, ‘‘executed’’ would refer to the market-facing act of becoming legally and irrevocably bound to the terms of the transaction under applicable law.65 In applying the proposed rule, the Commission would look to the activities of personnel assigned to (on an ongoing or temporary basis) or regularly working in a U.S. location.66 Such personnel may be working directly for the dealing entity itself or a third-party that is acting for or on behalf of (i.e., as an agent of) the dealing entity, including a U.S. affiliate of the dealing entity. The proposed definition would also include the market-facing activity of personnel normally associated with sales and trading even if the personnel are not formally designated as sales persons or traders. As an anti-evasionary measure, a transaction would be viewed as falling within the scope of the Dodd-Frank Act if personnel located in the United States direct other personnel to arrange, negotiate, or execute the transaction for or on behalf of a dealing entity. Swap transactions arranged, negotiated, or executed by personnel located in the United States implicate the Commission’s supervisory interests regardless of the reason such U.S. personnel were involved. For example, a swap would not fall outside the scope of the Dodd-Frank Act because a counterparty sought to enter into the swap outside of its jurisdiction’s regular 64 A swap transaction may be ‘‘arranged’’ by personnel located in the United States regardless of whether the counterparty initiated the transaction or whether the counterparty’s business was solicited. 65 Cf. 17 CFR 23.200(e) (defining ‘‘execution’’ to mean an agreement by the parties (whether orally, in writing, electronically, or otherwise) to the terms of a swap that legally binds the parties to such swap terms under applicable law); 23.200(d) (further defining ‘‘executed’’ to mean the completion of the execution process). 66 The Proposed Rule would accordingly not capture the activities of personnel assigned to a non-U.S. location if such personnel are only incidentally present in the United States when they arrange, negotiate, or execute a transaction (e.g., an employee of a non-U.S. person happens to be traveling within the United States to attend a conference). Nor would the Proposed Rule include a transaction solely on the basis that a U.S.-based attorney is involved in negotiations regarding the terms of the transaction. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 71953 trading hours. Additionally, the Commission believes permitting such an exception would only incentivize dealing entities to wait until after hours to enter into a swap, creating the potential for a substantial loophole. Finally, as the SEC noted in its crossborder rulemaking addressing ANE transactions, the Commission would not view a swap as falling outside the scope of the ANE transactions solely as a result of algorithmic trading.67 That is, a swap transaction involving algorithmic trading could be viewed as having been arranged, negotiated, or executed using personnel located in the United States if such personnel specify the trading strategy or techniques carried out through algorithmic trading or automated electronic execution of swaps.68 Therefore, performance of such activity by personnel located in the United States may fall within the scope of the Dodd-Frank Act and trigger the application of certain swap requirements thereunder. The Commission’s proposed approach to the determination of when a swap is an ANE transaction reflects its consideration of the comments received in response to the Request for Comment and is generally aligned with the SEC’s approach to this determination in the context of security-based swaps.69 In response to commenters and in the interest of aligning with the SEC, to the extent that the proposed rule applies to ANE transactions, application of the proposed rule would not be limited to swaps ‘‘regularly’’ arranged, negotiated, or executed using U.S. personnel. Accordingly, a dealing entity may need to establish operational structures to identify swaps for which relevant personnel performing market-facing activity in connection with the transaction are located in the United States. The Commission believes, however, that the proposed rule’s focus on personnel assigned to or regularly working in a U.S. location would exclude incidental activity and mitigate the burden of such an analysis, as the Commission expects that market 67 See Security-Based Swap Transactions Connected With a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed by Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception, 81 FR 8598, 8623 (Feb. 19, 2016) (‘‘SEC ANE Rule’’). The Commission would also not view a swap as falling outside the scope of ANE transactions because it resulted from automated electronic execution. 68 The activities or location of personnel responsible solely for coding the algorithm, however, as opposed to specifying the trading strategy or techniques that the algorithm is to follow, would not be relevant. 69 See supra note 67. E:\FR\FM\18OCP3.SGM 18OCP3 71954 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS participants have means of identifying personnel involved in market-facing activity, either for regulatory compliance purposes or to facilitate compensation.70 The Commission further expects that, to the extent that the Proposed Rule applies to ANE transactions, additional burdens on potential SDs could be reduced given that the Commission’s proposed approach to determining whether a swap falls within the scope of ANE transactions is substantively identical to the SEC’s approach to ANE transactions.71 The Commission’s treatment of ANE transactions is intended to capture activity that raises a substantial regulatory interest while still promoting a framework that is clear and workable for market participants. By focusing on market-facing activity carried out by personnel located in the United States, the Commission believes its interpretation adequately captures the Commission’s inherently strong regulatory interest in dealing activity occurring within its jurisdiction while enabling market participants to apply the definition in a relatively efficient manner. Request for Comment. The Commission invites comment on all aspects of the Proposed Rule, including the following: 1. The Commission invites comment on whether its interpretation of ANE transactions is appropriately tailored to capture activity that raises a substantial regulatory interest and sufficiently clear and workable for market participants. Is the Commission’s focus on and discussion of market-facing activity understandable and effective in excluding activities that are merely incidental to the swap transaction? Will the Commission’s interpretation pose any operational challenges? Please explain and provide specific recommendations for modifications or clarifications. 70 Dealing entities may also facilitate their compliance by establishing appropriate policies and procedures, including by requiring dealing activity to be arranged, negotiated, and executed by personnel located outside the United States. 71 One commenter on the SEC’s proposed approach, which closely tracked its final rule, observed that it created ‘‘a definable standard that will bring clarity to the application of securitybased swap requirements to security-based swap dealers, and is appropriate and consistent with the expectations of the parties as to when U.S. securitybased swap requirements will apply.’’ SIFMA/FSR (SEC July 13, 2015) at 2 (stating also that the commenters ‘‘strongly believe that the Commission has taken the correct approach in focusing on market-facing activity of sales and trading personnel in defining the ‘arrange, negotiate, or execute’ nexus that subjects security-based swap activity to the Commission’s regulations based on location of conduct’’). VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 2. Under what other circumstances, if any, should the Commission determine that U.S. personnel are directing a system for the algorithmic trading within the scope of its interpretation of ANE transactions? IV. Cross-Border Application of the Swap Dealer Registration Threshold In accordance with CEA section 1a(49)(D), the Commission has exempted from designation as an SD any entity that engages in a de minimis quantity of swap dealing with or on behalf of its customers.72 Specifically, Commission regulation 1.3(ggg)(4) provides that a person shall not be deemed to be an SD as a result of its swap dealing activity involving counterparties unless, during the preceding 12 months, the aggregate gross notional amount of the swap positions connected with those dealing activities exceeds the de minimis threshold.73 Commission regulation 1.3(ggg)(4) further requires that, in determining whether its swap dealing activity exceeds the de minimis threshold, a person must include the aggregate notional value of the swap positions connected with the dealing activities of its affiliates under common control (‘‘aggregation requirement’’).74 72 See 7 U.S.C. 1a(49)(D) (directing the Commission to establish a de minimis exception from the SD definition). See also 17 CFR 1.3(ggg)(4); Entities Rule, 77 FR 30596. 73 See 17 CFR 1.3(ggg)(4)(i)(A). The de minimis threshold is currently set at a phase-in level of $8 billion, with an ultimate threshold of $3 billion. Pursuant to Commission regulation 1.3(ggg)(4)(ii), following publication of a staff report on the de minimis exception, the Commission may either terminate the phase-in level, and thereby institute the $3 billion threshold, or propose an alternative threshold through rulemaking. See 17 CFR 1.3(ggg)(4)(ii). Commission staff published for public comment a preliminary report on the de minimis exception in November 2015, with comments due by January 19, 2016. See Swap Dealer De Minimis Exception Preliminary Report (Nov. 18, 2015), available at https://www.cftc.gov/ idc/groups/public/@swaps/documents/file/ dfreport_sddeminis_1115.pdf. The comment file is available at https://comments.cftc.gov/ PublicComments/CommentList.aspx?id=1634. Note that Commission regulation 1.3(ggg)(4) also contains separate de minimis exceptions related to transactions in which the counterparty is a ‘‘special entity’’ or ‘‘utility special entity.’’ See 17 CFR 1.3(ggg)(4)(i)(A)–(B). See also 17 CFR 1.3(ggg)(6) (identifying swaps that are not considered in determining whether a person is a swap dealer). 74 See 17 CFR 1.3(ggg)(4)(i)(A). For purposes of the Proposed Rule, the Commission construes ‘‘affiliates under common control’’ by reference to the Entities Rule, which defined control as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. See 77 FR at 30631 n.437. Accordingly, any reference in the Proposed Rule to ‘‘affiliates under common control’’ with a person would include affiliates that are controlling, controlled by, or under common control with such person. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 The Commission is now proposing rules to address how the de minimis threshold should apply to the crossborder swap dealing transactions of U.S. and non-U.S. persons.75 Specifically, the proposed rule identifies when a potential SD’s cross-border dealing activities should be included in its de minimis calculation and when they may properly be excluded. As discussed in the sections below, whether a potential SD would include a particular swap in its de minimis calculation would depend on whether the potential SD is classified as either a U.S. person or a non-U.S. person whose obligations under the relevant swap are guaranteed by a U.S. person (‘‘U.S. Guaranteed Entity’’) 76 (section A); a Foreign Consolidated Subsidiary (section B); or a non-U.S. person that is neither an FCS nor a U.S. Guaranteed Entity (‘‘Other Non-U.S. Person’’) (section C). Section D addresses the cross-border application of the aggregation requirement. Section E provides an overall summary of the Commission’s proposed approach. If adopted, the Proposed Rule would supersede the Guidance with respect to the cross-border application of the SD de minimis threshold. In developing the proposed crossborder approach to applying the SD and MSP registration thresholds,77 the Commission attempted to target those entities that—due to the nature of their relationship with a U.S. person or U.S. financial market—most directly implicate the purposes of the DoddFrank registration scheme. The proposed rule is also designed to apply the registration thresholds in a consistent manner to differing organizational structures that serve similar economic functions so as to avoid creating substantial regulatory loopholes. At the same time, the Commission is mindful of the impact of its choices on market efficiency and competition, as well as the importance of international comity when exercising the Commission’s authority. The Commission believes that the proposed rule reflects a measured approach that advances the goals underlying the SD and MSP registration schemes, consistent with the Commission’s 75 See proposed rule § 1.3(ggg)(7). preamble of this release uses the term ‘‘U.S. Guaranteed Entity’’ for convenience only. Whether a non-U.S. person would be considered a U.S. Guaranteed Entity would vary on a swap-byswap basis, such that a non-U.S. person may be considered a U.S. Guaranteed Entity for one swap and not another, depending on whether the nonU.S. person’s obligations under the swap are guaranteed by a U.S. person. 77 See section V, infra, for a discussion of the Commission’s proposed cross-border approach to applying the MSP registration thresholds. 76 The E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules statutory authority, while mitigating market distortions and inefficiencies. A. U.S. Persons and U.S. Guaranteed Entities Under the Proposed Rule, a U.S. person would include all of its swap dealing transactions in its de minimis threshold calculation without exception. As discussed in section II.A above, the term ‘‘U.S. person’’ encompasses a person who, by virtue of being domiciled or organized in the United States (or in the case of the unlimited U.S. responsibility prong, because U.S. person owner(s) serve as a financial backstop for all of the legal entity’s obligations and liabilities), raises the concerns intended to be addressed by the Dodd-Frank Act, regardless of the U.S. person status of its counterparty. Additionally, a person’s status as a U.S. person would be determined at the entity level and thus a U.S. person would include the swap dealing activity of foreign branches or operations that are part of the same legal person. The Commission notes that the proposed rule’s requirement that a U.S. person include all of its swap dealing transactions in its de minimis calculation is consistent with the Guidance.78 The proposed rule would also require a non-U.S. person that is not an FCS to include in its de minimis calculation swap dealing transactions with respect to which it is a U.S. Guaranteed Entity. The Commission believes that this result is appropriate because the swap of a non-U.S. person whose swap obligations are guaranteed by a U.S. person is identical, in relevant aspects, to a swap entered into directly by a U.S. person.79 As a result of the guarantee, the U.S. guarantor bears risk arising out of the swap as if it had entered into the 78 See Guidance, 78 FR at 45326. purposes of this proposed rulemaking, ‘‘guarantee’’ has the same meaning as defined in Commission regulation 23.160(a)(2) (cross-border application of the Commission’s margin requirements for uncleared swaps), except that application of the proposed definition of ‘‘guarantee’’ would not be limited to uncleared swaps. Under this definition, a ‘‘guarantee’’ would include arrangements, pursuant to which one party to a swap has rights of recourse against a guarantor, with respect to its counterparty’s obligations under the swap. For these purposes, a party to a swap has rights of recourse against a guarantor if the party has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from the guarantor with respect to its counterparty’s obligations under the swap. This ‘‘guarantee’’ definition also encompasses any arrangement pursuant to which the guarantor itself has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from any other guarantor with respect to the counterparty’s obligations under the swap. See Cross-Border Margin Rule, 81 FR 34818. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 79 For VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 swap directly. The U.S. guarantor’s financial resources in turn enable the non-U.S. affiliate to engage in dealing activity, because the affiliate’s counterparties will look to both the U.S. Guaranteed Entity and its U.S. guarantor to ensure performance of the swap. Absent the guarantee from the U.S. person, a counterparty may choose not to enter into the swap or may not do so on the same terms. In this way, the U.S. Guaranteed Entity and the U.S. guarantor effectively act together to engage in the dealing activity. Furthermore, treating U.S. Guaranteed Entities differently from U.S. persons could create a substantial regulatory loophole, incentivizing U.S. persons to conduct their dealing business with non-U.S. counterparties through nonU.S. affiliates, with a U.S. guarantee, to avoid application of the Dodd-Frank swap dealer requirements. Allowing transactions that have a similar economic reality with respect to U.S. commerce to be treated differently depending on how the parties structure their transactions could undermine the effectiveness of the Dodd-Frank swap provisions and related Commission regulations. Applying the same standard to similar transactions instead helps to limit those incentives and regulatory implications. B. Foreign Consolidated Subsidiaries Under the proposed rule, a Foreign Consolidated Subsidiary would include all of its swap dealing transactions in its de minimis threshold calculation, without exception.80 The Commission believes that the swap dealing transactions of an FCS should be treated in the same manner as swap dealing transactions of a U.S. person (and U.S. Guaranteed Entity) for purposes of the de minimis threshold calculation, given the nature of the relationship between the FCS and its U.S. ultimate parent entity. As discussed in section II.B. above, an FCS is under the financial control of its U.S. ultimate parent entity. Further, by virtue of consolidated reporting under U.S. GAAP, the swap activity of an FCS creates a direct risk for the U.S. ultimate parent entity. The Commission is also concerned that offering FCSs disparate treatment compared to U.S. persons could incentivize U.S. entities to conduct swap activities with non-U.S. counterparties through consolidated non-U.S. subsidiaries in order to avoid 80 To the extent that a non-U.S. person is both an FCS and a U.S. Guaranteed Entity with respect to a particular swap, the non-U.S. person would only be required to include the swap in its SD de minimis calculation once. See proposed rule § 1.3(ggg)(7). PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 71955 application of the Dodd-Frank Act SD requirements, creating the potential for a substantial regulatory loophole. C. Other Non-U.S. Persons Under the proposed rule, whether an Other Non-U.S. Person would include a particular swap in its de minimis calculation would depend on the status of the counterparty. Specifically, as further explained below, an Other NonU.S. Person would be required to include in its de minims threshold calculation its dealing activities with U.S. Persons, U.S. Guaranteed Entities, and FCSs, but not with Other Non-U.S. Persons (‘‘Other Non-U.S. counterparties’’). Additionally, Other Non-U.S. Persons would not be required to include in their de minimis threshold calculation any transaction that is executed anonymously on a swap execution facility (‘‘SEF’’), designated contract market (‘‘DCM’’), or foreign board of trade (‘‘FBOT’’) and cleared through a registered or exempt derivatives clearing organization (‘‘DCO’’). 1. U.S. Counterparties that are U.S. Persons or U.S. Guaranteed Entities Under the proposed rule, an Other Non-U.S. Person would generally include in its de minimis calculation all swap dealing transactions with U.S. counterparties, subject to the exception for transactions executed anonymously on a SEF, DCM, or FBOT and cleared (discussed in section 4 below). As a general rule, the Commission believes that all potential SDs should include in their de minimis calculations any swap with a U.S. counterparty.81 As discussed in section II.A. above, the term ‘‘U.S. person’’ encompasses persons that inherently raise the concerns intended to be addressed by the Dodd-Frank Act regardless of the U.S. person status of their counterparty. In the event of a default or insolvency of an Other NonU.S. SD with more than a de minimis level of swap dealing, the SD’s U.S. counterparties could be adversely affected. A credit event, including funding and liquidity problems, downgrades, default or insolvency at an Other Non-U.S. Person SD could therefore have a direct adverse impact on its U.S. counterparties, which could in turn create the risk of disruptions to the U.S. financial system. The Commission notes that the proposed rule’s requirement that an Other Non-U.S. Person include in its de minimis calculation all swap dealing 81 As discussed above, the definition of ‘‘U.S. person’’ includes any foreign branch. See proposed rule § 1.3(aaaaa)(5)(iii), (vi) (defining ‘‘U.S. person’’ to include ‘‘any branch of the legal entity’’). E:\FR\FM\18OCP3.SGM 18OCP3 71956 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS transactions with U.S. person counterparties (subject to the exception for swaps executed anonymously on a SEF, DCM, or FBOT and cleared, discussed in section 4 below) is largely consistent with the Guidance, except with respect to the treatment of swaps with foreign branches of U.S. SDs. Under the Guidance, a non-U.S. person that is not a ‘‘guaranteed affiliate’’ or a ‘‘conduit affiliate’’ (as those terms are interpreted in the Guidance) 82 would generally include in its de minimis threshold calculations all swap transactions with counterparties that are U.S. persons, except transactions with foreign branches of U.S. SDs.83 This exception was primarily driven by concerns that, absent such an exception, non-U.S. counterparties would avoid transacting with U.S. SDs.84 Upon further consideration, however, the Commission believes that incorporating a similar exception into the proposed rule could create a substantial regulatory loophole. As discussed above, a foreign branch is an integral part of a U.S. person, such that a transaction involving a foreign branch of a U.S. SD poses risk to the U.S. SD itself and, consequently, the U.S. financial system. Allowing Other NonU.S. Persons to engage in potentially unlimited swap dealing with foreign branches of U.S. SDs without having to register as SDs could therefore result in a substantial amount of dealing activity with U.S. counterparties occurring outside the comprehensive Dodd-Frank swap regime, undermining the effectiveness of the proposed rule. Under the proposed rule, an Other Non-U.S. Person would also include in its de minimis threshold calculation swap dealing transactions with a nonU.S. person that is a U.S. Guaranteed Entity, subject to an exception for transactions executed anonymously on a SEF, DCM, or FBOT and cleared.85 The Commission notes that the guarantee of a swap is an integral part of the swap and that, as discussed above, counterparties may not be willing to enter into a swap with a U.S. Guaranteed Entity in the absence of the guarantee. The Commission also recognizes that, given the highlyintegrated corporate structures of global 82 See Guidance, 78 FR at 45318, n.257–58. The Guidance uses the terms ‘‘conduit affiliate’’ and ‘‘affiliate conduit’’ interchangeably. 83 See id. at 45318–19. 84 See id. at 45324. 85 To the extent that the swap is with a non-U.S. counterparty that is both an FCS and a U.S. Guaranteed Entity with respect to a particular swap, the Other Non-U.S. Person would only be required to include the swap in its SD de minimis calculation once. See proposed rule § 1.3(ggg)(7). VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 financial groups described above, financial groups may elect to conduct their swap dealing activity in a number of different ways, including through a U.S. person or through a non-U.S. affiliate that benefits from a recourse guarantee from a U.S. person. Therefore, in order to avoid creating a substantial regulatory loophole, the Commission believes that swaps of an Other NonU.S. Person with a U.S. Guaranteed Entity should receive the same treatment as swaps with a U.S. person and should therefore be included in the Other Non-U.S. Person’s SD de minimis calculation. If Other Non-U.S. Persons were not required to include such transactions in their SD de minimis threshold calculations, they could engage in a significant level of swap dealing activity with U.S. Guaranteed Entities without being required to register as SDs. Treating swaps of Other Non-U.S. Persons with U.S. Guaranteed Entities differently than their swaps with U.S. persons could thereby undermine the effectiveness of the Dodd-Frank swap provisions and related Commission regulations. 2. Counterparties That Are FCSs Under the proposed rule, an Other Non-U.S. Person would include in its de minimis threshold calculation swap dealing transactions with a non-U.S. person that is an FCS, subject to an exception for transactions executed anonymously on a SEF, DCM, or FBOT and cleared. As discussed above, the default or insolvency of an Other NonU.S Person could have a direct adverse effect on an FCS, which through the interconnection to its U.S. ultimate parent, could have knock-on effects, potentially leading to disruptions to the U.S. financial system. The Commission believes that such risk would be significant to the extent that the Other Non-U.S. Person’s dealing activities with FCSs, U.S. persons and U.S. Guaranteed Entities 86 exceed the de minimis threshold. 3. Other Non-U.S. Counterparties Under the proposed rule, an Other Non-U.S. Person would not include in its de minimis calculation its swap dealing transactions with an Other NonU.S. Person. This approach reflects the Commission’s recognition of foreign jurisdictions’ strong supervisory interest in the swap transactions between Other Non-U.S. Persons, both of which are domiciled and operate abroad. Consistent with comity principles, the Commission believes that it would be appropriate to except this class of swap 86 Id. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 transactions from counting against the de minimis threshold. Further, the proposed rule would not require an Other Non-U.S. Person to include a swap transaction with an Other Non-U.S. Person counterparty in its de minimis threshold calculation even if the swap is arranged, negotiated, or executed by personnel located in the United States. Although, as stated above, a non-U.S. person that engages in ANE transactions is performing dealing activity in the United States, the Commission preliminarily does not believe that requiring Other Non-U.S. Persons to include ANE transactions in their de minimis threshold calculations would be necessary to advance the policy objectives of the Dodd-Frank swap regime when taking the proposed rule in context. In particular, the Commission preliminarily believes that the proposal to require FCSs to include all of their swap dealing transactions in their de minimis threshold calculations would capture a substantial portion of dealing activity engaged in by non-U.S. persons in which the Commission has a strong regulatory interest, such that the level of ANE transactions engaged in by Other Non-U.S. Persons may be comparatively insignificant. Additionally, Other Non-U.S. Persons that engage in ANE transactions could either be registered already by virtue of their swap transactions with U.S. persons or, if the proposed rule is adopted, be required to register as SDs by virtue of their swap transactions with U.S. persons, U.S. Guaranteed Entities or FCSs. 4. Swaps Executed Anonymously on a SEF, DCM, or FBOT and Cleared The Commission believes that when an Other Non-U.S. Person enters into a swap that is executed anonymously on a registered SEF, DCM, or FBOT and the swap is cleared through a registered or exempt DCO, the Other Non-U.S. Person may exclude the swap from its de minimis threshold calculation.87 The Commission recognizes that, under these circumstances, the Other Non-U.S. Person would not have the necessary information about its counterparty to determine whether the swap should be included in its de minimis threshold calculation. The Commission therefore believes that in this case the practical 87 The Commission clarifies that an Other NonU.S. Person would also be able exclude from its de minimis threshold calculation any swap that is executed anonymously on a foreign trading platform that is subject to relief from the requirement to register as a SEF or DCM, provided the swap is cleared through a registered or exempt DCO. E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules difficulties make it reasonable for the swap to be excluded altogether.88 D. Aggregation Requirement asabaliauskas on DSK3SPTVN1PROD with PROPOSALS As stated above, Commission regulation 1.3(ggg)(4) requires that, in determining whether its swap dealing transactions exceed the de minimis threshold, a person must include the aggregate notional value of any swap dealing transactions entered into by its affiliates under common control. Consistent with CEA section 2(i), the Commission interprets the aggregation requirement in Commission regulation 1.3(ggg)(4) in a manner that applies the same aggregation principles to all affiliates in a corporate group, whether they are U.S. or non-U.S. persons. Accordingly, under the proposed rule, a potential SD, whether a U.S. or non-U.S. person, would aggregate all swaps connected with its dealing activity with those of persons controlling, controlled by, or under common control with 89 the potential SD to the extent that these affiliated persons are themselves required to include those swaps in their own de minimis thresholds, unless the affiliated person is itself a registered SD. The Commission notes that this interpretation, which mirrors the approach taken in the Guidance,90 ensures that the aggregate notional value of applicable swap dealing transactions of all such unregistered U.S. and nonU.S. affiliates does not exceed the de minimis level. Stated in general terms, the Commission interprets the aggregation requirement to allow both U.S. persons and non-U.S. persons in an affiliated group to engage in swap dealing activity up to the de minimis threshold. When the affiliated group meets the de minimis threshold in the aggregate, one or more affiliate(s) (a U.S. affiliate or a non-U.S. affiliate) would have to register as an SD so that the relevant swap dealing activity of the unregistered affiliates remains below the threshold. 88 The Commission also believes that when an Other Non-U.S. Person clears a swap through a registered or exempt DCO, such Other Non-U.S. Person would not have to include the resulting swap (i.e., the novated swap) in its de minimis threshold calculation. A swap that is submitted for clearing is extinguished upon novation and replaced by new swap(s) that result from novation. See Commission regulation 39.12(b)(6). See also Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334, 69361 (Nov. 8, 2011). Where a swap is created by virtue of novation, such swap does not implicate swap dealing, and therefore it would not be appropriate to include such swaps in determining whether a non-U.S. person should register as an SD. 89 The Commission clarifies that for this purpose, the term ‘‘affiliates under common control’’ would include parent companies and subsidiaries. 90 See 78 FR at 45323. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 The Commission recognizes the borderless nature of swap dealing activities, in which a dealer may conduct swap dealing business through its various affiliates in different jurisdictions, and believes that this interpretation would address the concern that an affiliated group of U.S. and non-U.S. persons engaged in swap dealing transactions with a significant connection to the United States may not be required to register solely because such swap dealing activities are divided among affiliates that all individually fall below the de minimis threshold. E. Summary In summary, under the proposed rule, in making its de minimis calculation: • A U.S. person would include all of its swap dealing transactions. • A non-U.S. person would include all swap dealing transactions with respect to which it is a U.S. Guaranteed Entity. • A Foreign Consolidated Subsidiary would include all of its swap dealing transactions. • An Other Non-U.S. Person would include all of its swap dealing transactions with counterparties that are U.S. persons, U.S. Guaranteed Entities, or FCSs, unless the swap is executed anonymously on a registered SEF, DCM, or FBOT and cleared. It would not, however, include any of its swap dealing transactions with Other NonU.S. Persons, even if they constitute ANE transactions. • All potential SDs, whether U.S. or non-U.S. persons, would aggregate their swap dealing transactions with those of persons controlling, controlled by, or under common control with the potential SD to the extent that those affiliates are themselves required to include those swaps in their own de minimis thresholds, unless the affiliated person is a registered SD. Request for Comment. The Commission invites comment on all aspects of Proposed Rule, including the following: 1. The Commission invites comment on the appropriateness, necessity, and potential impact of requiring Other NonU.S. Persons to include ANE transactions in their de minimis threshold calculations. Should the Commission further harmonize with the SEC by requiring Other Non-U.S. Persons to include ANE transactions in their de minimis threshold calculations? 91 What effect would a determination not to impose such a requirement have on market liquidity and competitiveness? To what degree 91 See PO 00000 would U.S. swap dealers be adversely affected? Would a determination not to impose such a requirement create a substantial loophole or otherwise expose the U.S. financial system to unregulated risk? Do ANE transactions conducted by Other Non-U.S. Persons, particularly those not currently registered as SDs by virtue of their transactions with U.S. persons, form a significant segment of the U.S. swap market? The Commission is particularly interested in data or estimates regarding the current level of ANE transactions entered into by Other Non-U.S. Persons, including whether and how many Other Non-U.S. Persons that are not currently registered as SDs would exceed the current de minimis threshold as a result of being required to include ANE transactions in their de minimis threshold calculations. 2. The Commission invites comment on whether and to what extent the Proposed Rule should incorporate certain exceptions for non-U.S. persons that were included in the Guidance.92 Specifically, should the proposed rule permit Other Non-U.S. Persons to exclude from their de minimis threshold calculations: a. Swap transactions with foreign branches of U.S. SDs? If so, why and how should the Commission interpret the term ‘‘foreign branch of a U.S. swap dealer’’ (e.g., consistent with the Guidance,93 consistent with the SEC’s definitions of ‘‘foreign branch’’ and ‘‘transaction conducted through a foreign branch’’ in Exchange Act rules,94 or an alternative approach)? 92 See 78 FR at 45324 (providing that non-U.S. persons that are not guaranteed or conduit affiliates would generally not count toward their de minimis threshold calculations their swap dealing transactions with (i) a foreign branch of a U.S. swap dealer, (ii) a guaranteed affiliate of a U.S. person that is a swap dealer, and (iii) a guaranteed or conduit affiliate that is not a swap dealer and itself engages in de minimis swap dealing activity and which is affiliated with a swap dealer). 93 See id. at 45328–31 (discussing the scope of the term ‘‘foreign branch’’ and Commission’s consideration of whether a swap is with a foreign branch of a U.S. bank). 94 The SEC defined the term ‘‘foreign branch’’ in Exchange Act rule 3a71–3(a)(2), 17 CFR 240.3a71– 3(a)(2), to mean any branch of a U.S. bank if (i) the branch is located outside the United States; (ii) the branch operates for valid business reasons; and (iii) the branch is engaged in the business of banking and is subject to substantive banking regulation in the jurisdiction where located. The SEC defined the term ‘‘transaction conducted through a foreign branch’’ in Exchange Act rule 3a71–3(a)(3), 17 CFR 240.3a71–3(a)(3), to mean a security-based swap transaction that is arranged, negotiated, and executed by a U.S. person through a foreign branch of such U.S. person if (A) the foreign branch is the counterparty to such security-based swap transaction; and (B) the security-based swap transaction is arranged, negotiated, and executed on behalf of the foreign branch solely by persons SEC ANE Rule, 81 FR at 8621. Frm 00013 Fmt 4701 Sfmt 4702 71957 Continued E:\FR\FM\18OCP3.SGM 18OCP3 71958 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS b. Any swap transactions with U.S. Guaranteed Entities? If so, why and under what circumstances? 3. The Commission is concerned that a non-U.S. person that is affiliated with a U.S. SD could act as a conduit or an extension of the affiliated U.S. SD by entering into market-facing swaps in a foreign jurisdiction and then transferring some or all of the risk of such swaps to its affiliated U.S. SD through one or more inter-affiliate swaps. Furthermore, under the Proposed Rule, an Other Non-U.S. Person would not be required to include its market-facing swaps with Other NonU.S. counterparties in its SD de minimis threshold. The Commission invites comment as to whether Other Non-U.S. Persons should be required to include market-facing swaps with non-U.S. persons in their de minimis threshold calculations if any of the risk of such swaps is transferred to an affiliated U.S. SD through one or more inter-affiliate swaps and as to whether it would be too complex or costly to monitor and implement.95 If so: a. Should an Other Non-U.S. Person that is consolidated with an affiliated U.S. SD for financial reporting purposes and that transfers some or all of the risk of a swap with an Other Non-U.S. counterparty, directly or indirectly, to its affiliated U.S. SD (an ‘‘SD conduit’’) be required to count outward-facing swap as to which it acts as a conduit toward its SD or MSP registration threshold? b. Should an Other Non-U.S. Person be considered an SD Conduit only when it ‘‘regularly’’ acts as an SD Conduit, and if so, how would the Commission determine whether it ‘‘regularly’’ acts as an SD Conduit? c. Would it be appropriate to require an SD Conduit to include a marketfacing swap in its de minimis threshold calculation in its entirety, for ease of calculation, even if not all of the risk arising out of that swap is transferred to an affiliated U.S. SD through interaffiliate swaps? Is the Commission’s assumption that a formula to calculate the percentage of risk would be too costly and burdensome to implement correct? If not, please propose such a workable formula. Alternatively, should located outside the United States. See also SEC Cross-Border Rule, 79 FR 47278. 95 The Commission notes that the Commission’s final margin rule requires CSEs to collect initial margin from certain affiliates that are not subject to comparable initial margin collection requirements on their own outward-facing swaps with financial end-users, which addresses some of the credit risks associated with the outward-facing swaps. See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 636, 703 (Jan. 6, 2016) (‘‘Final Margin Rule’’). VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 an SD Conduit be required to include all of its swap dealing transactions (and not just those as to which it acts as an SD conduit) in its SD or MSP registration threshold? d. The Commission understands that a non-U.S. person may aggregate all or a group of its market-facing swaps and then transfer all or a portion of the risk of such swaps as one position to the affiliated U.S. SD. In that case, the Commission understands that it would not be burdensome for the non-U.S. person to disaggregate the netted swap, as the non-U.S. person’s trading system would aggregate these trades initially, and therefore should be able to perform a disaggregation function. Is the Commission’s understanding correct? e. Should the proposed rule be modified to require that Other Non-U.S. Persons include swaps in their SD or MSP registration thresholds if their counterparty is acting as an SD Conduit? f. Should swaps where either one of the counterparties is acting as an SD conduit be subject to other Dodd-Frank requirements (in addition to SD and MSP registration thresholds) in future rulemakings? V. Cross-Border Application of the Major Swap Participant Registration Thresholds CEA section 1a(33) defines ‘‘major swap participant’’ to include persons that are not SDs but that nevertheless pose a high degree of risk to the U.S. financial system by virtue of the ‘‘substantial’’ nature of their swap positions.96 In accordance with the Dodd-Frank Act and CEA section 1a(33)(B), the Commission adopted rules further defining ‘‘major swap participant’’ and providing that a person would not be deemed an MSP unless its swap positions exceed one of several thresholds.97 The thresholds were 96 See 7 U.S.C. 1a(33)(A) (defining ‘‘major swap participant’’ to mean any person who is not an SD and either (i) maintains a substantial position in swaps for any of the major swap categories, subject to certain exclusions; (ii) whose outstanding swaps create substantial counterparty exposure that could have serious effects on the U.S. financial system; or (iii) is a highly leveraged financial entity that is not subject to prudential capital requirements and that maintains a substantial position in swaps for any of the major swap categories. See also 17 CFR 1.3(hhh)(1); 156 Cong. Rec. S5907 (daily ed. July 15, 2010) (colloquy between Senators Hagen and Lincoln, discussing how the goal of the major participant definitions was to ‘‘focus on risk factors that contributed to the recent financial crisis, such as excessive leverage, under-collateralization of swap positions, and a lack of information about the aggregate size of positions’’). 97 See 17 CFR 1.3(hhh)–(mmm). See also Dodd Frank Act section 712(d)(1) (directing the Commission and the SEC, in consultation with the Board of Governors of the Federal Reserve System, to jointly further define, among other things, the PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 designed to take into account defaultrelated credit risk, the risk of multiple market participants failing close in time, and the risk posed by a market participant’s swap positions on an aggregate level.98 The Commission also adopted interpretive guidance that, for purposes of the MSP analysis, an entity’s swap positions would be attributable to a parent, other affiliate, or guarantor to the extent that the counterparty has recourse to the parent, other affiliate, or guarantor and the parent or guarantor is not subject to capital regulation by the Commission, SEC, or a prudential regulator (‘‘attribution requirement’’).99 The Commission is now proposing rules to address the cross-border application of the MSP thresholds to the swap positions of U.S. and non-U.S. persons.100 Applying CEA section 2(i) and principles of international comity, the proposed rule identifies when a potential MSP’s cross-border swap positions should apply toward the MSP thresholds and when they may be properly excluded. As discussed in the sections below, whether a potential registrant would include a particular swap in its MSP calculations would depend on whether the potential registrant is a U.S. person, a U.S. Guaranteed Entity,101 or a Foreign Consolidated Subsidiary (section A) or an Other Non-U.S. Person 102 (section B). Section C addresses the cross-border application of the attribution requirement. Section D provides an overall summary of the rule. If adopted, the Proposed Rule would supersede the Commission’s Cross-Border Guidance with respect to the cross-border application of the MSP thresholds. A. U.S. Persons, U.S. Guaranteed Entities, and Foreign Consolidated Subsidiaries Under the proposed rule, all of a U.S. person’s swap positions would apply term ‘‘major swap participant’’); 7 U.S.C. 1a(33)(B) (directing the Commission to further define ‘‘substantial position’’ at the threshold the Commission deems prudent for the effective monitoring, management, and oversight of entities that are systemically important or can significantly impact the U.S. financial system); Entities Rule, 77 FR 30596. 98 See 77 FR at 30666 (discussing the guiding principles behind the Commission’s definition of ‘‘substantial position’’ in 17 CFR 1.3(jjj)); id. at 30683 (noting that the Commission’s definition of ‘‘substantial counterparty exposure’’ in 17 CFR 1.3(lll) is founded on similar principles as its definition of ‘‘substantial position’’). 99 Id. at 30689. 100 See proposed rule § 1.3(nnn). 101 See notes 76 and 79, supra. 102 As indicated above, for purposes of the Proposed Rule, an ‘‘Other Non-U.S. Person’’ refers to a non-U.S. person that is neither an FCS nor a U.S. Guaranteed Entity. See section IV, supra. E:\FR\FM\18OCP3.SGM 18OCP3 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules toward the MSP thresholds without exception. As discussed in the context of the Proposed Rule’s approach to applying the SD de minimis registration threshold, by virtue of it being domiciled or organized in the United States, or the inherent nature of its connection to the United States, all of a U.S. person’s activities have a significant nexus to U.S. markets, giving the Commission a particularly strong regulatory interest in their swap activities. Accordingly, the Commission believes that all of a U.S. person’s swap positions, regardless of where they occur or the U.S. person status of the counterparty, present risk to the stability of the U.S. financial system and U.S. entities, including those that may be systemically important, and thus should apply toward the MSP thresholds. For related reasons, the proposed rule would also require a non-U.S. person that is not an FCS to include in its MSP calculations each swap position with respect to which it is a U.S. Guaranteed Entity. As explained in context of the SD de minimis threshold calculation, the Commission believes that the swap positions of a non-U.S. person whose swap obligations are guaranteed by a U.S. person are identical, in relevant aspects, to those entered into directly by a U.S. person and thus present risks to the stability of the U.S. financial system or of U.S. entities. Treating U.S. Guaranteed Entities differently from U.S. persons could also create a substantial regulatory loophole, allowing transactions that have a similar connection to or impact on U.S. commerce to be treated differently depending on how the parties are structured and thereby undermining the effectiveness of the Dodd-Frank swap provisions and related Commission regulations. The proposed rule would also require an FCS to include all of its swap positions in its MSP calculations.103 As discussed in the context of applying the SD de minimis threshold, by virtue of its relationship to its U.S. ultimate parent, the risk associated with an FCS’s swap positions have a direct impact on the financial position and risk profile of its U.S. parent. Accordingly, should the FCS or its counterparty default on a swap, the financial stability of the U.S. ultimate parent entity would be directly impacted, raising the types of regulatory concerns that MSP registration is 103 To the extent that a non-U.S. person is both an FCS and a U.S. Guaranteed Entity with respect to a particular swap, the non-U.S. person would only be required to include the swap position in its MSP calculations once. See proposed rule § 1.3(nnn). VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 intended to address. The Commission is also concerned that offering disparate treatment to FCSs compared to U.S. persons could create a substantial regulatory loophole, incentivizing U.S. financial groups to conduct their swap activities with non-U.S. counterparties through non-U.S. subsidiaries and thereby undermining the effectiveness of the Dodd-Frank swap provisions and related Commission regulations. B. Other Non-U.S. Persons Under the proposed rule, an Other Non-U.S. Person would include all of its swaps with U.S. persons, U.S. Guaranteed Entities, and Foreign Consolidated Subsidiaries in its MSP calculations, with a limited exception for transactions executed anonymously on a SEF, DCM, or FBOT and cleared.104 As discussed above, the default or insolvency of the Other Non-U.S. Person would have a direct adverse effect on a U.S. counterparty and, by virtue of the U.S. person’s significant nexus to the U.S. financial system, potentially could result in adverse effects or disruption to the U.S. financial system as a whole, particularly if the Other Non-U.S. Person’s swap positions are substantial enough to exceed an MSP registration threshold. The default or insolvency of the Other Non-U.S. Person would also present a financial impact to the U.S. financial system where the counterparty is an FCS because its U.S. ultimate parent would be directly impacted. The Other Non-U.S. Person’s default could also impact the United States through a U.S. Guaranteed Entity. Although the default on that swap may not directly affect the U.S. guarantor on that swap, the default could affect the U.S. Guaranteed Entity’s ability to meet its other obligations, for which the U.S. guarantor may also be liable. The Commission is also concerned that offering Other Non-U.S. Persons disparate treatment with respect to their swap positions with U.S. Guaranteed Entities compared to their swap positions with FCSs could incentivize Other Non-U.S. Persons to favor transacting with U.S. Guaranteed Entities solely in order to avoid application of the Dodd-Frank swap provisions. The Commission therefore has a strong regulatory interest in ensuring that Other Non-U.S. Persons are subject to the Dodd-Frank MSP requirements to 104 To the extent that the Other Non-U.S. Person’s swap position is with a non-U.S. counterparty that is both an FCS and a U.S. Guaranteed Entity with respect to a particular swap, the Other Non-U.S. Person would only be required to include the swap position in its MSP calculations once. See proposed rule § 1.3(nnn). PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 71959 the extent that their swap positions with U.S. Guaranteed Entities and FCSs exceed a registration threshold. Accordingly, the Commission believes that requiring Other Non-U.S. Persons to include their swap positions with FCSs and U.S. Guaranteed Entities as well as U.S. persons appropriately captures swap positions that present a risk to the U.S. financial system, ensuring that MSP regulation applies once that risk exceeds the relevant thresholds. However, as discussed in the context of the SD de minimis threshold, where the swap is executed anonymously on a SEF, DCM, or FBOT and cleared, the Commission believes that the practical difficulties involved in determining the status of the potential MSP’s counterparty would make it reasonable for the swap position to be excluded altogether.105 Where the counterparty is an Other Non-U.S. Person, however, the proposed rule would not require an Other NonU.S. Person to include the swap position in its MSP calculations, as the Commission does not believe the swap would present the type of risk to the U.S. financial system that MSP registration is intended to address.106 Further, the Commission clarifies that under the Proposed Rule, an Other Non105 See section IV.C.4, supra. Commission notes that the Guidance provided that non-U.S. persons that are not guaranteed affiliates generally could exclude from their MSP threshold calculations swap positions with either a foreign branch of a U.S. SD or a guaranteed affiliate that is an SD if either (i) the potential non-U.S. MSP is a non-financial entity or (ii) the potential non-U.S. MSP is a financial entity and the swap is either cleared or the swap documentation requires the foreign branch or guaranteed affiliate to collect daily variation margin with no threshold. See Guidance, 78 FR at 45324– 25. The Commission has determined that a similar exception in the Proposed Rule with regard to the swap positions of Other Non-U.S. Persons would be unnecessary and inappropriate because (1) two of the three prongs of the statutory MSP definition apply regardless of whether the potential MSP is a financial entity, see 7 U.S.C. 1a(33)(A)(i)–(ii), and (2) although subjecting a swap to the clearing or margin requirements may mitigate some of the risk of the swap, the risk is not entirely eliminated, and the mitigation effect of the clearing and margin requirements is taken into account in calculating the relevant MSP thresholds. See 17 CFR 1.3(jjj)(3)(iii) (defining ‘‘substantial position’’ such that the potential future exposure associated with positions that are subject to central clearing by a registered or exempt DCO is equal to 0.1 times the potential future exposure that would otherwise be calculated). Accordingly, the Commission believes that such swaps create the potential for systemic risk within the meaning of the MSP definition and that allowing such exclusion would allow market participants to inappropriately avoid the DoddFrank registration and other associated requirements that are designed to mitigate that risk. The Commission further believes that the Proposed Rule has the added benefit of aligning more closely with the SEC in this regard, which should serve to reduce compliance costs associated with MSP registration. 106 The E:\FR\FM\18OCP3.SGM 18OCP3 71960 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules U.S. Person would not be required to include its swap position with an Other Non-U.S. Person counterparty in its MSP calculations solely by reason of such swap being arranged, negotiated, or executed by personnel located in the United States. As stated above, arranging, negotiating, or executing swaps are functions that fall within the scope of the ‘‘swap dealer’’ definition. In contrast, the definition of MSP focuses primarily on credit risk and thus, the Commission does not believe that including ANE transactions in this context would address the regulatory concerns underlying the MSP registration requirement. C. Attribution Requirement In the Entities Rule, the Commission and the SEC (collectively, ‘‘Commissions’’) provided a joint interpretation that an entity’s swap positions in general would be attributed to a parent, other affiliate, or guarantor for purposes of the MSP analysis to the extent that the counterparties to those positions have recourse to the parent, other affiliate, or guarantor in connection with the position, such that no attribution would be required in the absence of recourse.107 Even in the presence of recourse, however, the Commissions stated that attribution of a person’s swap positions to a parent, other affiliate, or guarantor would not be necessary if the person is already subject to capital regulation by the Commission or the SEC or is a U.S. entity regulated as a bank in the United States (and is therefore subject to capital regulation by a prudential regulator).108 The Commission is also proposing to address the cross-border application of the attribution requirement in a manner consistent with the Entities Rule and CEA section 2(i) and generally comparable to the approach adopted by the SEC.109 Specifically, the Commission believes that the swap positions of an entity, whether a U.S. or non-U.S. person, should not be attributed to a parent, other affiliate, or guarantor for purposes of the MSP analysis in the absence of recourse. 107 See 77 FR at 30689. (positions of U.S. entities regulated as banks in the United States would be subject to capital and other requirements, making it unnecessary to separately address the risks associated with guarantees of those positions via MSP regulation). See also id. at n.1134 (‘‘As a result of this interpretation, holding companies will not be deemed to be major participants as a result of guarantees to certain U.S. entities that already are subject to capital regulation. The Commissions intend to address guarantees provided to non-U.S. entities, and guarantees by non-U.S. holding companies, in separate releases.’’). 109 See SEC Cross-Border Rule, 79 FR at 47346– 48. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 108 Id. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 Even in the presence of recourse, attribution would not be required if the entity that entered into the swap directly is subject to capital regulation by the Commission or the SEC or is regulated as a bank in the United States.110 If recourse is present, however, and the entity subject to a recourse guarantee (‘‘guaranteed entity’’) is not subject to capital regulation (as described above), whether the attribution requirement would apply would depend on the U.S. person status of the person to whom there is recourse (i.e., the U.S. person status of the guarantor). Specifically, a U.S. person guarantor would attribute to itself any swap position of a guaranteed entity, whether a U.S. person or a non-U.S. person, for which the counterparty to the swap has recourse against that U.S. person guarantor. The Commission believes that when a U.S. person acts as a guarantor of a swap position, the recourse guarantee creates risk within the United States of the type that MSP regulation is intended to address, regardless of the U.S. person status of the guaranteed entity or its counterparty.111 A non-U.S. person would attribute to itself any swap position of an entity for which the counterparty to the swap has recourse against the non-U.S. person unless all relevant persons (i.e., the nonU.S. person guarantor, the entity subject to the recourse guarantee, and its counterparty) are Other Non-U.S. Persons. In this regard, the Commission believes that when a non-U.S. person provides recourse with respect to the swap position of a particular entity, the economic reality of the swap position is substantially identical, in relevant respects, to a position entered into directly by the non-U.S. person. Additionally, the Commission believes that guaranteed entities would be able to enter into significantly more swap positions (and take on significantly more risk) as a result of the guarantee than they would otherwise, amplifying the risk of the non-U.S. person guarantor’s inability to carry out its obligations under the guarantee. Given that, as discussed above, the Commission believes that the swap positions of U.S. persons, FCSs, and U.S. Guaranteed Entities present the 110 The Commission further clarifies that the swap positions of an entity that is required to register as an MSP, or whose MSP registration is pending, would not be subject to the attribution requirement. 111 See Entities Rule, 77 FR at 30689 (attribution is intended to reflect the risk posed to the U.S. financial system when a counterparty to a position has recourse against a U.S. person). PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 types of risk that MSP regulation is intended to address, the Commission has a strong regulatory interest in ensuring that the attribution requirement applies to non-U.S. persons that provide recourse guarantees to U.S. persons, FCSs, and U.S. Guaranteed Entities. Accordingly, the Commission believes that a non-U.S. person should be required to attribute to itself the swap positions of any entity for which it provides a recourse guarantee unless it, the guaranteed entity, and its counterparty are Other-Non-U.S. Persons. D. Summary In summary, under the proposed rule, in making its MSP threshold calculations: • A U.S. person would include all of its swap positions. • A non-U.S. person would include all swap positions with respect to which it is a U.S. Guaranteed Entity. • A Foreign Consolidated Subsidiary would include all of its swap positions. • An Other Non-U.S. Person would include all of its swap positions with counterparties that are U.S. persons, U.S. Guaranteed Entities, or FCSs, unless the swap is executed anonymously on a registered SEF, DCM, or FBOT and cleared. It would not, however, include any of its swap positions with Other Non-U.S. counterparties. • All swap positions that are subject to recourse should also be attributed to a guarantor, whether it is a U.S. person or a non-U.S. person, unless the guarantor, the guaranteed entity, and its counterparty are Other Non-U.S. Persons. Request for Comment. The Commission invites comment on all aspects of the proposed rule, including the following: 1. The Commission invites comment on whether it should provide an exception for Other Non-U.S. Persons similar to that included in the Guidance for non-U.S. persons that are not guaranteed affiliates trading with either a foreign branch of a U.S. SD or a guaranteed affiliate that is an SD.112 Would such an exception be appropriate or otherwise consistent with the proposed rule? Why or why not? 2. In its rulemaking addressing the cross-border application of the MSP thresholds, the SEC determined not to require a non-U.S. person to include in its major security-based swap participant threshold calculations any security-based swap positions for which they (as opposed to their counterparty) 112 See E:\FR\FM\18OCP3.SGM note 106, supra. 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules benefit from a guarantee creating a right of recourse against a U.S. person.113 The SEC argued that if the non-U.S. person were to default, it would not pose a direct risk to its counterparty’s U.S. guarantor, as the non-U.S. person’s failure under the swap would not trigger any obligations under the guarantee of the swap. The Commission invites comment on whether it should adopt a similar approach and whether such an approach would be consistent with the Proposed Rule. 3. Should the Commission modify its interpretation with regard to the attribution requirement to further harmonize with the approach presented in the Guidance 114 and adopted by the SEC 115 and provide that attribution of a person’s swap positions to a parent, other affiliate, or guarantor would not be required if the person is subject to capital standards that are comparable to and as comprehensive as the capital regulations and oversight by a home country supervisor or regulator? If so, should the home country capital standards be deemed comparable and comprehensive if they are consistent in all respects with the Capital Accord of the Basel Committee on Banking Supervision (‘‘Basel Accord’’)? asabaliauskas on DSK3SPTVN1PROD with PROPOSALS VI. Cross-Border Application of the External Business Conduct Standards for Swap Dealers and Major Swap Participants Pursuant to CEA section 4s(h), the Commission has adopted rules establishing business conduct standards governing the conduct of SD/MSPs in transacting with swap counterparties.116 Broadly speaking, the external business conduct standards are designed to enhance counterparty protections by expanding the obligations of SD/MSPs with respect to their counterparties.117 Among other things, SDs and/or MSPs are required to conduct due diligence on their counterparties to verify their eligibility to trade; provide disclosure of material information about the swap to their counterparties; provide a daily mid-market mark for uncleared swaps; and, when recommending a swap to a counterparty, make a determination as 113 See SEC Cross-Border Rule, 79 FR at 47345 & n.593. 114 See 78 FR at 45326. 115 See SEC Cross-Border Rule, 79 FR at 47347– 48. 116 See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012); 17 CFR 23.400–51. 117 The term ‘‘counterparty’’ is defined for purposes of the external business conduct standards in 17 CFR 23.401 to include any person who is a prospective counterparty to a swap, as appropriate to subpart H. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 to the suitability of the swap for the counterparty based on reasonable diligence concerning the counterparty.118 The Commission is now proposing a rule to address the cross-border application of the external business conduct standards, including the extent to which they would apply to ANE transactions.119 Specifically, under the proposed rule, U.S. SD/MSPs, other than with respect to transactions conducted through foreign branches of U.S. SD/MSPs, would be required to comply with the Commission’s applicable external business conduct standards regardless of the status of the counterparty as a U.S. person (or as a foreign branch of a U.S. SD/MSP) 120 without substituted compliance. This requirement reflects the Commission’s view that the Dodd-Frank’s external business conduct standards should apply fully to registered SD/MSPs domiciled and operating in the United States because their swap activities are particularly likely to affect the integrity of the swaps market in the United States and give rise to concerns about the protection of participants in those markets.121 Foreign branches of U.S. SD/MSPs as well as non-U.S. SD/MSPs (including FCSs and U.S. Guaranteed Entities) would be required to comply with all of the Commission’s applicable external business conduct standards, without substituted compliance, to the extent 118 Note that certain external business conduct standards apply only to SDs and not MSPs. See, e.g., 17 CFR 23.434 (recommendations to counterparties—institutional suitability); § 23.440 (requirements for swap dealers acting as advisors to Special Entities). 119 The rule text for the cross-border application of external business conduct standards is proposed as § 23.452. 120 As used in this preamble, the term ‘‘U.S. SD/ MSP’’ refers to a U.S. person that is an SD or MSP and the term ‘‘Non-U.S. SD/MSP’’ refers to a nonU.S. person that is an SD or MSP. 121 The Commission observes that, where a swap between a non-U.S. SD/MSP (or foreign branch of a U.S. SD/MSP) and a U.S. person is executed anonymously on a registered DCM or SEF and cleared by a registered or exempt DCO, the external business conduct standards are not applicable. See, e.g., 17 CFR 23.402(b)–(c) (requiring swap dealers and MSPs to obtain and retain certain information only about each counterparty whose identity is known to the swap dealer or MSP prior to the execution of the transaction); § 23.430(e) (not requiring SD/MSPs to verify counterparty eligibility when a transaction is entered on a DCM or SEF and the swap dealer or MSP does not know the identity of the counterparty prior to execution); § 23.431(c) (not requiring disclosure of material information about a swap if initiated on a DCM or SEF and the swap dealer or MSP does not know the identity of the counterparty prior to execution). Because a registered FBOT is analogous to a DCM, the Commission is of the view that the requirements likewise would not be applicable where such a swap is executed anonymously on a registered FBOT and cleared. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 71961 that the counterparty is a U.S. person (other than a foreign branch of a U.S. SD/MSP).122 Given the focus of the Dodd-Frank counterparty protection mandate on U.S. persons, the Commission believes that the external business conduct standards should apply fully to all swap transactions with U.S. persons that are not foreign branches of a U.S. SD/MSP. With respect to transactions with counterparties that are foreign branches of U.S. SD/MSPs or non-U.S. persons (including FCSs and U.S. Guaranteed Entities), however, non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs would generally not be required to comply with the external business conduct rules, subject to one narrow exception: foreign branches of U.S. SDs and non-U.S. SDs that use personnel located in the United States to arrange, negotiate, or execute such transactions would be required to comply with Commission regulations 23.410 (Prohibition on Fraud, Manipulation, and other Abusive Practices) and 23.433 (Fair Dealing), without substituted compliance.123 This position reflects the Commission’s belief that, in general, imposing its customer protection standards on transactions between a foreign branch of a U.S. SD/MSP or a non-U.S. SD/MSP, on the one hand, and a counterparty that is a non-U.S. person or the foreign branch of a U.S. SD/MSP on the other, would generally not be necessary to advance the goals of the Dodd-Frank customer protection regime. However, to the extent that such SDs use personnel located in the United States to arrange, negotiate, or execute the swap transaction, the Commission believes that its interest in ensuring the 122 Although the Commission recognizes that foreign branches of U.S. SD/MSPs are part of the same legal entity as their U.S. principal, and that, from the standpoint of risk, there is no difference between a swap with a U.S. SD/MSP and a swap with its foreign branch, the Commission believes that for purposes of the external business conduct standards, which are oriented toward customer protection, a foreign branch of a U.S. SD/MSP should be treated the same as a non-U.S. SD/MSP. The Commission proposes to interpret the term ‘‘foreign branch of a U.S. person’’ that is a swap dealer (or MSP) as used in proposed rule § 23.452 in a manner that is consistent with the Guidance. See Guidance, 78 FR at 45328–31 (discussing the scope of the term ‘‘foreign branch’’ and the Commission’s consideration of whether a swap is with a foreign branch of a U.S. bank). 123 See section III for a discussion of the terms arrange, negotiate, and execute. The Commission notes that the external business conduct standards apply in connection with transactions in swaps as well as in connection with swaps that are offered but not entered into. See 17 CFR 23.400. Accordingly, Commission regulations 23.410 and 23.433 would apply where a non-U.S. SD uses personnel located in the United States to offer a swap even if that swap is not ultimately entered into. E:\FR\FM\18OCP3.SGM 18OCP3 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 71962 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules integrity of U.S. markets is implicated. By limiting application of the external business conduct standards to ANE transactions to the antifraud and fair dealing requirements, the proposed rule is tailored to ensure a basic level of counterparty protections while, consistent with the principles of international comity, recognizing the supervisory interests of the relevant foreign jurisdictions in applying their own sales practices requirements to transactions involving counterparties that are non-U.S. persons or foreign branches of a U.S. SD/MSP. This approach recognizes the supervisory interests of the local jurisdiction with respect to swaps conducted within that jurisdiction and that broadly imposing U.S. external business conduct standards with respect to such transactions would not be necessary to advance the goals of the Dodd-Frank customer protection regime. If adopted, the proposed rule would supersede the Guidance with respect to the cross-border application of the external business conduct standards. Request for Comment. The Commission invites comment on all aspects of the proposed rule, including the following: 1. The Commission invites comment regarding its determination to distinguish transactions entered into by foreign branches of U.S. persons that are SDs (or MSPs) for purposes of the crossborder application of the external business conduct standards.124 Should transactions involving foreign branches of U.S. SD/MSPs be treated in the same manner as transactions involving U.S. persons with respect to these requirements? Why or why not? Should the Commission, as proposed, interpret the term ‘‘foreign branch of a U.S. person’’ that is an SD (or MSP) in a manner consistent with the Guidance or incorporate an alternative approach, such as the definition of ‘‘foreign branch’’ in the SEC’s Exchange Act rules? 125 2. The Commission invites comment regarding the circumstances under which a swap transaction should be considered as being ‘‘with a foreign branch of a U.S. person’’ that is an SD (or MSP) as opposed to being with the U.S. person itself. Specifically, should the Commission, as proposed, adopt an interpretation consistent with the Guidance 126 or should it incorporate an alternative approach, such the how the SEC defines ‘‘transaction conducted 124 See note 122, supra. note 94, supra. 126 See note 122, supra. 125 See VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 through a foreign branch’’ in the context of its Exchange Act rules? 127 3. The Commission invites comment on the proposed treatment of non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs. Whether and to what extent should their swap transactions with foreign branches of U.S. SD/MSPs and non-U.S. persons be subject to the external business conduct standards? Should they be required to comply with the external business conduct standards with respect to their transactions with foreign branches of U.S. SD/MSPs or non-U.S. persons? If so, should substituted compliance be available? Relatedly, should transactions conducted through foreign branches of U.S. SD/MSPs receive the same treatment as other transactions conducted by U.S. SD/MSPs? Is limiting the scope of applicable requirements for ANE transactions entered into by foreign branches of U.S. SDs or non-U.S. SDs to the antifraud and fair dealing requirements appropriate, or should other external business conduct requirements in subpart H of part 23 of the Commission’s regulations also apply? Why or why not? VII. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’) requires that agencies consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities.128 The Commission previously established definitions of ‘‘small entities’’ to be used in evaluating the impact of its regulations on small entities in accordance with the RFA.129 The proposed regulation addresses when U.S. persons and non-U.S. persons would be required to include their cross-border swap dealing transactions or swap positions in their SD or MSP registration threshold calculations, respectively, as specified in the Proposed Rule,130 and the extent to which SDs or MSPs would be required to comply with the Commission’s external business conduct standards in connection with their cross-border swap transactions or swap positions.131 The Commission previously determined that SDs and MSPs are not small entities for purposes of the 127 See note 94, supra. 5 U.S.C. 601 et seq. 129 See 47 FR 18618 (Apr. 30, 1982) (finding that designated contract markets, future commission merchants, commodity pool operators and large traders are not small entities for RFA purposes). 130 See proposed rule § 1.3(aaaaa), (ggg)(7), and (nnn). 131 See proposed rule § 23.452. 128 See PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 RFA.132 The Commission believes, based on its information about the swap market and its market participants, that (1) the types of entities that may engage in more than a de minimis amount of swap dealing activity such that they would be required to register as an SD— which generally would be large financial institutions or other large entities—would not be ‘‘small entities’’ for purposes of the RFA; and (2) the types of entities that may have swap positions such that they would be required to register as an MSP would not be ‘‘small entities’’ for purposes of the RFA. Thus, to the extent such entities are large financial institutions or other large entities that would be required to register as SDs or MSPs with the Commission by virtue of their crossborder swap dealing transactions and swap positions, they would not be considered small entities.133 Under the proposed rule, to the extent that there are any affected small entities under the proposed rule, they will need to assess how they are classified under the proposed rule (i.e., U.S. person, FCS, U.S. Guaranteed Entity, and Other Non-U.S. Person) and monitor their swap activities in order to determine whether they are required to register as an SD under the proposed rule. The Commission believes that market participants would only incur incremental costs, which are expected to be marginal, in modifying their existing systems and policies and procedures resulting from changes to the status quo made by the proposed rule.134 Accordingly, for the foregoing reasons, the Commission finds that 132 See Entities Rule, 77 FR at 30701; Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (noting that like future commission merchants, swap dealers will be subject to minimum capital requirements, and are expected to be comprised of large firms, and that major swap participants should not be considered to be small entities for essentially the same reasons that it previously had determined large traders not to be small entities). 132 See 77 FR at 30701. 133 The SBA’s Small Business Size Regulations, codified at 13 CFR 121.201, identifies (through North American Industry Classification System codes) a small business size standard of $38.5 million or less in annual receipts for Sector 52, Subsector 523—Securities, Commodity Contracts, and Other Financial Investments and Related Activities. Entities affected by the Proposed Rule are generally large financial institutions or other large entities that would be required to include their cross border dealing transactions or swap positions towards the SD and MSP registration thresholds, respectively, as specified in the Proposed Rule. 134 The proposed regulation addresses the crossborder application of the registration and external business conduct regulations. The Proposed Rule does not change the current registration requirements or external business conduct requirements. E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS there will not be a substantial number of small entities impacted by the proposed rule. Therefore, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations will not have a significant economic impact on a substantial number of small entities. B. Paperwork Reduction Act The Paperwork Reduction Act of 1995 135 (‘‘PRA’’) imposes certain requirements on Federal agencies, including the Commission, in connection with conducting or sponsoring any ‘‘collection of information,’’ as defined by the PRA. Among its purposes, the PRA is intended to minimize the paperwork burden to the private sector, to ensure that any collection of information by a government agency is put to the greatest possible uses, and to minimize duplicative information collections across the government. The PRA applies to all information, ‘‘regardless of form or format,’’ whenever the government is ‘‘obtaining, causing to be obtained, [or] soliciting’’ information, and includes required ‘‘disclosure to third parties or the public, of facts or opinions,’’ when the information collection calls for ‘‘answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, ten or more persons.’’ 136 The PRA requirements have been determined to include not only mandatory but also voluntary information collections, and include both written and oral communications.137 The proposed rule would result in an amendment to existing collections of information, ‘‘Registration of Swap Dealers and Major Swap Participants,’’ Office of Management and Budget (‘‘OMB’’) Control No. 3038–0072, as discussed below. The Commission, therefore, is submitting this proposed rulemaking to OMB for its review and approval in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If the proposed rule is adopted, the responses to these collections of information would be mandatory. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number issued by OMB. The proposed rule provides for the cross-border application of the SD/MSP registration thresholds and external business conduct standards. The Commission estimates that if the 135 44 U.S.C. 3501 et seq. 136 See 44 U.S.C. 3502. 137 See 5 CFR 1320.3. VerDate Sep<11>2014 13:33 Oct 17, 2016 proposed rule is adopted, 14 unregistered non-U.S. persons may be classified as FCSs and required to register as new SDs because their swap dealing transactions would be in excess of the SD de minimis threshold.138 The Commission would increase the number of respondents under collection 3038– 0072 accordingly. The proposed rule would not otherwise trigger any new recordkeeping, disclosure, or reporting requirements or cause any incremental burden under the PRA. Information Collection Comments. The Commission invites the public and other Federal agencies to comment on any aspect of the reporting burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (2) evaluate the accuracy of the Commission’s estimate of the burden of the proposed collection of information; (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. Comments may be submitted directly to the Office of Information and Regulatory Affairs, by fax at (202) 395– 6566 or by email at OIRAsubmissions@ omb.eop.gov. Please provide the Commission with a copy of submitted comments so that all comments can be summarized and addressed in the final rule preamble. Refer to the ADDRESSES section of this notice of proposed rulemaking for comment submission instructions to the Commission. A copy of the supporting statements for the collections of information discussed above may be obtained by visiting https://RegInfo.gov. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this document in the Federal Register. Therefore, a comment is best assured of having its full effect if OMB receives it within 30 days of publication. C. Cost-Benefit Considerations As detailed above, the Commission is proposing rules that would define certain key terms for purposes of the 138 See the Appendix to Cost-Benefit Considerations, infra, for an explanation of the Commission’s estimate. Jkt 241001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 71963 Dodd-Frank swap provisions and address the cross-border application of the SD and MSP registration thresholds and the Commission’s external business conduct standards, including the extent to which such requirements would apply to ANE transactions. The baseline against which the costs and benefits of this proposed rule are compared is the status quo, i.e., the swap market as it exists today, with SD/ MSP registration thresholds and external business conduct rules applied to cross-border transactions in a manner consistent with the Guidance and the Cross-Border Margin Rule.139 In considering the costs and benefits of the proposed rule against this baseline, the Commission notes that the Commission’s existing swap requirements, including the registration thresholds and external business conduct standards, were adopted pursuant to the requirements of the Dodd-Frank Act and have cross-border application by virtue of CEA section 2(i). A significant portion of the costs and benefits associated with the proposed rule are therefore inherent in the statute itself and were addressed in the cost-benefit considerations of the underlying registration rules and external business conduct standards at the time they were adopted. This costbenefit discussion accordingly focuses on the central purpose and effect of the proposed rule, determining whether and to what extent the underlying SD/MSP registration thresholds and external business conduct standards should apply in a cross-border context, consistent with CEA section 2(i), the regulatory objectives of the Dodd-Frank Act, and principles of international comity. The costs associated with the key elements of the Commission’s proposed cross-border approach to the SD and MSP registration thresholds—requiring market participants to classify themselves as U.S. persons, U.S. Guaranteed Entities, Foreign Consolidated Subsidiaries, or Other Non-U.S. Persons and to apply the rule accordingly—fall into a few categories. Market participants would incur costs determining which category of market participant (e.g., an FCS or an Other Non-U.S. Person) they fall into (‘‘assessment costs’’), tracking their swap activities or positions to determine whether they should be included in their registration threshold calculations (‘‘monitoring costs’’), and, to the degree 139 Although the Guidance is non-binding, the Commission understands that market participants have developed policies and practices consistent with the views expressed therein. E:\FR\FM\18OCP3.SGM 18OCP3 71964 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS that their activities or positions exceed the relevant threshold, registering with the Commission as an SD or MSP (‘‘registration costs’’). Entities required to register as SDs as a result of the proposed rule would also incur costs associated with complying with the relevant Dodd-Frank requirements applicable to registrants, such as the capital, margin, and business conduct requirements (‘‘programmatic costs’’).140 While only new registrants would be assuming these programmatic costs for the first time, the obligations of entities that are already registered as SDs may also change in the future as an indirect consequence of the proposed rule. Although the Proposed Rule does not address the cross-border application of any Dodd-Frank requirements other than the registration thresholds and external business conduct standards, the Commission expects that the proposed rule’s classification scheme for market participants (as U.S. Persons, FCSs, etc.) and associated definitions (which closely track the approach adopted in the Cross-Border Margin Rule) would apply for purposes of future crossborder rulemakings. Accordingly, existing SDs may find that their crossborder compliance obligations with respect to other substantive Dodd-Frank requirements change in the future compared to the status quo as a result of having to adjust their classification (e.g., from non-U.S. person to FCS). As a result, the full extent of the programmatic costs associated with the proposed rule would be influenced by the scope and effect of future rulemakings addressing the cross-border application of substantive requirements under the Dodd-Frank Act. In developing the proposed rule, the Commission took into account the potential for creating or accentuating competitive disparities between market participants, which could contribute to market inefficiencies, including market fragmentation or decreased liquidity, as more fully discussed below. Significantly, competitive disparities may arise between U.S.-based financial groups and non-U.S. based financial groups as a result of differences in how the SD/MSP registration thresholds 140 The Commission’s discussion of programmatic costs and registration costs does not address MSPs. No entities are currently registered as MSPs, and the Commission does not expect that this status quo would change as a result of the Proposed Rule given the general similarities between the Proposed Rule’s approach to the MSP registration threshold calculations and the Guidance. For an estimate of the number of market participants that may be required to register as SDs as a result of the Proposed Rule, see the accompanying Appendix below. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 apply to the various classifications of market participants. For instance, dealing subsidiaries with a U.S. ultimate parent entity (i.e., FCSs)—which would be required to include all of their swap dealing transactions in their de minimis threshold calculations and therefore be more likely to trigger the SD registration threshold relative to Other Non-U.S. Persons—may be at a competitive disadvantage compared to Other NonU.S. Persons when trading with nonU.S. counterparties, as non-U.S. counterparties may prefer to trade with non-registrants in order to avoid application of the Dodd-Frank swaps regime.141 Again, the full competitive impact of the Proposed Rule will be influenced by future cross-border rulemakings, as well as the scope and implementation timelines associated with any related rules adopted by other jurisdictions. Other factors also create inherent challenges associated with attempting to assess costs and benefits of the Proposed Rule. To avoid the prospect of being regulated as an SD or MSP, or otherwise falling within the Dodd-Frank swap regime, some market participants may restructure their businesses or take other steps (e.g., limiting their counterparties to Other Non-U.S. Persons) to avoid exceeding the relevant registration thresholds. The degree of comparability between the approaches adopted by the Commission and foreign jurisdictions and the potential availability of substituted compliance, whereby a market participant may comply with a Dodd-Frank swap dealer requirement by complying with a comparable requirement of a foreign financial regulator, may also affect the competitive impact of the proposed rule. The Commission nevertheless believes that the proposed rule’s approach is necessary and appropriately tailored, consistent with CEA section 2(i) and principles of international comity, to ensure that the regulatory objectives of the Dodd-Frank registration requirements and external business conduct standards are preserved while still establishing a workable approach that recognizes foreign regulatory interests and minimizes competitive disparities and market inefficiencies to the degree possible. Furthermore, as mentioned above, the Commission expects to apply the definitions and classification scheme for market participants resulting from the proposed rule in future crossborder rulemakings; having a uniform set of definitions should mitigate the costs of cross-border compliance with the Dodd-Frank swap regime in the long run. In the sections that follow, the Commission discusses the costs and benefits associated with the proposed rule, as well as reasonable alternatives. Section 1 begins by addressing the assessment costs associated with the rule, which derive in part from the defined terms used in the proposed rule (the proposed definitions of ‘‘U.S. Person’’ and ‘‘Foreign Consolidated Subsidiary,’’ as well as the definition of ‘‘guarantee’’ adopted in the CrossBorder Margin Rule) and which, as mentioned above, are expected to be relevant outside the context of the crossborder application of the registration thresholds. Sections 2 and 3 consider the costs and benefits associated with the proposed rule’s determinations regarding how each classification of market participants (U.S. Persons, U.S. Guaranteed Entities, FCSs, and Other Non-U.S. Persons) should apply to the SD and MSP registration thresholds, respectively. Sections 4, 5, and 6 address the monitoring, registration, and programmatic costs associated with the proposed cross-border approach to the SD (and, as appropriate, MSP) registration thresholds, respectively. Section 7 addresses the costs and benefits associated with the proposed cross-border approach to the external business conduct standards, while Section 8 discusses the factors established in section 15(a) of the CEA. Discussion of the Commission’s costbenefit considerations concludes with an Appendix providing an estimate of the number of new SDs that are expected to register as a result of the Proposed Rule as well as the number of currently registered non-U.S. SDs that the Commission estimates would be classified as FCSs. The Commission invites comment regarding the nature and extent of any costs and benefits that could result from adoption of the Proposed Rule and, to the extent they can be quantified, monetary and other estimates thereof. 141 Dodd-Frank swap requirements may impose significant direct costs on participants falling within the SD/MSP definitions that are not borne by other market participants, including costs related to capital and margin requirements, regulatory reporting requirements, and business conduct requirements. To the extent that foreign jurisdictions adopt comparable requirements, these costs would be mitigated. 1. Assessment Costs As discussed above, in applying the proposed cross-border approach to the SD and MSP registration thresholds, market participants would be required to first classify themselves as either a U.S. person, an FCS, a U.S. Guaranteed PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules asabaliauskas on DSK3SPTVN1PROD with PROPOSALS Entity, or an Other Non-U.S. Person. This classification scheme is also generally applicable in the context of the proposed approach to the external business conduct standards,142 and the Commission further expects to rely on a similar classification scheme in the context of future rulemakings relating to the cross-border application of other substantive Dodd-Frank requirements. The Commission expects that the costs to affected market participants of assessing which classification they and their counterparties fall into would generally be marginal and incremental. In most cases, the Commission believes an entity will have performed an initial determination or assessment of its status under either the Cross-Border Margin Rule (which uses substantially similar definitions of ‘‘U.S. person,’’ ‘‘Foreign Consolidated Subsidiary,’’ and ‘‘guarantee’’) or the Guidance (which interprets ‘‘U.S. person’’ in a manner that is similar but not identical to the proposed definition of ‘‘U.S. person’’). Additionally, the proposed rule would allow market participants to rely on representations from their counterparties with regard to their classifications.143 Even with respect to market participants that have not previously determined their status under the CrossBorder Margin Rule or the Guidance, or that may need to reevaluate their status, the Commission believes that their assessment costs would be small as a result of the Proposed Rule’s reliance on relatively clear, objective definitions of the terms ‘‘U.S. person,’’ ‘‘Foreign Consolidated Subsidiary,’’ and ‘‘guarantee.’’ Specifically, the Commission believes that the costs of assessing whether a market participant is a ‘‘U.S. person’’ would be small as a result of certain key differences between the Proposed Rule’s U.S. person definition and the ‘‘U.S. person’’ interpretation in the Guidance.144 142 The proposed rule’s cross-border application of the external business conduct standards would also require SD/MSPs to determine whether a swap is a transaction through a foreign branch. See section VI, supra. 143 The Commission believes that these assessment costs for the most part have already been incurred by potential SD/MSPs as a result of adopting policies and procedures consistent with the Guidance and Cross-Border Margin Rule (which had similar classifications), both of which permitted counterparty representations. 144 As discussed further in section II.A, the proposed U.S. person definition does not include the U.S. majority-owned funds prong that was included in the U.S. person interpretation in the Guidance, which should lower assessment costs. The proposed definition also includes a modified version of the unlimited U.S. responsibility prong in the Guidance, which applied only to legal entities whose unlimited U.S. owners were majority owners. Removing the majority ownership VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 Similarly, with respect to the determination of whether a market participant falls within the ‘‘Foreign Consolidated Subsidiary’’ definition,145 the Commission believes that assessment costs would be small as the definition relies on a familiar consolidation test already used by affected market participants in preparing their financial statements under U.S. GAAP.146 Additionally, the proposed rule relies on the definition of ‘‘guarantee’’ provided in the Cross-Border Margin Rule, which is limited to arrangements in which one party to a swap has rights of recourse against a guarantor with respect to its counterparty’s obligations under the swap.147 Although non-U.S. persons that are not FCSs will need to know whether they are U.S. Guaranteed Entities with respect to the relevant swap on a swap-by-swap basis for purposes of the SD and MSP registration calculations, the Commission believes that this information will already be known by non-U.S. persons.148 Accordingly, the Commission believes that the costs associated with assessing whether an entity or its counterparty is a U.S. Guaranteed Entity (for the purpose of the registration calculations or any subsequent rulemakings) would be small. Finally, the Commission believes that proposing consistent U.S. person and Foreign Consolidated Subsidiary definitions, which would apply across all of the Commission’s future crossborder rulemakings (unless the specific rule or regulation otherwise provides or the context otherwise requires), would also further reduce costs (including assessment costs) over time by applying a consistent definition across all of the requirement from the unlimited U.S. responsibility prong may lower assessment costs, as compared to the Guidance. Additionally, the Proposed Rule also makes clear that the ‘‘U.S. person’’ definition does not capture international financial institutions. Further, the proposed definition does not include the catchall provision that was included in the Guidance, which should further increase legal certainty and reduce assessment costs. 145 The ‘‘Foreign Consolidated Subsidiary’’ definition is discussed further in section II.B. 146 The Commission also considered certain alternatives to the proposed FCS definition—such as relying on International Financial Reporting Standards in addition to or instead of U.S. GAAP or including a non-U.S. person whose U.S. parent meets standards for consolidation, but does not prepare consolidated financial statements under U.S. GAAP—but believes these alternatives add complexity, without any substantial benefits. 147 See note 79, supra. 148 Because a guarantee has a significant effect on pricing terms and on recourse in the event of a counterparty default, the Commission believes that the guarantee would already be in existence and that a non-U.S. person therefore would have knowledge of its existence before entering into a swap. PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 71965 Commission’s cross-border swaps rules.149 2. Cross-Border Application of the Swap Dealer Registration Threshold a. U.S. Persons and U.S. Guaranteed Entities Under the proposed rule, a U.S. person would include all of its swap dealing transactions in its de minimis calculation, without exception. As discussed above, that would include any swap dealing transactions conducted through a U.S. person’s foreign branch, as such swaps are directly attributed to, and therefore impact, the U.S. person. Given that this requirement mirrors the Guidance in this respect, the Commission believes that the proposed rule would have a minimal impact on the status quo with regard to the number of registered or potential U.S. SDs.150 The proposed rule would also require U.S. Guaranteed Entities (that are not FCSs) 151 to include all of their dealing transactions in their de minimis threshold calculation without exception. This approach, which recognizes that a U.S. Guaranteed Entity’s swap dealing transactions may have the same potential to impact the U.S. financial system as a U.S. person’s dealing transactions, closely parallels the approach taken in the Guidance with respect to ‘‘guaranteed affiliates.’’ 152 However, as explained in 149 The Commission recognizes that this benefit would not be fully realized until such future rulemakings are adopted. 150 As discussed in the Appendix, the Commission is not estimating the number of new U.S. SDs, as the methodology for including swaps in a U.S. person’s SD registration calculation does not diverge from the approach included in the Guidance (i.e., a U.S. person must include all of its swap dealing transactions in its de minimis threshold calculation). As further explained in the Appendix, the Commission does not expect an increase in the number of SDs resulting from the Proposed Rule’s definition of U.S. person and therefore assumes that no new U.S. SDs would register as U.S. SDs as a result of the Proposed Rule. 151 In order to avoid double counting, in the event that the swap of an FCS is guaranteed by a U.S. person, the swap would only be counted under the provision of the Proposed Rule that applies to FCSs. See proposed rule § 1.3(ggg)(7)(i)(B) and (C). 152 Under the Guidance, a ‘‘guaranteed affiliate’’ would generally include all swap dealing activities in its de minimis threshold calculation without exception. The Guidance interpreted ‘‘guarantee’’ to generally include ‘‘not only traditional guarantees of payment or performance of the related swaps, but also other formal arrangements that, in view of all the facts and circumstances, support the non-U.S. person’s ability to pay or perform its swap obligations with respect to its swaps.’’ See the Guidance at 45320. In contrast, the term ‘‘guarantee’’ in this proposed rulemaking has the same meaning as defined in Commission regulation 23.160(a)(2) (cross-border application of the Commission’s margin requirements for uncleared E:\FR\FM\18OCP3.SGM Continued 18OCP3 71966 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules the accompanying Appendix, the Commission believes that there are few U.S. Guaranteed Entities at this time.153 Accordingly, the Commission believes that, in this respect, any increase in costs associated with the Proposed Rule would be small. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS b. Foreign Consolidated Subsidiaries Under the proposed rule, a Foreign Consolidated Subsidiary would include all of its swap dealing transactions in its de minimis threshold calculation without exception. The Guidance did not differentiate FCSs from Other NonU.S. Persons, and therefore FCSs would generally only include in their de minimis threshold calculations their swap dealing transactions with U.S. persons (excluding foreign branches of U.S. SDs) and with certain guaranteed affiliates.154 However, as noted in section II.B, the Commission believes that it would be appropriate to distinguish FCSs from Other Non-U.S. Persons in determining the cross-border application of the SD de minimis threshold to such entities, as well as with respect to the Dodd-Frank swap provisions more generally. As discussed above, by virtue of the close integration between the FCS and its U.S. ultimate parent, counterparties look to both the FCS and its U.S. parent for fulfillment of the FCS’s obligations under the swap, even without any explicit guarantee. Therefore, the Commission believes that it is appropriate to require FCSs to include all of their swap dealing transactions in their SD de minimis calculation. In swaps), except that application of the proposed definition of ‘‘guarantee’’ would not be limited to uncleared swaps. See note 79, supra. 153 The proposed rule would require U.S. Guaranteed Entities that are not FCSs to include all of their dealing transactions in their de minimis calculation. However, the Commission believes that there are few U.S. Guaranteed Entities (that are not FCSs). The Commission notes that the Proposed Rule uses a narrower definition of guarantee (compared to the Guidance), which would result in relatively fewer U.S. Guaranteed Entities than if a broader definition were used. In addition, the Commission believes that, as a practical matter, few non-U.S. persons that are not FCSs obtain guarantees of their obligations under swaps (which would generally need to be obtained from an unaffiliated U.S. person). Although the Commission believes that there are few U.S. Guaranteed Entities at this time, the Commission has covered this infrequent situation in the Proposed Rule as a prophylactic measure. 154 The Commission believes that some FCSs would have been ‘‘guaranteed affiliates’’ as described in the Guidance at the time that it was initially issued, but the Commission understands that many financial groups ceased providing guarantees with regard to their affiliated entities’ swap activities subsequent to the issuance of the Guidance, such that FCSs would have adopted policies and practices consistent with the Guidance’s treatment of non-U.S. persons (that are not guaranteed or conduit affiliates). VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 addition, allowing an FCS to exclude non-U.S. swap dealing transactions from its calculation could incentivize U.S. financial groups to book their non-U.S. dealing transactions into an FCS, avoiding swap regulation. Under the Proposed Rule, the FCS definition is used to distinguish nonU.S. persons with a U.S. ultimate parent entity from Other Non-U.S. Persons for purposes of determining how DoddFrank swap provisions should apply. The full market impact of the Proposed Rule’s shift of some non-U.S. persons to FCSs cannot be determined at this time in the absence of further rulemakings addressing the cross-border application of substantive requirements under the Dodd-Frank Act. However, to the extent that future cross-border rulemakings apply more stringent requirements to swap transactions with FCSs, non-U.S. counterparties may seek to avoid transacting with such dealers, fragmenting swaps market liquidity into two pools—one for U.S. persons and FCSs and the other for non-U.S. persons (that are not FCSs). Nevertheless, as discussed above, the Commission believes that the proposal to require FCSs to include all of their swap dealing activity in their de minimis threshold calculations is necessary and appropriate to ensure the policy objectives of the Dodd-Frank Act are preserved and not undermined by a substantial regulatory loophole. c. Other Non-U.S. Persons Under the proposed rule, Other NonU.S. Persons would be required to include in their de minimis threshold calculations swap dealing activities with U.S. persons (including foreign branches of U.S. SDs), U.S. Guaranteed Entities, and FCSs. The proposed rule would not, however, require Other NonU.S. Persons to include swap dealing transactions with Other Non-U.S. Persons. Additionally, Other Non-U.S. Persons would not be required to include in their de minimis calculation any transaction that is executed anonymously on a SEF, DCM, or FBOT and cleared. The Commission believes that requiring Other Non-U.S. Persons to include their swap dealing transactions with U.S. persons in their de minimis calculations is necessary to advance the goals of the Dodd-Frank SD registration regime, which focuses on U.S. market participants and the market. As discussed above, the Commission considered incorporating an exception from the Guidance allowing non-U.S. persons to exclude from their de minimis thresholds transactions with foreign branches of U.S. SDs but PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 determined that, given the integral nature of the foreign branch to a U.S. person, such an exception would create a potentially significant regulatory loophole, allowing a substantial amount of dealing activity with U.S. counterparties to occur outside the comprehensive Dodd-Frank swap regime. Under the proposed rule, Other NonU.S. Persons would not be required to include any swap dealing transactions with Other Non-U.S. Persons in their SD de minimis threshold calculations, including ANE transactions. Although a non-U.S. person that engages in ANE transactions is performing dealing activity in the United States, the Commission does not believe that requiring non-U.S. persons to include ANE transactions in their de minimis threshold calculations would be necessary to advance the policy objectives of the Dodd-Frank swap regime when taking the Proposed Rule in context, particularly the proposal to require FCSs to include all of their swap dealing transactions in their de minimis threshold calculations. The Commission recognizes that the proposed rule’s cross-border approach to the de minimis threshold calculation could contribute to competitive disparities arising between U.S.-based financial groups and non-U.S. based financial groups. Potential SDs that are U.S. persons or that have a U.S. ultimate parent entity (FCSs) would be required to include all of their swap transactions. In contrast, potential non-U.S. SDs with a non-U.S. ultimate parent entity whose obligations under the relevant swap are not subject to a U.S. guarantee (Other Non-U.S. Persons) would be permitted to exclude swaps with Other Non-U.S. Persons, including ANE transactions. As a result, potential SDs with a U.S. ultimate parent entity may be at a competitive disadvantage, as more of their swap activity would apply toward the de minimis threshold and trigger the SD registration threshold relative to Other Non-U.S. Persons. To the extent that a currently unregistered non-U.S. person would be required to register as an SD under the proposed rule, its nonU.S. counterparties (clients and dealers) may possibly cease transacting with it in order to operate outside the Dodd-Frank swap regime.155 Additionally, unregistered non-U.S. dealers may be able to offer swaps on more favorable terms to non-U.S. counterparties than U.S. competitors (i.e., U.S. SDs, FCSs, 155 Additionally, some unregistered dealers may opt to withdraw from the market, thereby contracting the number of dealers competing in the swaps market, which may have an effect on competition and liquidity. E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules and U.S. Guaranteed Entities) because they are not required to register (and therefore would not be subject to the Dodd-Frank swap dealer regime).156 As noted above, however, the Commission believes that these competitive disparities would be mitigated to the extent that foreign jurisdictions impose comparable requirements. Furthermore, the Commission reiterates its belief that the cross-border approach to the SD registration threshold taken in the Proposed Rule is appropriately tailored to further the policy objectives of the Dodd-Frank Act while mitigating unnecessary burdens and disruption to market practices to the extent possible. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 3. Cross-Border Application of the Major Swap Participant Registration Thresholds As described in section V, the Proposed Rule would approach the cross-border application of the MSP registration thresholds in a similar manner as the SD de minimis registration threshold. Specifically, the proposed rule would require U.S. persons, U.S. Guaranteed Entities, and FCSs to include all of their swap positions in their MSP calculations without exception. As further explained in section V, in the Commission’s view this result is appropriate because the Commission believes that swap positions with U.S. persons, U.S. Guaranteed Entities, and FCSs can in each case have a significant effect on the U.S. financial system and therefore should be treated in a similar manner for purposes of the MSP registration calculation. For related reasons discussed in section V.B, the proposed rule would also require Other Non-U.S. Persons to include in their MSP calculations all of their swap positions with U.S. persons, U.S. Guaranteed Entities, and FCSs, with a limited exception for transactions executed anonymously on a SEF, DCM, or FBOT and cleared. The Commission believes that swap positions with U.S. persons, U.S. Guaranteed Entities, and FCSs can in each case have a significant effect on the U.S. financial system and therefore should be treated in a similar manner.157 Other Non-U.S. Persons 156 These non-U.S. dealers also may be able to offer swaps on more favorable terms to U.S. persons, giving them a competitive advantage over U.S. competitors with respect to U.S. counterparties. 157 In addition, the Commission considered whether to include an exclusion similar to that discussed in the Guidance (which provides that non-U.S. persons that are not ‘‘guaranteed affiliates’’ generally could exclude from their MSP threshold calculations swap positions with either a foreign branch of a U.S. SD or a guaranteed affiliate that is an SD if either (i) the potential non-U.S. MSP VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 would not, however, be required to include swap positions with Other NonU.S. Persons in their MSP calculations, as the Commission does not believe these swaps would present the type of risk to the U.S. financial system that the MSP definition and registration requirements are intended to address. The Commission notes that no entities are currently registered as MSPs. The Commission also does not believe that the proposed cross-border approach to the MSP registration thresholds would result in significant costs to market participants compared to the status quo (i.e., would not cause any market participants to register as MSPs) given the general similarities between the proposed rule’s approach to the MSP registration threshold calculations and the corollary approach provided in the Guidance.158 4. Monitoring Costs Under the proposed rule, market participants would need to continue to monitor their swap activities in order to determine whether they are, or continue to be, required to register as an SD or MSP. Given that market participants are believed to have developed policies and practices consistent with the crossborder approach to the SD/MSP registration thresholds expressed in the Guidance, the Commission believes that market participants would only incur incremental costs in modifying their existing systems and policies and procedures in response to the proposed rule (e.g., determining which swaps activities or positions would be required to be included in the registration threshold calculations).159 For example, the Commission notes that FCSs are likely to have adopted is a non-financial entity or (ii) the potential nonU.S. MSP is a financial entity and the swap is either cleared or the swap documentation requires the foreign branch or guaranteed affiliate to collect daily variation margin with no threshold). Although including corollary exclusions in the Proposed Rule might result in reduced compliance costs, the Commission preliminarily believes that such exclusions are unnecessary and inappropriate for the reasons discussed above. See note 106, supra. The Commission further does not believe that the decision not to include such an exception would result in any new MSPs. The Commission is also seeking comment in section V with regard to whether to adopt the SEC approach of not requiring a non-U.S. person to include in its MSP threshold calculations any swap positions for which they (as opposed to the non-U.S. person’s counterparty) benefit from a guarantee creating a right of recourse against a U.S. person. See note 113, supra, and accompanying text. 158 See also note 157, supra. 159 Although the cross-border approach to the MSP registration threshold calculation in the Proposed Rule is not identical to the approach included in the Guidance, see note 106, supra, the Commission believes that any resulting increase in monitoring costs resulting from the Proposed Rule would be incremental and de minimis. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 71967 policies and practices in line with the Guidance approach to non-U.S. persons that are not guaranteed or conduit affiliates and therefore may only be currently counting (or be provisionally registered by virtue of) their swap dealing transactions with U.S. persons, other than foreign branches of U.S. SDs.160 Although an FCS would be required under the proposed rule to include all swaps connected with its dealing activities in its de minimis calculation, without exception, the Commission believes that any increase in monitoring costs for FCSs would be de minimis, both initially and on an ongoing basis, because they already have systems that track swap dealing transactions with certain counterparties in place, which includes an assessment of their counterparties’ status.161 5. Registration Costs As a result of the proposed rule’s classification scheme for market participants (e.g., as U.S. persons, FCSs, U.S. Guaranteed Entities, and Other Non-U.S. Persons, as described above) and the proposed requirement that they apply the SD registration threshold accordingly, the Commission recognizes that some market participants would be required to register as SDs with the Commission who were previously not required to register. In considering the costs and benefits of the proposed rule, the Commission has estimated that approximately 14 unregistered non-U.S. persons may be required to register as SDs as a result of the proposed rule. The basis for this estimated increase in the number of SDs is discussed below in the accompanying Appendix. The Commission previously estimated registration costs in its rulemaking on registration of SDs; 162 however, the costs that may be incurred should be mitigated to the extent that these new SDs are affiliated with an existing SD, as most of these costs have already been realized by the consolidated group. The Commission has not included any discussion of registration costs for MSPs because it believes that few (if any) market participants will be required to 160 Although the Guidance provided that non-U.S. persons (that are not guaranteed or conduit affiliates) should generally include all of their swap dealing transactions with U.S. persons (excluding foreign branches of a U.S. SD) as well as swaps with certain guaranteed affiliates in their de minimis threshold calculations, the Commission understands that at the current time guaranteed affiliates, as defined in the Guidance, likely no longer exist or are few in number. 161 See section VII.C.1, supra, for a discussion of assessment costs. 162 See Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2623–25 (Jan. 19, 2012). E:\FR\FM\18OCP3.SGM 18OCP3 71968 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules participants will incur in each specific future rulemaking. 6. Programmatic Costs As noted above, if the proposed rule is adopted, certain market participants would likely be required to register as SDs and would become subject to various requirements imposed on swap dealers under the Dodd-Frank Act and related Commission’s regulations. To the extent that the proposed rule acts as a ‘‘gating’’ rule by affecting which entities engaged in cross-border swaps activities must comply with the SD requirements, the Proposed Rule could result in increased costs for particular entities that otherwise would not register as an SD and comply with the swap provisions.163 Market participants that are already registered (or provisionally registered) as SDs or MSPs prior to adoption of the proposed rule (if it is adopted) could also be affected by the proposal. In particular, the Commission is proposing rules that would define certain key terms for purposes of the Dodd-Frank swaps provisions (including future cross-border rulemakings). Therefore, the proposal could affect the treatment of market participants that are already registered (or provisionally registered) across the Commission’s entire crossborder framework and attendant costs and benefits in addition to those that are registering for the first time. The proposal also addresses the cross-border application of the Commission’s external business conduct standards, including the extent to which such requirements would apply to swap transactions that are arranged, negotiated, or executed by registered SDs or MSPs using personnel located in the United States. Further, as a result of the proposed rule, certain other market participants would be categorized differently under the proposal than they were under the Guidance, which could affect how they are treated across the Commission’s entire cross-border framework and attendant costs and benefits.164 Although the exact treatment of market participants across the Commission’s cross-border framework is not set out in this proposal, the Commission will address specific costs that market asabaliauskas on DSK3SPTVN1PROD with PROPOSALS register as an MSP under the Proposed Rule, as noted above. 7. Cross-Border Application of External Business Conduct Requirements As discussed in section VI above, the proposed rule addresses the crossborder application of the Commission’s external business conduct standards to transactions in which at least one of the counterparties is an SD/MSP, including the extent to which they would apply to ANE transactions. Under the proposed rule, U.S. SD/MSPs (other than foreign branches of U.S. SD/MSPs) would be required to comply with the Commission’s external business conduct standards without substituted compliance. As discussed above, this requirement reflects the Commission’s view that the Dodd-Frank external business conduct standards should apply fully to registered SDs and MSPs domiciled and operating in the United States because their swap activities are particularly likely to affect the integrity of the swaps market in the United States and raise concerns about the protection of participants in those markets. The Commission does not expect that this requirement would impose any additional costs on market participants in comparison to the status quo given that the Commission’s external business conduct standards already apply to U.S. SD/MSPs under the Commission’s external business conduct standards rulemaking.165 Non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs would only be required to comply with the external business conduct standards if (1) the counterparty is a U.S. person (other than a foreign branch of a U.S. SD/MSP) or (2) a non-U.S. SD or foreign branch of a U.S. SD uses personnel located in the United States to arrange, negotiate, or execute the transaction (or a swap that is offered but not entered into), in which case the antifraud 166 and fair dealing 167 requirements would apply. The proposal to require non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs to comply with the external business conduct standards where the counterparty is a U.S. person (other than a foreign branch of a U.S. SD/MSP) reflects the Commission’s recognition that the Dodd Frank Act’s counterparty protection mandate focuses on protecting U.S. market participants, such that the external business 163 As noted above, the Commission believes that, if the Proposed Rule is adopted, few (if any) market participants would be required to register as an MSP under the Proposed Rule, and therefore it has not included a separate discussion of programmatic costs for registered MSPs in this section. 164 As discussed below in the accompanying Appendix, the Commission has estimated that out of a total of 54 provisionally registered non-U.S. SDs entities, 17 would be classified as an FCS under the Proposed Rule. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 165 See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012). The Commission’s discussion of cost-benefit considerations is at 77 FR at 9805–22. 166 See 17 CFR 23.410. 167 See 17 CFR 23.433. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 requirements should apply fully to U.S. persons without substituted compliance regardless of the location from which the SD/MSP may be operating. The exception for counterparties that are foreign branches of U.S. SD/MSPs reflects the Commission’s belief that, even though the foreign branch is an integral part of the U.S. SD/MSP, a foreign regulatory regime may have a heightened interest in enforcing its own sales practice requirements to transactions occurring within its jurisdiction. Furthermore, this limited exception should reduce competitive disparities between such foreign branches and FCSs when transacting with non-U.S. clients. Again, the Commission does not expect that, in this regard, the proposed rule would impose any additional costs on market participants in comparison to the status quo, particularly given that the proposed rule does not significantly deviate from the Commission’s existing cross-border policy in this respect, as described in the Guidance.168 The proposed rule goes beyond the scope of the Guidance, however, by making clear that non-U.S. SDs and foreign branches of U.S. SDs would be required to comply with the antifraud and fair dealing external business conduct standards with respect to ANE transactions. This requirement would therefore impose additional compliance costs relative to the status quo not only on existing non-U.S. SDs and foreign branches of U.S. SDs, which likely currently do not comply with the external business conduct standards with respect to their transactions with non-U.S. persons or foreign branches of U.S. SD/MSPs, but any non-U.S. persons that are required to register by virtue of the proposed rule’s approach to the SD registration threshold. As discussed above, where swaps are arranged, negotiated or executed in the United States, the Commission has a strong supervisory interest both in protecting involved counterparties against fraud, manipulation and other abusive practices of an SD and in requiring that the SD communicate in a fair and balanced manner with these counterparties based on principles of fair dealing and good faith. Taking the proposed rule as a whole, however, the Commission does not believe that application of the remaining external business conduct standards would be necessary to advance the goals of the 168 Under the approach described in the Guidance, non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs generally would not comply with the business conduct standards to the extent that their counterparty is a foreign branch of a U.S. SD/ MSP or a non-U.S. person. E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules Dodd-Frank Act. Accordingly, by limiting application of the external business conduct standards to ANE transactions to the antifraud and fair dealing requirements, the Proposed Rule is appropriately tailored to ensure a basic level of counterparty protections while, consistent with the principles of international comity, recognizing the supervisory interests of the relevant foreign jurisdictions in applying their own sales practices requirements to transactions involving counterparties that are non-U.S. persons (or foreign branches of U.S. SD/MSPs) and avoiding potentially unnecessarily duplicative requirements. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 8. Section 15(a) Factors Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors. a. Protection of Market Participants and the Public The Commission believes the proposed rule would support protection of market participants and the public. By focusing on and capturing swap dealing transactions and swap positions involving U.S. persons and non-U.S. persons with a strong nexus to the United States (e.g., FCSs and U.S. Guaranteed Entities), the Proposed Rule’s approach to the cross-border application of the SD and MSP registration threshold calculations works to ensure that, consistent with CEA section 2(i) and the policy objectives of the Dodd-Frank Act, significant participants in the U.S. market are subject to the CEA’s swap regime. The proposed cross-border approach to the external business conduct standards, including applying the antifraud and fair dealing requirements to ANE transactions, similarly ensures that the Dodd-Frank market protections apply to swap activities that are particularly likely to affect the integrity of and raise concerns about the protection of participants in the U.S. market while, consistent with VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 principles of international comity, recognizing the supervisory interests of the relevant foreign jurisdictions in applying their own sales practices requirements to transactions involving non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs with non-U.S. persons and foreign branches of U.S. SD/MSPs. b. Efficiency, Competitiveness, and Financial Integrity of the Markets To the extent that the proposed rule leads additional entities to register as SDs, the Commission believes that the proposed rule could enhance the financial integrity of the markets by bringing significant U.S. swaps market participants under Commission oversight, which may reduce market disruptions and foster confidence and transparency in the U.S. market. The Commission recognizes that the Proposed Rule’s cross-border approach to the SD and MSP registration thresholds may create competitive disparities among market participants, based on the degree of their connection to the United States, that could contribute to market inefficiencies, including market fragmentation and decreased liquidity, as certain market participants may reduce their exposure to the U.S. market. As a result of reduced liquidity, counterparties may pay higher prices, in terms of bid-ask spreads (or in the case of swaps, the cost of the swap and the cost to hedge). Such competitive effects and market inefficiencies may, however, be mitigated by global efforts to harmonize approaches to swap regulation and by the large inter-dealer market, which may link the fragmented markets and enhance liquidity in the overall market. On balance, the Commission believes that the proposed rule’s approach is necessary and appropriately tailored to ensure that the purposes of the DoddFrank swap regime and its registration requirements are advanced while still establishing a workable approach that recognizes foreign regulatory interests and minimizes competitive disparities and market inefficiencies to the degree possible. The Commission further believes that the proposed rule’s crossborder approach to the external business conduct standards will promote the financial integrity of the markets by fostering transparency and confidence in the major participants in the U.S. swap markets. c. Price Discovery The Commission recognizes that the proposed rule’s approach to the crossborder application of the SD and MSP registration thresholds could also have an effect on liquidity, which may in PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 71969 turn influence price discovery. As liquidity in the swaps market is lessened and fewer dealers compete against one another, bid-ask spreads (cost of swap and cost to hedge) may widen and the ability to obtain the ‘true’ price of a swap may be hindered. However, as noted above, these negative effects would be mitigated as jurisdictions harmonize their swaps initiative and global financial institutions continue to manage their swaps books (i.e., moving risk with little or no cost, across an institution to market centers, where there is the greatest liquidity). The Commission does not believe that the proposed rule’s approach to the external business conduct standards, however, will have a measurable impact on price discovery. d. Sound Risk Management Practices The Commission believes that the proposed rule’s approach could promote the development of sound risk management practices by ensuring that significant participants in the U.S. market are subject to Commission oversight (via registration), including in particular important counterparty disclosure and recordkeeping requirements that will encourage policies and practices that promote fair dealing while discouraging abusive practices in U.S. markets. e. Other Public Interest Considerations The Commission has not identified any public interest considerations related to the costs and benefits of the proposed rule. Request for Comment. The Commission invites comment on all aspects of the costs and benefits associated with the proposed rule, including the following: 1. Is the Commission’s assumption that few, if any, market participants will be required to register as MSPs as a result of the proposed rule (as compared to the status quo) correct? If not, please provide an estimate of the number of market participants that are likely to have to register as MSPs as a result of the proposed rule, including an explanation for the basis of the estimate, and associated costs and benefits of the Proposed Rule’s provisions for MSPs (including potential MSPs). 2. The Commission preliminarily believes that a requirement that Other Non-U.S. Persons include ANE transactions in their SD registration threshold calculations would not be likely to increase the scope of entities that would be covered under its swap requirements, but may result in significant burdens. Is that belief correct? If not, please provide an E:\FR\FM\18OCP3.SGM 18OCP3 71970 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules estimate of the potential costs and benefits associated with including such a requirement? 3. The Commission invites information regarding whether and the extent to which specific foreign requirement(s) may affect the costs and benefits of the proposed rule, including information identifying the relevant foreign requirement(s) and any monetary or other quantitative estimates of the potential magnitude of those costs and benefits. 4. The Commission is estimating that 17 currently registered non-U.S. SDs would be classified as FCSs and that 14 unregistered non-U.S. persons may be classified as FCSs and required to register as new SDs because their swap dealing transactions are in excess of the SD de minimis threshold. The basis for these estimates is set forth below in the accompanying Appendix. The Commission seeks comments regarding its estimates of the scope and number of market participants potentially affected by the proposed rule, including its methodology for arriving at the estimates in the Appendix to Cost Benefit Considerations. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 9. Appendix to Cost-Benefit Considerations In this Appendix, the Commission explains its methodology for estimating, as a result of the proposed rule, the number of new entities that may be required to register with the Commission as SDs and the number of currently registered non-U.S. SDs that would be classified as an FCS. In arriving at this estimate, the Commission relied on SDR data and other data sources.169 However, the Commission faced a number of challenges in conducting a quantitative analysis. In particular, the Commission does not have SDR data on trades between two non-U.S. persons, and its estimate with regard to the number of non-U.S. persons that may be required to register as SDs by virtue of being FCSs is based on certain assumptions and adjustments, as explained further below. a. Estimates Regarding U.S. Persons and U.S. Guaranteed Entities The Commission is estimating that overall there will not be an increase in the number of persons that will be required to register as U.S. SDs as a result of the proposed rule, as the proposed rule’s approach to the swaps of U.S. persons mirrors the approach in the Guidance (i.e., all swap dealing 169 Additional sources are referenced below. See note 174, infra. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 transactions must be included). Furthermore, the Commission does not expect any increase in the number of SDs resulting from changes to the U.S. person definition.170 The Commission is also estimating that there will be no increase in the number of new SDs that are U.S. Guaranteed Entities, as the proposed rule uses a narrower definition of a guarantee (compared to the Guidance), which the Commission believes will result in few, if any, U.S. Guaranteed Entities.171 Therefore, for purposes of this cost-benefit analysis, the Commission estimates that currently there are no U.S. Guaranteed Entities (that are not FCSs) with over $8 billion in swaps dealing transactions. b. Estimates Regarding Foreign Consolidated Subsidiaries If the proposed rule is adopted, the Commission estimates that 17 currently registered non-U.S. SDs would be classified as FCSs and that 14 unregistered non-U.S. persons may be classified as FCSs and required to register as new SDs because their swap dealing transactions are in excess of the SD de minimis threshold. The basis for these estimates is set forth below. (1) Estimate of the Number of Non-U.S. Swap Dealers That Would Be Classified as FCSs In estimating the number of SDs that, as a result of the proposed rule, would shift from a category of non-U.S. SDs to the new category, FCS, the Commission reviewed its current list of registered SDs. As the definition of an FCS is dependent on whether the SD is a non170 There may be a decrease in the number of funds or other entities that fall within the U.S. person definition as compared to the Guidance because the proposed U.S. person definition does not include the U.S. majority-owned funds provision or the catchall provision that were included in the U.S. person interpretation in the Guidance, and the Commission is clarifying that the proposed definition does not capture international financial institutions. On the other hand, because the unlimited U.S. responsibility prong does not include a majority ownership requirement (in a modification from the Guidance), this could increase the number of entities that fall within the U.S. person definition resulting in a concomitant increase in the number of SDs as compared to the Guidance. In addition, the Commission is not providing a safe harbor for funds that are only solicited to non-U.S. persons, which is a difference from the policy discussed in the Guidance. Therefore, overall the Commission does not expect any increase in the number of SDs resulting from changes to the U.S. person definition. 171 As explained in the preamble, the Commission believes that there are few U.S. Guaranteed Entities at this time. See note 153, supra. Accordingly, the Commission does not expect an increase in the number of new SDs that would be required to register as a result of the Proposed Rule’s requirement that a U.S. Guaranteed Entity include all of its swaps in its SD de minimis calculation. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 U.S. person that has an ultimate U.S. parent entity, the Commission was able to isolate those entities from a list of non-U.S. SDs. From this list, the Commission estimated that out of a total of 54 provisionally registered non-U.S. SDs, 17 would be classified as an FCS under the proposed rule. (2) Estimate of Potential FCSs That May Be Required To Register as Swap Dealers The Commission estimates that approximately 14 unregistered non-U.S. persons with a U.S. ultimate parent entity under U.S. GAAP (‘‘potential FCSs’’) may be required to register as SDs as a result of the proposed rule. The Commission does not currently collect data on trades between non-U.S. persons (including those of potential FCSs with non-U.S. persons). Therefore, in estimating the number of potential FCSs that may be required to register as SDs, the Commission relied on SDR data regarding inter-affiliate trades between potential FCSs and their affiliated U.S. SDs (‘‘inter-affiliate trades’’). The Commission believes that SDR data on inter-affiliate trades provide a reasonable basis upon which to estimate the outward-dealing trades of potential FCSs with non-U.S. persons, provided that the estimate is scaled to the global swap market (as detailed below).172 As described in section I.B, global financial groups commonly carry out swap dealing activities in multiple jurisdictions through branches or affiliates that effectively operate as a single business under the control of the ultimate parent entity. Under this model, where a non-U.S. branch or affiliate in the global financial group enters into a swap with a non-U.S. client in a local market, it will then offset the risk associated with the outward-facing swap via an interaffiliate swap, which is likely to be with an affiliated dealer or market maker in the particular swap in the group.173 172 The Commission is unable to quantify certain swaps that may fall under the Proposed Rule. Specifically, there are dealing transactions entered into by potential FCSs with non-U.S. counterparties that would be included in the SD de minimis calculation of potential FCSs in this rulemaking that are not reported. Therefore, an estimate based solely on the SDR data for inter-affiliate trades would be under-inclusive because it only covers inter-affiliate trades between potential FCSs and their affiliated U.S. SDs. Accordingly, as detailed below, the Commission has scaled the inter-affiliate trade data to the global swaps market. 173 The Commission understands that risk may move in either direction in an inter-affiliate trade, and therefore, the Commission’s use of SDR data on inter-affiliate trades between a potential FCS and an affiliated U.S. SD may also be over-inclusive in estimating the number of SDs. However, for the reasons discussed in this section, the Commission believes that SDR data on potential FCSs’ inter- E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules Accordingly, the Commission believes that inter-affiliate trades provide a reasonable means of estimating a substantial portion of a potential FCS’s outward-facing swap dealing with nonU.S. counterparties. However, there is an important limitation on the use of this interaffiliate data which is likely to cause it to be under-inclusive as a proxy for the outward-facing trades of these potential FCSs with non-U.S. persons, as the Commission’s SDR data only includes swaps that are between a potential FCS and an affiliated U.S. SD. Potential FCSs may also transfer the risk of some of their outward-facing dealing activities to affiliated non-U.S. SDs located in market centers outside the United States (e.g., London and Tokyo) or retain the risk in their dealer portfolio (and an FCS must count all of its outward-facing dealing transactions toward its SD de minimis threshold under the proposed rule). Consequently, the Commission believes that using SDR data on interaffiliate trades (which only includes a potential FCS’s inter-affiliate swaps with an affiliated U.S. SD) as a proxy for swap dealing between a potential FCS and non-U.S. persons is likely to be under-inclusive. Therefore, the Commission has scaled the SDR data on inter-affiliate trades between a potential FCS and an affiliated U.S. SD to the global swaps market by applying a factor of 2 (which represents the approximate ratio between total U.S. swaps market and that of the global swaps market),174 in order to estimate the number of potential FCSs that may be required to register as SDs as a result of the proposed rule. Based on the foregoing assumptions, the Commission obtained SDR data on inter-affiliate swaps for each potential FCS with affiliated U.S. SDs during the period between March 5, 2015 and March 4, 2016 (the ‘‘Reference Period’’). Because this inter-affiliate trade data only includes open trades as of the end of the Reference Period (i.e., trades that were closed out during the Reference Period are not accounted for in the data), the Commission used a $1 billion notional amount as a screening threshold to identify those potential FCSs that may be required to register as an SD under the proposed rule, rather than the current $8 billion SD de minimis threshold. Seven of the nonU.S. persons identified as potential FCSs had inter-affiliate trades with U.S. SDs that exceeded this $1 billion screening threshold. The Commission then multiplied its estimate of 7 by a scaling factor of 2 (as described above) to estimate that approximately 14 potential FCSs may be required to register as SDs as a result of the proposed rule. 71971 c. Other Non-U.S. Persons The Commission is unable to estimate the number of new SDs that may be required to register as a result of the proposed rule’s requirement that an Other Non-U.S. Person include swaps with an FCS for SD registration threshold purposes due to the lack of SDR data regarding transactions between non-U.S. persons. The Commission also is not estimating the number of new SDs that may be required to register as a result of the proposed rule’s requirement that an Other Non-U.S. Person include swaps with a U.S. Person or U.S. Guaranteed Entity in its SD de minimis registration threshold. The Commission believes that few, if any, additional Other NonU.S. Persons would be required to register as an SD as a result of changes made by the proposed rule (as compared to the Guidance) with respect to either U.S. persons or U.S. Guaranteed Entities.175 As noted above, the Commission requests comment regarding its estimates of the scope and number of market participants potentially affected by the proposed rule, including its methodology for arriving at the estimates included in this Appendix. VIII. Preamble Summary Tables TABLE A—CROSS-BORDER APPLICATION OF THE SWAP DEALER DE MINIMIS THRESHOLD [Table A should be read in conjunction with the text of the proposed rule] Counterparty → Non-U.S. person U.S. Person U.S. Guaranteed entity 1/FCS Include ............................... Include ............................... Include. Include ............................... Include 2 ............................. Include ............................... Include 2 ............................. Include. Exclude. Potential SD ↓ U.S. Person ..................................................................... Non-U.S. Person: U.S. Guaranteed Entity 1/FCS .................................. Other Non-U.S. Person ............................................ Other Non-U.S. person asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 1 A non-U.S. person that is a U.S. Guaranteed Entity with respect to a swap would include the swap in its de minimis calculation if its swap counterparty has rights of recourse against a U.S. person with respect to its obligations under the swap. 2 An Other Non-U.S. Person would include all swaps connected with its dealing activity with counterparties that are U.S. persons, U.S. Guaranteed Entities, or FCSs unless the swap is executed anonymously on a registered SEF, DCM, or FBOT and cleared. affiliate swaps with affiliated U.S. SDs is much more likely to be under-inclusive as a means of estimating the number of potential FCSs that would be required to register as a result of the Proposed Rule. 174 The factor of 2 that the Commission is using to scale the data upon which it is basing its estimate to the global swaps market is based on the inverse of the 57% scaling factor used in the cost-benefit analysis for the Commission’s Final Margin Rule, rounded up to 2. In the Final Margin Rule, the Commission applied a 57% scale factor to the global notional amount of margin estimated in ISDA and BCBS–IOSCO surveys in order to better align its estimate of the global impact of margin requirements for uncleared swaps with the impact of the U.S. rules. The Commission utilized SDR data on uncleared interest rate swaps, which VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 represent the majority of the notional value associated with uncleared swaps, to compute the 57% scale factor. The 57% scale factor was designed to represent the notional amount of uncleared interest rate swaps reported to the SDRs as a fraction of the global notional amount of uncleared interest rate swaps. See Final Margin Rule, 81 FR at 690–91 (Appendix A). 175 The Commission believes that any increase in the number of Other Non-U.S. SDs that are required to register as an SD as a result of the proposed rule’s requirement that an Other Non-U.S. Person include swaps with a U.S. Person in its SD de minimis calculation would be de minimis because the Guidance expresses a similar policy. Under the Guidance, non-U.S. persons that are not guaranteed or conduit affiliates generally include swaps with U.S. persons, excluding foreign branches of U.S. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 SDS, in their SD de minimis calculation. To the extent this reflects current industry practice, the Commission believes that few, if any, additional Other Non-U.S. Persons would be required to register as SDs as a result of deviation from the Guidance by the proposed rule with regard to counting swaps with U.S. persons. In addition, as explained in the preamble, the Commission believes that there are few U.S. Guaranteed Entities at this time. See note 153, supra. Accordingly, the Commission does not expect an increase in the number of new SDs that would be required to register as a result of the proposed rule’s requirement that an Other Non-U.S. Person include swaps with a U.S. Guaranteed Entity in its SD de minimis calculation. E:\FR\FM\18OCP3.SGM 18OCP3 71972 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules Additionally, a potential SD, whether a U.S. or non-U.S. person, would aggregate all swaps connected with its dealing activity with those of persons controlling, controlled by, or under common control with such potential SD to the extent that these affiliated persons are themselves required to include those swaps in their own de minimis thresholds, unless the affiliated person is a registered SD. TABLE B—CROSS-BORDER APPLICATION OF THE MAJOR SWAP PARTICIPANT REGISTRATION THRESHOLDS [Table B should be read in conjunction with the text of the proposed rule] Counterparty → Non-U.S. person U.S. Person U.S. Guaranteed entity 1/FCS Include ............................... Include ............................... Include. Include ............................... Include b ............................. Include ............................... Include b ............................. Include. Exclude. Potential MSP ↓ U.S. Person ..................................................................... Non-U.S. Person: U.S. Guaranteed Entity a/FCS .................................. Other Non-U.S. Person ............................................ Other Non-U.S. person a A non-U.S. person that is a U.S. Guaranteed Entity with respect to the relevant swap would include the swap in its MSP threshold calculations if its swap counterparty has rights of recourse against a U.S. person with respect to its obligations under the swap. Additionally, all swap positions that are subject to recourse should be attributed to the guarantor, whether it is a U.S. person or a non-U.S. person, unless the guarantor, the guaranteed entity, and its counterparty are Other Non-U.S. Persons. b An Other Non-U.S. Person would include all of its swap positions with counterparties that are U.S. persons, U.S. Guaranteed Entities, or FCSs unless the swap is executed anonymously on a registered SEF, DCM, or FBOT and cleared. TABLE C—CROSS-BORDER APPLICATION OF THE EXTERNAL BUSINESS CONDUCT STANDARDS [Table C should be read in conjunction with the text of the proposed rule] Counterparty → U.S. Person Not a foreign branch of an SD/MSP Potential SD ↓ U.S. Person: Not a Foreign Branch ............................................... Foreign Branch ......................................................... Non-U.S. Person ............................................................. Foreign branch of an SD/MSP Apply .................................. Apply .................................. Apply .................................. Apply .................................. Do Not Apply * ................... Do Not Apply * ................... Non-U.S. person Apply. Do Not Apply.* Do Not Apply.* * An SD that uses personnel located in the United States to arrange, negotiate, or execute a swap transaction (or a swap that is offered but not entered into) would nevertheless be subject to Commission regulations 23.410 (Prohibition on Fraud, Manipulation, and other Abusive Practices) and 23.433 (Fair Dealing). List of Subjects The additions to read as follows: 17 CFR Part 1 Counterparties, Cross-border, Major swap participants, Swap dealers, Swaps. 17 CFR Part 23 Business conduct standards, Counterparties, Cross-border, Major swap participants, Swap dealers, Swaps. For the reasons discussed in the preamble, the Commodity Futures Trading Commission proposes to amend 17 CFR chapter I as follows: PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 1. The authority citation for part 1 continues to read as follows: asabaliauskas on DSK3SPTVN1PROD with PROPOSALS ■ Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 24 (2012). 2. Amend § 1.3 as follows: a. Add paragraphs (ggg)(7) and (nnn); b. Reserve paragraphs (ooo)–(www) and (tttt)–(zzzz); and ■ c. Add paragraph (aaaaa). ■ ■ ■ VerDate Sep<11>2014 17:22 Oct 17, 2016 Jkt 241001 § 1.3 Definitions. * * * * * (ggg) * * * (7) Cross-border application of de minimis registration threshold calculation. (i) For purposes of determining whether an entity engages in more than a de minimis quantity of swap dealing activity under § 1.3(ggg)(4)(i), a person shall include the following swaps (subject to § 1.3(ggg)(6)): (A) If such person is a U.S. person, all swaps connected with the dealing activity in which such person engages; (B) If such person is a Foreign Consolidated Subsidiary, all swaps connected with the dealing activity in which such person engages; (C) If such person is a non-U.S. person that is not a Foreign Consolidated Subsidiary, and its obligations under the relevant swap(s) are guaranteed by a U.S. person, all swaps connected with the dealing activity in which such person engages as to which its obligations under the relevant swap(s) are guaranteed by a U.S. person (in addition to any swaps that it is required PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 to include pursuant to paragraph (ggg)(7)(i)(D) of this section); (D) If such person is a non-U.S. person that is not a Foreign Consolidated Subsidiary, and its obligations under the relevant swap(s) are not guaranteed by a U.S. person, all of the following swaps connected with the dealing activity in which such person engages (in addition to any swaps that it is required to include pursuant to paragraph (ggg)(7)(i)(C) of this section) (unless the swap is entered into anonymously on a registered designated contract market, registered swap execution facility, or registered foreign board of trade and cleared through a registered or exempt derivatives clearing organization): (1) Swaps with a counterparty that is a U.S. person; (2) Swaps with a counterparty that is a Foreign Consolidated Subsidiary; and (3) Swaps with a counterparty that is a non-U.S. person that is not a Foreign Consolidated Subsidiary and whose obligations under the relevant swap(s) are guaranteed by a U.S. person. (ii) [Reserved] * * * * * E:\FR\FM\18OCP3.SGM 18OCP3 asabaliauskas on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules (nnn) Application of major swap participant tests in the cross-border context. (1) For purposes of determining a person’s status as a major swap participant as defined in section 1a(33) of the Act, 7 U.S.C. 1(a)(33) and the rules and regulations thereunder, a person shall include the following swap positions: (i) If such person is a U.S. person, all swap positions that are entered into by the person; (ii) If such person is a Foreign Consolidated Subsidiary, all swap positions that are entered into by the person; and (iii) If such person is a non-U.S. person that is not a Foreign Consolidated Subsidiary, and its obligations under the relevant swap(s) are guaranteed by a U.S. person, all swap positions that are entered into by the person as to which its obligations under the relevant swap(s) are guaranteed by a U.S. person (in addition to any swap positions that it is required to include pursuant to paragraph (nnn)(1)(iv) of this section); (iv) If such person is a non-U.S. person that is not a Foreign Consolidated Subsidiary, and its obligations under the relevant swap(s) are not guaranteed by a U.S. person, all of the following swap positions that are entered into by the person (in addition to any swap positions that it is required to include pursuant to paragraph (nnn)(1)(iii) of this section) (unless the swap position is entered into anonymously on a registered designated contract market, registered swap execution facility, or registered foreign board of trade and cleared through a registered or exempt derivatives clearing organization): (A) Swap positions with a counterparty that is a U.S. person; (B) Swap positions with a counterparty that is a Foreign Consolidated Subsidiary; and (C) Swap positions with a counterparty that is a non-U.S. person that is not a Foreign Consolidated Subsidiary and whose obligations under the relevant swap are guaranteed by a U.S. person. (2) [Reserved] (ooo)–(www) [Reserved] * * * * * (tttt)–(zzzz) [Reserved] (aaaaa) Cross-border definitions. The following terms, as used in the rules and regulations in this chapter, with respect to the cross-border application of the swap provisions of the Act (or of the rules and regulations in this chapter prescribed or promulgated thereunder), VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 shall have the meanings hereby assigned to them, unless the specific rule or regulation in this chapter otherwise provides or the context otherwise requires: (1) Foreign Consolidated Subsidiary means a non-U.S. person in which an ultimate parent entity that is a U.S. person (‘‘U.S. ultimate parent entity’’) has a controlling financial interest, in accordance with U.S. generally accepted accounting principles, such that the U.S. ultimate parent entity includes the non-U.S. person’s operating results, financial position and statement of cash flows in the U.S. ultimate parent entity’s consolidated financial statements, in accordance with U.S. generally accepted accounting principles. (2) Non-U.S. person means any person that is not a U.S. person. (3) Ultimate parent entity means the parent entity in a consolidated group in which none of the other entities in the consolidated group has a controlling interest, in accordance with U.S. generally accepted accounting principles. (4) United States means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia. (5) U.S. person means: (i) A natural person who is a resident of the United States; (ii) An estate of a decedent who was a resident of the United States at the time of death; (iii) A corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of entity similar to any of the foregoing (other than an entity described in paragraph (aaaaa)(5)(iv) or (v) of this section) (‘‘legal entity’’), in each case that is organized or incorporated under the laws of the United States or that has its principal place of business in the United States, including any branch of the legal entity; (iv) A pension plan for the employees, officers or principals of a legal entity described in paragraph (aaaaa)(5)(iii) of this section, unless the pension plan is primarily for foreign employees of such entity; (v) A trust governed by the laws of a state or other jurisdiction in the United States, if a court within the United States is able to exercise primary supervision over the administration of the trust; (vi) A legal entity (other than a limited liability company, limited liability partnership or similar entity where all of the owners of the entity have limited liability) that is owned by one or more persons described in PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 71973 paragraphs (aaaaa)(5)(i) through (v) of this section and for which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity, including any branch of the legal entity; or (vii) An individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in paragraphs (aaaaa)(5)(i) through (vi) of this section. PART 23—SWAP DEALERS AND MAJOR SWAP PARTICIPANTS 3. The authority citation for part 23 continues to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b– 1, 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21. Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b), Public Law 111–203, 124 Stat. 1641 (2010). 4. Add § 23.452 in subpart H to read as follows: ■ § 23.452 Cross-border application. (a) Except as provided in paragraph (b) of this section, anything else to the contrary in this subpart notwithstanding, a swap dealer or major swap participant that is a non-U.S. person or a foreign branch of a U.S. person shall not be subject to the requirements of this subpart with respect to any transaction in swaps (or any swap that is offered but not entered into) where its counterparty is a foreign branch of a U.S. person that is a swap dealer or major swap participant or is a non-U.S. person. (b) Notwithstanding paragraph (a) of this section, a swap dealer that is a nonU.S. person or a foreign branch of a U.S. person shall be subject to the requirements set forth in §§ 23.410 and 23.433 if the swap dealer uses personnel located in the United States to arrange, negotiate, or execute a transaction in swaps or a swap that is offered but not entered into. Issued in Washington, DC, on October 11, 2016, by the Commission. Christopher J. Kirkpatrick, Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. E:\FR\FM\18OCP3.SGM 18OCP3 71974 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules Appendices to Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants— Commission Voting Summary, Chairman’s Statement, and Commissioners’ Statements Appendix 1—Commission Voting Summary On this matter, Chairman Massad and Commissioners Bowen and Giancarlo voted in the affirmative. No Commissioner voted in the negative. asabaliauskas on DSK3SPTVN1PROD with PROPOSALS Appendix 2—Statement of Chairman Timothy G. Massad I am pleased to support this proposal, which addresses several important aspects of the cross-border application of our swaps rules. First, it seeks to enhance clarity and consistency in the application of our rules by proposing to define certain key terms, including the terms ‘‘U.S. person’’ and ‘‘Foreign Consolidated Subsidiary’’ (FCS), consistent with how they are defined in the Commission’s cross-border margin rule. Second, the proposal provides a clear standard for determining whether a swap dealing transaction should be included in an entity’s calculation of whether it must register as a swap dealer. The proposal states that for U.S. persons, as well as those nonU.S. persons whose swaps are guaranteed by a U.S. person or that are a financially consolidated subsidiary of a U.S. ultimate parent (FCS), all swap dealing transactions must be included. All other persons would include swap dealing transactions with counterparties that are U.S. persons or FCSs, as well as swaps that have a U.S. guarantee, unless the swap is executed anonymously on a registered platform and cleared. The Proposed Rule provides a similar counting framework for the major swap participant registration threshold. We are also proposing the application of external business conduct (EBC) standards for cross-border transactions, including those transactions that are arranged, negotiated, or executed by personnel in the U.S. Specifically, U.S. swap dealers would be required to comply with applicable standards, with the exception of their foreign branches. Non-U.S. swap dealers and foreign branches of U.S. swap dealers would be required to comply with applicable EBC standards for transactions with a U.S. counterparty—other than the foreign branch of a U.S. entity. For all other transactions, these dealers would not be subject to EBC standards, unless they use personnel located in the United States to arrange, negotiate, or execute such transactions. In that case, they would be required to comply with those EBC standards prohibiting fraud and other abusive conduct. This aspect of our proposal follows up on a staff advisory and a Commission request for comment relating to non-U.S. swap dealers using personnel located in the United States to arrange, negotiate, or execute swap transactions. We will address whether other VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 requirements should apply to such transactions at a later date. This is just the latest in a number of steps we have taken to address cross-border issues in swaps rules. We have harmonized clearinghouse regulation through our accord with the European Commission—as well as through our work to address recovery and resolution internationally. We have given exemptions from registration to several foreign clearinghouses, and granted ‘‘foreign board of trade’’ status to several exchanges. We are actively working on harmonizing data reporting standards, and we are looking at whether we can do the same regarding trading requirements. And we harmonized requirements on margin for uncleared swaps, adopted a cross-border approach to that rule, and recently issued our first comparability determination for margin. I wish to express my appreciation for the hard work of the CFTC staff in putting together these important rules. I thank Commissioner Bowen and Giancarlo for their support. And I encourage market participants to give us their comments on this proposed rule. Appendix 3—Concurring Statement of Commissioner Sharon Y. Bowen The rule proposal we have before us is significant. It addresses a number of important issues including: (i) The ‘‘US Person’’ definition; (ii) the treatment of foreign affiliates of US Persons (‘‘Foreign Consolidated Subsidiaries’’ or ‘‘FCS’’); (iii) the application of the de minimis threshold and business conduct standards to non-US registered dealers; and (iv) the treatment of swap trades that are ‘‘arranged, negotiated, or executed’’ in the US by foreign-based dealers but booked elsewhere. I intend to vote ‘‘yes’’ for this proposed rule. Although I do not agree with every part of the proposal, I believe the proposal and questions lay out the key issues to allow for meaningful comments from the public. In that vein, I strongly urge market participants and members of the general public to comment on this rule proposal before the Commission makes a final decision. Its importance to our overall effort to regulate the swaps market requires us to take special care in considering how average investors and interested citizens feel about this proposal before we decide to finalize it. I like many aspects of this rule. First, I am happy to see that it largely adopts the US Person and FCS definitions from the cross border margin rule. Whenever possible, we should try to make our rules consistent with each other; so this is a move in the right direction. Second, it proposes that three important groups: US-based dealers, non-US entities guaranteed by US persons, and FCS—each count all of their swaps—those with US persons and non-US persons—towards the de minimis threshold. It is important that we subject non-US entities guaranteed by US persons, and FCS to this standard, because their swap risks have a material effect on the related US entity, and therefore, poses risks to our US financial system. Thus, it makes sense that we count all of their dealing activity in determining whether they engage in enough dealing to require registration. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 However, I especially invite robust comment on certain aspects of the proposal: Conduit Affiliates: I am concerned that the current proposal does not capture the dealing activity of ‘‘conduit affiliates.’’ A conduit affiliate is (i) a non-US affiliate that is consolidated with a US entity (or where a non-US affiliate and a US entity are consolidated) where there is no ultimate US parent and (ii) which transfers, through back to back swaps, the risk of swaps it enters into with non-US counterparties to that US person. They, in essence, serve as conduits for US entities to engage in, and ultimately assume the risk of, non-US swap activity. One would assume that these conduit affiliates would be captured by our rules and therefore would have to count this activity towards the de minimis threshold. However, this is not the case. That US entity could engage in billions of dollars of swap activity through its conduit affiliate and avoid all of our swap requirements.1 This is a market risk concern. This issue is clearly highlighted in the questions, and I would be very interested in hearing comments about whether we should close this loophole, and require that conduit affiliates count all their trades, in which the risk is transferred to a US dealer, towards the de minimis threshold. Arranged, Negotiated, or Executed: While I am believe it is good that the proposal requires that all US trading desk personnel of non-US dealers are held to conduct standards, I am not certain that we have gone far enough. Specifically, I encourage comment on whether the dealing activity that occurs in the US with US personnel from the trading desk of a non-US dealer should be counted towards that non-US dealer’s threshold, even though the transactions are between two non-US counterparties and are booked outside the US. The FCS definition rightly requires non-US consolidated subsidiaries with a US parent to count all of their swap dealing activity towards the threshold, regardless of where it is booked. Does it make sense then that non-US dealers can use their US desks to engage in billions of dollars of swap dealing and never have that counted because the swaps are booked elsewhere? Are we, unnecessarily, putting US dealers at a serious competitive disadvantage to other dealers who are doing the very same thing sometimes just a few offices away? 2 Moreover, our fellow regulator, the Securities and Exchange Commission has answered ‘‘yes’’ to that question: Under their rules, non-US dealers must count security-based swap transactions that are arranged, negotiated or executed by US personnel toward their de minimis 1 Also, if we find the jurisdiction where the transaction occurs comparable, none of these swaps would have to be margined either. 2 ‘‘Remarks of Chairman Gary Gensler at Swap Execution Facility Conference: Bringing Transparency and Access to Markets’’ (Nov. 18, 2013), available at https://www.cftc.gov/PressRoom/ SpeechesTestimony/opagensler-152 (‘‘[A] U.S. swap dealer on the 32nd floor of a New York building and a foreign-based swap dealer on the 31st floor of the same building, have to follow the same rules when arranging, negotiating or executing a swap. One elevator bank . . . one set of rules.’’). E:\FR\FM\18OCP3.SGM 18OCP3 Federal Register / Vol. 81, No. 201 / Tuesday, October 18, 2016 / Proposed Rules threshold.3 Thus, if we choose not to do so, we would not be harmonized with our fellow regulator, which governs an important part of the swaps markets. For these reasons, and others, I would strongly encourage the public and market participants, particularly our US dealers, to comment on this proposal. Thank you. Appendix 4—Statement of Commissioner J. Christopher Giancarlo I support issuing today’s proposed rule in order to hear commenters’ considered views, especially with respect to the Commission’s approach on the issue of U.S. personnel arranging, negotiating or executing transactions for two non-U.S. persons. I have been a critic of the Commission’s 2013 over-expansive cross-border interpretative guidance 4 and its avoidance of asabaliauskas on DSK3SPTVN1PROD with PROPOSALS 3 17 CFR 240.3a71–3(b)(1)(iii)(C). See also ‘‘Security-Based Swap Transactions Connected With a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed by Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception; Final Rule,’’ 81 FR 8598 (Feb. 19, 2016). 4 Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26, 2013), https:// www.cftc.gov/idc/groups/public/@lrfederalregister/ documents/file/2013-17958a.pdf. VerDate Sep<11>2014 13:33 Oct 17, 2016 Jkt 241001 the rulemaking process to implement the sweeping policies contained therein. I consider both of these failings as having been compounded by the Division of Swap Dealer and Intermediary Oversight (DSIO) Advisory No. 13–69 5 stating that CFTC transactionlevel requirements apply to swaps between a non-U.S. swap dealer and a non-U.S. person if the swap is arranged, negotiated or executed by personnel or agents of the nonU.S. swap dealer located in the U.S. (ANE Transactions). Today the Commission is proposing a rulemaking on the cross-border application of the registration thresholds and external business conduct standards to swap dealers and major swap participants and the ANE Transactions in DSIO Advisory No. 13– 69. I commend the Commission for at last putting the guidance and advisory through the formal rulemaking process. The proposed rule provides that these ANE Transactions fall within the scope of the Dodd-Frank Act and that it may be appropriate to apply specific swap requirements to such transactions to advance Dodd-Frank’s regulatory objectives. Yet, it also preliminarily determines that applying registration thresholds and external business conduct standards to such ANE Transactions 5 CFTC Staff Advisory No. 13–69 (Nov. 14, 2013), https://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/13-69.pdf. PO 00000 Frm 00031 Fmt 4701 Sfmt 9990 71975 would not further Dodd-Frank’s regulatory objectives, except for certain abusive practices and fair dealing rules with respect to external business conduct standards. While this limited application seems appropriate, I am interested to hear commenters’ thoughts about the Commission’s approach and rationale before reaching a decision. Since this proposal only addresses registration thresholds and external business conduct standards, the Commission says it intends to address the application of other Dodd-Frank swap requirements to ANE Transactions in subsequent rulemakings as necessary and appropriate. Until that happens, I urge the staff to commit to extend no-action letter 16–64 6 in order to provide clarity that those swap requirements do not apply to ANE Transactions. This will provide the marketplace with certainty that all the swap requirements not addressed in today’s rulemaking will not apply to ANE Transactions until the Commission takes further action. [FR Doc. 2016–24905 Filed 10–17–16; 8:45 am] BILLING CODE 6351–01–P 6 CFTC Letter No. 16–64 (Aug. 4, 2016), https:// www.cftc.gov/idc/groups/public/@lrlettergeneral/ documents/letter/16-64.pdf. E:\FR\FM\18OCP3.SGM 18OCP3

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 81, Number 201 (Tuesday, October 18, 2016)]
[Proposed Rules]
[Pages 71946-71975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24905]

[[Page 71945]]

Vol. 81

Tuesday,

No. 201

October 18, 2016

Part VI

Commodity Futures Trading Commission

-----------------------------------------------------------------------

17 CFR Parts 1 and 23

Cross-Border Application of the Registration Thresholds and External
Business Conduct Standards Applicable to Swap Dealers and Major Swap
Participants; Proposed Rule

Federal Register / Vol. 81 , No. 201 / Tuesday, October 18, 2016 /
Proposed Rules

[[Page 71946]]

-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 23

RIN 3038-AE54

Cross-Border Application of the Registration Thresholds and
External Business Conduct Standards Applicable to Swap Dealers and
Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule; interpretations.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is publishing for public comment proposed rules and
interpretations (``Proposed Rule'') addressing the cross-border
application of certain swap provisions of the Commodity Exchange Act
(``CEA''). Specifically, the proposed rule defines key terms for
purposes of applying the CEA's swap provisions to cross-border
transactions and addresses the cross-border application of the
registration thresholds and external business conduct standards for
swap dealers and major swap participants, including the extent to which
they would apply to swap transactions that are arranged, negotiated, or
executed using personnel located in the United States.

DATES: Comments must be received on or before December 19, 2016.

ADDRESSES: You may submit comments, identified by RIN number 3038-AE54,
by any of the following methods:
CFTC Web site: https://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the Web site.
Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as Mail, above.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the CFTC's regulations, 17 CFR
145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of a
submission from https://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the notice will be retained in the public comment file
and will be considered as required under all applicable laws, and may
be accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT: Paul Schlichting, Assistant General
Counsel, (202) 418-5884, pschlichting@cftc.gov; Laura B. Badian,
Assistant General Counsel, (202) 418-5969, lbadian@cftc.gov; or Elise
Bruntel, Counsel, (202) 418-5577, ebruntel@cftc.gov; Office of the
General Counsel, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
A. Scope of Rulemaking
B. Current Market Structure
II. Definitions
A. U.S. Person
B. Foreign Consolidated Subsidiary (``FCS'')
III. ANE Transactions
A. Background
B. Commission's Views Regarding ANE Transactions
C. Proposed Interpretation Regarding the Scope of ANE
Transactions
IV. Cross-Border Application of the Swap Dealer Registration
Threshold
A. U.S. Persons and U.S. Guaranteed Entities
B. Foreign Consolidated Subsidiaries
C. Other Non-U.S. Persons
1. U.S. Counterparties That Are U.S. Persons or U.S. Guaranteed
Entities
2. Counterparties That Are FCSs
3. Other Non-U.S. Counterparties
4. Swaps Executed Anonymously on a SEF, DCM, or FBOT and Cleared
D. Aggregation Requirement
E. Summary
V. Cross-Border Application of the Major Swap Participant
Registration Thresholds
A. U.S. Persons, U.S. Guaranteed Entities, and Foreign
Consolidated Subsidiaries
B. Other Non-U.S. Persons
C. Attribution Requirement
D. Summary
VI. Cross-Border Application of the External Business Conduct
Standards for Swap Dealers and Major Swap Participants
VII. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Assessment Costs
2. Cross-Border Application of the Swap Dealer Registration
Threshold
a. U.S. Persons and U.S. Guaranteed Entities
b. Foreign Consolidated Subsidiaries
c. Other Non-U.S. Persons
3. Cross-Border Application of the Major Swap Participant
Registration Thresholds
4. Monitoring Costs
5. Registration Costs
6. Programmatic Costs
7. Cross-Border Application of External Business Conduct
Requirements
8. Section 15(a) Factors
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of the
Markets
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
9. Appendix to Cost-Benefit Considerations
VIII. Preamble Summary Tables
Table A--Cross-Border Application of the Swap Dealer De Minimis
Threshold
Table B--Cross-Border Application of the Major Swap Participant
Registration Thresholds
Table C--Cross Border Application of the External Business
Conduct Standards

I. Background

A. Scope of Rulemaking

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (``Dodd-Frank Act'' or ``Dodd-Frank'') \1\ amended the Commodity
Exchange Act (``CEA'') \2\ to establish a new regulatory framework for
swaps. Added in the wake of the 2008 financial crisis, which
highlighted the potential for cross-border swap activities to have a
substantial impact on the U.S. financial system, the new swap
provisions expressly apply to activities that have a direct and
significant connection with activities in, or effect on, U.S. commerce
or that contravene Commission rules or regulations necessary or
appropriate to prevent evasion.\3\
---------------------------------------------------------------------------

\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 7 U.S.C. 1 et seq.
\3\ See 7 U.S.C. 2(i). Section 2(i) of the CEA states that the
provisions of that chapter relating to swaps that were enacted by
the Wall Street Transparency and Accountability Act of 2010
(including any rule prescribed or regulation promulgated under that
Act) shall not apply to activities outside the United States unless
those activities (1) have a direct and significant connection with
activities in, or effect on, commerce of the United States; or (2)
contravene such rules or regulations as the Commission may prescribe
or promulgate as are necessary or appropriate to prevent the evasion
of any provision of that chapter that was enacted by the Wall Street
Transparency and Accountability Act of 2010.
---------------------------------------------------------------------------

In response to requests from market participants, the Commission
published

[[Page 71947]]

a policy statement and interpretive guidance regarding the cross-border
application of the swap provisions of the CEA.\4\ The Guidance offered
an interpretation of the term ``U.S. person'' and a general, non-
binding framework for the cross-border application of many substantive
Dodd-Frank requirements, including requirements for swap dealers
(``SDs'') and major swap participants (``MSPs'') (collectively, ``SD/
MSPs''). Given the complex and dynamic nature of the global swap
market, the Guidance was intended as a flexible and efficient way to
provide the Commission's views on cross-border issues raised by
commenters, allowing the Commission to adapt in response to changes in
the global regulatory and market landscape.\5\ The Commission
accordingly stated that it would review and modify its cross-border
policies as the global swaps market continues to evolve and consider
codifying the cross-border application of Dodd-Frank swap provisions in
future rulemakings, as appropriate.\6\
---------------------------------------------------------------------------

\4\ See Interpretive Guidance and Policy Statement Regarding
Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26,
2013) (``Guidance'').
\5\ Id. at 45297, n.39.
\6\ See id. The Commission notes that at the time that the
Guidance was adopted, it was tasked with regulating a market that
grew to a global scale without any meaningful regulation. Developing
a regulatory framework to fit that market is necessarily an
iterative process, one that requires adapting and responding to
rapid and continual changes in the market. Therefore, the Commission
expects that this proposed rulemaking will be followed by additional
rulemakings affecting the cross-border application of the
Commission's swap regulations.
---------------------------------------------------------------------------

In this release, the Commission is proposing to codify a central
element of the Dodd-Frank regulatory framework for SDs and MSPs,
incorporating various aspects of the Commission's recent cross-border
rulemaking regarding the margin requirement,\7\ including the
definitions of ``U.S. person'' and ``guarantee'' and the concept of a
Foreign Consolidated Subsidiary (``FCS''). Specifically, the Proposed
Rule addresses when U.S. and non-U.S. persons, including FCSs and those
whose swap obligations are guaranteed by a U.S. person, would be
required to include their cross-border swap dealing transactions or
swap positions in their SD or MSP registration threshold calculations,
respectively,\8\ and the extent to which SD/MSPs would be required to
comply with the Commission's business conduct standards governing their
conduct with swap counterparties (``external business conduct
standards'') in cross-border transactions.\9\
---------------------------------------------------------------------------

\7\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Cross-Border Application of the Margin
Requirements, 81 FR 34818 (May 31, 2016) (``Cross-Border Margin
Rule'').
\8\ See proposed rule Sec. 1.3(ggg)(7) and 1.3(nnn). The SD and
MSP registration thresholds are codified at 17 CFR 1.3(ggg)(4) and
1.3(hhh) through (mmm), respectively.
\9\ See proposed rule Sec. 23.452. The Commission's external
business conduct standards are codified in 17 CFR part 23, subpart H
(17 CFR 23.400 through 23.451).
---------------------------------------------------------------------------

The Proposed Rule also addresses issues related to a Commission
request for comment on a 2013 staff advisory, which discussed the
staff's view of the application of certain Dodd-Frank swap provisions
to non-U.S. SDs if they use personnel located in the United States.\10\
Specifically, the Proposed Rule addresses situations in which swap
transactions are arranged, negotiated, or executed using personnel
located in the United States (``ANE transactions''), including the
types of activities that would fall within the scope of ANE
transactions and the extent to which the SD registration threshold and
external business conduct standards apply to ANE transactions.
---------------------------------------------------------------------------

\10\ See 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, 79 FR 1347 (Jan. 8, 2014)
(``Request for Comment''); CFTC Staff Advisory No. 13-69,
Applicability of Transaction-Level Requirements to Activity in the
United States (Nov. 14, 2013) (``Staff Advisory''), available at
https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf. As stated therein, the Staff Advisory represented
the views of the Division of Swap Dealer and Intermediary Oversight
(``DSIO'') only, and not necessarily those of the Commission or any
other office or division thereof. Id. at 2.
---------------------------------------------------------------------------

As part of the proposed rule, the Commission is also proposing to
define the key terms of ``U.S. person'' and ``Foreign Consolidated
Subsidiary'' for broad cross-border application in a manner consistent
with how the terms were defined in the Cross-Border Margin Rule.\11\ If
adopted, the Commission intends that these definitions would be
relevant not only within the context of the proposed rule, but for
purposes of any subsequent rulemakings specifically addressing the
cross-border application of other substantive Dodd-Frank requirements,
unless the context or a specific rule or regulation otherwise requires.
The Commission believes that applying a single definition for these
terms throughout the Commission's cross-border framework going forward
would benefit market participants by eliminating complexity associated
with the use of different definitions for different Dodd-Frank rules.
---------------------------------------------------------------------------

\11\ See proposed rule Sec. 1.3(aaaaa); Cross-Border Margin
Rule, 81 FR 34818; 17 CFR 23.160(a).
---------------------------------------------------------------------------

The Proposed Rule does not address the cross-border application of
any substantive Dodd-Frank requirements beyond the SD/MSP registration
thresholds and external business conduct standards. The Commission
expects to address the cross-border application of other Dodd-Frank
requirements, including the availability of substituted compliance, in
subsequent rulemakings.

B. Current Market Structure

In determining how the Commission's SD/MSP registration thresholds
should apply to market participants in cross-border transactions and
the extent to which the Dodd-Frank swap requirements should apply to
ANE transactions, the Commission was informed by its understanding of
the current market practices of global financial institutions.
Financial groups that are active in the swap market typically operate
in multiple market centers \12\ and carry out swap activity with
counterparties around the world using a number of different operational
structures. A financial group's business model, including its booking
practices and how it carries out market-facing activities, reflects a
range of business and regulatory considerations, which are weighed
differently by, and have different effects on, each group.
---------------------------------------------------------------------------

\12\ Data from swap data repositories (``SDR data'') indicate
that the global swap market has several market centers, including
New York, London, and Tokyo.
---------------------------------------------------------------------------

Despite its geographic expanse, a global financial group
effectively operates as a single business, with a highly integrated
network of business lines and services conducted through various
branches or affiliated legal entities that are under the control of the
parent entity. While each branch or affiliate may serve a unique
purpose, they are highly interdependent and inextricably linked, with
affiliated entities within the corporate group providing financial or
credit support for each other, such as in the form of a guarantee or
the ability to transfer risk through inter-affiliate trades.\13\
---------------------------------------------------------------------------

\13\ Even in the absence of an explicit arrangement or
guarantee, the parent entity may, for reputational or other reasons,
choose or be compelled to assume the risk incurred by its
affiliates, branches, or offices located overseas.
---------------------------------------------------------------------------

A financial group may reflect all of its swaps in the financial
statements of one entity (the ``booking entity''), realizing netting
and operational benefits, a practice referred to as ``central
booking.'' In this case, the booking entity retains all the risk
associated with

[[Page 71948]]

each swap, creating one swap portfolio. Alternatively, a financial
group may book swaps in several different affiliates depending on the
jurisdiction where the counterparty is located or, alternatively, where
the financial group manages a particular type of risk or product. In
the latter case, the swaps will be reflected in the financial
statements of different affiliates. The risks related to the swaps,
however, may not remain in the entity in which the swap is booked.
Using arrangements such as inter-affiliate transactions or assignments,
the risks related to a swap may be transferred to different entities
within an affiliated group while the entity at which the swap is booked
remains unchanged.\14\
---------------------------------------------------------------------------

\14\ The extent to which swap risk may be transferred without
changing the booking entity may depend on relevant accounting rules,
legal requirements, and other factors. Swap activities may also be
carried out through branches located in separate jurisdictions
rather than, or in addition to, affiliates that are domiciled in
separate jurisdictions.
---------------------------------------------------------------------------

Regardless of a financial group's booking practices, it typically
engages in sales or trading functions in one or more market centers.
Performing sales and trading functions in global market centers
provides the financial group with access to counterparties in that
jurisdiction. The financial group's presence in a particular market
center also enables the group to more effectively engage in swaps in
that locale on behalf of affiliates in other jurisdictions that are
servicing counterparties in those jurisdictions.\15\
---------------------------------------------------------------------------

\15\ From discussions with market participants, the Commission
understands that financial groups typically prefer to operate their
swap businesses and manage swap portfolios in the jurisdiction where
the swap and the underlying asset have the deepest and most liquid
markets. In operating their swap dealing businesses in these market
centers, financial groups seek to take advantage of expertise in
products traded in those centers and obtain access to greater
liquidity, permitting them to more efficiently price such products
or otherwise compete more effectively in the global swap market,
including in jurisdictions different from the market center in which
the swap is traded.
---------------------------------------------------------------------------

In this highly-integrated corporate structure, where financial
groups engage in swap dealing activity with counterparties located in
multiple jurisdictions, it is not uncommon for a swap to be traded
through an affiliate in one jurisdiction (the ``market-facing
affiliate'') and booked and risk-managed in another (the ``booking
affiliate''). In such cases, a particular affiliate may become the
market-facing affiliate because its trading desk has expertise in
relevant products or because it has an established client network in
the relevant jurisdiction or market hub.\16\ However, although each
affiliate carries out a distinct function in a given swap transaction,
together they operate as an integrated dealing business.
---------------------------------------------------------------------------

\16\ The market-facing affiliate may in turn employ either its
own personnel or the personnel of another affiliate or unaffiliated
agent. Market-facing entities may use unaffiliated agents in order
to conduct swap dealing activity anonymously or to provide clients
with access to market hubs where they do not have their own
operations.
---------------------------------------------------------------------------

Large U.S. financial services firms emphasize the importance of
operating globally through a unified structure. For example, Goldman
Sachs explains that one of its core businesses ``serves our clients who
come to the firm to buy and sell financial products, raise funding and
manage risk. We do this by acting as a market maker and offering market
expertise on a global basis . . . . Through our global sales force, we
maintain relationships with our clients, receiving orders and
distributing investment research, trading ideas, market information and
analysis. As a market maker, we provide prices to clients globally
across thousands of products in all major asset classes and markets . .
. . Much of this connectivity between the firm and its clients is
maintained on technology platforms and operates globally wherever and
whenever markets are open for trading.'' \17\ Morgan Stanley explains
that it provides financial services to clients globally, primarily
through subsidiaries incorporated in the U.S., Europe and Asia, and it
``trades, invests and makes markets globally in listed swaps and
futures and OTC cleared and uncleared swaps, forwards, options and
other derivatives . . . .'' \18\ Citigroup, one of the largest U.S.
bank holding companies, describes its global presence as ``trading
desks in over 30 countries and market access in 70 countries.'' \19\
Citigroup also states that it manages its risk exposures from its
activities across all these countries via its ``Centralized Risk
Desk.'' \20\
---------------------------------------------------------------------------

\17\ See The Goldman Sachs Group, Inc. 2013 Annual Report on
Form 10-K at 3 (describing Institutional Client Services business,
which includes swaps and other derivatives trading), available at
https://www.goldmansachs.com/investor-relations/financials/archived/10k/docs/2013-10-k.pdf.
\18\ See Morgan Stanley 2013 Annual Report on Form 10-K at 3,
available at https://www.morganstanley.com/about-us-ir/shareholder/10k2013/10k2013.pdf.
\19\ See Global Equities, Citigroup, discussion of equities
product line (accessed Sept. 29, 2016), available at https://www.citibank.com/icg/global_markets/product_solutions/global_equities/index.jsp. While this description is in the context
of equities trading and not necessarily swaps, it illustrates the
integrated nature of the global operations of these firms and their
affiliates and subsidiaries in different countries.
\20\ See id.
---------------------------------------------------------------------------

In sum, the current swap market is global in scale and
characterized by a high level of interconnectedness among market
participants, with transactions negotiated, executed, and arranged
between counterparties in different jurisdictions, (and booked and
managed in still other jurisdictions). These market realities suggest
that a cross-border framework that focuses only on the domicile of the
market participant or location of counterparty risk would fail to
effectively advance the policy objectives of the Dodd-Frank swap
reforms, which were aimed at increasing market transparency and
counterparty protections and mitigating the risk of financial contagion
in the swap market.\21\ At the same time, the Commission is also
mindful that its policy choices should aim to enhance market efficiency
and competition and the overall functioning of the global swap market.
Accordingly, as described in detail below, in developing the Proposed
Rule the Commission has strived to implement a cross-border framework
that would achieve the important goals of the Dodd-Frank Act while
mitigating any unnecessary burdens and avoiding disruption to market
practices to the extent possible.
---------------------------------------------------------------------------

\21\ Nor would such a framework be consistent with CEA section
2(i), which provides that Dodd-Frank's swap provisions and the
Commission's regulations thereunder apply to cross-border
transactions under certain circumstances. See Secs. Indus. & Fin.
Mkts. Ass'n v. CFTC, 67 F. Supp. 3d 373, 425-26 & n.35 (D.D.C.
2014).
---------------------------------------------------------------------------

II. Definitions

The Commission is proposing to define the key terms of ``U.S.
person'' and ``Foreign Consolidated Subsidiary'' for purposes of
applying the Dodd-Frank swaps provisions to cross-border transactions.
Whether a market participant is a U.S. person or a Foreign Consolidated
Subsidiary would, for instance, affect how the SD/MSP registration
thresholds apply under the proposed rule.\22\ If adopted, these
definitions would also be relevant for purposes of any subsequent
rulemakings specifically addressing the cross-border application of
other substantive Dodd-Frank requirements, unless the context or a
specific rule or regulation otherwise requires.
---------------------------------------------------------------------------

\22\ Consistent with the reliance standard articulated in the
Commission's external business conduct rules, see 17 CFR 23.402(d),
market participants would be allowed to reasonably rely on
counterparty representations with respect to each of these
definitions unless they have information that would cause a
reasonable person to question the accuracy of the representation.
---------------------------------------------------------------------------

A. U.S. Person

Under the Proposed Rule, a ``U.S. person'' would be defined as
follows:
Any natural person who is a resident of the United States
(proposed Sec. 1.3(aaaaa)(5)(i));

[[Page 71949]]

Any estate of a decedent who was a resident of the United
States at the time of death (proposed Sec. 1.3(aaaaa)(5)(ii));
Any corporation, partnership, limited liability company,
business or other trust, association, joint-stock company, fund or any
form of entity similar to any of the foregoing (other than an entity
described in proposed paragraph (aaaaa)(5)(iv) or (v) of Sec. 1.3)
(``legal entity''), in each case that is organized or incorporated
under the laws of the United States or that has its principal place of
business in the United States, including any branch of the legal entity
\23\ (proposed Sec. 1.3(aaaaa)(5)(iii));
---------------------------------------------------------------------------

\23\ The Commission notes that the reference in proposed Sec.
1.3(aaaaa)(5)(iii) and (vi) (indicating that legal entities would
include any branch of the legal entity) is intended to make clear
that the definition includes both foreign and U.S. branches of an
entity. The Commission further notes that a branch does not have a
legal identity apart from its principal entity. The proposed
language is not intended to introduce any additional criteria for
determining an entity's U.S. person status.
---------------------------------------------------------------------------

Any pension plan for the employees, officers or principals
of a legal entity described in proposed paragraph (aaaaa)(5)(iii) of
Sec. 1.3, unless the pension plan is primarily for foreign employees
of such entity (proposed Sec. 1.3(aaaaa)(5)(iv));
Any trust governed by the laws of a state or other
jurisdiction in the United States, if a court within the United States
is able to exercise primary supervision over the administration of the
trust (proposed Sec. 1.3(aaaaa)(5)(v));
Any legal entity (other than a limited liability company,
limited liability partnership or similar entity where all of the owners
of the entity have limited liability) that is owned by one or more
persons described in proposed paragraphs (aaaaa)(5)(i) through (v) of
Sec. 1.3 who bear(s) unlimited responsibility for the obligations and
liabilities of the legal entity, including any branch of the legal
entity (proposed Sec. 1.3(aaaaa)(5)(vi)); and
Any individual account or joint account (discretionary or
not) where the beneficial owner (or one of the beneficial owners in the
case of a joint account) is a person described in proposed paragraphs
(aaaaa)(5)(i) through (vi) of Sec. 1.3 (proposed Sec.
1.3(aaaaa)(5)(vii)).\24\
---------------------------------------------------------------------------

\24\ See proposed rule Sec. 1.3(aaaaa)(5). See also proposed
rule Sec. 1.3(aaaaa)(2) (defining ``non-U.S. person'' as any person
that is not a U.S. person); 17 CFR 23.160(a)(10) (defining U.S.
person for purposes of the Cross-Border Margin Rule). The Commission
notes that an affiliate or a subsidiary of a U.S. person that is
organized or incorporated in a non-U.S. jurisdiction would not be
deemed a U.S. person solely by virtue of its affiliation with a U.S.
person. As used herein, the term ``U.S. counterparty'' refers to a
swap counterparty that is a ``U.S. person'' under the Proposed Rule.
---------------------------------------------------------------------------

In line with commenter requests, this definition mirrors the
definition of ``U.S. person'' recently adopted in the context of the
Cross-Border Margin Rule.\25\ As stated therein, the Commission
believes that this definition offers a clear, objective basis for
determining which individuals or entities should be identified as U.S.
persons and that harmonizing with the definition in the Cross-Border
Margin Rule is not only appropriate, but will reduce compliance costs
for market participants in the long run.
---------------------------------------------------------------------------

\25\ See 17 CFR 23.160(a)(10). See also Cross-Border Margin
Rule, 81 FR at 34823-24. Unless expressly stated otherwise herein,
the description of the U.S. person definition in the Cross-Border
Margin Rule, including the Commission's interpretation of the
principal place of business test regarding funds, would also apply
in the context of the Proposed Rule.
---------------------------------------------------------------------------

The proposed U.S. person definition is generally consistent with
the U.S. person interpretation set forth in the Guidance, with certain
exceptions.\26\ Notably, the proposed definition does not include a
commodity pool, pooled account, investment fund, or other collective
investment vehicle that is majority-owned by one or more U.S. persons
(``U.S. majority-owned fund prong'').\27\ The Commission understands
that identifying and tracking a fund's beneficial ownership may pose a
significant challenge in certain circumstances. Although the U.S.
owners of such funds may be adversely impacted in the event of a
counterparty default, the Commission believes that, on balance, the
majority-ownership test should not be included in the definition of
U.S. person.\28\ In the interest of providing legal certainty, the
proposed definition also does not include a catchall provision, thereby
limiting the definition of ``U.S. person'' to persons enumerated in the
rule.\29\
---------------------------------------------------------------------------

\26\ See Guidance, 78 FR at 45308-17 (setting forth the
interpretation of ``U.S. person'' for purposes of the Guidance).
\27\ See id. at 45313-14 (discussing the U.S. majority-ownership
prong for purposes of the Guidance). The Guidance interpreted
``majority-owned'' in this context to mean the beneficial ownership
of more than 50 percent of the equity or voting interests in the
collective investment vehicle. See id. at 45314.
\28\ Note that a fund fitting within the majority U.S. ownership
prong may also be a U.S. person within the scope of paragraph (iii)
of the Proposed Rule (entities organized or having a principal place
of business in the United States). As the Commission clarified in
the Cross-Border Margin Rule, whether a pool, fund or other
collective investment vehicle is publicly offered only to non-U.S.
persons and not offered to U.S. persons would not be relevant in
determining whether it falls within the scope of the proposed U.S.
person definition. See Cross-Border Margin Rule, 81 FR at 34824
n.62.
\29\ See Guidance, 78 FR at 45316 (discussing the inclusion of
the prefatory phrase ``include, but not be limited to'' in the
interpretation of ``U.S. person'' in the Guidance).
---------------------------------------------------------------------------

Finally, consistent with the Cross-Border Margin Rule, paragraph
(vi) of the proposed U.S. person definition includes legal entities
where one or more U.S. person owner(s) bear unlimited responsibility
for the obligations and liabilities of the legal entity (``unlimited
U.S. responsibility prong''). This paragraph represents a modified
version of a similar concept from the Guidance, which interpreted
``U.S. person'' to include a legal entity ``directly or indirectly
majority-owned'' by one or more U.S. person(s) that bear unlimited
responsibility for the legal entity's liabilities and obligations.\30\
Upon further consideration, the Commission believes that the amount of
equity the U.S. owner(s) have in this legal entity would not be
relevant because the U.S. person owner(s), by definition, serve as a
financial backstop for all of the legal entity's obligations and
liabilities regardless of whether they are majority or minority
owners.\31\
---------------------------------------------------------------------------

\30\ See id. at 45312-13 (discussing the unlimited U.S.
responsibility prong for purposes of the Guidance).
\31\ See Cross-Border Margin Rule, 81 FR at 34823-24.
---------------------------------------------------------------------------

In consideration of principles of international comity, the
Commission proposes that the term ``U.S. person'' would not include
international financial institutions. Consistent with Commission
precedent,\32\ the Commission interprets ``international financial
institutions'' to include ``international financial institutions'' as
defined in 22 U.S.C. 262r(c)(2) and institutions defined as
``multilateral development banks'' in the Proposal for the Regulation
of the European Parliament and of the Council on OTC Derivative
Transactions, Central Counterparties and Trade Repositories, Council of
the European Union Final Compromise Text, Article 1(4a(a)) (March 19,
2012).\33\
---------------------------------------------------------------------------

\32\ See Guidance, 78 FR at 45353 n.531 (incorporating the
interpretation of ``international financial institutions'' included
in Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 77 FR 30596,
30692 n.1180 (May 23, 2012) (``Entities Rule'')).
\33\ The two definitions overlap but together include the
following: The International Monetary Fund, International Bank for
Reconstruction and Development, European Bank for Reconstruction and
Development, International Development Association, International
Finance Corporation, Multilateral Investment Guarantee Agency,
African Development Bank, African Development Fund, Asian
Development Bank, Inter-American Development Bank, Bank for Economic
Cooperation and Development in the Middle East and North Africa,
Inter-American Investment Corporation, Council of Europe Development
Bank, Nordic Investment Bank, Caribbean Development Bank, European
Investment Bank and European Investment Fund. Note that the
International Bank for Reconstruction and Development, the
International Finance Corporation and the Multilateral Investment
Guarantee Agency are parts of the World Bank Group. The Commission's
proposal is generally similar to the position adopted by the SEC,
which excluded from its U.S. person definition the International
Monetary Fund, the International Bank for Reconstruction and
Development, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the United Nations,
and their agencies and pension plans, and any other similar
international organizations, their agencies and pension plans. See
17 CFR 240.3a71-3(a)(4)(iii); Application of ``Security-Based Swap
Dealer'' and ``Major Security-Based Swap Participant'' Definitions
to Cross-Border Security-Based Swap Activities; Republication, 79 FR
47278, 47306 (Aug. 12, 2014) (``SEC Cross-Border Rule'').

---------------------------------------------------------------------------

[[Page 71950]]

Request for Comment. The Commission invites comment on all aspects
of the Proposed Rule, including on whether and in what respects the
Commission should further harmonize the U.S. person definition in the
Proposed Rule to either the interpretation of U.S. person included in
the Guidance or the U.S. person definition adopted by the Securities
Exchange Commission (``SEC'') in rule 3a71-3(a)(4) under the Securities
Exchange Act of 1934 (``Exchange Act'').\34\
---------------------------------------------------------------------------

\34\ Exchange Act rule 3a71-3(a)(4), 17 CFR 240.3a71-3(a)(4),
defines ``U.S. person'' to mean any natural person resident in the
United States; any partnership, corporation, trust, investment
vehicle, or other legal person organized, incorporated, or
established under the laws of the United States or having its
principal place of business in the United States; any account
(whether discretionary or non-discretionary) of a U.S. person; or
any estate of a decedent who was a resident of the United States at
the time of death.
Exchange Act rule 3a71-3(a)(4) defines ``principal place of
business'' to mean the location from which the officers, partners,
or managers of the legal person primarily direct, control, and
coordinate the activities of the legal person. It also provides
that, with respect to an externally managed investment vehicle, this
location is the office from which the manager of the vehicle
primarily directs, controls, and coordinates the investment
activities of the vehicle.
---------------------------------------------------------------------------

B. Foreign Consolidated Subsidiary (``FCS'')

Under the Proposed Rule, the term ``Foreign Consolidated
Subsidiary'' identifies a non-U.S. person that is consolidated for
accounting purposes with an ultimate parent entity that is a U.S.
person (a ``U.S. ultimate parent entity''). Consistent with the Cross-
Border Margin Rule, the proposed rule would define ``Foreign
Consolidated Subsidiary'' to mean a non-U.S. person in which an
ultimate parent entity that is a U.S. person has a controlling
financial interest, in accordance with U.S. generally accepted
accounting principles (``U.S. GAAP''), such that the U.S. ultimate
parent entity includes the non-U.S. person's operating results,
financial position and statement of cash flows in the U.S. ultimate
parent entity's consolidated financial statements, in accordance with
U.S. GAAP.\35\ The proposed rule would define the term ``ultimate
parent entity'' to mean the parent entity in a consolidated group in
which none of the other entities in the consolidated group has a
controlling interest, in accordance with U.S. GAAP.\36\
---------------------------------------------------------------------------

\35\ See proposed rule Sec. 1.3(aaaaa)(1). See also 17 CFR
23.160(a)(1) (defining ``Foreign Consolidated Subsidiary'' for
purposes of the Cross-Border Margin Rule). The Cross-Border Margin
Rule defined the term ``Foreign Consolidated Subsidiary'' as limited
to SDs and MSPs subject to the Commission's margin requirements
(``Covered Swap Entities'' or ``CSEs''), using the term to
distinguish non-U.S. CSEs with a U.S. ultimate parent entity from
other non-U.S. CSEs. 81 FR at 34826-27. The proposed FCS definition
similarly but more broadly distinguishes any non-U.S. person that is
consolidated with a U.S. ultimate parent entity from other non-U.S.
persons, regardless of whether it is a CSE.
\36\ See proposed rule Sec. 1.3(aaaaa)(3). See also 17 CFR
23.160(a)(6) (defining ``ultimate parent entity'' for purposes of
the Cross-Border Margin Rule).
---------------------------------------------------------------------------

The proposed FCS definition offers a clear, bright-line test for
identifying non-U.S. persons whose swap activities present a greater
supervisory interest relative to other non-U.S. market participants,
due to the nature and extent of the FCS's relationship with its U.S.
ultimate parent. As described above, the nature of modern finance is
such that large financial institutions typically conduct their business
operations through a highly integrated network of business lines and
services conducted through multinational branches or subsidiaries that
are under the control of the ultimate parent entity. Under this
structure, U.S. and non-U.S. derivatives trading functions as a single
enterprise, using funds, risk management, information systems and
trading personnel across the entire consolidated entity in the most
efficient manner in effectuating coordinated trading strategies, with
the profits and losses from global trading operations aggregated in the
consolidated financial statements of the ultimate parent entity. The
Commission believes that the FCS definition appropriately encompasses
those entities within this consolidated group that are subject to the
financial control, and directly impact the financials, of the U.S.
ultimate parent entity.
First, consolidation under U.S. GAAP is predicated on the financial
control of the reporting entity.\37\ Therefore, an entity within a
financial group that is consolidated with its parent entity for
accounting purposes in accordance with U.S. GAAP is subject to the
financial control of that parent entity. Second, as the Commission
previously stated, by virtue of consolidation with its parent entity's
financial statement under U.S. GAAP, an FCS's swap activity creates
direct risk to the U.S. parent.\38\ That is, as a result of
consolidation, the financial position, operating results, and statement
of cash flows of an FCS are included in the financial statements of its
U.S. ultimate parent and therefore affect the financial condition, risk
profile, and market value of the parent. Because of that relationship,
risks taken by FCSs can have a direct effect on the U.S. ultimate
parent entity. Furthermore, the FCS's counterparties generally look to
both the FCS and its U.S. ultimate parent for fulfillment of the FCS's
obligations under the swap, even without any explicit guarantee.\39\ In
many cases, the Commission believes that the counterparty would not
enter into the transaction with the subsidiary (or would not do so on
the same terms), and the subsidiary would not be able to engage in a
swaps business, absent this close relationship with the parent entity.
---------------------------------------------------------------------------

\37\ There are two consolidation models. First, entities are
subjected to the variable interest entity (`VIE') model. If the VIE
model is not applicable, then entities are subjected to the voting
interest model. Under the VIE model, a reporting entity has a
controlling financial interest in a VIE if it has: (a) The power to
direct the activities of the VIE that most significantly affect the
VIE's economic performance, and (b) the obligation to absorb losses
or the right to receive benefits that could be significant to the
VIE. Under the voting interest model, a controlling financial
interest generally exists if a reporting entity has a majority
voting interest in another entity. In certain circumstances, the
power to control may exist when one entity holds less than a
majority voting interest (e.g., because of contractual provisions or
agreements with other shareholders). See Financial Accounting
Standards Board, Accounting Standards Codification 810,
Consolidation.
\38\ Cross-Border Margin Rule, 88 FR at 34826-27.
\39\ As Moody's Ratings states in a description of its bank
assessment methodology, ``most [financial] groups can be expected to
support banking entities within their consolidation.'' See Moody's
Investors Service, Cross-Border Application of the Swap Dealer De
Minimis Exception (Sept. 9, 2014) at 66, available at https://www.moodys.com/microsites/gbrm2014/RFC.pdf.
---------------------------------------------------------------------------

Under these circumstances, the Commission believes that it is
appropriate to require FCSs to include relevant swaps for the SD/MSP
registration calculation like a U.S. person (and U.S. Guaranteed
Entity).\40\

[[Page 71951]]

A failure to treat these entities the same in this context could
provide a U.S. financial group with an opportunity to avoid SD or MSP
registration by conducting relevant swap activities through
unregistered entities. However, as in the Cross-Border Margin Rule, the
Commission would not necessarily treat FCSs the same as a U.S. person
(or U.S. Guaranteed Entity) in the context of other Dodd-Frank swap
provisions.\41\ The Commission also recognizes that other affiliates,
even though they are not consolidated with the U.S. ultimate parent
entity for accounting purposes, could likewise be distinguished from
other non-U.S. persons given the nature of their relationship with the
U.S. person and the U.S. market.\42\ The Commission believes that the
consolidation test provides a workable definition that is tailored to
focus on those affiliates that present greater supervisory concerns
(relative to other non-U.S. persons).
---------------------------------------------------------------------------

\40\ The Commission notes that there are some important
differences between a U.S. Guaranteed Entity and an FCS. See Cross-
Border Margin Rule, 81 FR at 34827 (noting that, in contrast to U.S.
Guaranteed CSEs, in the event of an FCS's default, the U.S. ultimate
parent entity does not have a legal obligation to fulfill the
obligations of the FCS. Rather that decision would depend on the
business judgment of its parent). See also supra note 35 (describing
the definition of FCS in the context of the Cross-Border Margin
Rule).
\41\ Although the proposed rule is focused on the cross-border
application of the registration thresholds and external business
conduct standards for SD/MSPs, the Commission expects to address how
other substantive Dodd-Frank swap requirements (including the
trading and clearing mandates and reporting requirements) would
apply to FCSs in cross-border transactions in subsequent
rulemakings. In doing so, the Commission will give due consideration
to whether, and the extent to which, substituted compliance should
be made available to FCSs' swap transactions.
\42\ In particular, the Commission recognizes that, even absent
consolidated financial statements, a U.S. parent entity may, for
reputational reasons, determine that they must support their non-
U.S. affiliates at times of crisis, with direct risk implications
for the U.S. parent and U.S. market.
---------------------------------------------------------------------------

Request for Comment. The Commission seeks comment on all aspects of
the Proposed Rule's definition of ``Foreign Consolidated Subsidiary''
including on whether the proposed FCS definition appropriately captures
persons that raise greater supervisory concerns relative to other non-
U.S. persons whose swap obligations are not guaranteed by a U.S.
person. If not, please explain and provide an alternative(s).

III. ANE Transactions

A. Background

In November 2013, DSIO issued a staff advisory providing that a
non-U.S. swap dealer that regularly uses personnel or agents located in
the United States to arrange, negotiate, or execute a swap with a non-
U.S. person (``Covered Transactions'') would generally be required to
comply with the ``Transaction-Level Requirements,'' as the term was
used in the Guidance.\43\ In January 2014, the Commission published a
request for comment on all aspects of the Staff Advisory, including (1)
the scope and meaning of the phrase ``regularly arranging, negotiating,
or executing'' and what characteristics or factors distinguish ``core,
front-office'' activity from other activities; (2) whether the
Commission should adopt the Staff Advisory as Commission policy, in
whole or in part; and (3) whether substituted compliance should be
available for non-U.S. swap dealers with respect to Covered
Transactions.\44\
---------------------------------------------------------------------------

\43\ See supra note 10. See also Guidance, 78 FR at 45333
(providing that 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).
\44\ See Request for Comment, 79 FR at 1348-49.
---------------------------------------------------------------------------

The Commission received seventeen comment letters in response to
the Request for Comment.\45\ Most commenters challenged the Staff
Advisory as inconsistent with CEA section 2(i) \46\ or international
comity.\47\ They emphasized that the risk associated with Covered
Transactions lies outside the United States \48\ and that non-U.S. swap
dealers involve U.S. personnel primarily for the convenience of their
global customers.\49\ They also characterized the Staff Advisory as
impractical or unworkable, describing its key language (``regularly
arranging, negotiating, or executing swaps'' and ``performing core,
front-office activities'') as vague, open to broad interpretation, and
potentially capturing activities that are merely ``incidental'' to the
swap transaction.\50\ They further argued that if the Staff Advisory
were adopted as Commission policy, non-U.S. swap dealers would close
U.S. branches and relocate personnel to other countries (or otherwise
terminate agency contracts with U.S.-based agents) in order to avoid
Dodd-Frank swap regulation or having to interpret and apply the Staff
Advisory, thereby increasing market fragmentation.\51\
---------------------------------------------------------------------------

\45\ See American Bankers Association Securities Association
(``ABASA'') (Mar. 10, 2014); Americans for Financial Reform
(``AFR'') (Mar. 10, 2014); Barclays Bank PLC (``Barclays'') (Mar.
10, 2014); Chris R. Barnard (``Barnard'') (Mar. 8, 2014); Better
Markets Inc. (``Better Markets'') (Mar. 10, 2014); Coalition for
Derivatives End-Users (``Coalition'') (Mar. 10, 2014); Commercial
Energy Working Group (``CEWG'') (Mar. 10, 2014); European Commission
(Mar. 10, 2014); European Securities and Markets Authority
(``ESMA'') (Mar. 13, 2014); Institute for Agriculture and Trade
Policy (``IATP'') (Mar. 10, 2014); Institute of International
Bankers (``IIB'') (Mar. 10, 2014); International Swaps and
Derivatives Association, Inc. (``ISDA'') (Mar. 7, 2014); Investment
Adviser Association (``IAA'') (Mar. 10, 2014); Japanese Bankers
Association (``JBA'') (Mar. 7, 2014); Japan Financial Markets
Council (``JFMC'') (Mar. 4, 2014); Securities Industry and Financial
Markets Association, Futures Industry Association, and Financial
Services Roundtable (``SIFMA/FIA/FSR'') (Mar. 10, 2014);
Soci[eacute]t[eacute] G[eacute]n[eacute]rale (``SG'') (Mar. 10,
2014). The associated comment file is available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1452&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_50. Although the comment file includes records
of 22 comments, five were either duplicate submissions or not
responsive to the Request for Comment.
\46\ See, e.g., IAA at 2 n.4; IIB at 4-5 (transactions between
two non-U.S. persons present no risk to the U.S. financial system
and therefore do not have a ``direct and significant'' nexus to U.S.
commerce); ISDA at 3-4, 10-13 (challenging the Commission's
interpretation of ``direct and significant''); JFMC at 3; SIFMA/FIA/
FSR at A-2-A-3 (section 2(i) should be interpreted in light of the
Dodd-Frank goal of mitigating risk); SG at 8. Accord European
Commission (the Staff Advisory does not clearly articulate how the
standard it sets out is consistent with section 2(i)).
\47\ See, e.g., European Commission at 2 (the unavailability of
substituted compliance would seem to depart from the G20 commitment
to defer to foreign regulators when appropriate); IIB at 5-6; ISDA
at 8-9; IAA at 4 (failure to grant substituted compliance reflects a
lack of coordination with foreign regulators, leading to a less
efficient use of regulatory resources and the potential for
duplicative or conflicting regulations); JFMC at 3; SIFMA/FIA/FSR at
A-13.
\48\ See, e.g., Barclays at 3 n.11; IIB at 4-5; ISDA at 6-7;
SIFMA/FIA/FSR at 2, A-9-A-10; SG at 2 (adopting the Staff Advisory
would extend the Commission's regulations ``to swaps whose risk lies
totally offshore'' and that do not pose a high risk to the U.S.
financial system).
\49\ See, e.g., Coalition at 2 (non-U.S. SDs use U.S. personnel
to arrange, negotiate, or execute swaps because they have particular
subject matter expertise for or due to the location of their clients
across time zone); European Commission at 1; IIB at 7-8 n.18; IAA at
2; ISDA at 4; JFMC at 2-3; SIFMA/FIA/FSR at A-4; SG at 3 (a non-U.S.
SD may use salespersons in the United States if the Covered
Transaction is linked to a USD instrument).
\50\ See, e.g., Barclays at 4-5; European Commission at 3
(whether negotiation of a Master Agreement by U.S. middle office
staff would trigger application of the Staff Advisory is unclear);
IAA at 5 (``[T]he terms `arranging' and `negotiating' are overly
broad and may encompass activities that are incidental to a swap
transaction,'' such as providing market or pricing information);
SIFMA/FIA/FSR at A-12 (arranging and negotiating trading
relationships and legal documentation are ``middle- and back-office
operations'' and should not be included); SG at 7-8 (``regularly''
is an arbitrary concept that cannot be made workable, and
programming trading systems to interpret ``arranging, negotiating,
or executing'' on a trade-by-trade basis would not be feasible).
\51\ See, e.g., ABASA at 2 (adopting the Staff Advisory would
``impose unnecessary compliance burdens on swap market participants,
encourage them to re-locate jobs and activities outside the United
States to accommodate non-U.S. client demands, and fragment market
liquidity''); Coalition at 3 (emphasizing the impact on non-U.S.
affiliates of U.S. end users, such as increased hedging costs and
reduced access to registered counterparties); IIB at 7-8; ISDA at 4;
JFMC at 3; SG at 8-9. See also IAA at 3 (expressing concern that
non-U.S. clients may avoid hiring U.S. asset managers to avoid
application of the Staff Advisory).
---------------------------------------------------------------------------

A few commenters, however, supported the Staff Advisory.\52\ They
argued that the Commission has jurisdiction over swap activities

[[Page 71952]]

occurring inside the United States \53\ and expressed concern that the
Commission's failure to assert such jurisdiction would create a
substantial loophole, allowing U.S. financial firms to operate in the
United States without Dodd-Frank oversight by merely routing swaps
through a non-U.S. affiliate.\54\ They further argued that arranging,
negotiating, or executing swaps are functions normally performed by
brokers, traders, and salesperson and are ``economically central to the
business of swap dealing.'' \55\ They added the focus on the
``regular'' use of personnel located in the United States to perform
such core dealing activities would exclude ``entirely incidental''
interactions with U.S. personnel from triggering Dodd-Frank
oversight.\56\
---------------------------------------------------------------------------

\52\ See AFR; Better Markets; IATP.
\53\ See AFR at 2 (CEA section 2(i) clearly sets the statutory
jurisdiction of CFTC rules to include all activities conducted
inside the United States); Better Markets at 3 (the Staff Advisory
``represents the only reasonable interpretation of Congress's
mandate to regulate swaps transactions with a `direct and
significant connection with activities in, or effect on, commerce of
the United States'''); IATP at 1 (``It should be self-evident that
the swaps activities in the United States of non-U.S. persons fall
under the Commission's jurisdiction.'').
\54\ See AFR at 3 (failure to adopt the Staff Advisory ``could
mean that U.S. firms operating in the U.S. would face different
rules for the same transactions as compared to competitor firms also
operating in the very same market and location, perhaps literally
next door, who had arranged to route transactions through a
nominally foreign subsidiary''); Better Markets at 3 (allowing
registered swap dealers to book transactions overseas but otherwise
handle the swap inside the United States would ``create a gaping
loophole,'' resulting in ``keystroke off-shoring of the bookings,
but otherwise the on-shoring of the core activities associated with
the transaction'').
\55\ See AFR at 2-3, 5; Better Markets at 5 (brokers,
structurers, traders, and salesmen ``collectively comprise the
general understanding of the core front office'').
\56\ See AFR at 2-3, 5 (terms ```arranging, negotiating, or
executing' would appear to exclude purely clerical and incidental
functions such as notating or recording the sale of a swap for
consolidated risk management or bookkeeping purposes''). See also
id. at 5 (definition of ``regularly'' should be tied to an
expectation that U.S. personnel are available on request to arrange,
negotiate, and execute swaps).
---------------------------------------------------------------------------

Commenters that disagreed with the Staff Advisory nevertheless
offered a few suggestions for its modification, should the Commission
determine to adopt it, including offering substituted compliance for
Covered Transactions \57\ or otherwise limiting the scope of applicable
requirements.\58\ Certain commenters, for instance, recommended that
the applicable requirements be limited to pre-trade disclosure
requirements (e.g., disclosure of material information), arguing that
applying relationship-wide external business conduct rules would
require wholesale amendments to relationship documentations even where
the specific communication is not material to the overall trading
relationship.\59\
---------------------------------------------------------------------------

\57\ See, e.g., Coalition at 5; ESMA at 1; IAA at 3-4; ISDA at
9-10; SIFMA/FIA/FSR at A-13, SG at 6-7.
\58\ See, e.g., Barclays at 3 n.11 (transaction-level
requirements focused on risk mitigation, market integrity, or
transparency should not apply to Covered Transactions); Barnard at 2
(transaction-level requirements should not apply to Covered
Transactions with non-U.S. counterparties that are not guaranteed or
conduit affiliates); IIB at 9-10.
\59\ See, e.g., Barclays at 3 (``Applying the pre-trade
disclosure requirements promotes the Commission's interests in
regulating activities of U.S. based personnel or agents of
Commission registered entities and in protecting counterparties.
Such concerns may be raised by the activities of such individuals
even if the risk arising from those swaps transactions is borne by
entities outside the United States.''); IIB at 10-12 (``Non-U.S.
counterparties may reasonably expect the protection of the sales
practice rules applicable in the jurisdiction of the personnel
responsible for committing the non-U.S. swap dealer to the swap.'');
SIFMA/FIA/FSR at A-10-A-12 (``[O]nly direct communications by
personnel located in the United States with counterparties that
commit the SD to the execution of the transaction should trigger
application of the requirements under the Staff Advisory.''
(Emphasis omitted)).
---------------------------------------------------------------------------

B. Commission's Views Regarding ANE Transactions

After considering the views of commenters on the Staff Advisory in
response to the Commission's Request for Comment, the Commission is
setting forth its views on whether persons engaged in ANE transactions
or transactions arising from this activity fall within the scope of the
Dodd-Frank Act. The Commission's analysis is guided by the definition
of ``swap dealer'' under the CEA and Commission regulations.
Under both the CEA and Commission regulations, whether a person is
a ``swap dealer'' is a functional test that focuses on whether the
person engages in particular types of activities involving swaps.\60\
In general, the swap dealer definition encompasses persons that engage
in any of the following types of activity: (1) Holding oneself out as a
dealer in swaps; (2) making a market in swaps; (3) regularly entering
into swaps with counterparties as an ordinary course of business for
one's own account; or (4) engaging in any activity causing oneself to
be commonly known in the trade as a dealer or market maker in
swaps.\61\ Commission regulations further define the term to include
specific activities indicative of acting as a swap dealer, such as (1)
providing liquidity by accommodating demand for or facilitating
interest in the swap, holding oneself out as willing to enter into
swaps, or being known in the industry as being available to accommodate
demand for swaps; (2) advising a counterparty as to how to use swaps to
meet the counterparty's hedging goals, or structuring swaps on behalf
of a counterparty; (3) having a regular clientele and actively
advertising or soliciting clients in connection with swaps; (4) acting
in a market maker capacity on an organized exchange or trading system
for swaps, and (5) helping to set the prices offered in the market
rather than taking those prices, although the fact that a person
regularly takes the market price for its swaps does not foreclose the
possibility that the person may be a swap dealer.\62\ Neither the
statutory definition of ``swap dealer'' nor the Commission's further
definition of that term turns solely on risk to the U.S. financial
system. Consistent with the focus of the ``swap dealer'' definition on
a person's activity, the Commission does not believe that the location
of counterparty credit risk associated with a dealing swap--which, as
discussed above, is easily and often frequently moved across the
globe--should be determinative of whether a person's dealing activity
falls within the scope of the Dodd-Frank Act or whether the Commission
has a regulatory interest in the dealing activity. The appropriate
inquiry also considers whether a non-U.S. person is engaged in the
United States in any of the indicia of dealing activity set forth in
the definition of ``swap dealer.''
---------------------------------------------------------------------------

\60\ See 7 U.S.C. 1a(49); 17 CFR 1.3(ggg); Entities Rule, 77 FR
at 30598.
\61\ See Entities Rule, 77 FR at 30597; 7 U.S.C. 1a(49)(A); 17
CFR 1.3(ggg)(1).
\62\ See Entities Rule, 77 FR at 30608.
---------------------------------------------------------------------------

In the Commission's view, and as further explained below,
arranging, negotiating, or executing swaps are functions that fall
within the scope of the ``swap dealer'' definition. That the
counterparty risks may reside primarily outside the United States is
not determinative. To the extent that a person uses personnel located
in the United States (whether its own personnel or personnel of an
agent) to arrange, negotiate, or execute its swap dealing transactions,
the Commission believes that such person is conducting a substantial
aspect of its swap dealing activity within the United States and
therefore, falls within the scope of the Dodd-Frank Act.
The Commission further believes that to the extent that ANE
transactions raise regulatory concerns of the type that the Dodd-Frank
Act is intended to address, applying specific Dodd-Frank swap
requirements to ANE transactions may be appropriate. In establishing a
comprehensive regulatory regime for swaps under the Dodd-Frank Act,
Congress intended to advance several

[[Page 71953]]

fundamental policy objectives, including reducing risk, increasing
market transparency and promoting market integrity within the financial
system. A person that, in connection with its dealing activity, engages
in market-facing activity using personnel located in the United States
is conducting a substantial aspect of its dealing business in the
United States.\63\ Even if the financial risks are borne by entities
residing outside the United States, this activity indicates a level of
involvement, and intention to participate, in the U.S. swap market that
may raise concerns regarding customer protection, market transparency
and financial contagion intended to be addressed by the Dodd-Frank Act.
Accordingly, it would undermine the policy objectives of the Dodd-Frank
Act to deem persons that, in connection with their dealing activity,
engage in ANE transactions or transactions arising from this activity
to fall entirely outside the scope of the Dodd-Frank Act solely because
the transactions involve two non-U.S. counterparties.
---------------------------------------------------------------------------

\63\ As discussed above, the financial group affiliate may use
the trading desk of an affiliate that possesses expertise in
relevant products or personnel of an affiliate with an established
client network in relevant market hubs. The financial group
affiliate may also use the personnel of an unaffiliated agent to
conduct its swap dealing activity, typically where it is seeking to
trade anonymously or to provide clients with access to market hubs
where it does not have its own operation.
---------------------------------------------------------------------------

In making a determination as to whether a particular Dodd-Frank
swap requirement (including those specifically applicable to swap
dealers) should apply to an ANE transaction, the Commission would
consider the extent to which the underlying regulatory objectives would
be advanced in light of other policy considerations, including the
potential for undue market distortions and international comity. As
indicated above, the Proposed Rule addresses the application of the SD
registration threshold and external business conduct standards to ANE
transactions. The Commission intends to address application of other
Dodd-Frank swap requirements to ANE transactions in subsequent cross-
border rulemakings as necessary and appropriate.

C. Proposed Interpretation Regarding the Scope of ANE Transactions

For purposes of the proposed rule, the Commission uses the terms
``arrange'' and ``negotiate'' to refer to market-facing activity
normally associated with sales and trading, as opposed to internal,
back-office activities, such as ministerial or clerical tasks,
performed by personnel not involved in the actual sale or trading of
the relevant swap.\64\ Accordingly, the terms would not encompass
activities such as swap processing, preparation of the underlying swap
documentation (including negotiation of a master agreement and related
documentation), or the mere provision of research information to sales
and trading personnel located outside the United States. In line with
Commission precedent, ``executed'' would refer to the market-facing act
of becoming legally and irrevocably bound to the terms of the
transaction under applicable law.\65\
---------------------------------------------------------------------------

\64\ A swap transaction may be ``arranged'' by personnel located
in the United States regardless of whether the counterparty
initiated the transaction or whether the counterparty's business was
solicited.
\65\ Cf. 17 CFR 23.200(e) (defining ``execution'' to mean an
agreement by the parties (whether orally, in writing,
electronically, or otherwise) to the terms of a swap that legally
binds the parties to such swap terms under applicable law);
23.200(d) (further defining ``executed'' to mean the completion of
the execution process).
---------------------------------------------------------------------------

In applying the proposed rule, the Commission would look to the
activities of personnel assigned to (on an ongoing or temporary basis)
or regularly working in a U.S. location.\66\ Such personnel may be
working directly for the dealing entity itself or a third-party that is
acting for or on behalf of (i.e., as an agent of) the dealing entity,
including a U.S. affiliate of the dealing entity. The proposed
definition would also include the market-facing activity of personnel
normally associated with sales and trading even if the personnel are
not formally designated as sales persons or traders. As an anti-
evasionary measure, a transaction would be viewed as falling within the
scope of the Dodd-Frank Act if personnel located in the United States
direct other personnel to arrange, negotiate, or execute the
transaction for or on behalf of a dealing entity.
---------------------------------------------------------------------------

\66\ The Proposed Rule would accordingly not capture the
activities of personnel assigned to a non-U.S. location if such
personnel are only incidentally present in the United States when
they arrange, negotiate, or execute a transaction (e.g., an employee
of a non-U.S. person happens to be traveling within the United
States to attend a conference). Nor would the Proposed Rule include
a transaction solely on the basis that a U.S.-based attorney is
involved in negotiations regarding the terms of the transaction.
---------------------------------------------------------------------------

Swap transactions arranged, negotiated, or executed by personnel
located in the United States implicate the Commission's supervisory
interests regardless of the reason such U.S. personnel were involved.
For example, a swap would not fall outside the scope of the Dodd-Frank
Act because a counterparty sought to enter into the swap outside of its
jurisdiction's regular trading hours. Additionally, the Commission
believes permitting such an exception would only incentivize dealing
entities to wait until after hours to enter into a swap, creating the
potential for a substantial loophole.
Finally, as the SEC noted in its cross-border rulemaking addressing
ANE transactions, the Commission would not view a swap as falling
outside the scope of the ANE transactions solely as a result of
algorithmic trading.\67\ That is, a swap transaction involving
algorithmic trading could be viewed as having been arranged,
negotiated, or executed using personnel located in the United States if
such personnel specify the trading strategy or techniques carried out
through algorithmic trading or automated electronic execution of
swaps.\68\ Therefore, performance of such activity by personnel located
in the United States may fall within the scope of the Dodd-Frank Act
and trigger the application of certain swap requirements thereunder.
---------------------------------------------------------------------------

\67\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office or in a
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De
Minimis Exception, 81 FR 8598, 8623 (Feb. 19, 2016) (``SEC ANE
Rule''). The Commission would also not view a swap as falling
outside the scope of ANE transactions because it resulted from
automated electronic execution.
\68\ The activities or location of personnel responsible solely
for coding the algorithm, however, as opposed to specifying the
trading strategy or techniques that the algorithm is to follow,
would not be relevant.
---------------------------------------------------------------------------

The Commission's proposed approach to the determination of when a
swap is an ANE transaction reflects its consideration of the comments
received in response to the Request for Comment and is generally
aligned with the SEC's approach to this determination in the context of
security-based swaps.\69\ In response to commenters and in the interest
of aligning with the SEC, to the extent that the proposed rule applies
to ANE transactions, application of the proposed rule would not be
limited to swaps ``regularly'' arranged, negotiated, or executed using
U.S. personnel. Accordingly, a dealing entity may need to establish
operational structures to identify swaps for which relevant personnel
performing market-facing activity in connection with the transaction
are located in the United States. The Commission believes, however,
that the proposed rule's focus on personnel assigned to or regularly
working in a U.S. location would exclude incidental activity and
mitigate the burden of such an analysis, as the Commission expects that
market

[[Page 71954]]

participants have means of identifying personnel involved in market-
facing activity, either for regulatory compliance purposes or to
facilitate compensation.\70\ The Commission further expects that, to
the extent that the Proposed Rule applies to ANE transactions,
additional burdens on potential SDs could be reduced given that the
Commission's proposed approach to determining whether a swap falls
within the scope of ANE transactions is substantively identical to the
SEC's approach to ANE transactions.\71\
---------------------------------------------------------------------------

\69\ See supra note 67.
\70\ Dealing entities may also facilitate their compliance by
establishing appropriate policies and procedures, including by
requiring dealing activity to be arranged, negotiated, and executed
by personnel located outside the United States.
\71\ One commenter on the SEC's proposed approach, which closely
tracked its final rule, observed that it created ``a definable
standard that will bring clarity to the application of security-
based swap requirements to security-based swap dealers, and is
appropriate and consistent with the expectations of the parties as
to when U.S. security-based swap requirements will apply.'' SIFMA/
FSR (SEC July 13, 2015) at 2 (stating also that the commenters
``strongly believe that the Commission has taken the correct
approach in focusing on market-facing activity of sales and trading
personnel in defining the `arrange, negotiate, or execute' nexus
that subjects security-based swap activity to the Commission's
regulations based on location of conduct'').
---------------------------------------------------------------------------

The Commission's treatment of ANE transactions is intended to
capture activity that raises a substantial regulatory interest while
still promoting a framework that is clear and workable for market
participants. By focusing on market-facing activity carried out by
personnel located in the United States, the Commission believes its
interpretation adequately captures the Commission's inherently strong
regulatory interest in dealing activity occurring within its
jurisdiction while enabling market participants to apply the definition
in a relatively efficient manner.
Request for Comment. The Commission invites comment on all aspects
of the Proposed Rule, including the following:
1. The Commission invites comment on whether its interpretation of
ANE transactions is appropriately tailored to capture activity that
raises a substantial regulatory interest and sufficiently clear and
workable for market participants. Is the Commission's focus on and
discussion of market-facing activity understandable and effective in
excluding activities that are merely incidental to the swap
transaction? Will the Commission's interpretation pose any operational
challenges? Please explain and provide specific recommendations for
modifications or clarifications.
2. Under what other circumstances, if any, should the Commission
determine that U.S. personnel are directing a system for the
algorithmic trading within the scope of its interpretation of ANE
transactions?

IV. Cross-Border Application of the Swap Dealer Registration Threshold

In accordance with CEA section 1a(49)(D), the Commission has
exempted from designation as an SD any entity that engages in a de
minimis quantity of swap dealing with or on behalf of its
customers.\72\ Specifically, Commission regulation 1.3(ggg)(4) provides
that a person shall not be deemed to be an SD as a result of its swap
dealing activity involving counterparties unless, during the preceding
12 months, the aggregate gross notional amount of the swap positions
connected with those dealing activities exceeds the de minimis
threshold.\73\ Commission regulation 1.3(ggg)(4) further requires that,
in determining whether its swap dealing activity exceeds the de minimis
threshold, a person must include the aggregate notional value of the
swap positions connected with the dealing activities of its affiliates
under common control (``aggregation requirement'').\74\
---------------------------------------------------------------------------

\72\ See 7 U.S.C. 1a(49)(D) (directing the Commission to
establish a de minimis exception from the SD definition). See also
17 CFR 1.3(ggg)(4); Entities Rule, 77 FR 30596.
\73\ See 17 CFR 1.3(ggg)(4)(i)(A). The de minimis threshold is
currently set at a phase-in level of $8 billion, with an ultimate
threshold of $3 billion. Pursuant to Commission regulation
1.3(ggg)(4)(ii), following publication of a staff report on the de
minimis exception, the Commission may either terminate the phase-in
level, and thereby institute the $3 billion threshold, or propose an
alternative threshold through rulemaking. See 17 CFR
1.3(ggg)(4)(ii). Commission staff published for public comment a
preliminary report on the de minimis exception in November 2015,
with comments due by January 19, 2016. See Swap Dealer De Minimis
Exception Preliminary Report (Nov. 18, 2015), available at https://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf. The comment file is available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1634. Note
that Commission regulation 1.3(ggg)(4) also contains separate de
minimis exceptions related to transactions in which the counterparty
is a ``special entity'' or ``utility special entity.'' See 17 CFR
1.3(ggg)(4)(i)(A)-(B). See also 17 CFR 1.3(ggg)(6) (identifying
swaps that are not considered in determining whether a person is a
swap dealer).
\74\ See 17 CFR 1.3(ggg)(4)(i)(A). For purposes of the Proposed
Rule, the Commission construes ``affiliates under common control''
by reference to the Entities Rule, which defined control as the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting securities, by contract or
otherwise. See 77 FR at 30631 n.437. Accordingly, any reference in
the Proposed Rule to ``affiliates under common control'' with a
person would include affiliates that are controlling, controlled by,
or under common control with such person.
---------------------------------------------------------------------------

The Commission is now proposing rules to address how the de minimis
threshold should apply to the cross-border swap dealing transactions of
U.S. and non-U.S. persons.\75\ Specifically, the proposed rule
identifies when a potential SD's cross-border dealing activities should
be included in its de minimis calculation and when they may properly be
excluded. As discussed in the sections below, whether a potential SD
would include a particular swap in its de minimis calculation would
depend on whether the potential SD is classified as either a U.S.
person or a non-U.S. person whose obligations under the relevant swap
are guaranteed by a U.S. person (``U.S. Guaranteed Entity'') \76\
(section A); a Foreign Consolidated Subsidiary (section B); or a non-
U.S. person that is neither an FCS nor a U.S. Guaranteed Entity
(``Other Non-U.S. Person'') (section C). Section D addresses the cross-
border application of the aggregation requirement. Section E provides
an overall summary of the Commission's proposed approach. If adopted,
the Proposed Rule would supersede the Guidance with respect to the
cross-border application of the SD de minimis threshold.
---------------------------------------------------------------------------

\75\ See proposed rule Sec. 1.3(ggg)(7).
\76\ The preamble of this release uses the term ``U.S.
Guaranteed Entity'' for convenience only. Whether a non-U.S. person
would be considered a U.S. Guaranteed Entity would vary on a swap-
by-swap basis, such that a non-U.S. person may be considered a U.S.
Guaranteed Entity for one swap and not another, depending on whether
the non-U.S. person's obligations under the swap are guaranteed by a
U.S. person.
---------------------------------------------------------------------------

In developing the proposed cross-border approach to applying the SD
and MSP registration thresholds,\77\ the Commission attempted to target
those entities that--due to the nature of their relationship with a
U.S. person or U.S. financial market--most directly implicate the
purposes of the Dodd-Frank registration scheme. The proposed rule is
also designed to apply the registration thresholds in a consistent
manner to differing organizational structures that serve similar
economic functions so as to avoid creating substantial regulatory
loopholes. At the same time, the Commission is mindful of the impact of
its choices on market efficiency and competition, as well as the
importance of international comity when exercising the Commission's
authority. The Commission believes that the proposed rule reflects a
measured approach that advances the goals underlying the SD and MSP
registration schemes, consistent with the Commission's

[[Page 71955]]

statutory authority, while mitigating market distortions and
inefficiencies.
---------------------------------------------------------------------------

\77\ See section V, infra, for a discussion of the Commission's
proposed cross-border approach to applying the MSP registration
thresholds.
---------------------------------------------------------------------------

A. U.S. Persons and U.S. Guaranteed Entities

Under the Proposed Rule, a U.S. person would include all of its
swap dealing transactions in its de minimis threshold calculation
without exception. As discussed in section II.A above, the term ``U.S.
person'' encompasses a person who, by virtue of being domiciled or
organized in the United States (or in the case of the unlimited U.S.
responsibility prong, because U.S. person owner(s) serve as a financial
backstop for all of the legal entity's obligations and liabilities),
raises the concerns intended to be addressed by the Dodd-Frank Act,
regardless of the U.S. person status of its counterparty. Additionally,
a person's status as a U.S. person would be determined at the entity
level and thus a U.S. person would include the swap dealing activity of
foreign branches or operations that are part of the same legal person.
The Commission notes that the proposed rule's requirement that a U.S.
person include all of its swap dealing transactions in its de minimis
calculation is consistent with the Guidance.\78\
---------------------------------------------------------------------------

\78\ See Guidance, 78 FR at 45326.
---------------------------------------------------------------------------

The proposed rule would also require a non-U.S. person that is not
an FCS to include in its de minimis calculation swap dealing
transactions with respect to which it is a U.S. Guaranteed Entity. The
Commission believes that this result is appropriate because the swap of
a non-U.S. person whose swap obligations are guaranteed by a U.S.
person is identical, in relevant aspects, to a swap entered into
directly by a U.S. person.\79\ As a result of the guarantee, the U.S.
guarantor bears risk arising out of the swap as if it had entered into
the swap directly. The U.S. guarantor's financial resources in turn
enable the non-U.S. affiliate to engage in dealing activity, because
the affiliate's counterparties will look to both the U.S. Guaranteed
Entity and its U.S. guarantor to ensure performance of the swap. Absent
the guarantee from the U.S. person, a counterparty may choose not to
enter into the swap or may not do so on the same terms. In this way,
the U.S. Guaranteed Entity and the U.S. guarantor effectively act
together to engage in the dealing activity.
---------------------------------------------------------------------------

\79\ For purposes of this proposed rulemaking, ``guarantee'' has
the same meaning as defined in Commission regulation 23.160(a)(2)
(cross-border application of the Commission's margin requirements
for uncleared swaps), except that application of the proposed
definition of ``guarantee'' would not be limited to uncleared swaps.
Under this definition, a ``guarantee'' would include arrangements,
pursuant to which one party to a swap has rights of recourse against
a guarantor, with respect to its counterparty's obligations under
the swap. For these purposes, a party to a swap has rights of
recourse against a guarantor if the party has a conditional or
unconditional legally enforceable right to receive or otherwise
collect, in whole or in part, payments from the guarantor with
respect to its counterparty's obligations under the swap. This
``guarantee'' definition also encompasses any arrangement pursuant
to which the guarantor itself has a conditional or unconditional
legally enforceable right to receive or otherwise collect, in whole
or in part, payments from any other guarantor with respect to the
counterparty's obligations under the swap. See Cross-Border Margin
Rule, 81 FR 34818.
---------------------------------------------------------------------------

Furthermore, treating U.S. Guaranteed Entities differently from
U.S. persons could create a substantial regulatory loophole,
incentivizing U.S. persons to conduct their dealing business with non-
U.S. counterparties through non-U.S. affiliates, with a U.S. guarantee,
to avoid application of the Dodd-Frank swap dealer requirements.
Allowing transactions that have a similar economic reality with respect
to U.S. commerce to be treated differently depending on how the parties
structure their transactions could undermine the effectiveness of the
Dodd-Frank swap provisions and related Commission regulations. Applying
the same standard to similar transactions instead helps to limit those
incentives and regulatory implications.

B. Foreign Consolidated Subsidiaries

Under the proposed rule, a Foreign Consolidated Subsidiary would
include all of its swap dealing transactions in its de minimis
threshold calculation, without exception.\80\ The Commission believes
that the swap dealing transactions of an FCS should be treated in the
same manner as swap dealing transactions of a U.S. person (and U.S.
Guaranteed Entity) for purposes of the de minimis threshold
calculation, given the nature of the relationship between the FCS and
its U.S. ultimate parent entity. As discussed in section II.B. above,
an FCS is under the financial control of its U.S. ultimate parent
entity. Further, by virtue of consolidated reporting under U.S. GAAP,
the swap activity of an FCS creates a direct risk for the U.S. ultimate
parent entity. The Commission is also concerned that offering FCSs
disparate treatment compared to U.S. persons could incentivize U.S.
entities to conduct swap activities with non-U.S. counterparties
through consolidated non-U.S. subsidiaries in order to avoid
application of the Dodd-Frank Act SD requirements, creating the
potential for a substantial regulatory loophole.
---------------------------------------------------------------------------

\80\ To the extent that a non-U.S. person is both an FCS and a
U.S. Guaranteed Entity with respect to a particular swap, the non-
U.S. person would only be required to include the swap in its SD de
minimis calculation once. See proposed rule Sec. 1.3(ggg)(7).
---------------------------------------------------------------------------

C. Other Non-U.S. Persons

Under the proposed rule, whether an Other Non-U.S. Person would
include a particular swap in its de minimis calculation would depend on
the status of the counterparty. Specifically, as further explained
below, an Other Non-U.S. Person would be required to include in its de
minims threshold calculation its dealing activities with U.S. Persons,
U.S. Guaranteed Entities, and FCSs, but not with Other Non-U.S. Persons
(``Other Non-U.S. counterparties''). Additionally, Other Non-U.S.
Persons would not be required to include in their de minimis threshold
calculation any transaction that is executed anonymously on a swap
execution facility (``SEF''), designated contract market (``DCM''), or
foreign board of trade (``FBOT'') and cleared through a registered or
exempt derivatives clearing organization (``DCO'').
1. U.S. Counterparties that are U.S. Persons or U.S. Guaranteed
Entities
Under the proposed rule, an Other Non-U.S. Person would generally
include in its de minimis calculation all swap dealing transactions
with U.S. counterparties, subject to the exception for transactions
executed anonymously on a SEF, DCM, or FBOT and cleared (discussed in
section 4 below). As a general rule, the Commission believes that all
potential SDs should include in their de minimis calculations any swap
with a U.S. counterparty.\81\ As discussed in section II.A. above, the
term ``U.S. person'' encompasses persons that inherently raise the
concerns intended to be addressed by the Dodd-Frank Act regardless of
the U.S. person status of their counterparty. In the event of a default
or insolvency of an Other Non-U.S. SD with more than a de minimis level
of swap dealing, the SD's U.S. counterparties could be adversely
affected. A credit event, including funding and liquidity problems,
downgrades, default or insolvency at an Other Non-U.S. Person SD could
therefore have a direct adverse impact on its U.S. counterparties,
which could in turn create the risk of disruptions to the U.S.
financial system.
---------------------------------------------------------------------------

\81\ As discussed above, the definition of ``U.S. person''
includes any foreign branch. See proposed rule Sec.
1.3(aaaaa)(5)(iii), (vi) (defining ``U.S. person'' to include ``any
branch of the legal entity'').
---------------------------------------------------------------------------

The Commission notes that the proposed rule's requirement that an
Other Non-U.S. Person include in its de minimis calculation all swap
dealing

[[Page 71956]]

transactions with U.S. person counterparties (subject to the exception
for swaps executed anonymously on a SEF, DCM, or FBOT and cleared,
discussed in section 4 below) is largely consistent with the Guidance,
except with respect to the treatment of swaps with foreign branches of
U.S. SDs. Under the Guidance, a non-U.S. person that is not a
``guaranteed affiliate'' or a ``conduit affiliate'' (as those terms are
interpreted in the Guidance) \82\ would generally include in its de
minimis threshold calculations all swap transactions with
counterparties that are U.S. persons, except transactions with foreign
branches of U.S. SDs.\83\ This exception was primarily driven by
concerns that, absent such an exception, non-U.S. counterparties would
avoid transacting with U.S. SDs.\84\
---------------------------------------------------------------------------

\82\ See Guidance, 78 FR at 45318, n.257-58. The Guidance uses
the terms ``conduit affiliate'' and ``affiliate conduit''
interchangeably.
\83\ See id. at 45318-19.
\84\ See id. at 45324.
---------------------------------------------------------------------------

Upon further consideration, however, the Commission believes that
incorporating a similar exception into the proposed rule could create a
substantial regulatory loophole. As discussed above, a foreign branch
is an integral part of a U.S. person, such that a transaction involving
a foreign branch of a U.S. SD poses risk to the U.S. SD itself and,
consequently, the U.S. financial system. Allowing Other Non-U.S.
Persons to engage in potentially unlimited swap dealing with foreign
branches of U.S. SDs without having to register as SDs could therefore
result in a substantial amount of dealing activity with U.S.
counterparties occurring outside the comprehensive Dodd-Frank swap
regime, undermining the effectiveness of the proposed rule.
Under the proposed rule, an Other Non-U.S. Person would also
include in its de minimis threshold calculation swap dealing
transactions with a non-U.S. person that is a U.S. Guaranteed Entity,
subject to an exception for transactions executed anonymously on a SEF,
DCM, or FBOT and cleared.\85\ The Commission notes that the guarantee
of a swap is an integral part of the swap and that, as discussed above,
counterparties may not be willing to enter into a swap with a U.S.
Guaranteed Entity in the absence of the guarantee. The Commission also
recognizes that, given the highly-integrated corporate structures of
global financial groups described above, financial groups may elect to
conduct their swap dealing activity in a number of different ways,
including through a U.S. person or through a non-U.S. affiliate that
benefits from a recourse guarantee from a U.S. person. Therefore, in
order to avoid creating a substantial regulatory loophole, the
Commission believes that swaps of an Other Non-U.S. Person with a U.S.
Guaranteed Entity should receive the same treatment as swaps with a
U.S. person and should therefore be included in the Other Non-U.S.
Person's SD de minimis calculation. If Other Non-U.S. Persons were not
required to include such transactions in their SD de minimis threshold
calculations, they could engage in a significant level of swap dealing
activity with U.S. Guaranteed Entities without being required to
register as SDs. Treating swaps of Other Non-U.S. Persons with U.S.
Guaranteed Entities differently than their swaps with U.S. persons
could thereby undermine the effectiveness of the Dodd-Frank swap
provisions and related Commission regulations.
---------------------------------------------------------------------------

\85\ To the extent that the swap is with a non-U.S. counterparty
that is both an FCS and a U.S. Guaranteed Entity with respect to a
particular swap, the Other Non-U.S. Person would only be required to
include the swap in its SD de minimis calculation once. See proposed
rule Sec. 1.3(ggg)(7).
---------------------------------------------------------------------------

2. Counterparties That Are FCSs
Under the proposed rule, an Other Non-U.S. Person would include in
its de minimis threshold calculation swap dealing transactions with a
non-U.S. person that is an FCS, subject to an exception for
transactions executed anonymously on a SEF, DCM, or FBOT and cleared.
As discussed above, the default or insolvency of an Other Non-U.S
Person could have a direct adverse effect on an FCS, which through the
interconnection to its U.S. ultimate parent, could have knock-on
effects, potentially leading to disruptions to the U.S. financial
system. The Commission believes that such risk would be significant to
the extent that the Other Non-U.S. Person's dealing activities with
FCSs, U.S. persons and U.S. Guaranteed Entities \86\ exceed the de
minimis threshold.
---------------------------------------------------------------------------

\86\ Id.
---------------------------------------------------------------------------

3. Other Non-U.S. Counterparties
Under the proposed rule, an Other Non-U.S. Person would not include
in its de minimis calculation its swap dealing transactions with an
Other Non-U.S. Person. This approach reflects the Commission's
recognition of foreign jurisdictions' strong supervisory interest in
the swap transactions between Other Non-U.S. Persons, both of which are
domiciled and operate abroad. Consistent with comity principles, the
Commission believes that it would be appropriate to except this class
of swap transactions from counting against the de minimis threshold.
Further, the proposed rule would not require an Other Non-U.S.
Person to include a swap transaction with an Other Non-U.S. Person
counterparty in its de minimis threshold calculation even if the swap
is arranged, negotiated, or executed by personnel located in the United
States. Although, as stated above, a non-U.S. person that engages in
ANE transactions is performing dealing activity in the United States,
the Commission preliminarily does not believe that requiring Other Non-
U.S. Persons to include ANE transactions in their de minimis threshold
calculations would be necessary to advance the policy objectives of the
Dodd-Frank swap regime when taking the proposed rule in context. In
particular, the Commission preliminarily believes that the proposal to
require FCSs to include all of their swap dealing transactions in their
de minimis threshold calculations would capture a substantial portion
of dealing activity engaged in by non-U.S. persons in which the
Commission has a strong regulatory interest, such that the level of ANE
transactions engaged in by Other Non-U.S. Persons may be comparatively
insignificant. Additionally, Other Non-U.S. Persons that engage in ANE
transactions could either be registered already by virtue of their swap
transactions with U.S. persons or, if the proposed rule is adopted, be
required to register as SDs by virtue of their swap transactions with
U.S. persons, U.S. Guaranteed Entities or FCSs.
4. Swaps Executed Anonymously on a SEF, DCM, or FBOT and Cleared
The Commission believes that when an Other Non-U.S. Person enters
into a swap that is executed anonymously on a registered SEF, DCM, or
FBOT and the swap is cleared through a registered or exempt DCO, the
Other Non-U.S. Person may exclude the swap from its de minimis
threshold calculation.\87\ The Commission recognizes that, under these
circumstances, the Other Non-U.S. Person would not have the necessary
information about its counterparty to determine whether the swap should
be included in its de minimis threshold calculation. The Commission
therefore believes that in this case the practical

[[Page 71957]]

difficulties make it reasonable for the swap to be excluded
altogether.\88\
---------------------------------------------------------------------------

\87\ The Commission clarifies that an Other Non-U.S. Person
would also be able exclude from its de minimis threshold calculation
any swap that is executed anonymously on a foreign trading platform
that is subject to relief from the requirement to register as a SEF
or DCM, provided the swap is cleared through a registered or exempt
DCO.
\88\ The Commission also believes that when an Other Non-U.S.
Person clears a swap through a registered or exempt DCO, such Other
Non-U.S. Person would not have to include the resulting swap (i.e.,
the novated swap) in its de minimis threshold calculation. A swap
that is submitted for clearing is extinguished upon novation and
replaced by new swap(s) that result from novation. See Commission
regulation 39.12(b)(6). See also Derivatives Clearing Organization
General Provisions and Core Principles, 76 FR 69334, 69361 (Nov. 8,
2011). Where a swap is created by virtue of novation, such swap does
not implicate swap dealing, and therefore it would not be
appropriate to include such swaps in determining whether a non-U.S.
person should register as an SD.
---------------------------------------------------------------------------

D. Aggregation Requirement

As stated above, Commission regulation 1.3(ggg)(4) requires that,
in determining whether its swap dealing transactions exceed the de
minimis threshold, a person must include the aggregate notional value
of any swap dealing transactions entered into by its affiliates under
common control. Consistent with CEA section 2(i), the Commission
interprets the aggregation requirement in Commission regulation
1.3(ggg)(4) in a manner that applies the same aggregation principles to
all affiliates in a corporate group, whether they are U.S. or non-U.S.
persons. Accordingly, under the proposed rule, a potential SD, whether
a U.S. or non-U.S. person, would aggregate all swaps connected with its
dealing activity with those of persons controlling, controlled by, or
under common control with \89\ the potential SD to the extent that
these affiliated persons are themselves required to include those swaps
in their own de minimis thresholds, unless the affiliated person is
itself a registered SD. The Commission notes that this interpretation,
which mirrors the approach taken in the Guidance,\90\ ensures that the
aggregate notional value of applicable swap dealing transactions of all
such unregistered U.S. and non-U.S. affiliates does not exceed the de
minimis level.
---------------------------------------------------------------------------

\89\ The Commission clarifies that for this purpose, the term
``affiliates under common control'' would include parent companies
and subsidiaries.
\90\ See 78 FR at 45323.
---------------------------------------------------------------------------

Stated in general terms, the Commission interprets the aggregation
requirement to allow both U.S. persons and non-U.S. persons in an
affiliated group to engage in swap dealing activity up to the de
minimis threshold. When the affiliated group meets the de minimis
threshold in the aggregate, one or more affiliate(s) (a U.S. affiliate
or a non-U.S. affiliate) would have to register as an SD so that the
relevant swap dealing activity of the unregistered affiliates remains
below the threshold. The Commission recognizes the borderless nature of
swap dealing activities, in which a dealer may conduct swap dealing
business through its various affiliates in different jurisdictions, and
believes that this interpretation would address the concern that an
affiliated group of U.S. and non-U.S. persons engaged in swap dealing
transactions with a significant connection to the United States may not
be required to register solely because such swap dealing activities are
divided among affiliates that all individually fall below the de
minimis threshold.

E. Summary

In summary, under the proposed rule, in making its de minimis
calculation:
A U.S. person would include all of its swap dealing
transactions.
A non-U.S. person would include all swap dealing
transactions with respect to which it is a U.S. Guaranteed Entity.
A Foreign Consolidated Subsidiary would include all of its
swap dealing transactions.
An Other Non-U.S. Person would include all of its swap
dealing transactions with counterparties that are U.S. persons, U.S.
Guaranteed Entities, or FCSs, unless the swap is executed anonymously
on a registered SEF, DCM, or FBOT and cleared. It would not, however,
include any of its swap dealing transactions with Other Non-U.S.
Persons, even if they constitute ANE transactions.
All potential SDs, whether U.S. or non-U.S. persons, would
aggregate their swap dealing transactions with those of persons
controlling, controlled by, or under common control with the potential
SD to the extent that those affiliates are themselves required to
include those swaps in their own de minimis thresholds, unless the
affiliated person is a registered SD.
Request for Comment. The Commission invites comment on all aspects
of Proposed Rule, including the following:
1. The Commission invites comment on the appropriateness,
necessity, and potential impact of requiring Other Non-U.S. Persons to
include ANE transactions in their de minimis threshold calculations.
Should the Commission further harmonize with the SEC by requiring Other
Non-U.S. Persons to include ANE transactions in their de minimis
threshold calculations? \91\ What effect would a determination not to
impose such a requirement have on market liquidity and competitiveness?
To what degree would U.S. swap dealers be adversely affected? Would a
determination not to impose such a requirement create a substantial
loophole or otherwise expose the U.S. financial system to unregulated
risk? Do ANE transactions conducted by Other Non-U.S. Persons,
particularly those not currently registered as SDs by virtue of their
transactions with U.S. persons, form a significant segment of the U.S.
swap market? The Commission is particularly interested in data or
estimates regarding the current level of ANE transactions entered into
by Other Non-U.S. Persons, including whether and how many Other Non-
U.S. Persons that are not currently registered as SDs would exceed the
current de minimis threshold as a result of being required to include
ANE transactions in their de minimis threshold calculations.
---------------------------------------------------------------------------

\91\ See SEC ANE Rule, 81 FR at 8621.
---------------------------------------------------------------------------

2. The Commission invites comment on whether and to what extent the
Proposed Rule should incorporate certain exceptions for non-U.S.
persons that were included in the Guidance.\92\ Specifically, should
the proposed rule permit Other Non-U.S. Persons to exclude from their
de minimis threshold calculations:
---------------------------------------------------------------------------

\92\ See 78 FR at 45324 (providing that non-U.S. persons that
are not guaranteed or conduit affiliates would generally not count
toward their de minimis threshold calculations their swap dealing
transactions with (i) a foreign branch of a U.S. swap dealer, (ii) a
guaranteed affiliate of a U.S. person that is a swap dealer, and
(iii) a guaranteed or conduit affiliate that is not a swap dealer
and itself engages in de minimis swap dealing activity and which is
affiliated with a swap dealer).
---------------------------------------------------------------------------

a. Swap transactions with foreign branches of U.S. SDs? If so, why
and how should the Commission interpret the term ``foreign branch of a
U.S. swap dealer'' (e.g., consistent with the Guidance,\93\ consistent
with the SEC's definitions of ``foreign branch'' and ``transaction
conducted through a foreign branch'' in Exchange Act rules,\94\ or an
alternative approach)?
---------------------------------------------------------------------------

\93\ See id. at 45328-31 (discussing the scope of the term
``foreign branch'' and Commission's consideration of whether a swap
is with a foreign branch of a U.S. bank).
\94\ The SEC defined the term ``foreign branch'' in Exchange Act
rule 3a71-3(a)(2), 17 CFR 240.3a71-3(a)(2), to mean any branch of a
U.S. bank if (i) the branch is located outside the United States;
(ii) the branch operates for valid business reasons; and (iii) the
branch is engaged in the business of banking and is subject to
substantive banking regulation in the jurisdiction where located.
The SEC defined the term ``transaction conducted through a foreign
branch'' in Exchange Act rule 3a71-3(a)(3), 17 CFR 240.3a71-3(a)(3),
to mean a security-based swap transaction that is arranged,
negotiated, and executed by a U.S. person through a foreign branch
of such U.S. person if (A) the foreign branch is the counterparty to
such security-based swap transaction; and (B) the security-based
swap transaction is arranged, negotiated, and executed on behalf of
the foreign branch solely by persons located outside the United
States. See also SEC Cross-Border Rule, 79 FR 47278.

---------------------------------------------------------------------------

[[Page 71958]]

b. Any swap transactions with U.S. Guaranteed Entities? If so, why
and under what circumstances?
3. The Commission is concerned that a non-U.S. person that is
affiliated with a U.S. SD could act as a conduit or an extension of the
affiliated U.S. SD by entering into market-facing swaps in a foreign
jurisdiction and then transferring some or all of the risk of such
swaps to its affiliated U.S. SD through one or more inter-affiliate
swaps. Furthermore, under the Proposed Rule, an Other Non-U.S. Person
would not be required to include its market-facing swaps with Other
Non-U.S. counterparties in its SD de minimis threshold. The Commission
invites comment as to whether Other Non-U.S. Persons should be required
to include market-facing swaps with non-U.S. persons in their de
minimis threshold calculations if any of the risk of such swaps is
transferred to an affiliated U.S. SD through one or more inter-
affiliate swaps and as to whether it would be too complex or costly to
monitor and implement.\95\ If so:
---------------------------------------------------------------------------

\95\ The Commission notes that the Commission's final margin
rule requires CSEs to collect initial margin from certain affiliates
that are not subject to comparable initial margin collection
requirements on their own outward-facing swaps with financial end-
users, which addresses some of the credit risks associated with the
outward-facing swaps. See Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 81 FR 636, 703 (Jan.
6, 2016) (``Final Margin Rule'').
---------------------------------------------------------------------------

a. Should an Other Non-U.S. Person that is consolidated with an
affiliated U.S. SD for financial reporting purposes and that transfers
some or all of the risk of a swap with an Other Non-U.S. counterparty,
directly or indirectly, to its affiliated U.S. SD (an ``SD conduit'')
be required to count outward-facing swap as to which it acts as a
conduit toward its SD or MSP registration threshold?
b. Should an Other Non-U.S. Person be considered an SD Conduit only
when it ``regularly'' acts as an SD Conduit, and if so, how would the
Commission determine whether it ``regularly'' acts as an SD Conduit?
c. Would it be appropriate to require an SD Conduit to include a
market-facing swap in its de minimis threshold calculation in its
entirety, for ease of calculation, even if not all of the risk arising
out of that swap is transferred to an affiliated U.S. SD through inter-
affiliate swaps? Is the Commission's assumption that a formula to
calculate the percentage of risk would be too costly and burdensome to
implement correct? If not, please propose such a workable formula.
Alternatively, should an SD Conduit be required to include all of its
swap dealing transactions (and not just those as to which it acts as an
SD conduit) in its SD or MSP registration threshold?
d. The Commission understands that a non-U.S. person may aggregate
all or a group of its market-facing swaps and then transfer all or a
portion of the risk of such swaps as one position to the affiliated
U.S. SD. In that case, the Commission understands that it would not be
burdensome for the non-U.S. person to disaggregate the netted swap, as
the non-U.S. person's trading system would aggregate these trades
initially, and therefore should be able to perform a disaggregation
function. Is the Commission's understanding correct?
e. Should the proposed rule be modified to require that Other Non-
U.S. Persons include swaps in their SD or MSP registration thresholds
if their counterparty is acting as an SD Conduit?
f. Should swaps where either one of the counterparties is acting as
an SD conduit be subject to other Dodd-Frank requirements (in addition
to SD and MSP registration thresholds) in future rulemakings?

V. Cross-Border Application of the Major Swap Participant Registration
Thresholds

CEA section 1a(33) defines ``major swap participant'' to include
persons that are not SDs but that nevertheless pose a high degree of
risk to the U.S. financial system by virtue of the ``substantial''
nature of their swap positions.\96\ In accordance with the Dodd-Frank
Act and CEA section 1a(33)(B), the Commission adopted rules further
defining ``major swap participant'' and providing that a person would
not be deemed an MSP unless its swap positions exceed one of several
thresholds.\97\ The thresholds were designed to take into account
default-related credit risk, the risk of multiple market participants
failing close in time, and the risk posed by a market participant's
swap positions on an aggregate level.\98\ The Commission also adopted
interpretive guidance that, for purposes of the MSP analysis, an
entity's swap positions would be attributable to a parent, other
affiliate, or guarantor to the extent that the counterparty has
recourse to the parent, other affiliate, or guarantor and the parent or
guarantor is not subject to capital regulation by the Commission, SEC,
or a prudential regulator (``attribution requirement'').\99\
---------------------------------------------------------------------------

\96\ See 7 U.S.C. 1a(33)(A) (defining ``major swap participant''
to mean any person who is not an SD and either (i) maintains a
substantial position in swaps for any of the major swap categories,
subject to certain exclusions; (ii) whose outstanding swaps create
substantial counterparty exposure that could have serious effects on
the U.S. financial system; or (iii) is a highly leveraged financial
entity that is not subject to prudential capital requirements and
that maintains a substantial position in swaps for any of the major
swap categories. See also 17 CFR 1.3(hhh)(1); 156 Cong. Rec. S5907
(daily ed. July 15, 2010) (colloquy between Senators Hagen and
Lincoln, discussing how the goal of the major participant
definitions was to ``focus on risk factors that contributed to the
recent financial crisis, such as excessive leverage, under-
collateralization of swap positions, and a lack of information about
the aggregate size of positions'').
\97\ See 17 CFR 1.3(hhh)-(mmm). See also Dodd Frank Act section
712(d)(1) (directing the Commission and the SEC, in consultation
with the Board of Governors of the Federal Reserve System, to
jointly further define, among other things, the term ``major swap
participant''); 7 U.S.C. 1a(33)(B) (directing the Commission to
further define ``substantial position'' at the threshold the
Commission deems prudent for the effective monitoring, management,
and oversight of entities that are systemically important or can
significantly impact the U.S. financial system); Entities Rule, 77
FR 30596.
\98\ See 77 FR at 30666 (discussing the guiding principles
behind the Commission's definition of ``substantial position'' in 17
CFR 1.3(jjj)); id. at 30683 (noting that the Commission's definition
of ``substantial counterparty exposure'' in 17 CFR 1.3(lll) is
founded on similar principles as its definition of ``substantial
position'').
\99\ Id. at 30689.
---------------------------------------------------------------------------

The Commission is now proposing rules to address the cross-border
application of the MSP thresholds to the swap positions of U.S. and
non-U.S. persons.\100\ Applying CEA section 2(i) and principles of
international comity, the proposed rule identifies when a potential
MSP's cross-border swap positions should apply toward the MSP
thresholds and when they may be properly excluded. As discussed in the
sections below, whether a potential registrant would include a
particular swap in its MSP calculations would depend on whether the
potential registrant is a U.S. person, a U.S. Guaranteed Entity,\101\
or a Foreign Consolidated Subsidiary (section A) or an Other Non-U.S.
Person \102\ (section B). Section C addresses the cross-border
application of the attribution requirement. Section D provides an
overall summary of the rule. If adopted, the Proposed Rule would
supersede the Commission's Cross-Border Guidance with respect to the
cross-border application of the MSP thresholds.
---------------------------------------------------------------------------

\100\ See proposed rule Sec. 1.3(nnn).
\101\ See notes 76 and 79, supra.
\102\ As indicated above, for purposes of the Proposed Rule, an
``Other Non-U.S. Person'' refers to a non-U.S. person that is
neither an FCS nor a U.S. Guaranteed Entity. See section IV, supra.
---------------------------------------------------------------------------

A. U.S. Persons, U.S. Guaranteed Entities, and Foreign Consolidated
Subsidiaries

Under the proposed rule, all of a U.S. person's swap positions
would apply

[[Page 71959]]

toward the MSP thresholds without exception. As discussed in the
context of the Proposed Rule's approach to applying the SD de minimis
registration threshold, by virtue of it being domiciled or organized in
the United States, or the inherent nature of its connection to the
United States, all of a U.S. person's activities have a significant
nexus to U.S. markets, giving the Commission a particularly strong
regulatory interest in their swap activities. Accordingly, the
Commission believes that all of a U.S. person's swap positions,
regardless of where they occur or the U.S. person status of the
counterparty, present risk to the stability of the U.S. financial
system and U.S. entities, including those that may be systemically
important, and thus should apply toward the MSP thresholds.
For related reasons, the proposed rule would also require a non-
U.S. person that is not an FCS to include in its MSP calculations each
swap position with respect to which it is a U.S. Guaranteed Entity. As
explained in context of the SD de minimis threshold calculation, the
Commission believes that the swap positions of a non-U.S. person whose
swap obligations are guaranteed by a U.S. person are identical, in
relevant aspects, to those entered into directly by a U.S. person and
thus present risks to the stability of the U.S. financial system or of
U.S. entities. Treating U.S. Guaranteed Entities differently from U.S.
persons could also create a substantial regulatory loophole, allowing
transactions that have a similar connection to or impact on U.S.
commerce to be treated differently depending on how the parties are
structured and thereby undermining the effectiveness of the Dodd-Frank
swap provisions and related Commission regulations.
The proposed rule would also require an FCS to include all of its
swap positions in its MSP calculations.\103\ As discussed in the
context of applying the SD de minimis threshold, by virtue of its
relationship to its U.S. ultimate parent, the risk associated with an
FCS's swap positions have a direct impact on the financial position and
risk profile of its U.S. parent. Accordingly, should the FCS or its
counterparty default on a swap, the financial stability of the U.S.
ultimate parent entity would be directly impacted, raising the types of
regulatory concerns that MSP registration is intended to address. The
Commission is also concerned that offering disparate treatment to FCSs
compared to U.S. persons could create a substantial regulatory
loophole, incentivizing U.S. financial groups to conduct their swap
activities with non-U.S. counterparties through non-U.S. subsidiaries
and thereby undermining the effectiveness of the Dodd-Frank swap
provisions and related Commission regulations.
---------------------------------------------------------------------------

\103\ To the extent that a non-U.S. person is both an FCS and a
U.S. Guaranteed Entity with respect to a particular swap, the non-
U.S. person would only be required to include the swap position in
its MSP calculations once. See proposed rule Sec. 1.3(nnn).
---------------------------------------------------------------------------

B. Other Non-U.S. Persons

Under the proposed rule, an Other Non-U.S. Person would include all
of its swaps with U.S. persons, U.S. Guaranteed Entities, and Foreign
Consolidated Subsidiaries in its MSP calculations, with a limited
exception for transactions executed anonymously on a SEF, DCM, or FBOT
and cleared.\104\ As discussed above, the default or insolvency of the
Other Non-U.S. Person would have a direct adverse effect on a U.S.
counterparty and, by virtue of the U.S. person's significant nexus to
the U.S. financial system, potentially could result in adverse effects
or disruption to the U.S. financial system as a whole, particularly if
the Other Non-U.S. Person's swap positions are substantial enough to
exceed an MSP registration threshold.
---------------------------------------------------------------------------

\104\ To the extent that the Other Non-U.S. Person's swap
position is with a non-U.S. counterparty that is both an FCS and a
U.S. Guaranteed Entity with respect to a particular swap, the Other
Non-U.S. Person would only be required to include the swap position
in its MSP calculations once. See proposed rule Sec. 1.3(nnn).
---------------------------------------------------------------------------

The default or insolvency of the Other Non-U.S. Person would also
present a financial impact to the U.S. financial system where the
counterparty is an FCS because its U.S. ultimate parent would be
directly impacted. The Other Non-U.S. Person's default could also
impact the United States through a U.S. Guaranteed Entity. Although the
default on that swap may not directly affect the U.S. guarantor on that
swap, the default could affect the U.S. Guaranteed Entity's ability to
meet its other obligations, for which the U.S. guarantor may also be
liable. The Commission is also concerned that offering Other Non-U.S.
Persons disparate treatment with respect to their swap positions with
U.S. Guaranteed Entities compared to their swap positions with FCSs
could incentivize Other Non-U.S. Persons to favor transacting with U.S.
Guaranteed Entities solely in order to avoid application of the Dodd-
Frank swap provisions.
The Commission therefore has a strong regulatory interest in
ensuring that Other Non-U.S. Persons are subject to the Dodd-Frank MSP
requirements to the extent that their swap positions with U.S.
Guaranteed Entities and FCSs exceed a registration threshold.
Accordingly, the Commission believes that requiring Other Non-U.S.
Persons to include their swap positions with FCSs and U.S. Guaranteed
Entities as well as U.S. persons appropriately captures swap positions
that present a risk to the U.S. financial system, ensuring that MSP
regulation applies once that risk exceeds the relevant thresholds.
However, as discussed in the context of the SD de minimis threshold,
where the swap is executed anonymously on a SEF, DCM, or FBOT and
cleared, the Commission believes that the practical difficulties
involved in determining the status of the potential MSP's counterparty
would make it reasonable for the swap position to be excluded
altogether.\105\
---------------------------------------------------------------------------

\105\ See section IV.C.4, supra.
---------------------------------------------------------------------------

Where the counterparty is an Other Non-U.S. Person, however, the
proposed rule would not require an Other Non-U.S. Person to include the
swap position in its MSP calculations, as the Commission does not
believe the swap would present the type of risk to the U.S. financial
system that MSP registration is intended to address.\106\ Further, the
Commission clarifies that under the Proposed Rule, an Other Non-

[[Page 71960]]

U.S. Person would not be required to include its swap position with an
Other Non-U.S. Person counterparty in its MSP calculations solely by
reason of such swap being arranged, negotiated, or executed by
personnel located in the United States. As stated above, arranging,
negotiating, or executing swaps are functions that fall within the
scope of the ``swap dealer'' definition. In contrast, the definition of
MSP focuses primarily on credit risk and thus, the Commission does not
believe that including ANE transactions in this context would address
the regulatory concerns underlying the MSP registration requirement.
---------------------------------------------------------------------------

\106\ The Commission notes that the Guidance provided that non-
U.S. persons that are not guaranteed affiliates generally could
exclude from their MSP threshold calculations swap positions with
either a foreign branch of a U.S. SD or a guaranteed affiliate that
is an SD if either (i) the potential non-U.S. MSP is a non-financial
entity or (ii) the potential non-U.S. MSP is a financial entity and
the swap is either cleared or the swap documentation requires the
foreign branch or guaranteed affiliate to collect daily variation
margin with no threshold. See Guidance, 78 FR at 45324-25. The
Commission has determined that a similar exception in the Proposed
Rule with regard to the swap positions of Other Non-U.S. Persons
would be unnecessary and inappropriate because (1) two of the three
prongs of the statutory MSP definition apply regardless of whether
the potential MSP is a financial entity, see 7 U.S.C. 1a(33)(A)(i)-
(ii), and (2) although subjecting a swap to the clearing or margin
requirements may mitigate some of the risk of the swap, the risk is
not entirely eliminated, and the mitigation effect of the clearing
and margin requirements is taken into account in calculating the
relevant MSP thresholds. See 17 CFR 1.3(jjj)(3)(iii) (defining
``substantial position'' such that the potential future exposure
associated with positions that are subject to central clearing by a
registered or exempt DCO is equal to 0.1 times the potential future
exposure that would otherwise be calculated). Accordingly, the
Commission believes that such swaps create the potential for
systemic risk within the meaning of the MSP definition and that
allowing such exclusion would allow market participants to
inappropriately avoid the Dodd-Frank registration and other
associated requirements that are designed to mitigate that risk. The
Commission further believes that the Proposed Rule has the added
benefit of aligning more closely with the SEC in this regard, which
should serve to reduce compliance costs associated with MSP
registration.
---------------------------------------------------------------------------

C. Attribution Requirement

In the Entities Rule, the Commission and the SEC (collectively,
``Commissions'') provided a joint interpretation that an entity's swap
positions in general would be attributed to a parent, other affiliate,
or guarantor for purposes of the MSP analysis to the extent that the
counterparties to those positions have recourse to the parent, other
affiliate, or guarantor in connection with the position, such that no
attribution would be required in the absence of recourse.\107\ Even in
the presence of recourse, however, the Commissions stated that
attribution of a person's swap positions to a parent, other affiliate,
or guarantor would not be necessary if the person is already subject to
capital regulation by the Commission or the SEC or is a U.S. entity
regulated as a bank in the United States (and is therefore subject to
capital regulation by a prudential regulator).\108\
---------------------------------------------------------------------------

\107\ See 77 FR at 30689.
\108\ Id. (positions of U.S. entities regulated as banks in the
United States would be subject to capital and other requirements,
making it unnecessary to separately address the risks associated
with guarantees of those positions via MSP regulation). See also id.
at n.1134 (``As a result of this interpretation, holding companies
will not be deemed to be major participants as a result of
guarantees to certain U.S. entities that already are subject to
capital regulation. The Commissions intend to address guarantees
provided to non-U.S. entities, and guarantees by non-U.S. holding
companies, in separate releases.'').
---------------------------------------------------------------------------

The Commission is also proposing to address the cross-border
application of the attribution requirement in a manner consistent with
the Entities Rule and CEA section 2(i) and generally comparable to the
approach adopted by the SEC.\109\ Specifically, the Commission believes
that the swap positions of an entity, whether a U.S. or non-U.S.
person, should not be attributed to a parent, other affiliate, or
guarantor for purposes of the MSP analysis in the absence of recourse.
Even in the presence of recourse, attribution would not be required if
the entity that entered into the swap directly is subject to capital
regulation by the Commission or the SEC or is regulated as a bank in
the United States.\110\
---------------------------------------------------------------------------

\109\ See SEC Cross-Border Rule, 79 FR at 47346-48.
\110\ The Commission further clarifies that the swap positions
of an entity that is required to register as an MSP, or whose MSP
registration is pending, would not be subject to the attribution
requirement.
---------------------------------------------------------------------------

If recourse is present, however, and the entity subject to a
recourse guarantee (``guaranteed entity'') is not subject to capital
regulation (as described above), whether the attribution requirement
would apply would depend on the U.S. person status of the person to
whom there is recourse (i.e., the U.S. person status of the guarantor).
Specifically, a U.S. person guarantor would attribute to itself any
swap position of a guaranteed entity, whether a U.S. person or a non-
U.S. person, for which the counterparty to the swap has recourse
against that U.S. person guarantor. The Commission believes that when a
U.S. person acts as a guarantor of a swap position, the recourse
guarantee creates risk within the United States of the type that MSP
regulation is intended to address, regardless of the U.S. person status
of the guaranteed entity or its counterparty.\111\
---------------------------------------------------------------------------

\111\ See Entities Rule, 77 FR at 30689 (attribution is intended
to reflect the risk posed to the U.S. financial system when a
counterparty to a position has recourse against a U.S. person).
---------------------------------------------------------------------------

A non-U.S. person would attribute to itself any swap position of an
entity for which the counterparty to the swap has recourse against the
non-U.S. person unless all relevant persons (i.e., the non-U.S. person
guarantor, the entity subject to the recourse guarantee, and its
counterparty) are Other Non-U.S. Persons. In this regard, the
Commission believes that when a non-U.S. person provides recourse with
respect to the swap position of a particular entity, the economic
reality of the swap position is substantially identical, in relevant
respects, to a position entered into directly by the non-U.S. person.
Additionally, the Commission believes that guaranteed entities would be
able to enter into significantly more swap positions (and take on
significantly more risk) as a result of the guarantee than they would
otherwise, amplifying the risk of the non-U.S. person guarantor's
inability to carry out its obligations under the guarantee. Given that,
as discussed above, the Commission believes that the swap positions of
U.S. persons, FCSs, and U.S. Guaranteed Entities present the types of
risk that MSP regulation is intended to address, the Commission has a
strong regulatory interest in ensuring that the attribution requirement
applies to non-U.S. persons that provide recourse guarantees to U.S.
persons, FCSs, and U.S. Guaranteed Entities. Accordingly, the
Commission believes that a non-U.S. person should be required to
attribute to itself the swap positions of any entity for which it
provides a recourse guarantee unless it, the guaranteed entity, and its
counterparty are Other-Non-U.S. Persons.
D. Summary
In summary, under the proposed rule, in making its MSP threshold
calculations:
A U.S. person would include all of its swap positions.
A non-U.S. person would include all swap positions with
respect to which it is a U.S. Guaranteed Entity.
A Foreign Consolidated Subsidiary would include all of its
swap positions.
An Other Non-U.S. Person would include all of its swap
positions with counterparties that are U.S. persons, U.S. Guaranteed
Entities, or FCSs, unless the swap is executed anonymously on a
registered SEF, DCM, or FBOT and cleared. It would not, however,
include any of its swap positions with Other Non-U.S. counterparties.
All swap positions that are subject to recourse should
also be attributed to a guarantor, whether it is a U.S. person or a
non-U.S. person, unless the guarantor, the guaranteed entity, and its
counterparty are Other Non-U.S. Persons.
Request for Comment. The Commission invites comment on all aspects
of the proposed rule, including the following:
1. The Commission invites comment on whether it should provide an
exception for Other Non-U.S. Persons similar to that included in the
Guidance for non-U.S. persons that are not guaranteed affiliates
trading with either a foreign branch of a U.S. SD or a guaranteed
affiliate that is an SD.\112\ Would such an exception be appropriate or
otherwise consistent with the proposed rule? Why or why not?
---------------------------------------------------------------------------

\112\ See note 106, supra.
---------------------------------------------------------------------------

2. In its rulemaking addressing the cross-border application of the
MSP thresholds, the SEC determined not to require a non-U.S. person to
include in its major security-based swap participant threshold
calculations any security-based swap positions for which they (as
opposed to their counterparty)

[[Page 71961]]

benefit from a guarantee creating a right of recourse against a U.S.
person.\113\ The SEC argued that if the non-U.S. person were to
default, it would not pose a direct risk to its counterparty's U.S.
guarantor, as the non-U.S. person's failure under the swap would not
trigger any obligations under the guarantee of the swap. The Commission
invites comment on whether it should adopt a similar approach and
whether such an approach would be consistent with the Proposed Rule.
---------------------------------------------------------------------------

\113\ See SEC Cross-Border Rule, 79 FR at 47345 & n.593.
---------------------------------------------------------------------------

3. Should the Commission modify its interpretation with regard to
the attribution requirement to further harmonize with the approach
presented in the Guidance \114\ and adopted by the SEC \115\ and
provide that attribution of a person's swap positions to a parent,
other affiliate, or guarantor would not be required if the person is
subject to capital standards that are comparable to and as
comprehensive as the capital regulations and oversight by a home
country supervisor or regulator? If so, should the home country capital
standards be deemed comparable and comprehensive if they are consistent
in all respects with the Capital Accord of the Basel Committee on
Banking Supervision (``Basel Accord'')?
---------------------------------------------------------------------------

\114\ See 78 FR at 45326.
\115\ See SEC Cross-Border Rule, 79 FR at 47347-48.
---------------------------------------------------------------------------

VI. Cross-Border Application of the External Business Conduct Standards
for Swap Dealers and Major Swap Participants

Pursuant to CEA section 4s(h), the Commission has adopted rules
establishing business conduct standards governing the conduct of SD/
MSPs in transacting with swap counterparties.\116\ Broadly speaking,
the external business conduct standards are designed to enhance
counterparty protections by expanding the obligations of SD/MSPs with
respect to their counterparties.\117\ Among other things, SDs and/or
MSPs are required to conduct due diligence on their counterparties to
verify their eligibility to trade; provide disclosure of material
information about the swap to their counterparties; provide a daily
mid-market mark for uncleared swaps; and, when recommending a swap to a
counterparty, make a determination as to the suitability of the swap
for the counterparty based on reasonable diligence concerning the
counterparty.\118\
---------------------------------------------------------------------------

\116\ See Business Conduct Standards for Swap Dealers and Major
Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012);
17 CFR 23.400-51.
\117\ The term ``counterparty'' is defined for purposes of the
external business conduct standards in 17 CFR 23.401 to include any
person who is a prospective counterparty to a swap, as appropriate
to subpart H.
\118\ Note that certain external business conduct standards
apply only to SDs and not MSPs. See, e.g., 17 CFR 23.434
(recommendations to counterparties--institutional suitability);
Sec. 23.440 (requirements for swap dealers acting as advisors to
Special Entities).
---------------------------------------------------------------------------

The Commission is now proposing a rule to address the cross-border
application of the external business conduct standards, including the
extent to which they would apply to ANE transactions.\119\
Specifically, under the proposed rule, U.S. SD/MSPs, other than with
respect to transactions conducted through foreign branches of U.S. SD/
MSPs, would be required to comply with the Commission's applicable
external business conduct standards regardless of the status of the
counterparty as a U.S. person (or as a foreign branch of a U.S. SD/MSP)
\120\ without substituted compliance. This requirement reflects the
Commission's view that the Dodd-Frank's external business conduct
standards should apply fully to registered SD/MSPs domiciled and
operating in the United States because their swap activities are
particularly likely to affect the integrity of the swaps market in the
United States and give rise to concerns about the protection of
participants in those markets.\121\
---------------------------------------------------------------------------

\119\ The rule text for the cross-border application of external
business conduct standards is proposed as Sec. 23.452.
\120\ As used in this preamble, the term ``U.S. SD/MSP'' refers
to a U.S. person that is an SD or MSP and the term ``Non-U.S. SD/
MSP'' refers to a non-U.S. person that is an SD or MSP.
\121\ The Commission observes that, where a swap between a non-
U.S. SD/MSP (or foreign branch of a U.S. SD/MSP) and a U.S. person
is executed anonymously on a registered DCM or SEF and cleared by a
registered or exempt DCO, the external business conduct standards
are not applicable. See, e.g., 17 CFR 23.402(b)-(c) (requiring swap
dealers and MSPs to obtain and retain certain information only about
each counterparty whose identity is known to the swap dealer or MSP
prior to the execution of the transaction); Sec. 23.430(e) (not
requiring SD/MSPs to verify counterparty eligibility when a
transaction is entered on a DCM or SEF and the swap dealer or MSP
does not know the identity of the counterparty prior to execution);
Sec. 23.431(c) (not requiring disclosure of material information
about a swap if initiated on a DCM or SEF and the swap dealer or MSP
does not know the identity of the counterparty prior to execution).
Because a registered FBOT is analogous to a DCM, the Commission is
of the view that the requirements likewise would not be applicable
where such a swap is executed anonymously on a registered FBOT and
cleared.
---------------------------------------------------------------------------

Foreign branches of U.S. SD/MSPs as well as non-U.S. SD/MSPs
(including FCSs and U.S. Guaranteed Entities) would be required to
comply with all of the Commission's applicable external business
conduct standards, without substituted compliance, to the extent that
the counterparty is a U.S. person (other than a foreign branch of a
U.S. SD/MSP).\122\ Given the focus of the Dodd-Frank counterparty
protection mandate on U.S. persons, the Commission believes that the
external business conduct standards should apply fully to all swap
transactions with U.S. persons that are not foreign branches of a U.S.
SD/MSP.
---------------------------------------------------------------------------

\122\ Although the Commission recognizes that foreign branches
of U.S. SD/MSPs are part of the same legal entity as their U.S.
principal, and that, from the standpoint of risk, there is no
difference between a swap with a U.S. SD/MSP and a swap with its
foreign branch, the Commission believes that for purposes of the
external business conduct standards, which are oriented toward
customer protection, a foreign branch of a U.S. SD/MSP should be
treated the same as a non-U.S. SD/MSP. The Commission proposes to
interpret the term ``foreign branch of a U.S. person'' that is a
swap dealer (or MSP) as used in proposed rule Sec. 23.452 in a
manner that is consistent with the Guidance. See Guidance, 78 FR at
45328-31 (discussing the scope of the term ``foreign branch'' and
the Commission's consideration of whether a swap is with a foreign
branch of a U.S. bank).
---------------------------------------------------------------------------

With respect to transactions with counterparties that are foreign
branches of U.S. SD/MSPs or non-U.S. persons (including FCSs and U.S.
Guaranteed Entities), however, non-U.S. SD/MSPs and foreign branches of
U.S. SD/MSPs would generally not be required to comply with the
external business conduct rules, subject to one narrow exception:
foreign branches of U.S. SDs and non-U.S. SDs that use personnel
located in the United States to arrange, negotiate, or execute such
transactions would be required to comply with Commission regulations
23.410 (Prohibition on Fraud, Manipulation, and other Abusive
Practices) and 23.433 (Fair Dealing), without substituted
compliance.\123\ This position reflects the Commission's belief that,
in general, imposing its customer protection standards on transactions
between a foreign branch of a U.S. SD/MSP or a non-U.S. SD/MSP, on the
one hand, and a counterparty that is a non-U.S. person or the foreign
branch of a U.S. SD/MSP on the other, would generally not be necessary
to advance the goals of the Dodd-Frank customer protection regime.
However, to the extent that such SDs use personnel located in the
United States to arrange, negotiate, or execute the swap transaction,
the Commission believes that its interest in ensuring the

[[Page 71962]]

integrity of U.S. markets is implicated. By limiting application of the
external business conduct standards to ANE transactions to the
antifraud and fair dealing requirements, the proposed rule is tailored
to ensure a basic level of counterparty protections while, consistent
with the principles of international comity, recognizing the
supervisory interests of the relevant foreign jurisdictions in applying
their own sales practices requirements to transactions involving
counterparties that are non-U.S. persons or foreign branches of a U.S.
SD/MSP. This approach recognizes the supervisory interests of the local
jurisdiction with respect to swaps conducted within that jurisdiction
and that broadly imposing U.S. external business conduct standards with
respect to such transactions would not be necessary to advance the
goals of the Dodd-Frank customer protection regime.
---------------------------------------------------------------------------

\123\ See section III for a discussion of the terms arrange,
negotiate, and execute. The Commission notes that the external
business conduct standards apply in connection with transactions in
swaps as well as in connection with swaps that are offered but not
entered into. See 17 CFR 23.400. Accordingly, Commission regulations
23.410 and 23.433 would apply where a non-U.S. SD uses personnel
located in the United States to offer a swap even if that swap is
not ultimately entered into.
---------------------------------------------------------------------------

If adopted, the proposed rule would supersede the Guidance with
respect to the cross-border application of the external business
conduct standards.
Request for Comment. The Commission invites comment on all aspects
of the proposed rule, including the following:
1. The Commission invites comment regarding its determination to
distinguish transactions entered into by foreign branches of U.S.
persons that are SDs (or MSPs) for purposes of the cross-border
application of the external business conduct standards.\124\ Should
transactions involving foreign branches of U.S. SD/MSPs be treated in
the same manner as transactions involving U.S. persons with respect to
these requirements? Why or why not? Should the Commission, as proposed,
interpret the term ``foreign branch of a U.S. person'' that is an SD
(or MSP) in a manner consistent with the Guidance or incorporate an
alternative approach, such as the definition of ``foreign branch'' in
the SEC's Exchange Act rules? \125\
---------------------------------------------------------------------------

\124\ See note 122, supra.
\125\ See note 94, supra.
---------------------------------------------------------------------------

2. The Commission invites comment regarding the circumstances under
which a swap transaction should be considered as being ``with a foreign
branch of a U.S. person'' that is an SD (or MSP) as opposed to being
with the U.S. person itself. Specifically, should the Commission, as
proposed, adopt an interpretation consistent with the Guidance \126\ or
should it incorporate an alternative approach, such the how the SEC
defines ``transaction conducted through a foreign branch'' in the
context of its Exchange Act rules? \127\
---------------------------------------------------------------------------

\126\ See note 122, supra.
\127\ See note 94, supra.
---------------------------------------------------------------------------

3. The Commission invites comment on the proposed treatment of non-
U.S. SD/MSPs and foreign branches of U.S. SD/MSPs. Whether and to what
extent should their swap transactions with foreign branches of U.S. SD/
MSPs and non-U.S. persons be subject to the external business conduct
standards? Should they be required to comply with the external business
conduct standards with respect to their transactions with foreign
branches of U.S. SD/MSPs or non-U.S. persons? If so, should substituted
compliance be available? Relatedly, should transactions conducted
through foreign branches of U.S. SD/MSPs receive the same treatment as
other transactions conducted by U.S. SD/MSPs? Is limiting the scope of
applicable requirements for ANE transactions entered into by foreign
branches of U.S. SDs or non-U.S. SDs to the antifraud and fair dealing
requirements appropriate, or should other external business conduct
requirements in subpart H of part 23 of the Commission's regulations
also apply? Why or why not?

VII. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities.\128\ The
Commission previously established definitions of ``small entities'' to
be used in evaluating the impact of its regulations on small entities
in accordance with the RFA.\129\ The proposed regulation addresses when
U.S. persons and non-U.S. persons would be required to include their
cross-border swap dealing transactions or swap positions in their SD or
MSP registration threshold calculations, respectively, as specified in
the Proposed Rule,\130\ and the extent to which SDs or MSPs would be
required to comply with the Commission's external business conduct
standards in connection with their cross-border swap transactions or
swap positions.\131\
---------------------------------------------------------------------------

\128\ See 5 U.S.C. 601 et seq.
\129\ See 47 FR 18618 (Apr. 30, 1982) (finding that designated
contract markets, future commission merchants, commodity pool
operators and large traders are not small entities for RFA
purposes).
\130\ See proposed rule Sec. 1.3(aaaaa), (ggg)(7), and (nnn).
\131\ See proposed rule Sec. 23.452.
---------------------------------------------------------------------------

The Commission previously determined that SDs and MSPs are not
small entities for purposes of the RFA.\132\ The Commission believes,
based on its information about the swap market and its market
participants, that (1) the types of entities that may engage in more
than a de minimis amount of swap dealing activity such that they would
be required to register as an SD--which generally would be large
financial institutions or other large entities--would not be ``small
entities'' for purposes of the RFA; and (2) the types of entities that
may have swap positions such that they would be required to register as
an MSP would not be ``small entities'' for purposes of the RFA. Thus,
to the extent such entities are large financial institutions or other
large entities that would be required to register as SDs or MSPs with
the Commission by virtue of their cross-border swap dealing
transactions and swap positions, they would not be considered small
entities.\133\
---------------------------------------------------------------------------

\132\ See Entities Rule, 77 FR at 30701; Registration of Swap
Dealers and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19,
2012) (noting that like future commission merchants, swap dealers
will be subject to minimum capital requirements, and are expected to
be comprised of large firms, and that major swap participants should
not be considered to be small entities for essentially the same
reasons that it previously had determined large traders not to be
small entities).
\132\ See 77 FR at 30701.
\133\ The SBA's Small Business Size Regulations, codified at 13
CFR 121.201, identifies (through North American Industry
Classification System codes) a small business size standard of $38.5
million or less in annual receipts for Sector 52, Subsector 523--
Securities, Commodity Contracts, and Other Financial Investments and
Related Activities. Entities affected by the Proposed Rule are
generally large financial institutions or other large entities that
would be required to include their cross border dealing transactions
or swap positions towards the SD and MSP registration thresholds,
respectively, as specified in the Proposed Rule.
---------------------------------------------------------------------------

Under the proposed rule, to the extent that there are any affected
small entities under the proposed rule, they will need to assess how
they are classified under the proposed rule (i.e., U.S. person, FCS,
U.S. Guaranteed Entity, and Other Non-U.S. Person) and monitor their
swap activities in order to determine whether they are required to
register as an SD under the proposed rule. The Commission believes that
market participants would only incur incremental costs, which are
expected to be marginal, in modifying their existing systems and
policies and procedures resulting from changes to the status quo made
by the proposed rule.\134\
---------------------------------------------------------------------------

\134\ The proposed regulation addresses the cross-border
application of the registration and external business conduct
regulations. The Proposed Rule does not change the current
registration requirements or external business conduct requirements.
---------------------------------------------------------------------------

Accordingly, for the foregoing reasons, the Commission finds that

[[Page 71963]]

there will not be a substantial number of small entities impacted by
the proposed rule. Therefore, the Chairman, on behalf of the
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
proposed regulations will not have a significant economic impact on a
substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 \135\ (``PRA'') imposes certain
requirements on Federal agencies, including the Commission, in
connection with conducting or sponsoring any ``collection of
information,'' as defined by the PRA. Among its purposes, the PRA is
intended to minimize the paperwork burden to the private sector, to
ensure that any collection of information by a government agency is put
to the greatest possible uses, and to minimize duplicative information
collections across the government. The PRA applies to all information,
``regardless of form or format,'' whenever the government is
``obtaining, causing to be obtained, [or] soliciting'' information, and
includes required ``disclosure to third parties or the public, of facts
or opinions,'' when the information collection calls for ``answers to
identical questions posed to, or identical reporting or recordkeeping
requirements imposed on, ten or more persons.'' \136\ The PRA
requirements have been determined to include not only mandatory but
also voluntary information collections, and include both written and
oral communications.\137\
---------------------------------------------------------------------------

\135\ 44 U.S.C. 3501 et seq.
\136\ See 44 U.S.C. 3502.
\137\ See 5 CFR 1320.3.
---------------------------------------------------------------------------

The proposed rule would result in an amendment to existing
collections of information, ``Registration of Swap Dealers and Major
Swap Participants,'' Office of Management and Budget (``OMB'') Control
No. 3038-0072, as discussed below. The Commission, therefore, is
submitting this proposed rulemaking to OMB for its review and approval
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If the proposed
rule is adopted, the responses to these collections of information
would be mandatory. An agency may not conduct or sponsor, and a person
is not required to respond to, a collection of information unless it
displays a currently valid control number issued by OMB.
The proposed rule provides for the cross-border application of the
SD/MSP registration thresholds and external business conduct standards.
The Commission estimates that if the proposed rule is adopted, 14
unregistered non-U.S. persons may be classified as FCSs and required to
register as new SDs because their swap dealing transactions would be in
excess of the SD de minimis threshold.\138\ The Commission would
increase the number of respondents under collection 3038-0072
accordingly. The proposed rule would not otherwise trigger any new
recordkeeping, disclosure, or reporting requirements or cause any
incremental burden under the PRA.
---------------------------------------------------------------------------

\138\ See the Appendix to Cost-Benefit Considerations, infra,
for an explanation of the Commission's estimate.
---------------------------------------------------------------------------

Information Collection Comments. The Commission invites the public
and other Federal agencies to comment on any aspect of the reporting
burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicits comments in order to: (1) Evaluate whether the
proposed collection of information is necessary for the proper
performance of the functions of the Commission, including whether the
information will have practical utility; (2) evaluate the accuracy of
the Commission's estimate of the burden of the proposed collection of
information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by email at
OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy
of submitted comments so that all comments can be summarized and
addressed in the final rule preamble. Refer to the ADDRESSES section of
this notice of proposed rulemaking for comment submission instructions
to the Commission. A copy of the supporting statements for the
collections of information discussed above may be obtained by visiting
https://RegInfo.gov. OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication of
this document in the Federal Register. Therefore, a comment is best
assured of having its full effect if OMB receives it within 30 days of
publication.

C. Cost-Benefit Considerations

As detailed above, the Commission is proposing rules that would
define certain key terms for purposes of the Dodd-Frank swap provisions
and address the cross-border application of the SD and MSP registration
thresholds and the Commission's external business conduct standards,
including the extent to which such requirements would apply to ANE
transactions.
The baseline against which the costs and benefits of this proposed
rule are compared is the status quo, i.e., the swap market as it exists
today, with SD/MSP registration thresholds and external business
conduct rules applied to cross-border transactions in a manner
consistent with the Guidance and the Cross-Border Margin Rule.\139\ In
considering the costs and benefits of the proposed rule against this
baseline, the Commission notes that the Commission's existing swap
requirements, including the registration thresholds and external
business conduct standards, were adopted pursuant to the requirements
of the Dodd-Frank Act and have cross-border application by virtue of
CEA section 2(i). A significant portion of the costs and benefits
associated with the proposed rule are therefore inherent in the statute
itself and were addressed in the cost-benefit considerations of the
underlying registration rules and external business conduct standards
at the time they were adopted. This cost-benefit discussion accordingly
focuses on the central purpose and effect of the proposed rule,
determining whether and to what extent the underlying SD/MSP
registration thresholds and external business conduct standards should
apply in a cross-border context, consistent with CEA section 2(i), the
regulatory objectives of the Dodd-Frank Act, and principles of
international comity.
---------------------------------------------------------------------------

\139\ Although the Guidance is non-binding, the Commission
understands that market participants have developed policies and
practices consistent with the views expressed therein.
---------------------------------------------------------------------------

The costs associated with the key elements of the Commission's
proposed cross-border approach to the SD and MSP registration
thresholds--requiring market participants to classify themselves as
U.S. persons, U.S. Guaranteed Entities, Foreign Consolidated
Subsidiaries, or Other Non-U.S. Persons and to apply the rule
accordingly--fall into a few categories. Market participants would
incur costs determining which category of market participant (e.g., an
FCS or an Other Non-U.S. Person) they fall into (``assessment costs''),
tracking their swap activities or positions to determine whether they
should be included in their registration threshold calculations
(``monitoring costs''), and, to the degree

[[Page 71964]]

that their activities or positions exceed the relevant threshold,
registering with the Commission as an SD or MSP (``registration
costs'').
Entities required to register as SDs as a result of the proposed
rule would also incur costs associated with complying with the relevant
Dodd-Frank requirements applicable to registrants, such as the capital,
margin, and business conduct requirements (``programmatic
costs'').\140\ While only new registrants would be assuming these
programmatic costs for the first time, the obligations of entities that
are already registered as SDs may also change in the future as an
indirect consequence of the proposed rule. Although the Proposed Rule
does not address the cross-border application of any Dodd-Frank
requirements other than the registration thresholds and external
business conduct standards, the Commission expects that the proposed
rule's classification scheme for market participants (as U.S. Persons,
FCSs, etc.) and associated definitions (which closely track the
approach adopted in the Cross-Border Margin Rule) would apply for
purposes of future cross-border rulemakings. Accordingly, existing SDs
may find that their cross-border compliance obligations with respect to
other substantive Dodd-Frank requirements change in the future compared
to the status quo as a result of having to adjust their classification
(e.g., from non-U.S. person to FCS). As a result, the full extent of
the programmatic costs associated with the proposed rule would be
influenced by the scope and effect of future rulemakings addressing the
cross-border application of substantive requirements under the Dodd-
Frank Act.
---------------------------------------------------------------------------

\140\ The Commission's discussion of programmatic costs and
registration costs does not address MSPs. No entities are currently
registered as MSPs, and the Commission does not expect that this
status quo would change as a result of the Proposed Rule given the
general similarities between the Proposed Rule's approach to the MSP
registration threshold calculations and the Guidance. For an
estimate of the number of market participants that may be required
to register as SDs as a result of the Proposed Rule, see the
accompanying Appendix below.
---------------------------------------------------------------------------

In developing the proposed rule, the Commission took into account
the potential for creating or accentuating competitive disparities
between market participants, which could contribute to market
inefficiencies, including market fragmentation or decreased liquidity,
as more fully discussed below. Significantly, competitive disparities
may arise between U.S.-based financial groups and non-U.S. based
financial groups as a result of differences in how the SD/MSP
registration thresholds apply to the various classifications of market
participants. For instance, dealing subsidiaries with a U.S. ultimate
parent entity (i.e., FCSs)--which would be required to include all of
their swap dealing transactions in their de minimis threshold
calculations and therefore be more likely to trigger the SD
registration threshold relative to Other Non-U.S. Persons--may be at a
competitive disadvantage compared to Other Non-U.S. Persons when
trading with non-U.S. counterparties, as non-U.S. counterparties may
prefer to trade with non-registrants in order to avoid application of
the Dodd-Frank swaps regime.\141\ Again, the full competitive impact of
the Proposed Rule will be influenced by future cross-border
rulemakings, as well as the scope and implementation timelines
associated with any related rules adopted by other jurisdictions.
---------------------------------------------------------------------------

\141\ Dodd-Frank swap requirements may impose significant direct
costs on participants falling within the SD/MSP definitions that are
not borne by other market participants, including costs related to
capital and margin requirements, regulatory reporting requirements,
and business conduct requirements. To the extent that foreign
jurisdictions adopt comparable requirements, these costs would be
mitigated.
---------------------------------------------------------------------------

Other factors also create inherent challenges associated with
attempting to assess costs and benefits of the Proposed Rule. To avoid
the prospect of being regulated as an SD or MSP, or otherwise falling
within the Dodd-Frank swap regime, some market participants may
restructure their businesses or take other steps (e.g., limiting their
counterparties to Other Non-U.S. Persons) to avoid exceeding the
relevant registration thresholds. The degree of comparability between
the approaches adopted by the Commission and foreign jurisdictions and
the potential availability of substituted compliance, whereby a market
participant may comply with a Dodd-Frank swap dealer requirement by
complying with a comparable requirement of a foreign financial
regulator, may also affect the competitive impact of the proposed rule.
The Commission nevertheless believes that the proposed rule's
approach is necessary and appropriately tailored, consistent with CEA
section 2(i) and principles of international comity, to ensure that the
regulatory objectives of the Dodd-Frank registration requirements and
external business conduct standards are preserved while still
establishing a workable approach that recognizes foreign regulatory
interests and minimizes competitive disparities and market
inefficiencies to the degree possible. Furthermore, as mentioned above,
the Commission expects to apply the definitions and classification
scheme for market participants resulting from the proposed rule in
future cross-border rulemakings; having a uniform set of definitions
should mitigate the costs of cross-border compliance with the Dodd-
Frank swap regime in the long run.
In the sections that follow, the Commission discusses the costs and
benefits associated with the proposed rule, as well as reasonable
alternatives. Section 1 begins by addressing the assessment costs
associated with the rule, which derive in part from the defined terms
used in the proposed rule (the proposed definitions of ``U.S. Person''
and ``Foreign Consolidated Subsidiary,'' as well as the definition of
``guarantee'' adopted in the Cross-Border Margin Rule) and which, as
mentioned above, are expected to be relevant outside the context of the
cross-border application of the registration thresholds. Sections 2 and
3 consider the costs and benefits associated with the proposed rule's
determinations regarding how each classification of market participants
(U.S. Persons, U.S. Guaranteed Entities, FCSs, and Other Non-U.S.
Persons) should apply to the SD and MSP registration thresholds,
respectively. Sections 4, 5, and 6 address the monitoring,
registration, and programmatic costs associated with the proposed
cross-border approach to the SD (and, as appropriate, MSP) registration
thresholds, respectively. Section 7 addresses the costs and benefits
associated with the proposed cross-border approach to the external
business conduct standards, while Section 8 discusses the factors
established in section 15(a) of the CEA. Discussion of the Commission's
cost-benefit considerations concludes with an Appendix providing an
estimate of the number of new SDs that are expected to register as a
result of the Proposed Rule as well as the number of currently
registered non-U.S. SDs that the Commission estimates would be
classified as FCSs.
The Commission invites comment regarding the nature and extent of
any costs and benefits that could result from adoption of the Proposed
Rule and, to the extent they can be quantified, monetary and other
estimates thereof.
1. Assessment Costs
As discussed above, in applying the proposed cross-border approach
to the SD and MSP registration thresholds, market participants would be
required to first classify themselves as either a U.S. person, an FCS,
a U.S. Guaranteed

[[Page 71965]]

Entity, or an Other Non-U.S. Person. This classification scheme is also
generally applicable in the context of the proposed approach to the
external business conduct standards,\142\ and the Commission further
expects to rely on a similar classification scheme in the context of
future rulemakings relating to the cross-border application of other
substantive Dodd-Frank requirements.
---------------------------------------------------------------------------

\142\ The proposed rule's cross-border application of the
external business conduct standards would also require SD/MSPs to
determine whether a swap is a transaction through a foreign branch.
See section VI, supra.
---------------------------------------------------------------------------

The Commission expects that the costs to affected market
participants of assessing which classification they and their
counterparties fall into would generally be marginal and incremental.
In most cases, the Commission believes an entity will have performed an
initial determination or assessment of its status under either the
Cross-Border Margin Rule (which uses substantially similar definitions
of ``U.S. person,'' ``Foreign Consolidated Subsidiary,'' and
``guarantee'') or the Guidance (which interprets ``U.S. person'' in a
manner that is similar but not identical to the proposed definition of
``U.S. person''). Additionally, the proposed rule would allow market
participants to rely on representations from their counterparties with
regard to their classifications.\143\
---------------------------------------------------------------------------

\143\ The Commission believes that these assessment costs for
the most part have already been incurred by potential SD/MSPs as a
result of adopting policies and procedures consistent with the
Guidance and Cross-Border Margin Rule (which had similar
classifications), both of which permitted counterparty
representations.
---------------------------------------------------------------------------

Even with respect to market participants that have not previously
determined their status under the Cross-Border Margin Rule or the
Guidance, or that may need to reevaluate their status, the Commission
believes that their assessment costs would be small as a result of the
Proposed Rule's reliance on relatively clear, objective definitions of
the terms ``U.S. person,'' ``Foreign Consolidated Subsidiary,'' and
``guarantee.'' Specifically, the Commission believes that the costs of
assessing whether a market participant is a ``U.S. person'' would be
small as a result of certain key differences between the Proposed
Rule's U.S. person definition and the ``U.S. person'' interpretation in
the Guidance.\144\ Similarly, with respect to the determination of
whether a market participant falls within the ``Foreign Consolidated
Subsidiary'' definition,\145\ the Commission believes that assessment
costs would be small as the definition relies on a familiar
consolidation test already used by affected market participants in
preparing their financial statements under U.S. GAAP.\146\
---------------------------------------------------------------------------

\144\ As discussed further in section II.A, the proposed U.S.
person definition does not include the U.S. majority-owned funds
prong that was included in the U.S. person interpretation in the
Guidance, which should lower assessment costs. The proposed
definition also includes a modified version of the unlimited U.S.
responsibility prong in the Guidance, which applied only to legal
entities whose unlimited U.S. owners were majority owners. Removing
the majority ownership requirement from the unlimited U.S.
responsibility prong may lower assessment costs, as compared to the
Guidance. Additionally, the Proposed Rule also makes clear that the
``U.S. person'' definition does not capture international financial
institutions. Further, the proposed definition does not include the
catchall provision that was included in the Guidance, which should
further increase legal certainty and reduce assessment costs.
\145\ The ``Foreign Consolidated Subsidiary'' definition is
discussed further in section II.B.
\146\ The Commission also considered certain alternatives to the
proposed FCS definition--such as relying on International Financial
Reporting Standards in addition to or instead of U.S. GAAP or
including a non-U.S. person whose U.S. parent meets standards for
consolidation, but does not prepare consolidated financial
statements under U.S. GAAP--but believes these alternatives add
complexity, without any substantial benefits.
---------------------------------------------------------------------------

Additionally, the proposed rule relies on the definition of
``guarantee'' provided in the Cross-Border Margin Rule, which is
limited to arrangements in which one party to a swap has rights of
recourse against a guarantor with respect to its counterparty's
obligations under the swap.\147\ Although non-U.S. persons that are not
FCSs will need to know whether they are U.S. Guaranteed Entities with
respect to the relevant swap on a swap-by-swap basis for purposes of
the SD and MSP registration calculations, the Commission believes that
this information will already be known by non-U.S. persons.\148\
Accordingly, the Commission believes that the costs associated with
assessing whether an entity or its counterparty is a U.S. Guaranteed
Entity (for the purpose of the registration calculations or any
subsequent rulemakings) would be small.
---------------------------------------------------------------------------

\147\ See note 79, supra.
\148\ Because a guarantee has a significant effect on pricing
terms and on recourse in the event of a counterparty default, the
Commission believes that the guarantee would already be in existence
and that a non-U.S. person therefore would have knowledge of its
existence before entering into a swap.
---------------------------------------------------------------------------

Finally, the Commission believes that proposing consistent U.S.
person and Foreign Consolidated Subsidiary definitions, which would
apply across all of the Commission's future cross-border rulemakings
(unless the specific rule or regulation otherwise provides or the
context otherwise requires), would also further reduce costs (including
assessment costs) over time by applying a consistent definition across
all of the Commission's cross-border swaps rules.\149\
---------------------------------------------------------------------------

\149\ The Commission recognizes that this benefit would not be
fully realized until such future rulemakings are adopted.
---------------------------------------------------------------------------

2. Cross-Border Application of the Swap Dealer Registration Threshold

a. U.S. Persons and U.S. Guaranteed Entities
Under the proposed rule, a U.S. person would include all of its
swap dealing transactions in its de minimis calculation, without
exception. As discussed above, that would include any swap dealing
transactions conducted through a U.S. person's foreign branch, as such
swaps are directly attributed to, and therefore impact, the U.S.
person. Given that this requirement mirrors the Guidance in this
respect, the Commission believes that the proposed rule would have a
minimal impact on the status quo with regard to the number of
registered or potential U.S. SDs.\150\
---------------------------------------------------------------------------

\150\ As discussed in the Appendix, the Commission is not
estimating the number of new U.S. SDs, as the methodology for
including swaps in a U.S. person's SD registration calculation does
not diverge from the approach included in the Guidance (i.e., a U.S.
person must include all of its swap dealing transactions in its de
minimis threshold calculation). As further explained in the
Appendix, the Commission does not expect an increase in the number
of SDs resulting from the Proposed Rule's definition of U.S. person
and therefore assumes that no new U.S. SDs would register as U.S.
SDs as a result of the Proposed Rule.
---------------------------------------------------------------------------

The proposed rule would also require U.S. Guaranteed Entities (that
are not FCSs) \151\ to include all of their dealing transactions in
their de minimis threshold calculation without exception. This
approach, which recognizes that a U.S. Guaranteed Entity's swap dealing
transactions may have the same potential to impact the U.S. financial
system as a U.S. person's dealing transactions, closely parallels the
approach taken in the Guidance with respect to ``guaranteed
affiliates.'' \152\ However, as explained in

[[Page 71966]]

the accompanying Appendix, the Commission believes that there are few
U.S. Guaranteed Entities at this time.\153\ Accordingly, the Commission
believes that, in this respect, any increase in costs associated with
the Proposed Rule would be small.
---------------------------------------------------------------------------

\151\ In order to avoid double counting, in the event that the
swap of an FCS is guaranteed by a U.S. person, the swap would only
be counted under the provision of the Proposed Rule that applies to
FCSs. See proposed rule Sec. 1.3(ggg)(7)(i)(B) and (C).
\152\ Under the Guidance, a ``guaranteed affiliate'' would
generally include all swap dealing activities in its de minimis
threshold calculation without exception. The Guidance interpreted
``guarantee'' to generally include ``not only traditional guarantees
of payment or performance of the related swaps, but also other
formal arrangements that, in view of all the facts and
circumstances, support the non-U.S. person's ability to pay or
perform its swap obligations with respect to its swaps.'' See the
Guidance at 45320. In contrast, the term ``guarantee'' in this
proposed rulemaking has the same meaning as defined in Commission
regulation 23.160(a)(2) (cross-border application of the
Commission's margin requirements for uncleared swaps), except that
application of the proposed definition of ``guarantee'' would not be
limited to uncleared swaps. See note 79, supra.
\153\ The proposed rule would require U.S. Guaranteed Entities
that are not FCSs to include all of their dealing transactions in
their de minimis calculation. However, the Commission believes that
there are few U.S. Guaranteed Entities (that are not FCSs). The
Commission notes that the Proposed Rule uses a narrower definition
of guarantee (compared to the Guidance), which would result in
relatively fewer U.S. Guaranteed Entities than if a broader
definition were used. In addition, the Commission believes that, as
a practical matter, few non-U.S. persons that are not FCSs obtain
guarantees of their obligations under swaps (which would generally
need to be obtained from an unaffiliated U.S. person). Although the
Commission believes that there are few U.S. Guaranteed Entities at
this time, the Commission has covered this infrequent situation in
the Proposed Rule as a prophylactic measure.
---------------------------------------------------------------------------

b. Foreign Consolidated Subsidiaries
Under the proposed rule, a Foreign Consolidated Subsidiary would
include all of its swap dealing transactions in its de minimis
threshold calculation without exception. The Guidance did not
differentiate FCSs from Other Non-U.S. Persons, and therefore FCSs
would generally only include in their de minimis threshold calculations
their swap dealing transactions with U.S. persons (excluding foreign
branches of U.S. SDs) and with certain guaranteed affiliates.\154\
---------------------------------------------------------------------------

\154\ The Commission believes that some FCSs would have been
``guaranteed affiliates'' as described in the Guidance at the time
that it was initially issued, but the Commission understands that
many financial groups ceased providing guarantees with regard to
their affiliated entities' swap activities subsequent to the
issuance of the Guidance, such that FCSs would have adopted policies
and practices consistent with the Guidance's treatment of non-U.S.
persons (that are not guaranteed or conduit affiliates).
---------------------------------------------------------------------------

However, as noted in section II.B, the Commission believes that it
would be appropriate to distinguish FCSs from Other Non-U.S. Persons in
determining the cross-border application of the SD de minimis threshold
to such entities, as well as with respect to the Dodd-Frank swap
provisions more generally. As discussed above, by virtue of the close
integration between the FCS and its U.S. ultimate parent,
counterparties look to both the FCS and its U.S. parent for fulfillment
of the FCS's obligations under the swap, even without any explicit
guarantee. Therefore, the Commission believes that it is appropriate to
require FCSs to include all of their swap dealing transactions in their
SD de minimis calculation. In addition, allowing an FCS to exclude non-
U.S. swap dealing transactions from its calculation could incentivize
U.S. financial groups to book their non-U.S. dealing transactions into
an FCS, avoiding swap regulation.
Under the Proposed Rule, the FCS definition is used to distinguish
non-U.S. persons with a U.S. ultimate parent entity from Other Non-U.S.
Persons for purposes of determining how Dodd-Frank swap provisions
should apply. The full market impact of the Proposed Rule's shift of
some non-U.S. persons to FCSs cannot be determined at this time in the
absence of further rulemakings addressing the cross-border application
of substantive requirements under the Dodd-Frank Act. However, to the
extent that future cross-border rulemakings apply more stringent
requirements to swap transactions with FCSs, non-U.S. counterparties
may seek to avoid transacting with such dealers, fragmenting swaps
market liquidity into two pools--one for U.S. persons and FCSs and the
other for non-U.S. persons (that are not FCSs). Nevertheless, as
discussed above, the Commission believes that the proposal to require
FCSs to include all of their swap dealing activity in their de minimis
threshold calculations is necessary and appropriate to ensure the
policy objectives of the Dodd-Frank Act are preserved and not
undermined by a substantial regulatory loophole.
c. Other Non-U.S. Persons
Under the proposed rule, Other Non-U.S. Persons would be required
to include in their de minimis threshold calculations swap dealing
activities with U.S. persons (including foreign branches of U.S. SDs),
U.S. Guaranteed Entities, and FCSs. The proposed rule would not,
however, require Other Non-U.S. Persons to include swap dealing
transactions with Other Non-U.S. Persons. Additionally, Other Non-U.S.
Persons would not be required to include in their de minimis
calculation any transaction that is executed anonymously on a SEF, DCM,
or FBOT and cleared.
The Commission believes that requiring Other Non-U.S. Persons to
include their swap dealing transactions with U.S. persons in their de
minimis calculations is necessary to advance the goals of the Dodd-
Frank SD registration regime, which focuses on U.S. market participants
and the market. As discussed above, the Commission considered
incorporating an exception from the Guidance allowing non-U.S. persons
to exclude from their de minimis thresholds transactions with foreign
branches of U.S. SDs but determined that, given the integral nature of
the foreign branch to a U.S. person, such an exception would create a
potentially significant regulatory loophole, allowing a substantial
amount of dealing activity with U.S. counterparties to occur outside
the comprehensive Dodd-Frank swap regime.
Under the proposed rule, Other Non-U.S. Persons would not be
required to include any swap dealing transactions with Other Non-U.S.
Persons in their SD de minimis threshold calculations, including ANE
transactions. Although a non-U.S. person that engages in ANE
transactions is performing dealing activity in the United States, the
Commission does not believe that requiring non-U.S. persons to include
ANE transactions in their de minimis threshold calculations would be
necessary to advance the policy objectives of the Dodd-Frank swap
regime when taking the Proposed Rule in context, particularly the
proposal to require FCSs to include all of their swap dealing
transactions in their de minimis threshold calculations.
The Commission recognizes that the proposed rule's cross-border
approach to the de minimis threshold calculation could contribute to
competitive disparities arising between U.S.-based financial groups and
non-U.S. based financial groups. Potential SDs that are U.S. persons or
that have a U.S. ultimate parent entity (FCSs) would be required to
include all of their swap transactions. In contrast, potential non-U.S.
SDs with a non-U.S. ultimate parent entity whose obligations under the
relevant swap are not subject to a U.S. guarantee (Other Non-U.S.
Persons) would be permitted to exclude swaps with Other Non-U.S.
Persons, including ANE transactions. As a result, potential SDs with a
U.S. ultimate parent entity may be at a competitive disadvantage, as
more of their swap activity would apply toward the de minimis threshold
and trigger the SD registration threshold relative to Other Non-U.S.
Persons. To the extent that a currently unregistered non-U.S. person
would be required to register as an SD under the proposed rule, its
non-U.S. counterparties (clients and dealers) may possibly cease
transacting with it in order to operate outside the Dodd-Frank swap
regime.\155\ Additionally, unregistered non-U.S. dealers may be able to
offer swaps on more favorable terms to non-U.S. counterparties than
U.S. competitors (i.e., U.S. SDs, FCSs,

[[Page 71967]]

and U.S. Guaranteed Entities) because they are not required to register
(and therefore would not be subject to the Dodd-Frank swap dealer
regime).\156\ As noted above, however, the Commission believes that
these competitive disparities would be mitigated to the extent that
foreign jurisdictions impose comparable requirements. Furthermore, the
Commission reiterates its belief that the cross-border approach to the
SD registration threshold taken in the Proposed Rule is appropriately
tailored to further the policy objectives of the Dodd-Frank Act while
mitigating unnecessary burdens and disruption to market practices to
the extent possible.
---------------------------------------------------------------------------

\155\ Additionally, some unregistered dealers may opt to
withdraw from the market, thereby contracting the number of dealers
competing in the swaps market, which may have an effect on
competition and liquidity.
\156\ These non-U.S. dealers also may be able to offer swaps on
more favorable terms to U.S. persons, giving them a competitive
advantage over U.S. competitors with respect to U.S. counterparties.
---------------------------------------------------------------------------

3. Cross-Border Application of the Major Swap Participant Registration
Thresholds
As described in section V, the Proposed Rule would approach the
cross-border application of the MSP registration thresholds in a
similar manner as the SD de minimis registration threshold.
Specifically, the proposed rule would require U.S. persons, U.S.
Guaranteed Entities, and FCSs to include all of their swap positions in
their MSP calculations without exception. As further explained in
section V, in the Commission's view this result is appropriate because
the Commission believes that swap positions with U.S. persons, U.S.
Guaranteed Entities, and FCSs can in each case have a significant
effect on the U.S. financial system and therefore should be treated in
a similar manner for purposes of the MSP registration calculation.
For related reasons discussed in section V.B, the proposed rule
would also require Other Non-U.S. Persons to include in their MSP
calculations all of their swap positions with U.S. persons, U.S.
Guaranteed Entities, and FCSs, with a limited exception for
transactions executed anonymously on a SEF, DCM, or FBOT and cleared.
The Commission believes that swap positions with U.S. persons, U.S.
Guaranteed Entities, and FCSs can in each case have a significant
effect on the U.S. financial system and therefore should be treated in
a similar manner.\157\ Other Non-U.S. Persons would not, however, be
required to include swap positions with Other Non-U.S. Persons in their
MSP calculations, as the Commission does not believe these swaps would
present the type of risk to the U.S. financial system that the MSP
definition and registration requirements are intended to address.
---------------------------------------------------------------------------

\157\ In addition, the Commission considered whether to include
an exclusion similar to that discussed in the Guidance (which
provides that non-U.S. persons that are not ``guaranteed
affiliates'' generally could exclude from their MSP threshold
calculations swap positions with either a foreign branch of a U.S.
SD or a guaranteed affiliate that is an SD if either (i) the
potential non-U.S. MSP is a non-financial entity or (ii) the
potential non-U.S. MSP is a financial entity and the swap is either
cleared or the swap documentation requires the foreign branch or
guaranteed affiliate to collect daily variation margin with no
threshold). Although including corollary exclusions in the Proposed
Rule might result in reduced compliance costs, the Commission
preliminarily believes that such exclusions are unnecessary and
inappropriate for the reasons discussed above. See note 106, supra.
The Commission further does not believe that the decision not to
include such an exception would result in any new MSPs. The
Commission is also seeking comment in section V with regard to
whether to adopt the SEC approach of not requiring a non-U.S. person
to include in its MSP threshold calculations any swap positions for
which they (as opposed to the non-U.S. person's counterparty)
benefit from a guarantee creating a right of recourse against a U.S.
person. See note 113, supra, and accompanying text.
---------------------------------------------------------------------------

The Commission notes that no entities are currently registered as
MSPs. The Commission also does not believe that the proposed cross-
border approach to the MSP registration thresholds would result in
significant costs to market participants compared to the status quo
(i.e., would not cause any market participants to register as MSPs)
given the general similarities between the proposed rule's approach to
the MSP registration threshold calculations and the corollary approach
provided in the Guidance.\158\
---------------------------------------------------------------------------

\158\ See also note 157, supra.
---------------------------------------------------------------------------

4. Monitoring Costs
Under the proposed rule, market participants would need to continue
to monitor their swap activities in order to determine whether they
are, or continue to be, required to register as an SD or MSP. Given
that market participants are believed to have developed policies and
practices consistent with the cross-border approach to the SD/MSP
registration thresholds expressed in the Guidance, the Commission
believes that market participants would only incur incremental costs in
modifying their existing systems and policies and procedures in
response to the proposed rule (e.g., determining which swaps activities
or positions would be required to be included in the registration
threshold calculations).\159\
---------------------------------------------------------------------------

\159\ Although the cross-border approach to the MSP registration
threshold calculation in the Proposed Rule is not identical to the
approach included in the Guidance, see note 106, supra, the
Commission believes that any resulting increase in monitoring costs
resulting from the Proposed Rule would be incremental and de
minimis.
---------------------------------------------------------------------------

For example, the Commission notes that FCSs are likely to have
adopted policies and practices in line with the Guidance approach to
non-U.S. persons that are not guaranteed or conduit affiliates and
therefore may only be currently counting (or be provisionally
registered by virtue of) their swap dealing transactions with U.S.
persons, other than foreign branches of U.S. SDs.\160\ Although an FCS
would be required under the proposed rule to include all swaps
connected with its dealing activities in its de minimis calculation,
without exception, the Commission believes that any increase in
monitoring costs for FCSs would be de minimis, both initially and on an
ongoing basis, because they already have systems that track swap
dealing transactions with certain counterparties in place, which
includes an assessment of their counterparties' status.\161\
---------------------------------------------------------------------------

\160\ Although the Guidance provided that non-U.S. persons (that
are not guaranteed or conduit affiliates) should generally include
all of their swap dealing transactions with U.S. persons (excluding
foreign branches of a U.S. SD) as well as swaps with certain
guaranteed affiliates in their de minimis threshold calculations,
the Commission understands that at the current time guaranteed
affiliates, as defined in the Guidance, likely no longer exist or
are few in number.
\161\ See section VII.C.1, supra, for a discussion of assessment
costs.
---------------------------------------------------------------------------

5. Registration Costs
As a result of the proposed rule's classification scheme for market
participants (e.g., as U.S. persons, FCSs, U.S. Guaranteed Entities,
and Other Non-U.S. Persons, as described above) and the proposed
requirement that they apply the SD registration threshold accordingly,
the Commission recognizes that some market participants would be
required to register as SDs with the Commission who were previously not
required to register. In considering the costs and benefits of the
proposed rule, the Commission has estimated that approximately 14
unregistered non-U.S. persons may be required to register as SDs as a
result of the proposed rule. The basis for this estimated increase in
the number of SDs is discussed below in the accompanying Appendix. The
Commission previously estimated registration costs in its rulemaking on
registration of SDs; \162\ however, the costs that may be incurred
should be mitigated to the extent that these new SDs are affiliated
with an existing SD, as most of these costs have already been realized
by the consolidated group. The Commission has not included any
discussion of registration costs for MSPs because it believes that few
(if any) market participants will be required to

[[Page 71968]]

register as an MSP under the Proposed Rule, as noted above.
---------------------------------------------------------------------------

\162\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2623-25 (Jan. 19, 2012).
---------------------------------------------------------------------------

6. Programmatic Costs
As noted above, if the proposed rule is adopted, certain market
participants would likely be required to register as SDs and would
become subject to various requirements imposed on swap dealers under
the Dodd-Frank Act and related Commission's regulations. To the extent
that the proposed rule acts as a ``gating'' rule by affecting which
entities engaged in cross-border swaps activities must comply with the
SD requirements, the Proposed Rule could result in increased costs for
particular entities that otherwise would not register as an SD and
comply with the swap provisions.\163\
---------------------------------------------------------------------------

\163\ As noted above, the Commission believes that, if the
Proposed Rule is adopted, few (if any) market participants would be
required to register as an MSP under the Proposed Rule, and
therefore it has not included a separate discussion of programmatic
costs for registered MSPs in this section.
---------------------------------------------------------------------------

Market participants that are already registered (or provisionally
registered) as SDs or MSPs prior to adoption of the proposed rule (if
it is adopted) could also be affected by the proposal. In particular,
the Commission is proposing rules that would define certain key terms
for purposes of the Dodd-Frank swaps provisions (including future
cross-border rulemakings). Therefore, the proposal could affect the
treatment of market participants that are already registered (or
provisionally registered) across the Commission's entire cross-border
framework and attendant costs and benefits in addition to those that
are registering for the first time. The proposal also addresses the
cross-border application of the Commission's external business conduct
standards, including the extent to which such requirements would apply
to swap transactions that are arranged, negotiated, or executed by
registered SDs or MSPs using personnel located in the United States.
Further, as a result of the proposed rule, certain other market
participants would be categorized differently under the proposal than
they were under the Guidance, which could affect how they are treated
across the Commission's entire cross-border framework and attendant
costs and benefits.\164\ Although the exact treatment of market
participants across the Commission's cross-border framework is not set
out in this proposal, the Commission will address specific costs that
market participants will incur in each specific future rulemaking.
---------------------------------------------------------------------------

\164\ As discussed below in the accompanying Appendix, the
Commission has estimated that out of a total of 54 provisionally
registered non-U.S. SDs entities, 17 would be classified as an FCS
under the Proposed Rule.
---------------------------------------------------------------------------

7. Cross-Border Application of External Business Conduct Requirements
As discussed in section VI above, the proposed rule addresses the
cross-border application of the Commission's external business conduct
standards to transactions in which at least one of the counterparties
is an SD/MSP, including the extent to which they would apply to ANE
transactions. Under the proposed rule, U.S. SD/MSPs (other than foreign
branches of U.S. SD/MSPs) would be required to comply with the
Commission's external business conduct standards without substituted
compliance. As discussed above, this requirement reflects the
Commission's view that the Dodd-Frank external business conduct
standards should apply fully to registered SDs and MSPs domiciled and
operating in the United States because their swap activities are
particularly likely to affect the integrity of the swaps market in the
United States and raise concerns about the protection of participants
in those markets. The Commission does not expect that this requirement
would impose any additional costs on market participants in comparison
to the status quo given that the Commission's external business conduct
standards already apply to U.S. SD/MSPs under the Commission's external
business conduct standards rulemaking.\165\
---------------------------------------------------------------------------

\165\ See Business Conduct Standards for Swap Dealers and Major
Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012).
The Commission's discussion of cost-benefit considerations is at 77
FR at 9805-22.
---------------------------------------------------------------------------

Non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs would only be
required to comply with the external business conduct standards if (1)
the counterparty is a U.S. person (other than a foreign branch of a
U.S. SD/MSP) or (2) a non-U.S. SD or foreign branch of a U.S. SD uses
personnel located in the United States to arrange, negotiate, or
execute the transaction (or a swap that is offered but not entered
into), in which case the antifraud \166\ and fair dealing \167\
requirements would apply. The proposal to require non-U.S. SD/MSPs and
foreign branches of U.S. SD/MSPs to comply with the external business
conduct standards where the counterparty is a U.S. person (other than a
foreign branch of a U.S. SD/MSP) reflects the Commission's recognition
that the Dodd Frank Act's counterparty protection mandate focuses on
protecting U.S. market participants, such that the external business
requirements should apply fully to U.S. persons without substituted
compliance regardless of the location from which the SD/MSP may be
operating. The exception for counterparties that are foreign branches
of U.S. SD/MSPs reflects the Commission's belief that, even though the
foreign branch is an integral part of the U.S. SD/MSP, a foreign
regulatory regime may have a heightened interest in enforcing its own
sales practice requirements to transactions occurring within its
jurisdiction. Furthermore, this limited exception should reduce
competitive disparities between such foreign branches and FCSs when
transacting with non-U.S. clients. Again, the Commission does not
expect that, in this regard, the proposed rule would impose any
additional costs on market participants in comparison to the status
quo, particularly given that the proposed rule does not significantly
deviate from the Commission's existing cross-border policy in this
respect, as described in the Guidance.\168\
---------------------------------------------------------------------------

\166\ See 17 CFR 23.410.
\167\ See 17 CFR 23.433.
\168\ Under the approach described in the Guidance, non-U.S. SD/
MSPs and foreign branches of U.S. SD/MSPs generally would not comply
with the business conduct standards to the extent that their
counterparty is a foreign branch of a U.S. SD/MSP or a non-U.S.
person.
---------------------------------------------------------------------------

The proposed rule goes beyond the scope of the Guidance, however,
by making clear that non-U.S. SDs and foreign branches of U.S. SDs
would be required to comply with the antifraud and fair dealing
external business conduct standards with respect to ANE transactions.
This requirement would therefore impose additional compliance costs
relative to the status quo not only on existing non-U.S. SDs and
foreign branches of U.S. SDs, which likely currently do not comply with
the external business conduct standards with respect to their
transactions with non-U.S. persons or foreign branches of U.S. SD/MSPs,
but any non-U.S. persons that are required to register by virtue of the
proposed rule's approach to the SD registration threshold. As discussed
above, where swaps are arranged, negotiated or executed in the United
States, the Commission has a strong supervisory interest both in
protecting involved counterparties against fraud, manipulation and
other abusive practices of an SD and in requiring that the SD
communicate in a fair and balanced manner with these counterparties
based on principles of fair dealing and good faith. Taking the proposed
rule as a whole, however, the Commission does not believe that
application of the remaining external business conduct standards would
be necessary to advance the goals of the

[[Page 71969]]

Dodd-Frank Act. Accordingly, by limiting application of the external
business conduct standards to ANE transactions to the antifraud and
fair dealing requirements, the Proposed Rule is appropriately tailored
to ensure a basic level of counterparty protections while, consistent
with the principles of international comity, recognizing the
supervisory interests of the relevant foreign jurisdictions in applying
their own sales practices requirements to transactions involving
counterparties that are non-U.S. persons (or foreign branches of U.S.
SD/MSPs) and avoiding potentially unnecessarily duplicative
requirements.
8. Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
a. Protection of Market Participants and the Public
The Commission believes the proposed rule would support protection
of market participants and the public. By focusing on and capturing
swap dealing transactions and swap positions involving U.S. persons and
non-U.S. persons with a strong nexus to the United States (e.g., FCSs
and U.S. Guaranteed Entities), the Proposed Rule's approach to the
cross-border application of the SD and MSP registration threshold
calculations works to ensure that, consistent with CEA section 2(i) and
the policy objectives of the Dodd-Frank Act, significant participants
in the U.S. market are subject to the CEA's swap regime. The proposed
cross-border approach to the external business conduct standards,
including applying the antifraud and fair dealing requirements to ANE
transactions, similarly ensures that the Dodd-Frank market protections
apply to swap activities that are particularly likely to affect the
integrity of and raise concerns about the protection of participants in
the U.S. market while, consistent with principles of international
comity, recognizing the supervisory interests of the relevant foreign
jurisdictions in applying their own sales practices requirements to
transactions involving non-U.S. SD/MSPs and foreign branches of U.S.
SD/MSPs with non-U.S. persons and foreign branches of U.S. SD/MSPs.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
To the extent that the proposed rule leads additional entities to
register as SDs, the Commission believes that the proposed rule could
enhance the financial integrity of the markets by bringing significant
U.S. swaps market participants under Commission oversight, which may
reduce market disruptions and foster confidence and transparency in the
U.S. market. The Commission recognizes that the Proposed Rule's cross-
border approach to the SD and MSP registration thresholds may create
competitive disparities among market participants, based on the degree
of their connection to the United States, that could contribute to
market inefficiencies, including market fragmentation and decreased
liquidity, as certain market participants may reduce their exposure to
the U.S. market. As a result of reduced liquidity, counterparties may
pay higher prices, in terms of bid-ask spreads (or in the case of
swaps, the cost of the swap and the cost to hedge). Such competitive
effects and market inefficiencies may, however, be mitigated by global
efforts to harmonize approaches to swap regulation and by the large
inter-dealer market, which may link the fragmented markets and enhance
liquidity in the overall market. On balance, the Commission believes
that the proposed rule's approach is necessary and appropriately
tailored to ensure that the purposes of the Dodd-Frank swap regime and
its registration requirements are advanced while still establishing a
workable approach that recognizes foreign regulatory interests and
minimizes competitive disparities and market inefficiencies to the
degree possible. The Commission further believes that the proposed
rule's cross-border approach to the external business conduct standards
will promote the financial integrity of the markets by fostering
transparency and confidence in the major participants in the U.S. swap
markets.
c. Price Discovery
The Commission recognizes that the proposed rule's approach to the
cross-border application of the SD and MSP registration thresholds
could also have an effect on liquidity, which may in turn influence
price discovery. As liquidity in the swaps market is lessened and fewer
dealers compete against one another, bid-ask spreads (cost of swap and
cost to hedge) may widen and the ability to obtain the `true' price of
a swap may be hindered. However, as noted above, these negative effects
would be mitigated as jurisdictions harmonize their swaps initiative
and global financial institutions continue to manage their swaps books
(i.e., moving risk with little or no cost, across an institution to
market centers, where there is the greatest liquidity). The Commission
does not believe that the proposed rule's approach to the external
business conduct standards, however, will have a measurable impact on
price discovery.
d. Sound Risk Management Practices
The Commission believes that the proposed rule's approach could
promote the development of sound risk management practices by ensuring
that significant participants in the U.S. market are subject to
Commission oversight (via registration), including in particular
important counterparty disclosure and recordkeeping requirements that
will encourage policies and practices that promote fair dealing while
discouraging abusive practices in U.S. markets.
e. Other Public Interest Considerations
The Commission has not identified any public interest
considerations related to the costs and benefits of the proposed rule.
Request for Comment. The Commission invites comment on all aspects
of the costs and benefits associated with the proposed rule, including
the following:
1. Is the Commission's assumption that few, if any, market
participants will be required to register as MSPs as a result of the
proposed rule (as compared to the status quo) correct? If not, please
provide an estimate of the number of market participants that are
likely to have to register as MSPs as a result of the proposed rule,
including an explanation for the basis of the estimate, and associated
costs and benefits of the Proposed Rule's provisions for MSPs
(including potential MSPs).
2. The Commission preliminarily believes that a requirement that
Other Non-U.S. Persons include ANE transactions in their SD
registration threshold calculations would not be likely to increase the
scope of entities that would be covered under its swap requirements,
but may result in significant burdens. Is that belief correct? If not,
please provide an

[[Page 71970]]

estimate of the potential costs and benefits associated with including
such a requirement?
3. The Commission invites information regarding whether and the
extent to which specific foreign requirement(s) may affect the costs
and benefits of the proposed rule, including information identifying
the relevant foreign requirement(s) and any monetary or other
quantitative estimates of the potential magnitude of those costs and
benefits.
4. The Commission is estimating that 17 currently registered non-
U.S. SDs would be classified as FCSs and that 14 unregistered non-U.S.
persons may be classified as FCSs and required to register as new SDs
because their swap dealing transactions are in excess of the SD de
minimis threshold. The basis for these estimates is set forth below in
the accompanying Appendix. The Commission seeks comments regarding its
estimates of the scope and number of market participants potentially
affected by the proposed rule, including its methodology for arriving
at the estimates in the Appendix to Cost Benefit Considerations.
9. Appendix to Cost-Benefit Considerations
In this Appendix, the Commission explains its methodology for
estimating, as a result of the proposed rule, the number of new
entities that may be required to register with the Commission as SDs
and the number of currently registered non-U.S. SDs that would be
classified as an FCS. In arriving at this estimate, the Commission
relied on SDR data and other data sources.\169\ However, the Commission
faced a number of challenges in conducting a quantitative analysis. In
particular, the Commission does not have SDR data on trades between two
non-U.S. persons, and its estimate with regard to the number of non-
U.S. persons that may be required to register as SDs by virtue of being
FCSs is based on certain assumptions and adjustments, as explained
further below.
---------------------------------------------------------------------------

\169\ Additional sources are referenced below. See note 174,
infra.
---------------------------------------------------------------------------

a. Estimates Regarding U.S. Persons and U.S. Guaranteed Entities
The Commission is estimating that overall there will not be an
increase in the number of persons that will be required to register as
U.S. SDs as a result of the proposed rule, as the proposed rule's
approach to the swaps of U.S. persons mirrors the approach in the
Guidance (i.e., all swap dealing transactions must be included).
Furthermore, the Commission does not expect any increase in the number
of SDs resulting from changes to the U.S. person definition.\170\
---------------------------------------------------------------------------

\170\ There may be a decrease in the number of funds or other
entities that fall within the U.S. person definition as compared to
the Guidance because the proposed U.S. person definition does not
include the U.S. majority-owned funds provision or the catchall
provision that were included in the U.S. person interpretation in
the Guidance, and the Commission is clarifying that the proposed
definition does not capture international financial institutions. On
the other hand, because the unlimited U.S. responsibility prong does
not include a majority ownership requirement (in a modification from
the Guidance), this could increase the number of entities that fall
within the U.S. person definition resulting in a concomitant
increase in the number of SDs as compared to the Guidance. In
addition, the Commission is not providing a safe harbor for funds
that are only solicited to non-U.S. persons, which is a difference
from the policy discussed in the Guidance. Therefore, overall the
Commission does not expect any increase in the number of SDs
resulting from changes to the U.S. person definition.
---------------------------------------------------------------------------

The Commission is also estimating that there will be no increase in
the number of new SDs that are U.S. Guaranteed Entities, as the
proposed rule uses a narrower definition of a guarantee (compared to
the Guidance), which the Commission believes will result in few, if
any, U.S. Guaranteed Entities.\171\ Therefore, for purposes of this
cost-benefit analysis, the Commission estimates that currently there
are no U.S. Guaranteed Entities (that are not FCSs) with over $8
billion in swaps dealing transactions.
---------------------------------------------------------------------------

\171\ As explained in the preamble, the Commission believes that
there are few U.S. Guaranteed Entities at this time. See note 153,
supra. Accordingly, the Commission does not expect an increase in
the number of new SDs that would be required to register as a result
of the Proposed Rule's requirement that a U.S. Guaranteed Entity
include all of its swaps in its SD de minimis calculation.
---------------------------------------------------------------------------

b. Estimates Regarding Foreign Consolidated Subsidiaries
If the proposed rule is adopted, the Commission estimates that 17
currently registered non-U.S. SDs would be classified as FCSs and that
14 unregistered non-U.S. persons may be classified as FCSs and required
to register as new SDs because their swap dealing transactions are in
excess of the SD de minimis threshold. The basis for these estimates is
set forth below.
(1) Estimate of the Number of Non-U.S. Swap Dealers That Would Be
Classified as FCSs
In estimating the number of SDs that, as a result of the proposed
rule, would shift from a category of non-U.S. SDs to the new category,
FCS, the Commission reviewed its current list of registered SDs. As the
definition of an FCS is dependent on whether the SD is a non-U.S.
person that has an ultimate U.S. parent entity, the Commission was able
to isolate those entities from a list of non-U.S. SDs. From this list,
the Commission estimated that out of a total of 54 provisionally
registered non-U.S. SDs, 17 would be classified as an FCS under the
proposed rule.
(2) Estimate of Potential FCSs That May Be Required To Register as Swap
Dealers
The Commission estimates that approximately 14 unregistered non-
U.S. persons with a U.S. ultimate parent entity under U.S. GAAP
(``potential FCSs'') may be required to register as SDs as a result of
the proposed rule. The Commission does not currently collect data on
trades between non-U.S. persons (including those of potential FCSs with
non-U.S. persons). Therefore, in estimating the number of potential
FCSs that may be required to register as SDs, the Commission relied on
SDR data regarding inter-affiliate trades between potential FCSs and
their affiliated U.S. SDs (``inter-affiliate trades'').
The Commission believes that SDR data on inter-affiliate trades
provide a reasonable basis upon which to estimate the outward-dealing
trades of potential FCSs with non-U.S. persons, provided that the
estimate is scaled to the global swap market (as detailed below).\172\
As described in section I.B, global financial groups commonly carry out
swap dealing activities in multiple jurisdictions through branches or
affiliates that effectively operate as a single business under the
control of the ultimate parent entity. Under this model, where a non-
U.S. branch or affiliate in the global financial group enters into a
swap with a non-U.S. client in a local market, it will then offset the
risk associated with the outward-facing swap via an inter-affiliate
swap, which is likely to be with an affiliated dealer or market maker
in the particular swap in the group.\173\

[[Page 71971]]

Accordingly, the Commission believes that inter-affiliate trades
provide a reasonable means of estimating a substantial portion of a
potential FCS's outward-facing swap dealing with non-U.S.
counterparties.
---------------------------------------------------------------------------

\172\ The Commission is unable to quantify certain swaps that
may fall under the Proposed Rule. Specifically, there are dealing
transactions entered into by potential FCSs with non-U.S.
counterparties that would be included in the SD de minimis
calculation of potential FCSs in this rulemaking that are not
reported. Therefore, an estimate based solely on the SDR data for
inter-affiliate trades would be under-inclusive because it only
covers inter-affiliate trades between potential FCSs and their
affiliated U.S. SDs. Accordingly, as detailed below, the Commission
has scaled the inter-affiliate trade data to the global swaps
market.
\173\ The Commission understands that risk may move in either
direction in an inter-affiliate trade, and therefore, the
Commission's use of SDR data on inter-affiliate trades between a
potential FCS and an affiliated U.S. SD may also be over-inclusive
in estimating the number of SDs. However, for the reasons discussed
in this section, the Commission believes that SDR data on potential
FCSs' inter-affiliate swaps with affiliated U.S. SDs is much more
likely to be under-inclusive as a means of estimating the number of
potential FCSs that would be required to register as a result of the
Proposed Rule.
---------------------------------------------------------------------------

However, there is an important limitation on the use of this inter-
affiliate data which is likely to cause it to be under-inclusive as a
proxy for the outward-facing trades of these potential FCSs with non-
U.S. persons, as the Commission's SDR data only includes swaps that are
between a potential FCS and an affiliated U.S. SD. Potential FCSs may
also transfer the risk of some of their outward-facing dealing
activities to affiliated non-U.S. SDs located in market centers outside
the United States (e.g., London and Tokyo) or retain the risk in their
dealer portfolio (and an FCS must count all of its outward-facing
dealing transactions toward its SD de minimis threshold under the
proposed rule). Consequently, the Commission believes that using SDR
data on inter-affiliate trades (which only includes a potential FCS's
inter-affiliate swaps with an affiliated U.S. SD) as a proxy for swap
dealing between a potential FCS and non-U.S. persons is likely to be
under-inclusive. Therefore, the Commission has scaled the SDR data on
inter-affiliate trades between a potential FCS and an affiliated U.S.
SD to the global swaps market by applying a factor of 2 (which
represents the approximate ratio between total U.S. swaps market and
that of the global swaps market),\174\ in order to estimate the number
of potential FCSs that may be required to register as SDs as a result
of the proposed rule.
---------------------------------------------------------------------------

\174\ The factor of 2 that the Commission is using to scale the
data upon which it is basing its estimate to the global swaps market
is based on the inverse of the 57% scaling factor used in the cost-
benefit analysis for the Commission's Final Margin Rule, rounded up
to 2. In the Final Margin Rule, the Commission applied a 57% scale
factor to the global notional amount of margin estimated in ISDA and
BCBS-IOSCO surveys in order to better align its estimate of the
global impact of margin requirements for uncleared swaps with the
impact of the U.S. rules. The Commission utilized SDR data on
uncleared interest rate swaps, which represent the majority of the
notional value associated with uncleared swaps, to compute the 57%
scale factor. The 57% scale factor was designed to represent the
notional amount of uncleared interest rate swaps reported to the
SDRs as a fraction of the global notional amount of uncleared
interest rate swaps. See Final Margin Rule, 81 FR at 690-91
(Appendix A).
---------------------------------------------------------------------------

Based on the foregoing assumptions, the Commission obtained SDR
data on inter-affiliate swaps for each potential FCS with affiliated
U.S. SDs during the period between March 5, 2015 and March 4, 2016 (the
``Reference Period''). Because this inter-affiliate trade data only
includes open trades as of the end of the Reference Period (i.e.,
trades that were closed out during the Reference Period are not
accounted for in the data), the Commission used a $1 billion notional
amount as a screening threshold to identify those potential FCSs that
may be required to register as an SD under the proposed rule, rather
than the current $8 billion SD de minimis threshold. Seven of the non-
U.S. persons identified as potential FCSs had inter-affiliate trades
with U.S. SDs that exceeded this $1 billion screening threshold. The
Commission then multiplied its estimate of 7 by a scaling factor of 2
(as described above) to estimate that approximately 14 potential FCSs
may be required to register as SDs as a result of the proposed rule.
c. Other Non-U.S. Persons
The Commission is unable to estimate the number of new SDs that may
be required to register as a result of the proposed rule's requirement
that an Other Non-U.S. Person include swaps with an FCS for SD
registration threshold purposes due to the lack of SDR data regarding
transactions between non-U.S. persons. The Commission also is not
estimating the number of new SDs that may be required to register as a
result of the proposed rule's requirement that an Other Non-U.S. Person
include swaps with a U.S. Person or U.S. Guaranteed Entity in its SD de
minimis registration threshold. The Commission believes that few, if
any, additional Other Non-U.S. Persons would be required to register as
an SD as a result of changes made by the proposed rule (as compared to
the Guidance) with respect to either U.S. persons or U.S. Guaranteed
Entities.\175\
---------------------------------------------------------------------------

\175\ The Commission believes that any increase in the number of
Other Non-U.S. SDs that are required to register as an SD as a
result of the proposed rule's requirement that an Other Non-U.S.
Person include swaps with a U.S. Person in its SD de minimis
calculation would be de minimis because the Guidance expresses a
similar policy. Under the Guidance, non-U.S. persons that are not
guaranteed or conduit affiliates generally include swaps with U.S.
persons, excluding foreign branches of U.S. SDS, in their SD de
minimis calculation. To the extent this reflects current industry
practice, the Commission believes that few, if any, additional Other
Non-U.S. Persons would be required to register as SDs as a result of
deviation from the Guidance by the proposed rule with regard to
counting swaps with U.S. persons.
In addition, as explained in the preamble, the Commission
believes that there are few U.S. Guaranteed Entities at this time.
See note 153, supra. Accordingly, the Commission does not expect an
increase in the number of new SDs that would be required to register
as a result of the proposed rule's requirement that an Other Non-
U.S. Person include swaps with a U.S. Guaranteed Entity in its SD de
minimis calculation.
---------------------------------------------------------------------------

As noted above, the Commission requests comment regarding its
estimates of the scope and number of market participants potentially
affected by the proposed rule, including its methodology for arriving
at the estimates included in this Appendix.

VIII. Preamble Summary Tables

Table A--Cross-Border Application of the Swap Dealer De Minimis Threshold
[Table A should be read in conjunction with the text of the proposed rule]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Counterparty [rarr] Non-U.S. person
-------------------------------------------------
U.S. Person............ U.S. Guaranteed........ Other Non-U.S.
Potential SD [darr] entity \1\/FCS......... person
----------------------------------------------------------------------------------------------------------------
U.S. Person.......................... Include................ Include................ Include.
Non-U.S. Person:
U.S. Guaranteed Entity \1\/FCS... Include................ Include................ Include.
Other Non-U.S. Person............ Include \2\............ Include \2\............ Exclude.
----------------------------------------------------------------------------------------------------------------
\1\ A non-U.S. person that is a U.S. Guaranteed Entity with respect to a swap would include the swap in its de
minimis calculation if its swap counterparty has rights of recourse against a U.S. person with respect to its
obligations under the swap.
\2\ An Other Non-U.S. Person would include all swaps connected with its dealing activity with counterparties
that are U.S. persons, U.S. Guaranteed Entities, or FCSs unless the swap is executed anonymously on a
registered SEF, DCM, or FBOT and cleared.

[[Page 71972]]

Additionally, a potential SD, whether a U.S. or non-U.S. person, would aggregate all swaps connected with its
dealing activity with those of persons controlling, controlled by, or under common control with such potential
SD to the extent that these affiliated persons are themselves required to include those swaps in their own de
minimis thresholds, unless the affiliated person is a registered SD.

Table B--Cross-Border Application of the Major Swap Participant Registration Thresholds
[Table B should be read in conjunction with the text of the proposed rule]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Counterparty [rarr] Non-U.S. person
-------------------------------------------------
U.S. Person............ U.S. Guaranteed........ Other Non-U.S.
Potential MSP [darr] entity \1\/FCS......... person
----------------------------------------------------------------------------------------------------------------
U.S. Person.......................... Include................ Include................ Include.
Non-U.S. Person:
U.S. Guaranteed Entity \a\/FCS... Include................ Include................ Include.
Other Non-U.S. Person............ Include \b\............ Include \b\............ Exclude.
----------------------------------------------------------------------------------------------------------------
\a\ A non-U.S. person that is a U.S. Guaranteed Entity with respect to the relevant swap would include the swap
in its MSP threshold calculations if its swap counterparty has rights of recourse against a U.S. person with
respect to its obligations under the swap. Additionally, all swap positions that are subject to recourse
should be attributed to the guarantor, whether it is a U.S. person or a non-U.S. person, unless the guarantor,
the guaranteed entity, and its counterparty are Other Non-U.S. Persons.
\b\ An Other Non-U.S. Person would include all of its swap positions with counterparties that are U.S. persons,
U.S. Guaranteed Entities, or FCSs unless the swap is executed anonymously on a registered SEF, DCM, or FBOT
and cleared.

Table C--Cross-Border Application of the External Business Conduct Standards
[Table C should be read in conjunction with the text of the proposed rule]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Counterparty [rarr] U.S. Person
--------------------------------------------------
Not a foreign branch... Foreign branch of...... Non-U.S. person
Potential SD [darr] of an SD/MSP........... an SD/MSP..............
----------------------------------------------------------------------------------------------------------------
U.S. Person:
Not a Foreign Branch............. Apply.................. Apply.................. Apply.
Foreign Branch................... Apply.................. Do Not Apply *......... Do Not Apply.*
Non-U.S. Person...................... Apply.................. Do Not Apply *......... Do Not Apply.*
----------------------------------------------------------------------------------------------------------------
* An SD that uses personnel located in the United States to arrange, negotiate, or execute a swap transaction
(or a swap that is offered but not entered into) would nevertheless be subject to Commission regulations
23.410 (Prohibition on Fraud, Manipulation, and other Abusive Practices) and 23.433 (Fair Dealing).

List of Subjects

17 CFR Part 1

Counterparties, Cross-border, Major swap participants, Swap
dealers, Swaps.

17 CFR Part 23

Business conduct standards, Counterparties, Cross-border, Major
swap participants, Swap dealers, Swaps.

For the reasons discussed in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24
(2012).

0
2. Amend Sec. 1.3 as follows:
0
a. Add paragraphs (ggg)(7) and (nnn);
0
b. Reserve paragraphs (ooo)-(www) and (tttt)-(zzzz); and
0
c. Add paragraph (aaaaa).
The additions to read as follows:

Sec. 1.3 Definitions.

* * * * *
(ggg) * * *
(7) Cross-border application of de minimis registration threshold
calculation.
(i) For purposes of determining whether an entity engages in more
than a de minimis quantity of swap dealing activity under Sec.
1.3(ggg)(4)(i), a person shall include the following swaps (subject to
Sec. 1.3(ggg)(6)):
(A) If such person is a U.S. person, all swaps connected with the
dealing activity in which such person engages;
(B) If such person is a Foreign Consolidated Subsidiary, all swaps
connected with the dealing activity in which such person engages;
(C) If such person is a non-U.S. person that is not a Foreign
Consolidated Subsidiary, and its obligations under the relevant swap(s)
are guaranteed by a U.S. person, all swaps connected with the dealing
activity in which such person engages as to which its obligations under
the relevant swap(s) are guaranteed by a U.S. person (in addition to
any swaps that it is required to include pursuant to paragraph
(ggg)(7)(i)(D) of this section);
(D) If such person is a non-U.S. person that is not a Foreign
Consolidated Subsidiary, and its obligations under the relevant swap(s)
are not guaranteed by a U.S. person, all of the following swaps
connected with the dealing activity in which such person engages (in
addition to any swaps that it is required to include pursuant to
paragraph (ggg)(7)(i)(C) of this section) (unless the swap is entered
into anonymously on a registered designated contract market, registered
swap execution facility, or registered foreign board of trade and
cleared through a registered or exempt derivatives clearing
organization):
(1) Swaps with a counterparty that is a U.S. person;
(2) Swaps with a counterparty that is a Foreign Consolidated
Subsidiary; and
(3) Swaps with a counterparty that is a non-U.S. person that is not
a Foreign Consolidated Subsidiary and whose obligations under the
relevant swap(s) are guaranteed by a U.S. person.
(ii) [Reserved]
* * * * *

[[Page 71973]]

(nnn) Application of major swap participant tests in the cross-
border context.
(1) For purposes of determining a person's status as a major swap
participant as defined in section 1a(33) of the Act, 7 U.S.C. 1(a)(33)
and the rules and regulations thereunder, a person shall include the
following swap positions:
(i) If such person is a U.S. person, all swap positions that are
entered into by the person;
(ii) If such person is a Foreign Consolidated Subsidiary, all swap
positions that are entered into by the person; and
(iii) If such person is a non-U.S. person that is not a Foreign
Consolidated Subsidiary, and its obligations under the relevant swap(s)
are guaranteed by a U.S. person, all swap positions that are entered
into by the person as to which its obligations under the relevant
swap(s) are guaranteed by a U.S. person (in addition to any swap
positions that it is required to include pursuant to paragraph
(nnn)(1)(iv) of this section);
(iv) If such person is a non-U.S. person that is not a Foreign
Consolidated Subsidiary, and its obligations under the relevant swap(s)
are not guaranteed by a U.S. person, all of the following swap
positions that are entered into by the person (in addition to any swap
positions that it is required to include pursuant to paragraph
(nnn)(1)(iii) of this section) (unless the swap position is entered
into anonymously on a registered designated contract market, registered
swap execution facility, or registered foreign board of trade and
cleared through a registered or exempt derivatives clearing
organization):
(A) Swap positions with a counterparty that is a U.S. person;
(B) Swap positions with a counterparty that is a Foreign
Consolidated Subsidiary; and
(C) Swap positions with a counterparty that is a non-U.S. person
that is not a Foreign Consolidated Subsidiary and whose obligations
under the relevant swap are guaranteed by a U.S. person.
(2) [Reserved]
(ooo)-(www) [Reserved]
* * * * *
(tttt)-(zzzz) [Reserved]
(aaaaa) Cross-border definitions. The following terms, as used in
the rules and regulations in this chapter, with respect to the cross-
border application of the swap provisions of the Act (or of the rules
and regulations in this chapter prescribed or promulgated thereunder),
shall have the meanings hereby assigned to them, unless the specific
rule or regulation in this chapter otherwise provides or the context
otherwise requires:
(1) Foreign Consolidated Subsidiary means a non-U.S. person in
which an ultimate parent entity that is a U.S. person (``U.S. ultimate
parent entity'') has a controlling financial interest, in accordance
with U.S. generally accepted accounting principles, such that the U.S.
ultimate parent entity includes the non-U.S. person's operating
results, financial position and statement of cash flows in the U.S.
ultimate parent entity's consolidated financial statements, in
accordance with U.S. generally accepted accounting principles.
(2) Non-U.S. person means any person that is not a U.S. person.
(3) Ultimate parent entity means the parent entity in a
consolidated group in which none of the other entities in the
consolidated group has a controlling interest, in accordance with U.S.
generally accepted accounting principles.
(4) United States means the United States of America, its
territories and possessions, any State of the United States, and the
District of Columbia.
(5) U.S. person means:
(i) A natural person who is a resident of the United States;
(ii) An estate of a decedent who was a resident of the United
States at the time of death;
(iii) A corporation, partnership, limited liability company,
business or other trust, association, joint-stock company, fund or any
form of entity similar to any of the foregoing (other than an entity
described in paragraph (aaaaa)(5)(iv) or (v) of this section) (``legal
entity''), in each case that is organized or incorporated under the
laws of the United States or that has its principal place of business
in the United States, including any branch of the legal entity;
(iv) A pension plan for the employees, officers or principals of a
legal entity described in paragraph (aaaaa)(5)(iii) of this section,
unless the pension plan is primarily for foreign employees of such
entity;
(v) A trust governed by the laws of a state or other jurisdiction
in the United States, if a court within the United States is able to
exercise primary supervision over the administration of the trust;
(vi) A legal entity (other than a limited liability company,
limited liability partnership or similar entity where all of the owners
of the entity have limited liability) that is owned by one or more
persons described in paragraphs (aaaaa)(5)(i) through (v) of this
section and for which such person(s) bears unlimited responsibility for
the obligations and liabilities of the legal entity, including any
branch of the legal entity; or
(vii) An individual account or joint account (discretionary or not)
where the beneficial owner (or one of the beneficial owners in the case
of a joint account) is a person described in paragraphs (aaaaa)(5)(i)
through (vi) of this section.

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
3. The authority citation for part 23 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Public Law 111-203, 124 Stat. 1641 (2010).

0
4. Add Sec. 23.452 in subpart H to read as follows:

Sec. 23.452 Cross-border application.

(a) Except as provided in paragraph (b) of this section, anything
else to the contrary in this subpart notwithstanding, a swap dealer or
major swap participant that is a non-U.S. person or a foreign branch of
a U.S. person shall not be subject to the requirements of this subpart
with respect to any transaction in swaps (or any swap that is offered
but not entered into) where its counterparty is a foreign branch of a
U.S. person that is a swap dealer or major swap participant or is a
non-U.S. person.
(b) Notwithstanding paragraph (a) of this section, a swap dealer
that is a non-U.S. person or a foreign branch of a U.S. person shall be
subject to the requirements set forth in Sec. Sec. 23.410 and 23.433
if the swap dealer uses personnel located in the United States to
arrange, negotiate, or execute a transaction in swaps or a swap that is
offered but not entered into.

Issued in Washington, DC, on October 11, 2016, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

Note: The following appendices will not appear in the Code of
Federal Regulations.

[[Page 71974]]

Appendices to Cross-Border Application of the Registration Thresholds
and External Business Conduct Standards Applicable to Swap Dealers and
Major Swap Participants--Commission Voting Summary, Chairman's
Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.

Appendix 2--Statement of Chairman Timothy G. Massad

I am pleased to support this proposal, which addresses several
important aspects of the cross-border application of our swaps
rules.
First, it seeks to enhance clarity and consistency in the
application of our rules by proposing to define certain key terms,
including the terms ``U.S. person'' and ``Foreign Consolidated
Subsidiary'' (FCS), consistent with how they are defined in the
Commission's cross-border margin rule.
Second, the proposal provides a clear standard for determining
whether a swap dealing transaction should be included in an entity's
calculation of whether it must register as a swap dealer. The
proposal states that for U.S. persons, as well as those non-U.S.
persons whose swaps are guaranteed by a U.S. person or that are a
financially consolidated subsidiary of a U.S. ultimate parent (FCS),
all swap dealing transactions must be included. All other persons
would include swap dealing transactions with counterparties that are
U.S. persons or FCSs, as well as swaps that have a U.S. guarantee,
unless the swap is executed anonymously on a registered platform and
cleared. The Proposed Rule provides a similar counting framework for
the major swap participant registration threshold.
We are also proposing the application of external business
conduct (EBC) standards for cross-border transactions, including
those transactions that are arranged, negotiated, or executed by
personnel in the U.S. Specifically, U.S. swap dealers would be
required to comply with applicable standards, with the exception of
their foreign branches. Non-U.S. swap dealers and foreign branches
of U.S. swap dealers would be required to comply with applicable EBC
standards for transactions with a U.S. counterparty--other than the
foreign branch of a U.S. entity. For all other transactions, these
dealers would not be subject to EBC standards, unless they use
personnel located in the United States to arrange, negotiate, or
execute such transactions. In that case, they would be required to
comply with those EBC standards prohibiting fraud and other abusive
conduct.
This aspect of our proposal follows up on a staff advisory and a
Commission request for comment relating to non-U.S. swap dealers
using personnel located in the United States to arrange, negotiate,
or execute swap transactions. We will address whether other
requirements should apply to such transactions at a later date.
This is just the latest in a number of steps we have taken to
address cross-border issues in swaps rules. We have harmonized
clearinghouse regulation through our accord with the European
Commission--as well as through our work to address recovery and
resolution internationally. We have given exemptions from
registration to several foreign clearinghouses, and granted
``foreign board of trade'' status to several exchanges. We are
actively working on harmonizing data reporting standards, and we are
looking at whether we can do the same regarding trading
requirements. And we harmonized requirements on margin for uncleared
swaps, adopted a cross-border approach to that rule, and recently
issued our first comparability determination for margin.
I wish to express my appreciation for the hard work of the CFTC
staff in putting together these important rules. I thank
Commissioner Bowen and Giancarlo for their support. And I encourage
market participants to give us their comments on this proposed rule.

Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen

The rule proposal we have before us is significant. It addresses
a number of important issues including: (i) The ``US Person''
definition; (ii) the treatment of foreign affiliates of US Persons
(``Foreign Consolidated Subsidiaries'' or ``FCS''); (iii) the
application of the de minimis threshold and business conduct
standards to non-US registered dealers; and (iv) the treatment of
swap trades that are ``arranged, negotiated, or executed'' in the US
by foreign-based dealers but booked elsewhere.
I intend to vote ``yes'' for this proposed rule. Although I do
not agree with every part of the proposal, I believe the proposal
and questions lay out the key issues to allow for meaningful
comments from the public. In that vein, I strongly urge market
participants and members of the general public to comment on this
rule proposal before the Commission makes a final decision. Its
importance to our overall effort to regulate the swaps market
requires us to take special care in considering how average
investors and interested citizens feel about this proposal before we
decide to finalize it.
I like many aspects of this rule. First, I am happy to see that
it largely adopts the US Person and FCS definitions from the cross
border margin rule. Whenever possible, we should try to make our
rules consistent with each other; so this is a move in the right
direction.
Second, it proposes that three important groups: US-based
dealers, non-US entities guaranteed by US persons, and FCS--each
count all of their swaps--those with US persons and non-US persons--
towards the de minimis threshold. It is important that we subject
non-US entities guaranteed by US persons, and FCS to this standard,
because their swap risks have a material effect on the related US
entity, and therefore, poses risks to our US financial system. Thus,
it makes sense that we count all of their dealing activity in
determining whether they engage in enough dealing to require
registration.
However, I especially invite robust comment on certain aspects
of the proposal:
Conduit Affiliates: I am concerned that the current proposal
does not capture the dealing activity of ``conduit affiliates.'' A
conduit affiliate is (i) a non-US affiliate that is consolidated
with a US entity (or where a non-US affiliate and a US entity are
consolidated) where there is no ultimate US parent and (ii) which
transfers, through back to back swaps, the risk of swaps it enters
into with non-US counterparties to that US person. They, in essence,
serve as conduits for US entities to engage in, and ultimately
assume the risk of, non-US swap activity. One would assume that
these conduit affiliates would be captured by our rules and
therefore would have to count this activity towards the de minimis
threshold. However, this is not the case. That US entity could
engage in billions of dollars of swap activity through its conduit
affiliate and avoid all of our swap requirements.\1\ This is a
market risk concern. This issue is clearly highlighted in the
questions, and I would be very interested in hearing comments about
whether we should close this loophole, and require that conduit
affiliates count all their trades, in which the risk is transferred
to a US dealer, towards the de minimis threshold.
---------------------------------------------------------------------------

\1\ Also, if we find the jurisdiction where the transaction
occurs comparable, none of these swaps would have to be margined
either.
---------------------------------------------------------------------------

Arranged, Negotiated, or Executed: While I am believe it is good
that the proposal requires that all US trading desk personnel of
non-US dealers are held to conduct standards, I am not certain that
we have gone far enough. Specifically, I encourage comment on
whether the dealing activity that occurs in the US with US personnel
from the trading desk of a non-US dealer should be counted towards
that non-US dealer's threshold, even though the transactions are
between two non-US counterparties and are booked outside the US. The
FCS definition rightly requires non-US consolidated subsidiaries
with a US parent to count all of their swap dealing activity towards
the threshold, regardless of where it is booked. Does it make sense
then that non-US dealers can use their US desks to engage in
billions of dollars of swap dealing and never have that counted
because the swaps are booked elsewhere? Are we, unnecessarily,
putting US dealers at a serious competitive disadvantage to other
dealers who are doing the very same thing sometimes just a few
offices away? \2\ Moreover, our fellow regulator, the Securities and
Exchange Commission has answered ``yes'' to that question: Under
their rules, non-US dealers must count security-based swap
transactions that are arranged, negotiated or executed by US
personnel toward their de minimis

[[Page 71975]]

threshold.\3\ Thus, if we choose not to do so, we would not be
harmonized with our fellow regulator, which governs an important
part of the swaps markets.
---------------------------------------------------------------------------

\2\ ``Remarks of Chairman Gary Gensler at Swap Execution
Facility Conference: Bringing Transparency and Access to Markets''
(Nov. 18, 2013), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-152 (``[A] U.S. swap dealer on the 32nd
floor of a New York building and a foreign-based swap dealer on the
31st floor of the same building, have to follow the same rules when
arranging, negotiating or executing a swap. One elevator bank . . .
one set of rules.'').
\3\ 17 CFR 240.3a71-3(b)(1)(iii)(C). See also ``Security-Based
Swap Transactions Connected With a Non-U.S. Person's Dealing
Activity That Are Arranged, Negotiated, or Executed by Personnel
Located in a U.S. Branch or Office or in a U.S. Branch or Office of
an Agent; Security-Based Swap Dealer De Minimis Exception; Final
Rule,'' 81 FR 8598 (Feb. 19, 2016).
---------------------------------------------------------------------------

For these reasons, and others, I would strongly encourage the
public and market participants, particularly our US dealers, to
comment on this proposal. Thank you.

Appendix 4--Statement of Commissioner J. Christopher Giancarlo

I support issuing today's proposed rule in order to hear
commenters' considered views, especially with respect to the
Commission's approach on the issue of U.S. personnel arranging,
negotiating or executing transactions for two non-U.S. persons.
I have been a critic of the Commission's 2013 over-expansive
cross-border interpretative guidance \4\ and its avoidance of the
rulemaking process to implement the sweeping policies contained
therein. I consider both of these failings as having been compounded
by the Division of Swap Dealer and Intermediary Oversight (DSIO)
Advisory No. 13-69 \5\ stating that CFTC transaction-level
requirements apply to swaps between a non-U.S. swap dealer and 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 U.S.
(ANE Transactions). Today the Commission is proposing a rulemaking
on the cross-border application of the registration thresholds and
external business conduct standards to swap dealers and major swap
participants and the ANE Transactions in DSIO Advisory No. 13-69. I
commend the Commission for at last putting the guidance and advisory
through the formal rulemaking process.
---------------------------------------------------------------------------

\4\ Interpretive Guidance and Policy Statement Regarding
Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26,
2013), https://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.
\5\ CFTC Staff Advisory No. 13-69 (Nov. 14, 2013), https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.
---------------------------------------------------------------------------

The proposed rule provides that these ANE Transactions fall
within the scope of the Dodd-Frank Act and that it may be
appropriate to apply specific swap requirements to such transactions
to advance Dodd-Frank's regulatory objectives. Yet, it also
preliminarily determines that applying registration thresholds and
external business conduct standards to such ANE Transactions would
not further Dodd-Frank's regulatory objectives, except for certain
abusive practices and fair dealing rules with respect to external
business conduct standards. While this limited application seems
appropriate, I am interested to hear commenters' thoughts about the
Commission's approach and rationale before reaching a decision.
Since this proposal only addresses registration thresholds and
external business conduct standards, the Commission says it intends
to address the application of other Dodd-Frank swap requirements to
ANE Transactions in subsequent rulemakings as necessary and
appropriate. Until that happens, I urge the staff to commit to
extend no-action letter 16-64 \6\ in order to provide clarity that
those swap requirements do not apply to ANE Transactions. This will
provide the marketplace with certainty that all the swap
requirements not addressed in today's rulemaking will not apply to
ANE Transactions until the Commission takes further action.
---------------------------------------------------------------------------

\6\ CFTC Letter No. 16-64 (Aug. 4, 2016), https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-64.pdf.

[FR Doc. 2016-24905 Filed 10-17-16; 8:45 am]
BILLING CODE 6351-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.