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2013-17958

  • Federal Register, Volume 78 Issue 144 (Friday, July 26, 2013)[Federal Register Volume 78, Number 144 (Friday, July 26, 2013)]

    [Rules and Regulations]

    [Pages 45291-45374]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2013-17958]

    [[Page 45291]]

    Vol. 78

    Friday,

    No. 144

    July 26, 2013

    Part II

    Commodity Futures Trading Commission

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    17 CFR Chapter I

    Interpretive Guidance and Policy Statement Regarding Compliance With

    Certain Swap Regulations; Rule

    Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules

    and Regulations

    [[Page 45292]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter I

    RIN 3038-AD85

    Interpretive Guidance and Policy Statement Regarding Compliance

    With Certain Swap Regulations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Interpretive Guidance and Policy Statement.

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    SUMMARY: On July 12, 2012, the Commodity Futures Trading Commission

    (``Commission'' or ``CFTC'') published for public comment its proposed

    interpretive guidance and policy statement (``Proposed Guidance'')

    regarding the cross-border application of the swaps provisions of the

    Commodity Exchange Act (``CEA''), as added by Title VII of the Dodd-

    Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank

    Act'' or ``Dodd-Frank''). On December 21, 2012, the Commission also

    proposed further guidance on certain aspects of the Proposed Guidance

    (``Further Proposed Guidance'').

    The Commission has determined to finalize the Proposed Guidance

    with certain modifications and clarifications to address public

    comments. The Commission's Interpretive Guidance and Policy Statement

    (``Guidance'') addresses the scope of the term ``U.S. person,'' the

    general framework for swap dealer and major swap participant

    registration determinations (including the aggregation requirement

    applicable to the de minimis calculation with respect to swap dealers),

    the treatment of swaps involving certain foreign branches of U.S.

    banks, the treatment of swaps involving a non-U.S. counterparty

    guaranteed by a U.S. person or ``affiliate conduit,'' and the

    categorization of the Dodd-Frank swaps provisions as ``Entity-Level

    Requirements'' or ``Transaction-Level Requirements.''

    DATES: Effective Date: This Guidance will become effective July 26,

    2013.

    FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, Division of

    Swap Dealer and Intermediary Oversight, (202) 418-5977,

    gbarnett@cftc.gov; Sarah E. Josephson, Director, Office of

    International Affairs, (202) 418-5684, sjosephson@cftc.gov; Mark

    Fajfar, Assistant General Counsel, Office of General Counsel, (202)

    418-6636, mfajfar@cftc.gov; Laura B. Badian, Counsel, Office of General

    Counsel, (202) 418-5969, lbadian@cftc.gov; Commodity Futures Trading

    Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,

    DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Introduction

    A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

    B. The Proposed Guidance and Further Proposed Guidance

    II. Scope of This Guidance

    III. Interpretation of Section 2(i)

    A. Comments

    B. Statutory Analysis

    C. Principles of International Comity

    IV. Guidance

    A. Interpretation of the Term ``U.S. Person''

    1. Proposed Interpretation

    2. Comments

    a. Phase-In Interpretation

    b. Comments on Particular Prongs of the Proposed Interpretation

    of the Term ``U.S. Person''

    c. Commenters' Proposed Alternatives

    d. Due Diligence

    e. Non-U.S. Person That Is Affiliated, Guaranteed, or Controlled

    by U.S. Person

    f. Foreign Branch of U.S. Person

    g. Regulation S

    h. Other Clarifications

    3. Commission Guidance

    a. Due Diligence

    b. Foreign Branch of U.S. Person

    c. Regulation S

    d. Other Clarifications

    4. Summary

    B. Registration

    1. Proposed Guidance

    2. Comments

    3. Commission Guidance

    a. Registration Thresholds for U.S. Persons and Non-U.S.

    Persons, Including Those Guaranteed by U.S. Persons

    b. Aggregation

    c. Exclusion of Certain Swaps by Non-U.S. Persons From the Swap

    Dealer De Minimis Threshold

    d. Exclusion of Certain Swaps by Non-U.S. Persons From the MSP

    Calculation

    e. Exclusion of Certain Swaps Executed Anonymously on a SEF,

    DCM, or Foreign Board of Trade (``FBOT'') and Cleared

    f. MSP-Parent Guarantees

    4. Summary

    C. Interpretation of the Term ``Foreign Branch;'' When a Swap

    Should Be Considered To Be With the Foreign Branch of a U.S. Person

    That Is a Swap Dealer or MSP

    1. Interpretation of the Term ``Foreign Branch'' and Treatment

    of Foreign Branches

    2. Comments

    3. Commission Guidance

    a. Scope of the Term ``Foreign Branch''

    b. Commission Consideration of Whether a Swap Is With a Foreign

    Branch of a U.S. Bank

    D. Description of the Entity-Level and Transaction-Level

    Requirements

    1. Description of the Entity-Level Requirements

    a. First Category of Entity-Level Requirements

    i. Capital Adequacy

    ii. Chief Compliance Officer

    iii. Risk Management

    iv. Swap Data Recordkeeping (Except Certain Aspects of Swap Data

    Recordkeeping Relating to Complaints and Sales Materials)

    b. Second Category of Entity-Level Requirements

    i. SDR Reporting

    ii. Swap Data Recordkeeping Relating to Complaints and Marketing

    and Sales Materials

    iii. Physical Commodity Large Swaps Trader Reporting (Large

    Trader Reporting)

    2. Description of the Transaction-Level Requirements

    a. Category A: Risk Mitigation and Transparency

    i. Required Clearing and Swap Processing

    ii. Margin and Segregation Requirements for Uncleared Swaps

    iii. Trade Execution

    iv. Swap Trading Relationship Documentation

    v. Portfolio Reconciliation and Compression

    vi. Real-Time Public Reporting

    vii. Trade Confirmation

    viii. Daily Trading Records

    b. Category B: External Business Conduct Standards

    E. Categorization of Entity-Level and Transaction-Level

    Requirements

    1. Categorization Under the Proposed Guidance

    2. Comments

    a. Reporting and Trade-Execution Requirements

    b. Swap Trading Relationship Documentation, Portfolio

    Reconciliation and Compression, Daily Trading Records and External

    Business Conduct Standards

    c. Internal Conflicts of Interest Requirement

    d. Position Limits and Anti-Manipulation Rules

    3. Commission Guidance

    a. Entity-Level Requirements

    i. The First Category--Capital Adequacy, Chief Compliance

    Officer, Risk Management, and Swap Data Recordkeeping (Except for

    Certain Recordkeeping Requirements)

    ii. The Second Category--SDR Reporting, Certain Swap Data

    Recordkeeping Requirements and Large Trader Reporting

    b. Transaction-Level Requirements

    i. The Category A Transaction-Level Requirements

    ii. The Category B Transaction-Level Requirements (External

    Business Conduct Standards)

    F. Substituted Compliance

    1. Proposed Guidance

    2. Comments

    3. Overview of the Substituted Compliance Regime

    4. Process for Comparability Determinations

    5. Conflicts Arising Under Privacy and Blocking Laws

    6. Clearing

    [[Page 45293]]

    a. Clearing Venues

    b. Foreign End-Users

    G. Application of the Entity-Level and Transaction-Level

    Requirements To Swap Dealers and MSPs

    1. Comments

    2. Commission Guidance

    3. Application of the Entity-Level Requirements To Swap Dealers

    and MSPs the Commission's policy on

    a. To U.S. Swap Dealers and MSPs

    b. To Non-U.S. Swap Dealers and MSPs

    4. Application of the ``Category A'' Transaction-Level

    Requirements To Swap Dealers and MSPs

    a. Swaps With U.S. Swap Dealers and MSPs

    b. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs

    c. Swaps With a Non-U.S. Person Guaranteed by a U.S. Person

    i. Proposed Guidance

    ii. Comments

    iii. Commission Guidance

    d. Swaps With a Non-U.S. Person That Is an Affiliate Conduit

    i. Proposed Guidance

    ii. Comments

    iii. Commission Guidance

    5. Application of the ``Category B'' Transaction-Level

    Requirements To Swap Dealers and MSPs

    a. Swaps With U.S. Swap Dealers and U.S. MSPs

    b. Swaps With Foreign Branches of a U.S. Bank That Is a Swap

    Dealer or MSP

    c. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs

    H. Application of the CEA's Swap Provisions and Commission

    Regulations to Market Participants That Are Not Registered as a Swap

    Dealer or MSP

    1. Swaps Between Non-Registrants Where One or More of the Non-

    Registrants Is a U.S. Person

    2. Swaps between Non-Registrants That Are Both Non-U.S. Persons

    a. Large Trader Reporting

    b. Swaps Where Each of the Counterparties Is Either a Guaranteed

    or Conduit Affiliate

    c. Swaps Where Neither or Only One of the Parties Is a

    Guaranteed or Conduit Affiliate

    V. Appendix A--The Entity-Level Requirements

    A. First Category of Entity-Level Requirements

    1. Capital Adequacy

    2. Chief Compliance Officer

    3. Risk Management

    i. Swap Data Recordkeeping (Except Certain Aspects of Swap Data

    Recordkeeping Relating to Complaints and Sales Materials)

    B. Second Category of Entity-Level Requirements

    1. SDR Reporting

    2. Swap Data Recordkeeping Relating to Complaints and Marketing

    and Sales Materials

    3. Physical Commodity Large Swaps Trader Reporting (Large Trader

    Reporting)

    VI. Appendix B--The Transaction-Level Requirements

    A. Category A: Risk Mitigation and Transparency

    1. Required Clearing and Swap Processing

    2. Margin and Segregation Requirements for Uncleared Swaps

    3. Trade Execution

    4. Swap Trading Relationship Documentation

    5. Portfolio Reconciliation and Compression

    6. Real-Time Public Reporting

    7. Trade Confirmation

    8. Daily Trading Records

    B. Category B: External Business Conduct Standards

    VII. Appendix C--Application of the Entity-Level Requirements to

    Swap Dealers and MSPs*

    VIII. Appendix D--Application of the Category A Transaction-Level

    Requirements to Swap Dealers and MSPs*

    IX. Appendix E--Application of the Category B Transaction-Level

    Requirements to Swap Dealers and MSPs*

    X. Appendix F--Application of Certain Entity-Level and Transaction-

    Level Requirements to Non-Swap Dealer/Non-MSP Market Participants*

    I. Introduction

    A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

    On July 21, 2010, President Obama signed the Dodd-Frank Act,\1\

    Title VII of which amended the CEA to establish a new regulatory

    framework for swaps. The legislation was enacted to reduce systemic

    risk (including risk to the U.S. financial system created by

    interconnections in the swaps market), increase transparency, and

    promote market integrity within the financial system by, among other

    things: (1) Providing for the registration and comprehensive regulation

    of swap dealers \2\ and major swap participants (each, an ``MSP''); (2)

    imposing clearing and trade execution requirements on standardized

    derivatives products; (3) creating rigorous recordkeeping and data

    reporting regimes with respect to swaps, including real-time public

    reporting; and (4) enhancing the Commission's rulemaking and

    enforcement authorities over all registered entities, intermediaries,

    and swap counterparties subject to the Commission's oversight.

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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ For purposes of this Guidance, the term ``swap dealer''

    means any swap dealer registered with the Commission. Similarly, the

    term ``MSP'' means any MSP registered with the Commission.

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    Section 722(d) of the Dodd-Frank Act amended the CEA by adding

    section 2(i),\3\ which provides that the swaps provisions of the CEA

    (including any CEA rules or regulations) apply to cross-border

    activities when certain conditions are met, namely, when such

    activities have a ``direct and significant connection with activities

    in, or effect on, commerce of the United States'' or when they

    contravene Commission rules or regulations as are necessary or

    appropriate to prevent evasion of the swaps provisions of the CEA

    enacted under Title VII of the Dodd-Frank Act.\4\

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    \3\ 7 U.S.C. 2(i).

    \4\ Id. Section 2(i) of the CEA states that the provisions of

    the Act 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 have a direct and significant connection with activities

    in, or effect on, commerce of the United States; or 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 this Act that was enacted by the Wall Street

    Transparency and Accountability Act of 2010.

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    The potential for cross-border activities to have a substantial

    impact on the U.S. financial system was apparent in the fall of 2008,

    when a series of large financial institutional failures threatened to

    freeze foreign and domestic credit markets. In September 2008, for

    example, U.S.-regulated insurance company American International Group

    (``AIG'') nearly failed as a result of risk incurred by the London swap

    trading operations of its subsidiary AIG Financial Products

    (``AIGFP'').\5\ Enormous losses on credit default swaps entered into by

    AIGFP and guaranteed by AIG led to a credit downgrade for AIG,

    triggering massive collateral calls and an acute liquidity crisis for

    both entities. AIG only avoided default through more than $112.5

    [[Page 45294]]

    billion in support from the Federal Reserve Bank of New York and nearly

    $70 billion from the U.S. Department of the Treasury and the Federal

    Reserve.

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    \5\ See, e.g., Congressional Oversight Panel, June Oversight

    Report, The AIG Rescue, Its Impact on Markets, and the Government's

    Exit Strategy, (Jun. 10, 2010), available at http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT-111JPRT56698.pdf (``AIG

    Report''); Office of the Special Inspector General for the Troubled

    Asset Relief Program, Factors Affecting Efforts to Limit Payments to

    AIG Counterparties (Nov. 17, 2009), available at http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf. AIGFP was a Delaware

    corporation based in Connecticut that was an active participant in

    the credit default swap (``CDS'') market in the years leading up to

    the crisis. See id. at 23. AIGFP's CDS activities benefited from

    credit support provided by another Delaware corporation, American

    International Group, Inc., AIGFP's highly-rated parent company.

    Although both AIG and AIGFP were incorporated and headquartered in

    the U.S., much of AIGFP's CDS business was conducted through its

    London office and involved non-U.S. counterparties and credit

    exposures. Id. at 18. See also Office of the Special Inspector

    General for the Troubled Asset Relief Program, Factors Affecting

    Efforts to Limit Payments to AIG Counterparties, at 20 (Nov. 17,

    2009) (listing AIGFP's CDS counterparties, including a variety of

    U.S. and foreign financial institutions), available at: http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf.

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    A global, complex, and highly integrated business model also played

    a role in, and complicated, the bankruptcy of former U.S.-based

    multinational corporation Lehman Brothers Holding Inc. (``LBHI'') in

    September 2008. In addition to guaranteeing certain swaps for its

    subsidiary Lehman Brothers International Europe (``LBIE''), estimated

    at nearly 130,000 OTC derivatives contracts at the time LBIE was placed

    into administration on September 15, 2008, LBHI and its global

    affiliates relied on each other for many of their financial and

    operational services, including treasury and depository functions,

    custodial arrangements, trading facilitation, and information

    management.\6\ The complexity of the financial and operational

    relationships of LBHI and its domestic and international affiliates,

    including with respect to risk associated with swaps, provides an

    example of how risks can be transferred across multinational affiliated

    entities, in some cases in non-transparent ways that make it difficult

    for market participants and regulators to fully assess those risks.

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    \6\ ``The global nature of the Lehman business with highly

    integrated, trading and non-trading relationships across the group

    led to a complex series of inter-company positions being outstanding

    at the date of Administration. There are over 300 debtor and

    creditor balances between LBIE and its affiliates representing

    $10.5B of receivables and $11.0B of payables as of September 15

    2008.'' See Lehman Brothers International (Europe) in

    Administration, Joint Administrators' Progress Report for the Period

    15 September 2008 to 14 March 2009 (Apr. 14, 2009) (``Lehman

    Brothers Progress Report''), available at http://www.pwc.co.uk/en_uk/uk/assets/pdf/lbie-progress-report-140409.pdf.

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    Even in the absence of an explicit business arrangement or

    guarantee, U.S. companies may for reputational or other reasons choose,

    or feel compelled, to assume the cost of risks incurred by foreign

    affiliates. In 2007, U.S.-based global investment firm Bear Stearns

    decided to extend loans secured by assets of uncertain value to two

    Cayman Islands-based hedge funds it sponsored after they suffered

    substantial losses due to their investments in subprime mortgages, even

    though Bear Stearns was not legally obligated to support those

    funds.\7\ Shortly thereafter, the funds, filed for bankruptcy

    protection.\8\

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    \7\ See In re Bear Sterns High-Grade Structured Credit

    Strategies Master Funds, Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007),

    available at http://www.nysb.uscourts.gov/opinions/brl/158971_25_opinion.pdf.

    \8\ See id.

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    Although the Dodd-Frank Act was enacted in the wake of the 2008

    financial crisis, the impact of cross-border activities on the health

    and stability of U.S. companies and financial markets is not new. A

    decade before the AIG and Lehman collapses, a Cayman Islands hedge fund

    managed by Connecticut-based Long-Term Capital Management L.P.

    (``LTCM'') nearly failed.\9\ The hedge fund had a swap book of more

    than $1 trillion notional and only $4 billion in capital. The hedge

    fund avoided collapse only after the Federal Reserve Bank of New York

    intervened and supervised a financial rescue and reorganization by

    creditors of the fund.\10\ While the fund was a Cayman Island

    partnership, its default would have caused significant market

    disruption in the United States.\11\

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    \9\ See The President's Working Group on Financial Markets,

    Hedge Funds, Leverage, and the Lessons of Long-Term Capital

    Management (April 1999), available at http://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf.

    \10\ See id. at 13.

    \11\ See id. at 17.

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    More recently, J.P. Morgan Chase & Co. (``J.P. Morgan''), the

    largest U.S. bank, disclosed a multi-billion dollar trading loss

    stemming in part from positions in a credit-related swap portfolio

    managed through its London Chief Investment Office.\12\ The

    relationship between the New York and London offices of J.P. Morgan

    that were involved in the credit swaps that were the source of this

    loss demonstrates the close integration among the various branches,

    agencies, offices, subsidiaries and affiliates of U.S. financial

    institutions, which may be located both inside and outside the United

    States. Despite their geographic expanse, the branches, agencies,

    offices, subsidiaries and affiliates of large U.S. financial

    institutions in many cases effectively operate as a single

    business.\13\

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    \12\ See Sen. Permanent Subcomm. on Investigations, 113th Cong.,

    Majority and Minority Staff Report, JPMorgan Chase Whale Trades: A

    Case History of Derivatives Risks and Abuses (March 15, 2013),

    available at http://www.levin.senate.gov/download/?id=bfb5cd04-41dc-4e2d-a5e1-ab2b81abfaa8-2560k. See also Dodd-Frank Statement (``[A]ny

    suggestion that U.S. financial entities learned enough from AIG's

    devastating misjudgments are [sic] undercut by the multi-billion

    dollar loss incurred by a bank generally considered to be among the

    most careful--J.P.Morgan Chase--in its London derivative

    trading.'').

    \13\ See Letter from Sen. Carl Levin, Chairman of the Permanent

    Subcommittee on Investigations at 4 (Apr. 23, 2013) (``Letter from

    Sen. Levin''), available at http://www.levin.senate.gov/download/levin_comment_letter_cftc_042313. See also Cross-Border

    Application of Certain Swaps Provisions of the Commodity Exchange

    Act, 77 FR 41214, 41216 (Jul. 12, 2012) (``Proposed Guidance'').

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    Efforts to regulate the swaps market in the wake of the 2008

    financial crisis are underway not only in the United States, but also

    abroad. In 2009, leaders of the Group of 20 (``G20'')--whose membership

    includes the European Union (``EU''), the United States, and 18 other

    countries--agreed that: (i) OTC derivatives contracts should be

    reported to trade repositories; (ii) all standardized OTC derivatives

    contracts should be cleared through central counterparties and traded

    on exchanges or electronic trading platforms, where appropriate, by the

    end of 2012; and (iii) non-centrally cleared contracts should be

    subject to higher capital requirements. In line with the G20

    commitment, much progress has been made to coordinate and harmonize

    international reform efforts, but the pace of reform varies among

    jurisdictions and disparities in regulations remain due to differences

    in cultures, legal and political traditions, and financial systems.\14\

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    \14\ Legislatures and regulators in a number of foreign

    jurisdictions are undertaking significant regulatory reforms over

    the swaps market and its participants. See CFTC and SEC, Joint

    Report on International Swap Regulation Required by Section 719(c)

    of the Dodd-Frank Wall Street Reform and Consumer Protection Act at

    13 (Jan. 31, 2012), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/dfstudy_isr_013112.pdf.

    For example, the European Commission released a public

    consultation on revising the Markets in Financial Instruments

    Directive (``MiFID'') in December 2010. See ``European Commission

    Public Consultation: Review of the Markets in Financial Instruments

    Directive'' (Dec. 8, 2010), available at http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf.

    In October 2011, the European Commission released two public

    consultations, one to revise MiFID and the other for creating a new

    regulation entitled the Markets in Financial Instruments Regulation

    (``MiFIR''). See European Commission, Proposal for a Directive of

    the European Parliament and of the Council on markets in financial

    instruments repealing Directive 2004/39/EC of the European

    Parliament and of the Council, COM (2011) 656 final (Oct. 20, 2011),

    available at http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_656_en.pdf; European Commission, Proposal for

    a Regulation of the European Parliament and of the Council on

    markets in financial instruments and amending regulation [EMIR] on

    OTC derivatives, central counterparties and trade repositories, COM

    (2011) 652 final (Oct. 20, 2011), available at http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_652_en.pdf.

    As of March 15, 2013, the majority of the regulatory technical

    standards (i.e., rulemakings) of the European Market Infrastructure

    Regulation (``EMIR'') entered into force. The EMIR and the related

    regulatory technical standards generally regard requirements for

    clearinghouses, clearing, data repositories, regulatory reporting,

    and uncleared OTC transactions. Certain technical standards under

    EMIR have yet to be developed and completed. These standards regard

    margin and capital for uncleared transactions and contracts that

    have a ``direct, substantial and foreseeable effect within the

    [European] Union.'' See EMIR Article 11(14)(e).

    The Japanese legislature passed the Amendment to the Financial

    Instruments and Exchange Act (``FIEA'') in May 2010. See Japan

    Financial Services Agency, Outline of the bill for amendment of the

    Financial Instruments and Exchange Act (May 2010), available at

    http://www.fsa.go.jp/en/refer/diet/174/01.pdf.

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    [[Page 45295]]

    The failures of Lehman Brothers and the Bear Stearns hedge funds,

    and the near failures of LTCM's hedge fund and AIG (which required

    intervention by the government and Federal Reserve), and their

    collateral effects on the broader economy and U.S. commerce,\15\

    provide examples of how risks that a large financial institution takes

    abroad in swap transactions or otherwise can result in or contribute to

    substantial losses to U.S. persons and threaten the financial stability

    of the entire U.S. financial system. These failures and near failures

    revealed the vulnerability of the U.S. financial system and economy to

    systemic risk resulting from, among other things, poor risk management

    practices of certain financial firms, the lack of supervisory oversight

    for certain financial institutions as a whole, and the overall

    interconnectedness of the global swap business.\16\ These failures and

    near failures demonstrate the need for and potential implications of

    cross-border swaps regulation.

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    \15\ On October 3, 2008, President Bush signed the Emergency

    Economic Stabilization Act of 2008, which was principally designed

    to allow the U.S. Treasury and other government agencies to take

    action to restore liquidity and stability to the U.S. financial

    system (e.g., the Troubled Asset Relief Program--also known as

    TARP--under which the U.S. Treasury was authorized to purchase up to

    $700 billion of troubled assets that weighed down the balance sheets

    of U.S. financial institutions). See Public Law 110-343, 122 Stat.

    3765 (2008).

    \16\ See Financial Crisis Inquiry Commission, The Financial

    Crisis Inquiry Report: Final Report of the National Commission on

    the Causes of the Financial and Economic Crisis in the United States

    at xvi-xxvii (Jan. 21, 2011), available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.

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    B. The Proposed Guidance and Further Proposed Guidance

    To address the scope of the cross-border application of the Dodd-

    Frank Act, the Commission published the Proposed Guidance on July 12,

    2012, setting forth its proposed interpretation of the manner in which

    it intends that section 2(i) of the CEA would apply Title VII's swaps

    provisions to cross-border activities.\17\ In view of the complex legal

    and policy issues involved, the Commission published the Proposed

    Guidance to solicit comments from all interested persons and to further

    inform the Commission's deliberations. Specifically, the Proposed

    Guidance addressed the general manner in which the Commission proposed

    to consider: (1) When a non-U.S. person's swap dealing activities would

    justify registration as a ``swap dealer,'' \18\ as further defined in a

    joint release adopted by the Commission and the Securities and Exchange

    Commission (``SEC''); \19\ (2) when a non-U.S. person's swaps positions

    would justify registration as a ``major swap participant,'' \20\ as

    further defined in the Final Entities Rules; and (3) how foreign

    branches, agencies, affiliates, and subsidiaries of U.S. swap dealers

    generally should be treated. The Proposed Guidance also generally

    described the policy and procedural framework under which the

    Commission would consider compliance with a comparable and

    comprehensive regulatory requirement of a foreign jurisdiction as a

    reasonable substitute for compliance with the attendant requirements of

    the CEA. Last, the Proposed Guidance set forth the manner in which the

    Commission proposed to interpret section 2(i) of the CEA as it would

    generally apply to clearing, trading, and certain reporting

    requirements under the Dodd-Frank Act with respect to swaps between

    counterparties that are not swap dealers or MSPs.

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    \17\ See Proposed Guidance, 77 FR 41214. Simultaneously with

    publication of the Proposed Guidance, the Commission published a

    proposed exemptive order providing time-limited relief from certain

    cross-border applications of the swaps provisions of Title VII and

    the Commission's regulations. See Proposed Exemptive Order Regarding

    Compliance with Certain Swap Regulations, 77 FR 41110 (July 12,

    2012) (``Proposed Order''). The Commission approved a final

    exemptive order on December 21, 2012, which reflected certain

    modifications and clarifications to the Proposed Order to address

    public comments. See Final Exemptive Order Regarding Compliance with

    Certain Swap Regulations, 78 FR 858 (Jan. 7, 2013) (``January

    Order'').

    \18\ See 7 U.S.C. 1a(49) (defining the term ``swap dealer'').

    \19\ See Further Definition of `Swap Dealer,' `Security-Based

    Swap Dealer,' `Major Swap Participant,' `Major Security-Based Swap

    Participant' and `Eligible Contract Participant,' 77 FR 30596 (May

    23, 2012) (``Final Entities Rules'').

    \20\ See 7 U.S.C. 1a(33) (defining the term ``major swap

    participant'').

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

    The public comment period on the Proposed Guidance ended on August

    27, 2012. The Commission received approximately 290 comment letters on

    the Proposed Guidance from a variety of interested parties, including

    major U.S. and non-U.S. banks and financial institutions that conduct

    global swap business, trade associations, clearing organizations, law

    firms (representing international banks and dealers), public interest

    organizations, and foreign regulators.\21\

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

    \21\ The Commission also received approximately 26 comment

    letters on the Proposed Order. Because the Proposed Guidance and

    Proposed Order were substantially interrelated, many commenters

    submitted a single comment letter addressing both proposals. The

    comment letters submitted in response to the Proposed Order and

    Proposed Guidance may be found on the Commission's Web site at

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234.

    Approximately 200 individuals submitted substantially identical

    letters to the effect that oversight of the $700 trillion global

    derivatives market is the key to meaningful reform. The letters

    state that because the market is inherently global, risks can be

    transferred around the world with the touch of a button. Further,

    according to these letters, loopholes in the Proposed Guidance could

    allow foreign affiliates of Wall Street banks to escape regulation.

    Lastly, the letters request that the Proposed Guidance be

    strengthened to ensure that the Dodd-Frank derivatives protections

    will directly apply to the full global activities of all important

    participants in the U.S. derivatives markets.

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

    The Further Proposed Guidance, issued on December 21, 2012,\22\

    reflected the Commission's determination that further consideration of

    public comments regarding the Commission's proposed interpretation of

    the term ``U.S. person,'' and its proposed guidance regarding

    aggregation for purposes of swap dealer registration, would be helpful

    to the Commission in issuing final interpretive guidance. In order to

    facilitate the Commission's further consideration of these issues, in

    the Further Proposed Guidance the Commission sought public comment on:

    (1) An alternative interpretation of the aggregation requirement for

    swap dealer registration in Commission regulation 1.3(ggg)(4); \23\ (2)

    an alternative ``prong'' of the proposed interpretation of the term

    ``U.S. person'' in the Proposed Guidance which relates to U.S. owners

    that are responsible for the liabilities of a non-U.S. entity; and (3)

    a separate alternative prong of the proposed interpretation of the term

    ``U.S. person'' which relates to commodity pools and funds with

    majority-U.S. ownership.

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

    \22\ See Further Proposed Guidance Regarding Compliance With

    Certain Swap Regulations, 78 FR 909, 913 (Jan. 7, 2013) (``Further

    Proposed Guidance'').

    \23\ 17 CFR 1.3(ggg)(4). The Commission's regulations are

    codified at 17 CFR Ch. I.

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

    The public comment period on the Further Proposed Guidance ended on

    February 6, 2013. The Commission received approximately 24 comment

    letters on the Further Proposed Guidance from interested parties

    including major U.S. and non-U.S. banks and financial institutions,

    trade associations, law firms (representing international banks and

    dealers), public interest organizations, and foreign regulators.\24\

    With respect to both the Proposed Guidance and the Further Proposed

    Guidance and throughout the process of considering this Guidance,

    [[Page 45296]]

    the Commission (and Commission's staff) held numerous meetings and

    discussions with various market participants, domestic bank regulators,

    and other interested parties.\25\

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

    \24\ The comment letters submitted in response to the Further

    Proposed Guidance are available on the Commission's Web site at

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1315.

    \25\ The records of these meetings and communications are

    available on the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/Cross-BorderApplicationofSwapsProvisions/index.htm.

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

    Further, the Commission's staff closely consulted with the staff of

    the SEC in an effort to increase understanding of each other's

    regulatory approaches and to harmonize the cross-border approaches of

    the two agencies to the greatest extent possible, consistent with their

    respective statutory mandates.\26\ The Commission is cognizant of the

    value of harmonization by the Commission and the SEC of their cross-

    border policies to the fullest extent possible. The staffs of the

    Commission and the SEC have participated in numerous meetings to work

    jointly toward this objective. The Commission expects that this

    consultative process will continue as each agency works towards

    implementing its respective cross-border policy.

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

    \26\ Sections 722 and 772 of the Dodd-Frank Act establish the

    scope of the Commission's and SEC's jurisdiction over cross-border

    swaps and security-based swaps, respectively. CEA section 2(i),

    which was added by section 722 of the Dodd-Frank Act, is discussed

    above. Section 30(c) of the Securities Exchange Act of 1934

    (``Exchange Act''), which was added by section 772 of the Dodd-Frank

    Act, provides that the swaps provisions of the Exchange Act added by

    Title VII do not apply ``to any person insofar as such person

    transacts a business in security-based swaps without the

    jurisdiction of the United States, unless such person transacts such

    business in contravention of such rules and regulations as the [SEC]

    may prescribe as necessary or appropriate to prevent the evasion of

    any provision [added by Title VII of the Dodd-Frank Act] . . . ''

    See 15 U.S.C. 78dd(c).

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

    The SEC recently published for public comment proposed rules and

    interpretive guidance to address the application of the provisions of

    the Exchange Act, added by Subtitle B of Title VII of the Dodd-Frank

    Act, that relate to cross-border security-based swap activities.\27\

    The Commission has considered the SEC's cross-border proposal and has

    taken it into account in the process of considering this Guidance. The

    SEC's proposal acknowledges the statutory provisions and regulatory

    precedents that are relevant to security-based swaps by virtue of the

    fact that security-based swaps are securities.\28\ For example, the

    SEC's proposed rules regarding registration of security-based swap

    dealers build from the SEC's traditional approach to the registration

    of brokers and dealers under the Exchange Act.\29\ The SEC's proposal

    also notes the SEC's belief that Congress intended the territorial

    application of Title VII to entities and transactions in the security-

    based swaps market to follow similar principles to those applicable to

    the securities market under the Exchange Act.\30\ The Commission

    believes that one factor in harmonization of the two agencies'

    approaches is that Congress did not express a similar intent that the

    application of Title VII to entities and transactions in the swaps

    market should follow principles that preceded the Dodd-Frank Act, but

    rather mandated a new regulatory regime for swaps.\31\

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

    \27\ See Cross-Border Security-Based Swap Activities; Re-

    Proposal of Regulation SBSR and Certain Rules and Forms Relating to

    the Registration of Security-Based Swap Dealers and Major Security-

    Based Swap Participants, 78 FR 30968 (May 23, 2013) (``SEC Cross-

    Border Proposal'').

    \28\ The SEC Cross-Border Proposal notes that the definition of

    ``security'' in the Exchange Act includes security-based swaps,

    which raises issues related to the statutory definitions of

    ``broker'' and ``dealer,'' the statutory exchange registration

    requirement, and other statutory requirements related to securities.

    Id. at 30972.

    \29\ Id. at 30990.

    \30\ Id. at 30983-84.

    \31\ One commenter expressed the view that the SEC's proposed

    rule is entirely inapplicable to the CFTC's statutory mandate to

    regulate the risks from cross border derivatives trading and related

    activities. This commenter stated that the SEC was given very

    limited statutory authority in the Dodd-Frank Act related solely to

    anti-evasion, in contrast to the Commission, which was given the

    same anti-evasion authority plus an affirmative statutory mandate to

    regulate cross-border derivative activities that ``have a direct an

    significant connection with activities in, or effect on, commerce of

    the United States.'' This commenter further stated that a broader

    statutory mandate makes sense because the Commission ``has decades

    of expertise and jurisdiction for virtually the entire derivatives

    markets,'' whereas the SEC has ``jurisdiction for no more than 3.5

    percent of those markets.'' See Better Markets Inc. (``Better

    Markets'') (Jun. 24, 2013) at 2.

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

    The Commission also recognizes the critical role of international

    cooperation and coordination in the regulation of derivatives in the

    highly interconnected global market, where risks are transmitted across

    national borders and market participants operate in multiple

    jurisdictions. Close cooperative relationships and coordination with

    other jurisdictions take on even greater importance given that, prior

    to the recent reforms, the swaps market has largely operated without

    regulatory oversight, and given that many jurisdictions are in

    differing stages of implementing their regulatory reform. To this end,

    the Commission's staff has actively engaged in discussions with their

    foreign counterparts in an effort to better understand and develop a

    more harmonized cross-border regulatory framework. The Commission

    expects that these discussions will continue as it implements the

    cross-border interpretive guidance and as other jurisdictions develop

    their own regulatory approaches to derivatives.\32\

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

    \32\ This is one aspect of the Commission's on-going bilateral

    and multilateral efforts to promote international coordination of

    regulatory reform. The Commission's staff is engaged in

    consultations with Europe, Japan, Hong Kong, Singapore, Switzerland,

    Canada, Australia, Brazil, and Mexico on derivatives reform. In

    addition, the Commission's staff is participating in several

    standard-setting initiatives, co-chairs the IOSCO Task Force on OTC

    Derivatives, and has created an informal working group of

    derivatives regulators to discuss implementation of derivatives

    reform. See also Joint Press Statement of Leaders on Operating

    Principles and Areas of Exploration in the Regulation of the Cross-

    border OTC Derivatives Market, published as CFTC Press Release 6439-

    12, Dec. 4, 2012, available at http://www.cftc.gov/PressRoom/PressReleases/pr6439-12; OTC Derivatives Regulators Group Report to

    the G-20 Meeting of Finance Ministers and Central Bank Governors of

    18-19 April 2013, linked to CFTC Press Release ODRG Report to G-20,

    Apr. 16, 2013, available at http://www.cftc.gov/PressRoom/PressReleases/odrg_reporttog20release.

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

    In general, many of the financial institutions and law firms

    (representing financial institutions) that commented on the Proposed

    Guidance and Further Proposed Guidance stated that the Commission's

    proposed interpretation of the extraterritorial application of Title

    VII of the Dodd-Frank Act was overly broad and unnecessarily complex

    and unclear.\33\ Among the issues they raised were concerns relating to

    the interpretation of the term ``U.S. person,'' aggregation for

    purposes of swap dealer registration, lack of parity in the treatment

    of foreign branches and affiliates of U.S. persons, the approach to

    guaranteed non-U.S. affiliates and non-U.S. affiliate ``conduits,'' and

    the ``comparability'' assessment for purposes of substituted

    compliance. The commenters also urged the Commission to allow

    sufficient time after the publication of the final interpretive

    guidance for market participants to understand and implement any new

    policies of the Commission, before the Commission begins to apply such

    policies.

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

    \33\ See, e.g., Securities Industry and Financial Markets

    Association (``SIFMA'') (Aug. 27, 2012); Institute of International

    Bankers (``IIB'') (Aug. 27, 2012); Sullivan & Cromwell, on behalf of

    Bank of America Corp., Citi, and J.P. Morgan (``Sullivan &

    Cromwell'') (Aug. 13, 2012); Bank of America Merrill Lynch, Barclays

    Capital, and PNB Paribas et al., submitted by Cleary Gottlieb Steen

    & Hamilton LLP (``Cleary'') (Aug. 16, 2012).

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

    Other commenters disagreed that the Commission's proposed

    interpretation of its extraterritorial authority was overly broad,

    instead arguing that the Commission had not gone far enough.\34\

    [[Page 45297]]

    For example, AFR stated that the Proposed Guidance ``takes some real

    positive steps in affirming CFTC jurisdiction over a variety of cross-

    border transactions,'' but ``falls well short of closing potential

    cross-border loopholes.'' \35\ Senator Levin wrote that although

    ``members of the financial industry have filed comment letters urging

    the CFTC to weaken its proposals . . . American families and businesses

    deserve strong protections against the risks posed by derivatives

    trading, including from cross-border swaps, and . . . the Proposed

    Guidance should be strengthened rather than weakened.'' \36\

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

    \34\ See, e.g., Americans for Financial Reform, submitted by

    Marcus Stanley (``AFR'') (Aug. 27, 2012); Better Markets (Aug. 16,

    2012); Michael Greenberger, Francis King Cary School of Law,

    University of Maryland (``Greenberger'') (Aug. 13, 2012).

    \35\ AFR (Aug. 27, 2012) at 2.

    \36\ Letter from Sen. Levin at 3.

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

    II. Scope of This Guidance

    After carefully reviewing and considering the comments on the

    Proposed Guidance and the Further Proposed Guidance, the Commission has

    determined to finalize the Proposed Guidance. This Guidance sets forth

    the general policy of the Commission in interpreting how section 2(i)

    of the CEA provides for the application of the swaps provisions of the

    CEA and Commission regulations to cross-border activities when such

    activities have a ``direct and significant connection with activities

    in, or effect on, commerce of the United States'' or when they

    contravene Commission rulemaking.\37\ Unlike a binding rule adopted by

    the Commission, which would state with precision when particular

    requirements do and do not apply to particular situations, this

    Guidance is a statement of the Commission's general policy regarding

    cross-border swap activities \38\ and allows for flexibility in

    application to various situations, including consideration of all

    relevant facts and circumstances that are not explicitly discussed in

    the guidance. The Commission believes that the statement of its policy

    in this Guidance will assist market participants in understanding how

    the Commission intends that the registration and certain other

    substantive requirements of the Dodd-Frank Act generally would apply to

    their cross-border activities.\39\

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

    \37\ See 7 U.S.C. 2(i).

    \38\ The Commission notes that part 23 of its regulations

    defines ``swaps activities'' to mean, ``with respect to a

    [registered swap dealer or MSP], such registrant's activities

    related to swaps and any product used to hedge such swaps,

    including, but not limited to, futures, options, other swaps or

    security-based swaps, debt or equity securities, foreign currency,

    physical commodities, and other derivatives.'' See 17 CFR 23.200(j);

    23.600(a)(7).

    \39\ In this regard, the Commission notes that it would consider

    codifying certain aspects of the Guidance in future rulemakings, as

    appropriate; but at this time, this guidance is intended to provide

    an efficient and flexible vehicle to communicate the agency's

    current views on how the Dodd-Frank swap requirements would apply on

    a cross-border basis.

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

    This release is intended to inform the public of the Commission's

    views on how it ordinarily expects to apply existing law and

    regulations in the cross-border context. In determining the application

    of the CEA and Commission regulations to particular entities and

    transactions in cross-border contexts, the Commission will apply the

    relevant statutory provisions, including CEA section 2(i), and

    regulations to the particular facts and circumstances. Accordingly, the

    public has the ability to present facts and circumstances that would

    inform the application of the substantive policy positions set forth in

    this release.

    The Commission understands the complex and dynamic nature of the

    global swap market and the need to take an adaptable approach to cross-

    border issues, particularly as it continues to work closely with

    foreign regulators to address potential conflicts with respect to each

    country's respective regulatory regime. Although the Commission is

    issuing the Guidance at this time, the Commission will continue to

    follow developments as foreign regulatory regimes and the global swaps

    market continue to evolve. In this regard, the Commission will

    periodically review this Guidance in light of future developments.

    This release is organized into four main sections. Section III sets

    forth the Commission's interpretation of CEA section 2(i) and the

    general manner in which it intends to apply the swaps provisions of the

    Dodd-Frank Act to activities outside the United States. Section IV

    addresses the public comments and Commission Guidance on: (A) The

    Commission's interpretation of the term ``U.S. person''; (B) swap

    dealer and MSP registration; (C) the scope of the term ``foreign

    branch'' of a U.S. bank and consideration of when a swap should be

    considered to be with the foreign branch of a U.S. bank; (D) a

    description of the entity-level requirements and transaction-level

    requirements under Title VII and the Commission's related regulations

    (``Entity-Level Requirements'' and ``Transaction-Level Requirements,''

    respectively); (E) the categorization of Title VII swaps provisions

    (and Commission regulations) as either Entity-Level or Transaction-

    Level Requirements; (F) substituted compliance, including an overview

    of the principles guiding substituted compliance determinations for

    Entity-Level and Transaction-Level Requirements, a general description

    of the process for comparability determinations, and a discussion of

    conflicts arising under foreign privacy and blocking laws; (G)

    application of the Entity-Level Requirements and ``Category A'' and

    ``Category B'' Transaction-Level Requirements to swap dealers and MSPs;

    and (H) application of the CEA's swaps provisions and Commission

    regulations where both parties to a swap are neither swap dealers nor

    MSPs.\40\

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

    \40\ Certain provisions of Title VII apply regardless of whether

    a swap dealer or MSP is a counterparty to the swap. These provisions

    include the clearing requirement (7 U.S.C. 2(h)(1)), the trade

    execution requirement (2(h)(8)), reporting to SDRs (2(a)(13)(G)),

    and real-time public reporting (2(a)(13)).

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

    In addition, this Guidance includes the following Appendices, which

    should be read in conjunction with (and are qualified by) the remainder

    of the Guidance: (1) Appendix A--The Entity-Level Requirements; (2)

    Appendix B--The Transaction-Level Requirements: (3) Appendix C--

    Application of the Entity-Level Requirements; (4) Appendix D--

    Application of the Category A Transaction-Level Requirements to Swap

    Dealers and MSPs; (5) Appendix E--Application of the Category B

    Transaction-Level Requirements to Swap Dealers and MSPs; and (6)

    Appendix F--Application of Certain Entity-Level and Transaction-Level

    Requirements to Non-Swap Dealer/Non-MSP Market Participants.

    III. Interpretation of Section 2(i)

    CEA section 2(i) provides that the swaps provisions of Title VII

    shall not apply to activities outside the United States unless those

    activities--

    Have a direct and significant connection with activities

    in, or effect on, commerce of the United States; or

    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 [the CEA] that was enacted by the [Dodd-

    Frank Act].

    In the Proposed Guidance, the Commission noted that section 2(i)

    provides the Commission express authority over swap activities outside

    the United States when certain conditions are met, but it does not

    require the Commission to extend its reach to the outer bounds of that

    authorization. Rather, in exercising its authority with respect to swap

    activities outside the United States, the Commission will be guided by

    international comity principles.

    [[Page 45298]]

    A. Comments

    Some commenters addressing the interpretation of section 2(i) in

    the Proposed Guidance stated that the activities of the non-U.S.

    branches and subsidiaries of U.S. persons outside the United States

    with respect to swaps with non-U.S. persons should not be subject to

    Dodd-Frank requirements. Sullivan & Cromwell asserted that the non-U.S.

    branches and subsidiaries generally do not enter into swaps with U.S.

    persons and therefore the jurisdictional nexus with the United States

    that would justify application of the Dodd-Frank Act is absent.\41\

    Sullivan & Cromwell stated that there are legitimate business reasons

    for U.S. persons to establish non-U.S. branches and subsidiaries, so

    doing so should not be interpreted to mean that the U.S. person is

    using the branch to evade application of the Dodd-Frank Act.\42\

    Sullivan & Cromwell argued that the Dodd-Frank Act's application

    outside the United States should be narrowly construed because it

    includes only specific exceptions to the judicial precedent that U.S.

    laws should be interpreted to apply outside the United States only when

    such application is clearly expressed in the law.\43\ Similarly, SIFMA

    argued that the Commission's proposal asserted a broad jurisdictional

    scope that is inconsistent with the congressional intent expressed in

    section 2(i) of the CEA.\44\

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

    \41\ Sullivan & Cromwell (Aug. 13, 2012) at 6-7.

    \42\ Id. at 8.

    \43\ Id. at 9.

    \44\ SIFMA (Aug. 27, 2012) at 2.

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

    Sullivan & Cromwell cited past instances where the Commission has

    not applied its regulations to firms that deal solely with foreign

    customers and do not conduct business in or from the United States or

    to the non-U.S. subsidiaries of entities registered with the

    Commission.\45\ Sullivan & Cromwell and SIFMA stated that the

    application of Dodd-Frank requirements to non-U.S. swap activities

    would be contrary to principles of international comity and cooperation

    with foreign regulators, would lead to less efficient use of regulatory

    resources, and would subject the affected entities to potentially

    conflicting regulations and increased costs of compliance.\46\ SIFMA

    asserted that the jurisdictional scope in the Commission's proposal is

    not necessary to prevent evasive activity, because the Commission

    already has broad authority to address evasion.\47\ Sullivan & Cromwell

    and SIFMA also argued that imposing the Dodd-Frank requirements on non-

    U.S. branches and subsidiaries of U.S. persons would put those entities

    at a disadvantage compared to competitors in foreign jurisdictions,

    while other federal laws and banking regulations (such as the Edge Act

    \48\) indicate that Congress wishes to promote such entities' ability

    to compete in foreign jurisdictions.\49\

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

    \45\ Sullivan & Cromwell (Aug. 13, 2012) at 10.

    \46\ Id. at 11; SIFMA (Aug. 27, 2012) at 3 and A55.

    \47\ SIFMA (Aug. 27, 2012) at 3.

    \48\ 12 U.S.C. 611-31.

    \49\ Id.; Sullivan & Cromwell (Aug. 13, 2012) at 12-14.

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

    By contrast, Senator Levin stated that the J.P. Morgan ``whale

    trades'' provide an example of how major U.S. financial institutions

    have integrated their U.S. and non-U.S. swap activities, and therefore

    supports the application of the swaps provisions of Title VII and

    Commission regulations to the non-U.S. offices of U.S. financial

    institutions.\50\ He explained that a Senate investigation found that

    J.P. Morgan personnel in London executed the ``whale trades'' using

    money from the U.S. bank's excess deposits, and while traders in London

    conducted the trades, the trades were attributed to a U.S. affiliate of

    J.P. Morgan through back-to-back arrangements between the London branch

    and New York branch.\51\ He also stated the whale trades were entered

    into with counterparties including major U.S. banks and J.P. Morgan's

    own investment bank.\52\ Senator Levin concluded that because of the

    integration of U.S. and non-U.S. offices and affiliates of U.S.

    financial institutions, it is critical that the non-U.S. offices and

    affiliates of U.S. financial institutions follow the same Dodd-Frank

    requirements as are applicable to the U.S. financial institutions.\53\

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

    \50\ Letter from Sen. Levin at 4.

    \51\ Id.

    \52\ Id.

    \53\ Id. at 7. See also Dodd-Frank Statement (``An exemption for

    foreign derivatives activity by the [ ] affiliates of American

    institutions is a free pass no matter where that activity is

    located.'').

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

    B. Statutory Analysis

    In interpreting the phrase ``direct and significant,'' the

    Commission has examined the plain language of the statutory provision,

    similar language in other statutes with cross-border application, and

    the legislative history of section 2(i).

    The statutory language in new CEA section 2(i) is structured

    similarly to the statutory language in the Foreign Trade Antitrust

    Improvements Act of 1982 (the ``FTAIA''),\54\ which provides the

    standard for the cross-border application of the Sherman Antitrust

    Act.\55\ The FTAIA, like CEA section 2(i), excludes certain non-U.S.

    commercial transactions from the reach of U.S. law. It provides that

    the antitrust provisions of the Sherman Act ``shall not apply to [anti-

    competitive] conduct involving trade or commerce . . . with foreign

    nations.'' \56\ However, like paragraph (1) of CEA section 2(i), the

    FTAIA also creates exceptions to the general exclusionary rule and thus

    brings back within antitrust coverage any conduct that: (1) has a

    ``direct, substantial, and reasonably foreseeable effect'' on U.S.

    commerce; \57\ and (2) ``such effect gives rise to a [Sherman Act]

    claim.'' \58\ In F. Hoffman-LaRoche, Ltd. v. Empagran S.A., the Supreme

    Court stated that ``this technical language initially lays down a

    general rule placing all (nonimport) activity involving foreign

    commerce outside the Sherman Act's reach. It then brings such conduct

    back within the Sherman Act's reach provided that the conduct both (1)

    sufficiently affects American commerce, i.e., it has a `direct,

    substantial, and reasonably foreseeable effect' on American domestic,

    import, or (certain) export commerce, and (2) has an effect of a kind

    that antitrust law considers harmful, i.e., the `effect' must `giv[e]

    rise to a [Sherman Act] claim.' '' \59\

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

    \54\ 15 U.S.C. 6a.

    \55\ 15 U.S.C. 1-7.

    \56\ 15 U.S.C. 6a.

    \57\ 6a(1).

    \58\ 6a(2).

    \59\ 542 U.S. 155, 162 (2004) (emphasis in original).

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

    It is appropriate, therefore, to read section 2(i) of the CEA as a

    clear expression of congressional intent that the swaps provisions of

    Title VII of the Dodd-Frank Act apply to activities beyond the borders

    of the United States when certain circumstances are present. These

    circumstances include, pursuant to paragraph (1) of section 2(i), when

    activities outside the United States meet the statutory test of having

    a ``direct and significant connection with activities in, or effect

    on,'' U.S. commerce.

    An examination of the language in the FTAIA, however, does not

    provide an unambiguous roadmap for the Commission in interpreting

    section 2(i) of the CEA. There are both similarities, and a number of

    significant differences, between the language in CEA section 2(i) and

    the language in the FTAIA. Further, the Supreme Court has not provided

    definitive guidance as to the meaning of the ``direct, substantial, and

    reasonably foreseeable'' test in the FTAIA, and the lower courts have

    interpreted the individual terms in the FTAIA differently.

    Although a number of courts have interpreted the various terms in

    the

    [[Page 45299]]

    FTAIA, only the term ``direct'' appears in both CEA section 2(i) and

    the FTAIA. Relying upon the Supreme Court's definition of the term

    ``direct'' in the Foreign Sovereign Immunities Act (``FSIA''),\60\ the

    U.S. Court of Appeals for the Ninth Circuit construed the term

    ``direct'' in the FTAIA as requiring a ``relationship of logical

    causation,'' \61\ such that ``an effect is `direct' if it follows as an

    immediate consequence of the defendant's activity.'' \62\ However, in

    an en banc decision, the U.S. Court of Appeals for the Seventh Circuit

    held that ``the Ninth Circuit jumped too quickly on the assumption that

    the FSIA and the FTAIA use the word `direct' in the same way.'' \63\

    After examining the text of the FTAIA as well as its history and

    purpose, the Seventh Circuit found persuasive the ``other school of

    thought [that] has been articulated by the Department of Justice's

    Antitrust Division, which takes the position that, for FTAIA purposes,

    the term `direct' means only `a reasonably proximate causal nexus.' ''

    \64\ The Seventh Circuit rejected interpretations of the term

    ``direct'' that included any requirement that the consequences be

    foreseeable, substantial, or immediate.\65\

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

    \60\ See 28 U.S.C. 1605(a)(2).

    \61\ United States v. LSL Biotechnologies, 379 F.3d 672, 693

    (9th Cir. 2004). ``As a threshold matter, many courts have debated

    whether the FTAIA established a new jurisdictional standard or

    merely codified the standard applied in [United States v. Aluminum

    Co. of Am., 148 F.2d 416 (2d Cir. 1945)] and its progeny. Several

    courts have raised this question without answering it. The Supreme

    Court did as much in [Harford Fire Ins. Co. v. California, 509 U.S.

    764 (1993)].'' Id. at 678.

    \62\ Id. at 692-3, quoting Republic of Argentina v. Weltover,

    Inc., 504 U.S. 607, 618 (1992) (providing that, pursuant to the

    FSIA, 28 U.S.C. 1605(a)(2), immunity does not extend to commercial

    conduct outside the United States that ``causes a direct effect in

    the United States'').

    \63\ Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 857 (7th

    Cir. 2012) (en banc).

    \64\ Id.

    \65\ Id. at 856-57.

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

    Other terms in the FTAIA differ from the terms used in section 2(i)

    of the CEA. First, the FTAIA test explicitly requires that the effect

    on U.S. commerce be a ``reasonably foreseeable'' result of the

    conduct.\66\ Section 2(i) of the CEA, by contrast, does not provide

    that the effect on U.S. commerce must be foreseeable. Second, whereas

    the FTAIA solely relies on the ``effects'' on U.S. commerce to

    determine cross-border application of the Sherman Act, section 2(i) of

    the CEA refers to both ``effect'' and ``connection.'' ``The FTAIA says

    that the Sherman Act applies to foreign `conduct' with a certain kind

    of harmful domestic effect.'' \67\ Section 2(i), by contrast, applies

    more broadly--not only to particular instances of conduct that have an

    effect on U.S. commerce, but also to activities that have a direct and

    significant ``connection with activities in'' U.S. commerce. Unlike the

    FTAIA, section 2(i) applies the swaps provisions of the CEA to

    activities outside the United States that have the requisite connection

    with activities in U.S. commerce, regardless of whether a ``harmful

    domestic effect'' has occurred.

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

    \66\ See, e.g., Animal Sciences Products. v. China Minmetals

    Corp., 654 F.3d 462, 471 (3d Cir. 2011) (``[T]he FTAIA's `reasonably

    foreseeable' language imposes an objective standard: the requisite

    `direct' and `substantial' effect must have been `foreseeable' to an

    objectively reasonable person.'').

    \67\ Hoffman-LaRoche, 452 U.S. at 173.

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

    As the foregoing textual analysis indicates, Congress crafted

    section 2(i) differently from its analogue in the antitrust laws.

    Congress delineated the cross-border scope of the Sherman Act in

    section 6a of the FTAIA as applying to conduct that has a ``direct''

    and ``substantial'' and ``reasonably foreseeable'' ``effect'' on U.S.

    commerce. In section 2(i), on the other hand, Congress did not include

    a requirement that the effects or connections of the activities outside

    the United States be ``reasonably foreseeable'' for the Dodd-Frank

    swaps provisions to apply. Further, Congress included language in

    section 2(i) to apply the Dodd-Frank swaps provisions in circumstances

    in which there is a direct and significant connection with activities

    in U.S. commerce, regardless of whether there is an effect on U.S.

    commerce. The different words that Congress used in paragraph (1) of

    section 2(i), as compared to its closest statutory analogue in section

    6a of the FTAIA, inform the Commission in construing the boundaries of

    its cross-border authority over swap activities under the CEA.\68\

    Accordingly, the Commission believes it is appropriate to interpret

    section 2(i) such that it applies to activities outside the United

    States in circumstances in addition to those that would be reached

    under the FTAIA standard.

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

    \68\ The provision that ultimately became section 722(d) of the

    Dodd-Frank Act was added during consideration of the legislation in

    the House of Representatives. See 155 Cong. Rec. H14685 (Dec. 10,

    2009). The version of what became Title VII that was reported by the

    House Agriculture Committee and the House Financial Services

    Committee did not include any provision addressing cross-border

    application. See 155 Cong. Rec. H14549 (Dec. 10, 2009). The

    Commission finds it significant that, in adding the cross-border

    provision before final passage, the House did so in terms that, as

    discussed in text, were different from, and broader than, the terms

    used in the analogous provision of the FTAIA.

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

    As further described in the Proposed Guidance, one of the principal

    rationales for the enactment of the Dodd-Frank derivatives reforms was

    the need for a comprehensive scheme of regulation to prevent systemic

    risk in the U.S. financial system.\69\ More particularly, a primary

    purpose of Title VII of the Dodd-Frank Act is to address risk to the

    U.S. financial system created by interconnections in the swaps

    market.\70\ Title VII of the Dodd-Frank Act gave the Commission new and

    broad authority to regulate the swaps market to address and mitigate

    risks arising from swap activities that in the future could cause a

    financial crisis.

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

    \69\ See Proposed Guidance, 77 FR at 41215-41216.

    \70\ Cf. 156 Cong. Rec. S5818 (July 14, 2010) (statement of Sen.

    Lincoln) (``In 2008, our Nation's economy was on the brink of

    collapse. America was being held captive by a financial system that

    was so interconnected, so large, and so irresponsible that our

    economy and our way of life were about to be destroyed.''),

    available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/pdf/CREC-2010-07-14.pdf; 156 Cong. Rec. S5888 (July 15, 2010) (statement of

    Sen. Shaheen) (``We need to put in place reforms to stop Wall Street

    firms from growing so big and so interconnected that they can

    threaten our entire economy.''), available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf; 156 Cong.

    Rec. S5905 (July 15, 2010) (statement of Sen. Stabenow) (``For too

    long the over-the-counter derivatives market has been unregulated,

    transferring risk between firms and creating a web of fragility in a

    system where entities became too interconnected to fail.''),

    available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf.

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

    In global markets, the source of such risk is not confined to

    activities within U.S. borders. Due to the interconnectedness between

    firms, traders, and markets in the U.S. and abroad, a firm's failure,

    or trading losses overseas, can quickly spill over to the United States

    and affect activities in U.S. commerce and the stability of the U.S.

    financial system. Accordingly, Congress did not limit the application

    of the Dodd-Frank Act to activities within the United States. Rather,

    in recognition of the global nature of the swaps market, and the fact

    that risks to the U.S. financial system may arise from activities

    outside the United States, as well as from activities within the United

    States, Congress explicitly provided for cross-border application of

    Title VII to activities outside the United States that pose risks to

    the U.S. financial system.\71\

    [[Page 45300]]

    Therefore, upon consideration of the statutory language, as well as the

    prophylactic purpose of the CEA and the amendments made to it by Title

    VII, the Commission construes section 2(i) to apply the swaps

    provisions of the CEA to activities outside the United States that have

    either: (1) A direct and significant effect on U.S. commerce; or, in

    the alternative, (2) a direct and significant connection with

    activities in U.S. commerce, and through such connection present the

    type of risks to the U.S. financial system and markets that Title VII

    directed the Commission to address. The Commission interprets section

    2(i) in a manner consistent with the overall goals of the Dodd-Frank

    Act to reduce risks to the U.S. financial system and avoid future

    financial crises.\72\

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

    \71\ The legislative history of the Dodd-Frank Act shows that in

    the fall of 2009, neither the Over-the-Counter Derivatives Markets

    Act of 2009, H.R. 3795, 111th Cong. (1st Sess. 2009), reported by

    the Financial Services Committee chaired by Rep. Barney Frank, nor

    the Derivatives Markets Transparency and Accountability Act of 2009,

    H.R. 977, 111th Cong. (1st Sess. 2009), reported by the Agriculture

    Committee chaired by Rep. Collin Peterson, included a general

    territoriality limitation that would have restricted Commission

    regulation of transactions between two foreign persons located

    outside of the United States. During the House Financial Services

    Committee markup on October 14, 2009, Rep. Spencer Bachus offered an

    amendment that would have restricted the jurisdiction of the

    Commission over swaps between non-U.S. resident persons transacted

    without the use of the mails or any other means or instrumentality

    of interstate commerce. Chairman Frank opposed the amendment, noting

    that there may well be cases where non-U.S. residents are engaging

    in transactions that have an effect on the United States and that

    are insufficiently regulated internationally and that he would not

    want to prevent U.S. regulators from stepping in. Chairman Frank

    expressed his commitment to work with Rep. Bachus going forward, and

    Rep. Bachus withdrew the amendment. See H. Fin. Serv. Comm. Mark Up

    on Discussion Draft of the Over-the-Counter Derivatives Markets Act

    of 2009, 111th Cong., 1st Sess. (Oct. 14, 2009) (statements of Rep.

    Bachus and Rep. Frank), available at http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=231922.

    \72\ The Commission also notes that the Supreme Court has

    indicated that the FTAIA may be interpreted more broadly when the

    government is seeking to protect the public from anticompetitive

    conduct than when a private plaintiff brings suit. See Hoffman-

    LaRoche, 452 U.S. at 170 (``A Government plaintiff, unlike a private

    plaintiff, must seek to obtain the relief necessary to protect the

    public from further anticompetitive conduct and to redress

    anticompetitive harm. And a Government plaintiff has legal authority

    broad enough to allow it to carry out its mission.'').

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

    Consistent with this overall interpretation, the Commission

    believes that the term ``direct'' in CEA section 2(i) should be

    interpreted in a manner consistent with the position of the Department

    of Justice Antitrust Division with respect to the meaning of the same

    term in the FTAIA, and as recently adopted by the Seventh Circuit.\73\

    The Commission therefore interprets the term ``direct'' in section 2(i)

    so as to require ``a reasonably proximate causal nexus'' and not to

    require foreseeability, substantiality, or immediacy.\74\

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

    \73\ See note 63 and accompanying text, supra.

    \74\ The Seventh Circuit's rationale for rejecting the Ninth

    Circuit's interpretation applies with at least equal, if not

    greater, force to the interpretation of the word ``direct'' in

    section 2(i) of the CEA. As discussed in note 68 and the

    accompanying text, supra, Congress expressly declined to import the

    FTAIA standards of substantiality, immediacy, or foreseeability into

    section 2(i). The Commission believes that the terms included in

    section 2(i) that are the same as the terms in the FTAIA should be

    interpreted in a manner consistent with Congress's determination to

    not import other, different standards from the FTAIA into section

    2(i). Where Congress has included in a new statute one term but not

    another from an existing statute, it is reasonable to conclude that

    Congress did not want the other existing standards included in the

    new statute.

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

    Consistent with the purpose of Title VII to protect the U.S.

    financial system against the build-up of systemic risks, the Commission

    does not read section 2(i) so as to require a transaction-by-

    transaction determination that a specific swap outside the United

    States has a ``direct and significant connection with activities in, or

    effect on, commerce of the United States'' in order to apply the swaps

    provisions of the CEA to such transactions. Rather, it is the

    connection of swap activities, viewed as a class or in the aggregate,

    to activities in commerce of the United States that must be assessed to

    determine whether application of the CEA swaps provisions is

    warranted.\75\

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

    \75\ The Commission believes this interpretation is supported by

    Congress's use of the plural term ``activities'' in CEA section

    2(i), rather than the singular term ``activity.'' The Commission

    believes it is reasonable to interpret the use of the plural term

    ``activities'' in section 2(i) to require not that each particular

    activity have the requisite connection with U.S. commerce, but

    rather that such activities in the aggregate, or a class of

    activity, have the requisite nexus with U.S. commerce. This

    interpretation is consistent with the overall objectives of Title

    VII, as described above. Further, the Commission believes that a

    swap-by-swap approach to jurisdiction would be ``too complex to

    prove workable.'' See Hoffman-LaRoche, 542 U.S. at 168.

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

    This conclusion is bolstered by similar interpretations of other

    federal statutes regulating interstate commerce. Recently, the Supreme

    Court reaffirmed a similar ``aggregate effects'' approach in Nat'l

    Fed'n of Indep. Bus. v. Sebelius.\76\ In that case, the Court phrased

    the holding in the seminal ``aggregate effects'' decision, Wickard v.

    Filburn,\77\ in this way: ``[The farmer's] decision, when considered in

    the aggregate along with similar decisions of others, would have had a

    substantial effect on the interstate market for wheat.'' \78\ In

    another recent case, Gonzales v Raich,\79\ the Court adopted similar

    reasoning to uphold the application of the Controlled Substance Act

    \80\ to prohibit the intrastate use of medical marijuana for medicinal

    purposes. In Raich, the Court held that Congress could regulate purely

    intrastate activity if the failure to do so would ``leave a gaping

    hole'' in the federal regulatory structure. These cases support the

    Commission's cross-border authority over swap activities that as a

    class, or in the aggregate, have a direct and significant connection

    with activities in, or effect on, U.S. commerce--whether or not an

    individual swap may satisfy the statutory standard.\81\

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

    \76\ 132 S. Ct. 2566 (2012).

    \77\ 317 U.S. 111 (1942).

    \78\ 132 S. Ct. 2566, 2588 (2012). At issue in Wickard was the

    regulation of a farmer's production and use of wheat even though the

    wheat was ``not intended in any part for commerce but wholly for

    consumption on the farm.'' 317 U.S. at 118. The Supreme Court upheld

    the application of the regulation, stating that although the

    farmer's ``own contribution to the demand for wheat may be trivial

    by itself,'' the federal regulation could be applied when his

    contribution ``taken together with that of many others similarly

    situated, is far from trivial.'' Id. at 128-29. The Court also

    stated it had ``no doubt that Congress may properly have considered

    that wheat consumed on the farm where grown, if wholly outside the

    scheme of regulation, would have a substantial effect in defeating

    and obstructing its purpose . . . .'' Id.

    \79\ 545 U.S. 1 (2005).

    \80\ 21 U.S.C. 801 et seq.

    \81\ In Sebelius, the Court stated, ``Where the class of

    activities is regulated, and that class is within the reach of

    federal power, the courts have no power to excise, as trivial,

    individual instances of the class.'' 132 S. Ct. at 2587 (quoting

    Perez v. United States, 402 U.S. 146, 154 (1971).

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

    C. Principles of International Comity

    The case law in the antitrust area also teaches the importance of

    recognizing the laws and interests of other countries in applying an

    ambiguous federal statute across borders; in such circumstances,

    principles of international comity counsel courts and agencies to act

    reasonably in exercising jurisdiction with respect to activity that

    takes place elsewhere. In Hoffman-LaRoche, an antitrust class action

    lawsuit alleging an international price-fixing conspiracy by foreign

    and domestic vitamin manufacturers and distributors, the Supreme Court

    held that ambiguous statutes should be construed to ``avoid

    unreasonable interference with the sovereign authority of other

    nations.'' \82\ The Court explained that this rule of construction

    ``reflects customary principles of international law'' and ``helps the

    potentially conflicting laws of different nations work together in

    harmony--a harmony particularly needed in today's highly interdependent

    commercial world.'' \83\

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

    \82\ 542 U.S. at 164.

    \83\ Id. at 165.

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

    In determining whether the exercise of jurisdiction by one nation

    over activities in another nation would be reasonable, the courts and

    agencies are guided by the Restatement (Third) of Foreign Relations Law

    of the United States (the ``Restatement''). Drawing upon traditional

    principles of international law, the Restatement provides bases of

    jurisdiction to prescribe law, as well as limitations on the exercise

    of jurisdiction. In addition

    [[Page 45301]]

    to recognizing territoriality and nationality as bases for

    jurisdiction, the Restatement expressly provides that a country has

    jurisdiction to prescribe law with respect to ``conduct outside its

    territory that has or is intended to have substantial effect within its

    territory.'' \84\

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

    \84\ See Restatement sec. 402(1)(c). A comment to the

    Restatement also identifies jurisdiction with respect to activity

    outside the country, but having or intended to have substantial

    effect within the country's territory, as an aspect of jurisdiction

    based on territoriality. See Restatement sec. 402 cmt. d.

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

    The Restatement also provides that even where a country has a basis

    for jurisdiction, it should not prescribe law with respect to a person

    or activity in another country when the exercise of such jurisdiction

    is unreasonable.\85\ The reasonableness of such an exercise of

    jurisdiction, in turn, is to be determined by evaluating all relevant

    factors, including certain specifically enumerated factors where

    appropriate:

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

    \85\ Restatement sec. 403(1).

    (a) the link of the activity to the territory of the regulating

    state, i.e., the extent to which the activity takes place within the

    territory, or has substantial, direct, and foreseeable effect upon

    or in the territory;

    (b) the connections, such as nationality, residence, or economic

    activity, between the regulating state and the persons principally

    responsible for the activity to be regulated, or between that state

    and those whom the regulation is designed to protect;

    (c) the character of the activity to be regulated, the

    importance of regulation to the regulating state, the extent to

    which other states regulate such activities, and the degree to which

    the desirability of such regulation is generally accepted;

    (d) the existence of justified expectations that might be

    protected or hurt by the regulation;

    (e) the importance of the regulation to the international

    political, legal, or economic system;

    (f) the extent to which the regulation is consistent with the

    traditions of the international system;

    (g) the extent to which another state may have an interest in

    regulating the activity; and

    (h) the likelihood of conflict with regulation by another

    state.\86\

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

    \86\ Restatement sec. 403(2).

    Notably, the Restatement does not preclude concurrent regulation by

    multiple jurisdictions. However, where concurrent jurisdiction by two

    or more jurisdictions creates conflict, the Restatement recommends that

    each country evaluate both its interests in exercising jurisdiction and

    those of the other jurisdiction, and where possible, to consult with

    each other.\87\

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

    \87\ With regard to conflicting exercises of jurisdiction,

    section 403(3) of the Restatement states:

    (3) When it would not be unreasonable for each of the two states

    to exercise jurisdiction over a person or activity, but the

    prescriptions by the two states are in conflict, each state has an

    obligation to evaluate its own as well as the other state's interest

    in exercising jurisdiction, in light of all the relevant factors,

    including those set out in Subsection (2), a state should defer to

    the other state if that state's interest is clearly greater.

    Comment e. to section 403 of the Restatement states:

    Conflicting exercises of jurisdiction. Subsection (3) applies

    when an exercise of jurisdiction by each of two states is not

    unreasonable, but their regulations conflict. In that case, each

    state is required to evaluate both its interests in exercising

    jurisdiction and those of the other state. When possible, the two

    states should consult with each other. If one state has a clearly

    greater interest, the other should defer, by abandoning its

    regulation or interpreting or modifying it so as to eliminate the

    conflict. When neither state has a clearly stronger interest, states

    often attempt to eliminate the conflict so as to reduce

    international friction and avoid putting those who are the object of

    the regulations in a difficult situation. Subsection (3) is

    addressed primarily to the political departments of government, but

    it may be relevant also in judicial proceedings.

    Subsection (3) applies only when one state requires what another

    prohibits, or where compliance with the regulations of two states

    exercising jurisdiction consistently with this section is otherwise

    impossible. It does not apply where a person subject to regulation

    by two states can comply with the laws of both; for example, where

    one state requires keeping accounts on a cash basis, the other on an

    accrual basis. It does not apply merely because one state has a

    strong policy to permit or encourage an activity which another state

    prohibits, or one state exempts from regulation an activity which

    another regulates. Those situations are governed by Subsection (2),

    but do not constitute conflict within Subsection (3).

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

    Consistent with the Restatement, in determining the extent to which

    the Dodd-Frank swaps provisions apply to activities abroad, the

    Commission has strived to protect U.S. interests as determined by

    Congress in Title VII, and minimize conflicts with the laws of other

    jurisdictions. The Commission has carefully considered, among other

    things, the level of the home jurisdiction's supervisory interests over

    the subject activity and the extent to which the activity takes place

    within the foreign territory.\88\ At the same time, the Commission has

    also considered the potential for cross-border activities to have

    substantial connection to or impact on the U.S. financial system and

    the global, highly integrated nature of today's swap business; to

    fulfill the purposes of the Dodd-Frank swaps reform, the Commission's

    supervisory oversight cannot be confined to activities strictly within

    the territory of the United States.

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

    \88\ For purposes of this Guidance, the terms ``home

    jurisdiction'' or ``home country'' are used interchangeably and

    refer to the jurisdiction in which the person or entity is

    established, including the European Union.

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

    The Commission believes that the Guidance strikes the proper

    balance between these competing factors to ensure that the Commission

    can discharge its responsibilities to protect the U.S. markets, market

    participants, and financial system, consistent with the traditions of

    the international system and comity principles, as set forth in the

    Restatement. Of particular relevance is the Commission's approach to

    substituted compliance, which would be expected to mitigate any burden

    associated with potentially conflicting foreign regulations and would

    generally be appropriate in light of the supervisory interests of

    foreign regulators in entities domiciled and operating in its

    jurisdiction.\89\

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

    \89\ As discussed in section IV.F, infra, the Commission's

    recognition of substituted compliance would be based on an

    evaluation of whether the requirements of the foreign jurisdiction

    are comparable and comprehensive compared to the applicable

    requirement(s) under the CEA and Commission regulations, based on a

    consideration of all relevant factors, including among other things:

    (i) the comprehensiveness of the foreign regulator's supervisory

    compliance program, and (ii) the authority of such foreign regulator

    to support and enforce its oversight of the registrant's branch or

    agency with regard to such activities to which substituted

    compliance applies.

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

    In addition, recognizing that close cooperation and coordination

    with other jurisdictions is vital to the regulation of derivatives in

    the highly interconnected global market, the Commission's staff expects

    to remain actively engaged in discussions with foreign regulators as

    the Commission implements the cross-border interpretive guidance and as

    other jurisdictions develop their own regulatory requirements for

    derivatives. The Commission recognizes that conflicts of law may exist

    and is ready to address those issues as they may arise. In that regard,

    where a real conflict of laws exists, the Commission strongly

    encourages regulators and registrants to consult directly with its

    staff.

    IV. Guidance

    A. Interpretation of the Term ``U.S. Person''

    1. Proposed Interpretation

    Under the Proposed Guidance, the term ``U.S. person'' identifies

    those persons who, under the Commission's interpretation, could be

    expected to satisfy the jurisdictional nexus under section 2(i) of the

    CEA based on their swap activities either individually or in the

    aggregate.\90\ As proposed, the Commission's interpretation of the term

    ``U.S. person'' would generally encompass: (1) persons (or classes of

    persons) located within the United

    [[Page 45302]]

    States; and (2) persons that may be domiciled or operate outside the

    United States but whose swap activities nonetheless have a ``direct and

    significant connection with activities in, or effect on, commerce of

    the United States'' within the meaning of CEA section 2(i).

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

    \90\ See Proposed Guidance, 77 FR at 41218. The discussion of

    the term ``U.S. person'' in this Guidance is limited to the

    relevance of this term for purposes of the Commission regulations

    promulgated under Title VII. The Commission does not intend that

    this discussion would apply to other uses of the term ``person'' in

    the CEA.

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

    Specifically, as set forth in the Proposed Guidance, the

    Commission's interpretation of the term ``U.S. person'' would generally

    include, but not be limited to:

    (i) any natural person who is a resident of the United States;

    (ii) any corporation, partnership, limited liability company,

    business or other trust, association, joint-stock company, fund or

    any form of enterprise similar to any of the foregoing, in each case

    that is either (A) organized or incorporated under the laws of the

    United States or having its principal place of business in the

    United States (legal entity) or (B) in which the direct or indirect

    owners thereof are responsible for the liabilities of such entity

    and one or more of such owners is a U.S. person;

    (iii) any individual account (discretionary or not) where the

    beneficial owner is a U.S. person;

    (iv) any commodity pool, pooled account, or collective

    investment vehicle (whether or not it is organized or incorporated

    in the United States) of which a majority ownership is held,

    directly or indirectly, by a U.S. person(s);

    (v) any commodity pool, pooled account, or collective investment

    vehicle the operator of which would be required to register as a

    commodity pool operator under the CEA;

    (vi) a pension plan for the employees, officers or principals of

    a legal entity with its principal place of business inside the

    United States; and

    (vii) an estate or trust, the income of which is subject to U.S.

    income tax regardless of source.

    Under the proposed interpretation, a ``U.S. person'' would include

    a foreign branch of a U.S. person; on the other hand, a non-U.S.

    affiliate guaranteed by a U.S. person would not be within the

    Commission's interpretation of the term ``U.S. person.''

    The Further Proposed Guidance included alternatives for two

    ``prongs'' of the proposed interpretation of the term ``U.S. person''

    in the Proposed Guidance: prong (ii)(B), which relates to U.S. owners

    that are responsible for the liabilities of a non-U.S. entity; and

    prong (iv), which relates to commodity pools and funds with majority-

    U.S. ownership.

    The alternative version of prong (ii)(B) in the Further Proposed

    Guidance would limit its scope to a non-U.S. legal entity that is

    directly or indirectly majority-owned by one or more natural persons or

    legal entities that meet prong (i) or (ii) of the interpretation, in

    which such U.S. person(s) bears unlimited responsibility for the

    obligations and liabilities of the legal entity. This alternative prong

    (ii)(B) would generally not include an entity that is a corporation,

    limited liability company or limited liability partnership where

    shareholders, members or partners have limited liability. Further, the

    Commission stated in the Further Proposed Guidance that the majority-

    ownership criterion would be intended to avoid capturing those legal

    entities that have negligible U.S. ownership interests. Unlimited

    liability corporations where U.S. persons have majority ownership and

    where such U.S. persons have unlimited liability for the obligations

    and liabilities of the entity generally would be covered under this

    alternative to prong (ii)(B).

    The alternative prong (ii)(B) in the Further Proposed Guidance was

    as follows:

    (ii) A corporation, partnership, limited liability company,

    business or other trust, association, joint-stock company, fund or

    any form of enterprise similar to any of the foregoing, in each case

    that is either (A) organized or incorporated under the laws of a

    state or other jurisdiction in the United States or having its

    principal place of business in the United States or (B) directly or

    indirectly majority-owned by one or more persons described in prong

    (i) or (ii)(A) and in which such person(s) bears unlimited

    responsibility for the obligations and liabilities of the legal

    entity (other than a limited liability company or limited liability

    partnership where partners have limited liability);

    The Further Proposed Guidance explained that this alternative

    proposed prong would generally treat an entity as a U.S. person if one

    or more of its U.S. majority owners has unlimited responsibility for

    losses of, or nonperformance by, the entity. This prong would reflect

    that when the structure of an entity is such that the U.S. direct or

    indirect owners are ultimately liable for the entity's obligations and

    liabilities, the connection to activities in, or effect on, U.S.

    commerce would be expected to satisfy the requisite jurisdictional

    nexus. This ``look-through'' requirement also would serve to discourage

    persons from creating such indirect ownership structures for the

    purpose of engaging in activities outside of the Dodd-Frank regulatory

    regime. Under the Further Proposed Guidance, this alternative proposed

    prong generally would not render a legal entity organized or domiciled

    in a foreign jurisdiction a ``U.S. person'' simply because the entity's

    swaps obligations are guaranteed by a U.S. person.

    With respect to prong (iv) of the interpretation of the term ``U.S.

    person'' in the Proposed Guidance, the Further Proposed Guidance set

    forth an alternative under which any commodity pool, pooled account,

    investment fund or other collective investment vehicle generally would

    be within the interpretation of the term ``U.S. person'' if it is

    (directly or indirectly) majority-owned by one or more natural persons

    or legal entities that meet prong (i) or (ii) of the interpretation of

    the term ``U.S. person.'' The Further Proposed Guidance explained that

    for purposes of this alternative prong (iv), the Commission would

    interpret ``majority-owned'' to mean the beneficial ownership of 50

    percent or more of the equity or voting interests in the collective

    investment vehicle. Similar to the alternative prong (ii)(B) discussed

    above, the Commission generally would not interpret the collective

    investment vehicle's place of organization or incorporation to be

    determinative of its status as a U.S. person. The Further Proposed

    Guidance clarified that under alternative prong (iv), the Commission

    would interpret the term ``U.S. person'' to include a pool, fund, or

    other collective investment vehicle that is publicly traded only if it

    is offered, directly or indirectly, to U.S. persons.

    The alternative prong (iv) in the Further Proposed Guidance was as

    follows:

    (iv) A commodity pool, pooled account, investment fund, or other

    collective investment vehicle that is not described in prong (ii)

    and that is directly or indirectly majority-owned by one or more

    persons described in prong (i) or (ii), except any commodity pool,

    pooled account, investment fund, or other collective investment

    vehicle that is publicly-traded but not offered, directly or

    indirectly, to U.S. persons;

    The Further Proposed Guidance explained that this alternative

    proposed prong (iv) is intended to capture collective investment

    vehicles that are created for the purpose of pooling assets from U.S.

    investors and channeling these assets to trade or invest in line with

    the objectives of the U.S. investors, regardless of the place of the

    vehicle's organization or incorporation. These collective investment

    vehicles may serve as a means to achieve the investment objectives of

    their beneficial owners, rather than being separate, active operating

    businesses. As such, the beneficial owners would be directly exposed to

    the risks created by the swaps that their collective investment

    vehicles enter into.

    [[Page 45303]]

    2. Comments

    In general, commenters stated that the proposed ``U.S. person''

    interpretation presented significant interpretive issues and

    implementation challenges.\91\ The commenters contended that it would

    be difficult to determine U.S. person status because of the breadth of

    the proposed interpretation, potential ambiguities it contains, and the

    collection of information its application may require. The commenters,

    therefore, urged the Commission to consider how the proposed

    interpretation could be stated in a simpler and more easily applied

    manner.\92\ While a number of commenters stated that the Commission's

    construction of the term ``U.S. person'' in the Proposed Guidance was

    overbroad,\93\ several commenters on the Further Proposed Guidance

    advocated for a broader reading of the term than any of those proposed

    by the Commission.\94\

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

    \91\ See SIFMA (Aug. 27, 2012) at 5; Societe Generale

    (``SocGen'') (Aug. 8, 2012) at 4; IIB (Aug. 27, 2012) at 4-14;

    Deutsche Bank AG (``Deutsche Bank'') (Aug. 27, 2012) at 1-4; Goldman

    Sachs ``(Goldman'') (Aug. 27, 2012) at 3; The Hong Kong Association

    of Banks (``Hong Kong Banks'') (Aug. 27, 2012) at 3-4; Australian

    Bankers' Association Inc. (``Australian Bankers'') (Aug. 27, 2012)

    at 4.

    \92\ SIFMA (August 27, 2012) at A10.

    \93\ See, e.g., European Commission (Aug. 24, 2012) at 1-2; Hong

    Kong Banks (Aug. 27, 2012) at 4; J.P. Morgan (Aug. 13, 2012) at 9.

    \94\ See Better Markets (Feb. 15, 2013) at 4-8; Michael

    Greenberger and Brandy Bruyere, University of Maryland, and AFR

    (``Greenberger/AFR'') (Feb. 6, 2013) at 3 (stating that none of the

    definitions of U.S. person proposed by the CFTC are sufficient to

    protect U.S. taxpayers from the risks of foreign subsidiaries and

    affiliates of U.S. financial institutions). See also Letter from

    Sen. Levin at 7-8.

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

    a. Phase-in Interpretation

    A number of commenters requested that the Commission adopt an

    interim interpretation of ``U.S. person'' that would allow firms to

    rely on their existing systems and classifications and avoid the need

    to develop systems to follow a temporary interpretation of the term

    ``U.S. person'' that may change in the near future.\95\ IIB explained

    that applying any interpretation of ``U.S. person'' that departs from

    status based on residence or jurisdiction of organization, and in some

    cases principal place of business, will require sufficient time to

    implement relevant documentation conventions and diligence

    procedures.\96\ IIB, therefore, requested that the Commission implement

    a phased-in approach to the ``U.S. person'' interpretation that would

    encompass, in general, (1) a natural person who is a U.S. resident and

    (2) a corporate entity that is organized or incorporated under the laws

    of the United States or has its place of business in the United

    States.\97\

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

    \95\ See, e.g., Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27,

    2012) at A8-9; IIB (Aug. 9, 2012) at 4; Deutsche Bank (Aug. 13,

    2012) at 2; State Street Corporation (``State Street'') (Aug. 27,

    2012) at 2; Goldman (Aug. 27, 2012) at 3.

    \96\ See IIB (Aug. 9, 2012) at 4.

    \97\ For purposes of IIB's definition, a foreign branch of a

    U.S. swap dealer would be considered a non-U.S. person. IIB added

    that it believes that the Commission should adopt a final definition

    of ``U.S. person'' that is consistent with its proposed interim

    definition. Id.

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

    SIFMA also urged the Commission to phase in the ``U.S. person''

    interpretation, citing the implementation difficulties identified by

    IIB. Specifically, SIFMA recommended that the Commission allow market

    participants to apply an interim interpretation of ``U.S. person''

    until 90 days after the final interpretation of ``U.S. person'' is

    published.\98\ SIFMA stated that the interim interpretation--which was

    identical to IIB's interim interpretation--should identify ``core''

    U.S. persons and would allow its members to phase in compliance with

    the Dodd-Frank requirements without building new systems that might

    have to be changed when the Commission states a final interpretation of

    the term.\99\

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

    \98\ See SIFMA (Aug. 25, 2012) at A8.

    \99\ Id. at A8.

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

    b. Comments on Particular Prongs of the Proposed Interpretation of the

    Term ``U.S. Person''

    Commenters' concerns were primarily (though not exclusively)

    directed to three prongs of the proposed ``U.S. person''

    interpretation: prong (ii)(B) relating to U.S. owners that are

    responsible for the liabilities of a non-U.S. company; prong (iv)

    relating to commodity pools and funds with majority-U.S. ownership; and

    prong (v) relating to registered commodity pool operators. Below, the

    Commission describes the main comments to all the prongs of the

    proposed interpretation of ``U.S. person'' in greater detail.

    Commenters generally did not comment on prong (i).

    With respect to prong (ii)(A), the Investment Industry Association

    of Canada (IIAC) stated that the Commission should look to the location

    of a legal entity's management (or the majority of its directors and

    executive officers), instead of the location of organization.\100\ Two

    commenters stated that the ``principal place of business'' element of

    the interpretation was ambiguous and difficult to administer and thus

    recommended that it be removed.\101\

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

    \100\ See IIAC (Aug. 27, 2012) at 3-5.

    \101\ See Lloyds Banking Group (``Lloyds'') (Aug. 24, 2012) at

    3; Managed Fund Association and Alternative Investment Management

    Association (``MFA/AIMA'') (Aug. 28, 2012) at 6.

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

    On the other hand, Senator Levin supported an inclusive

    interpretation of the term ``U.S. person'' that would encompass foreign

    offices and affiliates of U.S. financial institutions and corporations,

    because requiring a case-by-case analysis of whether they should be

    subject to the Dodd-Frank Act would be complicated, burdensome, and

    susceptible to gamesmanship.\102\ He also suggested that, since it

    appears that typically foreign affiliates and subsidiaries operate not

    as independent actors but are closely integrated with their parent

    corporations, obtaining from them the financial backing needed for

    their derivative trades, the Commission's interpretation should presume

    that a foreign affiliate engaged in swap activity is an extension of

    the parent corporation, unless the parent can demonstrate that the

    foreign affiliate should be treated as independent.\103\ Senator Levin

    also stated that the Commission's interpretation should include as a

    U.S. person any foreign affiliate under common control with a U.S.

    person, based on factors such as common management, funding, systems,

    and financial reporting.\104\

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

    \102\ See Letter from Sen. Levin at 7-8.

    \103\ Id. (stating that it ``makes little economic sense, given

    the insubstantial reality of many foreign affiliates and

    subsidiaries in the financial industry'' to ``view a foreign

    affiliate or subsidiary as a non-U.S. person even if it were fully

    integrated with its U.S. parent, operated as a wholly owned shell

    operation with no offices or employees of its own, and functioned in

    the same way as a branch or agency office'').

    \104\ Id. at 8.

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

    With respect to prong (ii)(B) of the interpretation, which

    addresses situations where the direct or indirect owners of an entity

    are responsible for its liabilities, several commenters stated that the

    phrase ``responsible for the liabilities'' was vague. For example, the

    Committee on Capital Markets Regulation (``Capital Markets'') stated

    that the phrase ``responsible for the liabilities'' was open to

    interpretation and requested that the Commission provide more details

    regarding its interpretation of this phrase.\105\ SIFMA sought

    clarification on whether the Commission intended to capture

    partnerships where the partners have unlimited liability.\106\ The

    International Swaps and Derivatives Association Inc. (``ISDA'') stated

    that it was not clear whether the concept includes

    [[Page 45304]]

    guarantees, sureties, simple risk of loss of equity, or other type of

    exposure.\107\ Deutsche Bank further noted that the language in prong

    (ii)(B) could be read to include an entity guaranteed by a U.S. person,

    which appears at odds with possibly varying policies elsewhere in the

    Proposed Guidance for entities guaranteed by U.S. persons.\108\

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

    \105\ See Capital Markets (Aug. 24, 2012) at 5.

    \106\ See SIFMA (Aug. 27, 2012) at A13 and A19.

    \107\ See ISDA (Aug. 27, 2012) at 9; MFA/AIMA (Aug. 28, 2012) at

    6.

    \108\ See Deutsche Bank (Aug. 27, 2012) at 3. See also Peabody

    Energy Corporation (``Peabody'')(Aug. 28, 2012) at 2-3 (``By

    contrast, a foreign affiliate or subsidiary of a U.S. person would

    be considered a non-U.S. person, even where such an affiliate or

    subsidiary has certain or all of swap-related obligations guaranteed

    by the U.S. person.'') (citing Proposed Guidance, 77 FR at 41218);

    SIFMA (Aug. 27, 2012) at A2 (stating that the Commission should

    clarify that prong (ii)(B) of the interpretation is not meant to

    capture an entity merely because it is guaranteed by a U.S. person).

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

    Commenters also expressed concerns about the lack of a minimum

    U.S.-ownership threshold. For example, Sumitomo Mitsui Trust Bank Ltd.

    (``Sumitomo'') stated that there should be a minimum level of ownership

    of the entity in question by one or more U.S. persons for this prong to

    apply, and suggested that the majority ownership threshold used in

    prong (iv) apply here as well.\109\ ISDA emphasized a different point,

    stating that without clear thresholds, a non-U.S. business would be

    within the Commission's interpretation of the term ``U.S. person'' by

    virtue of even negligible ownership interests by U.S. persons.\110\ The

    Financial Services Roundtable (``FSR'') stated that prong (ii) is

    overbroad because it would cover even minority-U.S. owned institutions

    based only on a pro-rata (or less) parent liability guarantee.\111\

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

    \109\ See Sumitomo (Aug. 24, 2012) at 2.

    \110\ See ISDA (Aug. 10, 2012) at 8 (recommending that

    regardless of the nature of the ``responsibilities for the

    liabilities,'' only direct owners of apparent non-U.S. persons

    should be considered, and that the Commission adopt a presumptive

    control threshold of 25% direct ownership for distinguishing between

    control persons and owners that need not be considered in assessing

    the status of an entity as a U.S. person).

    \111\ See FSR (Aug. 27, 2012) at 3.

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

    Capital Markets raised a concern that whether a conclusion that the

    direct or indirect owners of a U.S. legal entity are ``responsible for

    the liabilities'' of such entity requires knowledge of each

    counterparty's legal and ownership structure.\112\ FSR stated that

    interpretation of prong (ii)(B) would depend on a reevaluation of most,

    if not all, counterparty relationships in order to determine what type

    of liability guarantees exist between an entity and its parent.\113\

    Both Capital Markets and FSR stated that firms do not currently have

    any reasonable means to obtain information necessary to assess this

    element of the interpretation, particularly within the short time frame

    prior to the registration date.

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

    \112\ See Capital Markets (Aug. 24, 2012) at 5.

    \113\ See FSR (Aug. 27, 2012) at 3.

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

    One commenter supported finalization of the alternative prong

    (ii)(B) in the Further Proposed Guidance, with minor clarifying

    changes. The Commercial Energy Working Group (``CEWG'') stated that the

    words ``all of'' should be added to clarify that this prong would

    generally apply when U.S. persons that are majority owners bear

    ``unlimited responsibility for all of the obligations and liabilities

    of the legal entity . . .'' \114\ The CEWG also stated that the

    Guidance should reaffirm that a guarantee of a non-U.S. person by a

    U.S. person, in and of itself, generally would not invoke U.S. person

    status.\115\ Other commenters that supported the principles of the

    alternative prong (ii)(B) thought that the interpretation of ``U.S.

    person'' in this regard should be restructured. The Investment Company

    Institute (``ICI'') stated that the Commission should clarify that

    collective investment vehicles would not fall within the alternative

    prong (ii)(B) because the investors' liabilities are limited to the

    amount of their investment.\116\ Thus, ICI stated that it believes the

    alternative prong (ii)(B) would be superfluous with respect to

    collective investment vehicles because the alternative prong (iv) in

    the Further Proposed Guidance would address these entities if they are

    majority-owned by U.S. persons.\117\ MFA/AIMA, on the other hand,

    supported the combination of majority ownership and unlimited liability

    elements in the alternative prong (ii)(B) and recommended that

    collective investment vehicles be considered under that prong.\118\

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

    \114\ See CEWG, submitted by Sutherland Asbill & Brennan LLP

    (Feb. 25, 2013) at 5.

    \115\ Id.

    \116\ See ICI (Feb. 6, 2013) at 3.

    \117\ See id. at 2. See also IIB (Feb 6, 2013) at 10-11

    (collective investment vehicles should be excluded from prong (ii)

    and addressed only in prong (iv)).

    \118\ See MFA/AIMA (Feb. 6, 2013) at 7-8. Thus under MFA/AIMA's

    approach, the status of collective investment vehicles would be

    determined by reference to only the tests in alternative prong

    (ii)(B).

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

    Other commenters stated that the Commission should clarify that the

    language at the end of the proposed alternative prong (ii)(B), which

    refers to limited liability companies and limited liability

    partnerships, would generally also apply to other types of entities

    where owners have limited liability but where the entities have

    different names in foreign legal jurisdictions.\119\ MFA/AIMA and SIFMA

    AMG stated that the Commission should clarify how frequently an entity

    should consider (e.g., annually) whether U.S. persons are its direct or

    indirect majority owners, and provide for a transition period after an

    entity falls within this prong of the interpretation for the first

    time.\120\

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

    \119\ Id. at 10-11; Asociaci[oacute]n Bancaria y de Entidades

    Financieras de Colombia (``Colombian Bankers'') (Feb. 6, 2013) at 1-

    2; IIB (Feb. 6, 2013) at 10; ISDA (Feb. 6, 2013) at 5-6.

    \120\ See MFA/AIMA (Feb. 6, 2013) at 12; SIFMA/AMG (Feb. 14,

    2013) at 6. ISDA stated that the Commission should clarify how the

    prong would apply to an entity where some but not all of the owners

    have unlimited responsibility. In this case, the Commission should

    clarify whether the U.S. owners with majority ownership of the

    entity also each must bear unlimited responsibility for the entity's

    obligations and liabilities or, rather, whether it suffices that a

    single U.S. owner has unlimited responsibility once U.S. majority

    ownership is established. See ISDA (Feb. 6, 2013) at 5-7.

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

    Other commenters were critical of the alternative prong (ii)(B).

    Greenberger/AFR and Better Markets stated that this proposed prong is

    too narrow, because it appears to require that U.S. persons be both the

    majority owners of an entity and bear unlimited responsibility for the

    entity's obligations and liabilities, in order for the entity to be

    within the Commission's interpretation of the term ``U.S. person''

    based solely on ownership by U.S. persons.\121\ Greenberger/AFR pointed

    out that a U.S. person could be the majority owner of an entity

    organized outside the United States, and be responsible for 99% of the

    entity's obligations, yet the entity would not fall within the

    Commission's interpretation under the proposed prong.\122\

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

    \121\ See Greenberger/AFR (Feb. 6, 2013) at 7; Better Markets

    (Feb. 15, 2013) at 7-8.

    \122\ See Greenberger/AFR (Feb. 6, 2013) at 7.

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

    Other commenters suggested that the alternative prong (ii)(B) is

    too broad, recommending that the ownership element be limited to when a

    majority of the direct owners of an entity are U.S. persons, because

    considering the indirect ownership of an entity will be unworkable for

    many entities.\123\ ISDA also stated that the concept of ``unlimited

    responsibility'' is too amorphous to be a basis for the Commission's

    interpretation, because it could turn on fact-sensitive and

    [[Page 45305]]

    uncertain legal judgments under doctrines such as ``veil-piercing'' or

    ``alter ego'' entities.\124\ Moreover, ISDA asserted that the

    Commission has not justified the treatment of unlimited liability

    entities in the proposed alternative prong (ii)(B) by demonstrating how

    such entities are more susceptible to being used to evade Dodd-Frank

    regulations or otherwise raise the concerns addressed by the

    Commission's regulations.\125\

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

    \123\ See MFA/AIMA (Feb. 6, 2013) at 7; SIFMA, The Clearing

    House, Association LLC (``The Clearing House''), and FSR (``SIFMA/

    CH/FSR'') (Feb. 6, 2013) at 2, A8-9; ISDA (Feb. 6, 2013) at 5. IIB

    and SIFMA/AMG made similar comments and questioned whether extending

    this prong to entities where a majority of indirect owners are U.S.

    persons would be consistent with the ``direct and significant

    connection'' language in CEA section 2(i). See IIB (Feb. 6, 2013) at

    10; SIFMA/AMG (Feb. 14, 2013) at 3-4.

    \124\ See ISDA (Feb. 6, 2013) at 6. ISDA also stated that the

    Commission should make clear that the reference to ``unlimited

    responsibility'' does not include responsibility arising out of

    separate contractual arrangements or extraordinary circumstances,

    such as conduct by owners that results in veil piercing or limited

    partner participation in management of a partnership. See id. SIFMA/

    CH/FSR made similar points and stated that this prong is not

    necessary because market participants have not used unlimited

    liability entities to avoid Dodd-Frank regulations. See SIFMA/CH/FSR

    (Feb. 6, 2013) at A12.

    \125\ See ISDA (Feb. 6, 2013) at 6.

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

    Commenters were also critical of the element of the alternative

    prong (ii)(B) that would treat a collective investment vehicle as a

    U.S. person if its principal place of business is in the United States.

    They stated that application of this element would be very unclear and

    difficult on an operational level.\126\ Commenters also stated that a

    collective investment vehicle should be treated as a U.S. person if it

    is organized in the U.S., not if its manager or operator is in the

    U.S.\127\

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

    \126\ Id. at 6-7; SIFMA/CH/FSR (Feb. 6, 2013) at A1, A5-6, B5;

    IIB (Feb. 6, 2013) at 7-8, 10.

    \127\ See MFA/AIMA (Feb. 6, 2013) at 8-9; SIFMA/AMG (Feb. 6,

    2013) at A7-8. The Japanese Bankers Association made similar

    comments and stated that the Commission should clarify whether the

    location of the principal place of business of a subsidiary that is

    controlled by its parent is the location of the subsidiary's

    headquarters or the parent's headquarters. Japanese Bankers

    Association (Feb. 6, 2013) at 7.

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

    Peabody Energy Corporation (``Peabody'') and SIFMA/AMG stated the

    Commission should adopt the interpretation of U.S. person in the

    January Order, which does not include all the elements of the proposed

    alternative prong (ii)(B).\128\

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

    \128\ See Peabody (Feb. 5, 2013) at 1-2; SIFMA/AMG (Feb. 6,

    2013) at 1-3.

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

    Commenters generally did not comment on prong (iii) of the proposed

    interpretation of the term ``U.S. person.''

    With respect to prong (iv) relating to majority direct- or

    indirect-owned commodity pools, pooled accounts, or collective

    investment vehicles, several commenters stated that this prong was

    unworkable because the proposed interpretation would require

    potentially unascertainable information.\129\ According to SIFMA,

    reliance on representations would be the only practical way to consider

    the status of counterparties as U.S. persons under this prong since

    other types of information, such as the direct and indirect ownership

    of any commodity pool, pooled account or collective investment vehicle

    with which a market participant transacts, may be unavailable, non-

    public or otherwise sensitive.\130\ Moreover, a fund would be required

    to monitor its level of U.S. ownership on an on-going basis, and this

    prong could result in frequent changes in the fund's U.S. person

    status.\131\ The Clearing House argued that the interpretation should

    not look through direct investors to indirect investors, unless there

    is evidence of evasion.\132\ Other commenters questioned whether the

    proposed interpretation of ``U.S. person'' for commodity pools, pooled

    accounts, and collective investment vehicles meets the ``direct and

    significant'' jurisdictional nexus applicable to the Commission's

    application of Title VII to transactions with such persons.\133\

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

    \129\ See, e.g., ISDA (Aug. 10, 2012) at 8; SIFMA (Aug. 27,

    2012) at A17; Credit Suisse (Aug. 27, 2012) at 3-4; The Clearing

    House Association LLC (``The Clearing House'') (Aug. 27, 2012) at

    12-13; Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012) at 6-7.

    \130\ See SIFMA (Aug. 27, 2012) at A17-18. See also IIB (Aug.

    27, 2012) at 7 (arguing that since pools cannot ascertain or control

    the status of their indirect investors, the reference to indirect

    ownership should be removed).

    \131\ SIFMA (Aug. 27, 2012) at A17.

    \132\ See The Clearing House (Aug. 13, 2012) at 15 n. 20.

    \133\ See, e.g., SIFMA/AMG (Aug. 27, 2012) at 2-3; MFA/AIMA

    (Aug. 28, 2012) at 4-5; ICI (Aug. 23, 2012) at 4.

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

    Cleary urged that the Commission not adopt an interpretation of

    ``U.S. person'' based on the composition of fund ownership, at least

    prior to finalizing the interpretation.\134\ As it explained, even if

    the Commission's interpretation would allow for reasonable reliance on

    counterparty representations, fund counterparties would not be able to

    provide any representation except with respect to funds formed after

    the finalization of the interpretation for which the fund's

    subscription materials could have been modified to capture the relevant

    information.\135\ If the Commission nevertheless decided to adopt an

    interpretation based on investor composition, Cleary argued against

    including a fund in the interpretation on the basis of indirect

    ownership at any level less than a majority-ownership.\136\

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

    \134\ See Cleary (Aug. 16, 2012) at 6-7.

    \135\ Id.

    \136\ Id. IIB also noted that fund sponsors/operators verify

    investor status through subscription materials provided at the time

    of initial investment. Therefore, they request that any test based

    on fund ownership apply only to funds formed after the effective

    date of the final ``U.S. person'' interpretation. IIB also agreed

    that majority ownership is the minimum threshold under which a

    foreign fund should be included in the interpretation of the term

    ``U.S. person.'' See IIB (Aug. 27, 2012) at 6-7.

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

    Consideration of majority-ownership is particularly problematic

    with respect to funds that are publicly traded, according to several

    commenters.\137\ For example, ICI explained that U.S. persons typically

    purchase shares in non-U.S. funds through intermediaries, and that such

    shares are registered and held in nominee/street name accounts.\138\ In

    such cases, the fund manager/operator would not have information

    regarding the underlying investors.\139\ SIFMA recommended that

    publicly offered and listed commodity pools organized in foreign

    jurisdictions be excluded from the interpretation.\140\ Credit Suisse

    stated that a fund should not be considered a U.S person to the extent

    that it is organized outside the United States and is subject to

    foreign regulation that is comparable to U.S. law. To the extent the

    fund is not so regulated, then the fund would be within the U.S. person

    interpretation only where it is organized under the laws of the United

    States or marketed to U.S. residents.\141\

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

    \137\ See, e.g., SIFMA (Aug. 27, 2012) at A20; ICI (Aug. 23,

    2012) at 3-7; MFA/AIMA (Aug. 28, 2012) at 4; Credit Suisse (Aug. 27,

    2012) at 3-4.

    \138\ See ICI (Aug. 23, 2012) at 3.

    \139\ ICI also noted that certain jurisdictions may prohibit

    disclosure by intermediaries of beneficial owner information. Id.

    \140\ See SIFMA (Aug. 27, 2012) at A19-20.

    \141\ See Credit Suisse (Aug, 27, 2012) at 3-4.

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

    One commenter strongly supported the alternative prong (iv) in the

    Further Proposed Guidance. Citadel stated that since the Dodd-Frank

    clearing and reporting requirements will mitigate systemic risk,

    increase transparency and promote competition, the U.S. person

    interpretation should encompass offshore collective investment vehicles

    that have a sufficient U.S. nexus.\142\ If it did not, then a core,

    active portion of the swaps market would fall outside the scope of the

    transaction level requirements, including clearing, which would

    undermine central objectives of Dodd-Frank, create opportunities for

    regulatory arbitrage, and risk fragmenting the swaps markets.\143\

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

    \142\ See Citadel (Feb. 6, 2013) at 1.

    \143\ See id.

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

    Other commenters argued that the entities that would be covered by

    the alternative prong (iv) should not be covered by the interpretation

    of ``U.S. person,'' which should cover only entities that are directly

    majority-owned by U.S. persons. For example, SIFMA/

    [[Page 45306]]

    CH/FSR stated that consideration of indirect ownership could require

    ongoing monitoring of ownership, which is burdensome or even

    impossible, and would not necessarily reflect a sufficient

    jurisdictional nexus to the United States.\144\ SIFMA/CH/FSR also

    stated that if consideration of majority ownership is included in the

    interpretation, it should reflect an objective statement of the

    ownership level that the Commission would consider relevant to U.S.-

    person status, so as to exclude entities that are owned by U.S. persons

    only to a de minimis extent and allow an annual consideration of

    ownership.\145\ MFA/AIMA and the Investment Adviser Association

    (``IAA'') also provided reasons that there is not a sufficient

    jurisdictional nexus with the United States to include in the

    Commission's interpretation of the term ``U.S. person'' collective

    investment vehicles that are indirectly majority-owned by U.S.

    persons.\146\

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

    \144\ See SIFMA/CH/FSR (Feb. 6, 2013) at A8-9. See also IIB

    (Feb. 6, 2013) at 11 (systems to track indirect ownership would be

    difficult and expensive to implement).

    \145\ See SIFMA/CH/FSR (Feb. 6, 2013) at A8-9. ISDA stated that

    the lack of an objective policy regarding the interpretation of

    majority ownership would lead to arbitrary or indeterminate results

    for many collective investment vehicles due to their varied capital

    structures (citing, for example, structured finance vehicles, which

    merit further analysis due not only to their complex capital

    structures but also to practical difficulties in monitoring

    ownership of their securities), and the practical consequences of

    the alternative interpretations can be considered only following a

    more concrete proposal offered for public comment. See ISDA (Feb. 6,

    2013) at 6-7.

    \146\ MFA/AIMA stated that since interactions between collective

    investment vehicles and registered swap dealers are expected to be

    covered by Dodd-Frank requirements or comparable foreign

    regulations, the inclusion of collective investment vehicles as

    ``U.S. persons'' is less important to achieve regulatory coverage.

    See MFA/AIMA (Feb. 6, 2013) at 7-8. MFA/AIMA also disputed whether

    the pooling of assets in a collective investment vehicle is a

    fundamental difference that denotes a greater U.S. nexus than the

    pooling of assets by corporations or other financial entities, and

    therefore it is problematic that alternative prong (iv) is more

    onerous (in MFA/AIMA's view) for non-U.S collective investment

    vehicles than alternative prong (ii) is for corporate or other

    financial entities. See id. IAA stated that it is inappropriate to

    define an entity as a U.S. person based on characteristics of

    investors in the entity rather than the characteristics of the

    entity itself. See IAA (Feb. 6, 2013) at 4.

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

    Some commenters stated that whether a collective investment vehicle

    would be included in the interpretation of U.S. person should depend on

    whether the fund or other collective investment vehicle is being

    offered to U.S. persons, arguing that the interpretation should cover

    collective investment vehicles that are targeted to the U.S. market or

    to U.S. investors by focusing on activities within the control of the

    vehicle's manager.\147\

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

    \147\ See Invesco Advisers Inc. (``Invesco'') (Feb. 6, 2013) at

    11 (manager of collective investment vehicle determines whether to

    make offering in the United States; subsequent purchases by non-U.S.

    persons who have relocated to the U.S. should not alone constitute

    offering in the U.S.); IIB (Feb. 6, 2013) at 11. Invesco, ICI and

    IAA each stated that the language at the end of alternative prong

    (iv) (if it is adopted) should be interpreted to cover collective

    investment vehicles that are ``publicly-offered'' only to non-U.S.

    persons, even if the vehicles are not publicly-traded. See Invesco

    (Feb. 6, 2013) at 2; ICI (Feb. 6, 2013) at 3; IAA (Feb. 6, 2013) at

    4. See also ICI (Jul. 5, 2013) at 3 n. 9 (``There is an important

    distinction between publicly-traded funds and publicly-offered

    funds: publicly-offered funds are those that are broadly available

    to retail investors; publicly-traded funds are simply a subset of

    publicly-offered funds that trade on exchanges or other secondary

    markets. Excluding from the U.S. person definition only publicly-

    traded funds would capture only a subset of non-U.S. regulated

    funds. We note that, by contrast, hedge funds are neither publicly

    offered nor publicly traded and, unlike non-U.S. retail funds, are

    not subject to substantive government regulation and oversight

    similar in scope to that provided by the U.S. Investment Company

    Act.'').

    ICI and IAA stated that the Commission should interpret whether

    an offer is made to U.S. persons in accordance with precedents under

    the SEC's Regulation S. See ICI (Feb. 6, 2013) at 4-5 n. 14; IAA

    (Feb. 6, 2013) at 4. ISDA stated that the Commission's

    interpretation should specifically exclude any collective investment

    vehicle that offers its securities in accordance with local law and

    customary documentation practices in a local market, as well as

    offerings conducted in accordance with the Regulation S. See ISDA

    (Feb. 6, 2013) at 7.

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

    Commenters also stated that regardless of the policy adopted in

    this regard, in the consideration of whether an entity is a U.S.

    person, only information that is available to third parties or other

    parties should be considered relevant, and the Commission's policy

    should contemplate that market participants would rely on a

    representation of U.S. person status. Also, the Commission's policy

    should clarify how it would apply during the transition period

    immediately after expiration of the January Order.\148\

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

    \148\ See SIFMA/AMG (Feb. 14, 2013) at 4 n. 8; IIB (Feb. 6,

    2013) at 7; ISDA (Feb. 6, 2013) at 7; Japanese Bankers Association

    (Feb. 6, 2013) at 5.

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

    Addressing prong (v) relating to registered commodity pool

    operators, many commenters stated that the Commission should not adopt

    an interpretation that looks to the registration status of a fund's

    operator, because this interpretation could capture a non-U.S. fund

    that does not itself trigger registration as a commodity pool operator

    and has a minimal U.S. nexus.\149\ A number of commenters urged the

    Commission not to adopt an interpretation that looks to the nationality

    of the fund's manager/operator since this would place U.S.-based

    investment managers at a competitive disadvantage, without addressing

    the Commission's regulatory objectives.\150\ IIB generally agreed with

    these commenters and stated that the commodity pool operator

    registration prong would be over-inclusive because, under the

    Commission's current rules, an operator of a foreign pool may be

    required to register as a commodity pool operator with less than 50

    percent U.S. ownership; at the same time, the prong also would be

    under-inclusive because it would not cover funds whose operators are

    eligible for relief from commodity pool operator registration.

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

    \149\ See, e.g., SIFMA (Aug. 27, 2012) at A21; ICI (Aug. 23,

    2012) at 3-7; IIB (Aug. 9, 2012) at 3; MFA/AIMA (Aug. 28, 2012) at

    4-5; IIAC (Aug. 27, 2012) at 4, 5. As IIB explained, even a fund

    that lacks a sufficient U.S. connection can be considered a U.S.

    person where its commodity pool operator is required to register.

    IIB (Aug. 9, 2012) at 3. Under Commission regulation 3.10, the

    operator of a non-U.S. fund with even one U.S.-based owner is

    required to register as a commodity pool operator.

    \150\ See SIFMA (Aug. 27, 2012) at A13; ICI (Aug, 23, 2012) at

    4; Cleary (Aug. 16, 2012) at 7; The Clearing House (Aug. 27, 2012)

    at 13-14.

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

    ICI recommended that the Commission, instead, interpret the term

    ``U.S. person'' to include a commodity pool, pooled account, or

    collective investment vehicle that is ``offered publicly, directly or

    indirectly'' by the manager/sponsor to U.S. persons.\151\ As ICI

    explained, this alternative approach would base a fund's U.S. person

    status on more workable considerations, and not on changes in investor

    status that are beyond the control of a fund or its manager/operator.

    In the consideration of whether a fund is making a public offering to

    U.S. persons, ICI recommended that the Commission look to SEC

    Regulation S.\152\

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

    \151\ See ICI (Aug. 23, 2012) at 5-6.

    \152\ Id. at 6-7. Regulation S is codified at 17 CFR 230.901

    through 230.905.

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

    IIAC recommended that prong (vi) relating to pension plans be

    modified so that pension plans designed exclusively for foreign

    employees of a U.S.-based entity are not within the interpretation of

    the term ``U.S. person.'' Further, IIAC urged the Commission to clarify

    that U.S. investment advisers or other fiduciaries not be considered to

    be within the interpretation of the term ``U.S. person'' when they are

    acting on behalf of non-U.S. accounts.\153\

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

    \153\ IIAC (Aug. 27, 2012) at 4.

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

    IIB stated that prong (vii) relating to an estate or trust should

    be replaced, explaining that market participants do not typically

    identify an estate's or trust's regulatory status on the basis of its

    tax status. Instead, it recommended that the Commission's

    interpretation look to the status of the executor, administrator, or

    trustee. Specifically,

    [[Page 45307]]

    IIB recommended that the Commission's interpretation of the term ``U.S.

    person'' include an estate or trust that is organized in the United

    States ``unless (A) an executor, administrator or trustee that is not a

    U.S. person has sole or shared investment discretion with respect to

    the assets of the trust or estate, (B) in the case of an estate, the

    estate is governed by foreign law and (C) in the case of a trust, no

    beneficiary of the trust (and no settlor if the trust is revocable) is

    a U.S. person . . . .'' \154\

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

    \154\ IIB (Aug. 27, 2012) at 14.

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

    c. Commenters' Proposed Alternatives

    A number of commenters provided substantially different alternative

    interpretations of the term ``U.S. person.'' \155\ Most notably, the

    commenters' alternatives would not encompass persons by virtue of

    ``indirect'' U.S. ownership. For example, SIFMA's proposed ``U.S.

    person'' interpretation would include only those commodity pools or

    collective investment vehicles that are organized or incorporated under

    U.S. law or are (1) directly majority owned by ``U.S. persons'' or, in

    the case of ownership by a pool, a pool that is organized in the United

    States and (2) not publicly offered.\156\ IIB submitted an alternative

    ``U.S. person'' interpretation that generally tracked SIFMA's proposed

    interpretation.\157\

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

    \155\ See, e.g., SIFMA (Aug. 27, 2012); IIB (Aug. 27, 2012); The

    Clearing House (Aug. 27, 2012).

    \156\ See SIFMA (Aug. 27, 2012) at A10-11.

    \157\ See IIB (Aug. 27, 2012) at 13-14.

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

    d. Due Diligence

    Many commenters stated that the Commission's policy in this regard

    should contemplate that a firm would reasonably rely on counterparty

    representations regarding their U.S. person status.\158\ For example,

    SIFMA stated that the Commission's policy should be consistent with a

    determination by the swap counterparty itself of its U.S.-person

    status, but in the alternative, SIFMA recommended that the Commission's

    policy contemplate reasonable reliance on counterparty

    representations.\159\ According to these commenters, counterparty

    representations are the only practical means of determining

    counterparty status as firms do not currently collect the information

    necessary to evaluate counterparty status under the proposed

    interpretation. The commenters also were concerned that certain prongs

    of the proposed interpretation (e.g., ``look-through'' obligations

    associated with the ``direct and indirect ownership'' criterion in

    prong (iv)) would render it difficult, if not impossible, for market

    participants to directly consider whether their counterparties would be

    within the Commission's interpretation of the term ``U.S. person.''

    SIFMA and Cleary further pointed out that the Commission has accepted

    reasonable reliance on counterparty representations in the context of

    the external business conduct standards.\160\

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

    \158\ See, e.g., SIFMA (Aug. 27, 2012) at A16-17; Deutsche Bank

    (Aug. 27, 2012) at 4; Capital Markets (Aug. 24, 2012) at 5; SIFMA/

    AMG (Aug. 27, 2012) at 4-5.

    \159\ SIFMA (Aug. 27, 2012) at A16-18.

    \160\ SIFMA/AMG (Aug. 27, 2012) at 4-5; Cleary (Aug. 16. 2012)

    at 6.

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

    e. Non-U.S. Person That Is Affiliated, Guaranteed, or Controlled by

    U.S. Person

    Viewed as a whole, the proposed interpretation of the term ``U.S.

    person,'' would generally not include a non-U.S. affiliate of a U.S.

    person, even if all of such affiliate's swaps are guaranteed by the

    U.S. person.\161\ The Commission, nevertheless, raised a concern

    regarding risks associated with a U.S. person providing a guarantee to

    its non-U.S. affiliates and requested comments on whether the term

    ``U.S. person'' should, in fact, be interpreted to generally include a

    non-U.S. affiliate guaranteed by a U.S. person.\162\ In addition, the

    Commission sought comments on whether the term ``U.S. person'' also

    should be interpreted to generally include any non-U.S. persons

    controlled by or under common control with a U.S. person.\163\

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

    \161\ See Proposed Guidance, 77 FR at 41218. For purposes of

    this Guidance, the Commission generally interprets the term

    ``affiliates'' to include an entity's parent entity and

    subsidiaries, if any, unless stated otherwise.

    \162\ Id.

    \163\ Id.

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

    Responding to the Commission's request for comments on this issue,

    many commenters stated that Title VII requires the Commission to

    interpret the term ``U.S. person'' to include foreign affiliates of

    U.S. persons, and U.S. affiliates of foreign persons, in order to

    protect U.S. taxpayers from the risks posed by the global swaps

    market.\164\ Senator Levin urged that ``[a]t a minimum, it is essential

    that [the Guidance] . . . include as a U.S. person any foreign

    affiliate or subsidiary under common control with a U.S. person.''

    \165\ He also agreed with statements in the Proposed Guidance that non-

    U.S. affiliates guaranteed by U.S. persons effectively transfer the

    risks of their swaps to the U.S. guarantor, and therefore the

    guaranteed non-U.S. affiliates should be subject to U.S.

    safeguards.\166\ Public Citizen stated that not interpreting the term

    ``U.S. person'' to include a foreign affiliate of a U.S. person ``hides

    the rabbit in the hat'' for Title VII purposes.\167\ It argued that

    Congress intended financial entities that are controlled by U.S.

    financial institutions or that could adversely impact the U.S. economy

    to be regulated as U.S. persons under Title VII in order to fully

    protect American taxpayers from the threat of ``future financial

    bailouts.''

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

    \164\ See Public Citizen's Congress Watch (``Public Citizen'')

    (Aug. 14, 2012) at 9-10; IATP (Aug. 27, 2012) at 4; Better Markets

    (Aug. 27, 2012) at 6.

    \165\ See Letter from Sen. Levin at 8.

    \166\ See id. (citing Proposed Guidance, 77 FR at 41218).

    \167\ Public Citizen (Aug. 14, 2012) at 3.

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

    Greenberger also expressed support for including foreign swap

    entities controlled by U.S. parents in the interpretation of the term

    ``U.S. person.'' In his view, the Commission's distinction between

    guaranteed and non-guaranteed foreign subsidiaries is arbitrary, as the

    absence of a U.S. guarantee does not insulate the U.S. parent from risk

    exposure.\168\ Other commenters argued that the Commission's

    interpretation of the term ``U.S. person'' should include foreign

    affiliates whose swaps are guaranteed by a U.S. person.\169\

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

    \168\ Greenberger (Aug. 27, 2012) at 6-7.

    \169\ See Better Markets (Aug. 27, 2012) at 6-7; Public Citizen

    (Aug. 14, 2012) at 3.

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

    Other commenters objected to including a non-U.S. entity in the

    interpretation of the term ``U.S. person'' solely on the basis of

    affiliation with a U.S. person or having its swaps guaranteed by a U.S.

    person. Sullivan & Cromwell argued that foreign operations of a U.S.-

    based bank do not have a ``direct and significant connection with

    activities in, or effect on,'' U.S. commerce based solely on

    affiliation with or guarantee by a U.S. parent bank.\170\ It stated

    that overseas operations usually have a non-U.S. orientation (i.e.,

    transactions with non-U.S. counterparties for non-U.S. business

    purposes), and thus the connection to U.S. commerce is indirect and,

    further, transactions with non-U.S. counterparties will not have a

    significant effect on U.S. commerce. Other commenters raised similar

    concerns about the lack of jurisdictional nexus. For example, The

    Clearing House stated that the Commission must conclude that the risk

    to the U.S. entity is ``significant'' before designating a non-U.S.

    guaranteed entity a ``U.S. person,'' and further stated that a non-U.S.

    entity that is subject to local capital

    [[Page 45308]]

    rules or swap dealer registration should be excluded from the

    interpretation of ``U.S. person.'' \171\ SIFMA, addressing the control

    issue, objected to including a non-U.S. person that is controlled by,

    or under common control with, such person in the interpretation of the

    term ``U.S. person'' since such control is insufficient to satisfy the

    jurisdictional nexus required by section 2(i).\172\

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

    \170\ See Sullivan & Cromwell (Aug. 13, 2012) at A2-3. See also

    Hong Kong Banks (Aug. 27, 2012) at 4.

    \171\ See The Clearing House (Aug. 27, 2012) at 17.

    \172\ See SIFMA (Aug. 27. 2012) at A20. See also Australian

    Bankers (Aug. 27, 2012) at 4 (stating that the control concept

    should not be relevant in the definition of ``U.S. person,'' and

    while common control may potentially indicate common risk, the

    Commission's focus on the ultimate location of the risk is a more

    relevant to the interpretation of the term ``U.S. person.'').

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

    Japanese Bankers Association did not agree that these situations

    effect a risk transfer to the U.S. person, arguing that the risk would

    ultimately be incurred by the non-U.S. person and not by the U.S.

    guarantor; thus, it believed that the term ``U.S. person'' should not

    be interpreted to include a non-U.S. person guaranteed by a U.S.

    person.\173\ The Coalition for Derivatives End-Users (``End-Users

    Coalition'') expressed concerns about competitive implications, stating

    that imputing U.S. status to a non-U.S. person guaranteed by a U.S.

    person may disadvantage the non-U.S. affiliates of U.S. end-users,

    since those non-U.S. affiliates may need to be guaranteed to enter into

    swaps with non-U.S. counterparties.\174\

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

    \173\ See Japanese Bankers Association (Aug. 27. 2012) at 8.

    \174\ See End-Users Coalition (Aug. 27, 2012) at 3 (urging the

    Commission to exclude a foreign affiliate of a U.S. end-user,

    guaranteed by that end-user, from its interpretation).

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

    f. Foreign Branch of U.S. Person

    In the Proposed Guidance, the Commission stated that a foreign

    branch of a U.S. swap dealer should be included in the Commission's

    interpretation of the term ``U.S. person'' because it is a part, or an

    extension, of a U.S. person.\175\ Several commenters agreed with the

    Commission's interpretation.\176\ Senator Levin asserted that the ``JP

    Morgan whale trades provide strong factual support for an inclusive

    definition of U.S. person, in particular when it comes to the foreign

    branch or agency of a U.S. corporation.''\177\ Other commenters

    recommended that a foreign branch of a U.S. swap dealer be excluded

    from the interpretation. Sullivan & Cromwell argued that a foreign

    branch should not be included in the interpretation solely on the basis

    that it is a part of a U.S. bank.\178\ Citi recommended that the

    Commission's policy should be that a foreign branch of a U.S. swap

    dealer is generally considered a non-U.S. person, so long as the branch

    remains subject to Entity-Level Requirements and obtains substituted

    compliance for Transaction-Level Requirements for transactions with

    non-U.S. persons.\179\ In Citi's view, this would address comments by

    the foreign branch's non-U.S. clients that they would have to register

    as swap dealers or MSPs, while assuring that such non-U.S. clients'

    swaps with the foreign branch would generally be covered by the

    Transaction-Level Requirements or substituted compliance.

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

    \175\ See Proposed Guidance, 77 FR at 41218.

    \176\ See, e.g., Public Citizen (Aug. 27, 2012) at 5;

    Greenberger (Aug. 27, 2012) at 3; Better Markets (Aug. 27, 2012) at

    2, 6-7.

    \177\ See Letter from Sen. Levin at 7.

    \178\ See Sullivan & Cromwell (Aug. 13, 2012) at A6-7.

    \179\ See Citi (Aug. 27, 2012) at 2-4 (stating that foreign

    branches of U.S.-based swap dealers should not be considered ``U.S.

    persons,'' but should still be subject to the Commission's Entity-

    Level and Transactional-Level Requirements). See also State Street

    (Aug. 27, 2012) at 3; IIB (Aug. 27, 2012) at 8.

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

    g. Regulation S

    Some commenters believed that the Commission's policy should

    explicitly adopt the SEC's Regulation S definition of a ``U.S.

    person.'' MFA/AIMA stated that Regulation S eliminates problems and

    inconsistencies in the Commission's proposed interpretation.\180\ J.P.

    Morgan stated that Regulation S would facilitate compliance by non-U.S.

    market participants since they are familiar with the SEC's

    approach.\181\ On the other hand, the Institute for Agriculture and

    Trade Policy (``IATP'') argued against incorporating the Regulation S

    definition, stating that it predates the prominence of the swaps

    market.\182\

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

    \180\ See MFA/AIMA (Aug. 28, 2012) at 8-9.

    \181\ See J.P. Morgan (Aug. 13, 2012) at 9.

    \182\ See IATP (Aug. 27, 2012) at 4.

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

    h. Other Clarifications

    A number of commenters voiced concerns regarding potential

    expansion of the Commission's interpretation of the term ``U.S.

    person,'' which they thought could result from the prefatory phrase

    ``includes, but is not limited to,'' and requested that the Commission

    affirmatively state that non-U.S. persons are any persons that would

    not be covered by the interpretation of the term ``U.S. person.'' \183\

    A non-exhaustive ``U.S. person'' interpretation, they contended, would

    create unnecessary uncertainty.

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

    \183\ See SIFMA (Aug. 27, 2012) at A15; IIB (Aug. 27, 2012) at

    11-12; EC (Aug. 24, 2012) at 1-2; Australian Bankers (Aug. 27, 2012)

    at 4.

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

    A number of commenters further stated that the interpretation of

    the term ``U.S. person'' should be applied only for purposes of the

    registration and regulation of swap dealers and MSPs.\184\ The Futures

    Industry Association (``FIA'') argued that the interpretation of the

    term ``U.S. person'' should not extend to those provisions of the CEA

    governing the activities of futures commission merchants (``FCMs'')

    with respect to either exchange-traded futures (whether executed on a

    designated contract market or a foreign board of trade) or cleared

    swaps.\185\ SIFMA similarly requested that the Commission clarify that

    the final interpretation of the term ``U.S. person'' does not override

    existing market practice as it relates to futures or FCMs, including

    with respect to clearing.\186\ SIFMA also requested that the Commission

    clarify that the final interpretation of the term ``U.S. person'' for

    cross-border swaps regulation is the single interpretation for all

    Dodd-Frank swaps regulation purposes.\187\ Finally, SIFMA requested

    that supranational organizations, such as the World Bank and

    International Monetary Fund (and their affiliates) be excluded from the

    interpretation.\188\

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

    \184\ See, e.g., The Futures and Options Association Ltd.

    (``FOA'') (Aug. 13, 2012) at 10-11; SIFMA (Aug. 27, 2012); IIB (Aug.

    27, 2012); EC (Aug. 24, 2012).

    \185\ See FIA (Aug. 27, 2012) at 2-3.

    \186\ See SIFMA (Aug. 27, 2012) at A14-15.

    \187\ Id.

    \188\ Id. at A21.

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

    3. Commission Guidance

    The Commission has carefully reviewed and considered the comments

    received and is finalizing a policy that will generally set forth an

    interpretation of the term ``U.S. person,'' as used in this Guidance,

    with certain modifications to the proposed definition as described

    below. As explained in the Proposed Guidance, the term ``U.S. person,''

    as used in the context of CEA section 2(i), generally encompasses those

    persons whose activities--either individually or in the aggregate--have

    the requisite ``direct and significant'' connection with activities in,

    or effect on, U.S. commerce within the meaning of section 2(i).\189\

    The various prongs of

    [[Page 45309]]

    the Commission's interpretation are intended to identify persons for

    which, in practice, the connection or effects required by section 2(i)

    are likely to exist and thereby inform the public of circumstances in

    which the Commission expects that the swaps provisions of the CEA and

    the Commission's regulations would apply pursuant to the statute. In

    this respect, the Commission will consider not only a person's legal

    form and its domicile (or location of operation), but also the economic

    reality of a particular structure or arrangement, along with all other

    relevant facts and circumstances, in order to identify those persons

    whose activities meet the ``direct and significant'' jurisdictional

    nexus. Below, the Commission discusses each prong of its proposed

    interpretation of the term ``U.S. person.''

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

    \189\ For purposes of this Guidance, the Commission interprets

    the term ``U.S. person'' by reference to the extent to which swap

    activities or transactions involving one or more such persons have

    the relevant jurisdictional nexus. For example, this interpretation

    would help determine whether non-U.S. persons engaging in swap

    dealing transactions with ``U.S. persons'' in excess of the de

    minimis level would be required to register and be regulated as a

    swap dealer. In addition, for the same reasons, the term ``U.S.

    person'' can be helpful in determining the level of U.S. interest

    for purposes of analyzing and applying principles of international

    comity when considering the extent to which U.S. transaction-level

    requirements should apply to swap transactions.

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

    First, the Commission will include in its consideration the

    elements in prongs (i) and (ii)(A), as proposed, renumbered as prongs

    (i) and (iii).\190\ These prongs of the ``U.S. person'' interpretation

    generally incorporate a ``territorial'' concept of a U.S. person.\191\

    That is, these are natural persons and legal entities that are

    physically located or incorporated within U.S. territory and,

    consequently, the Commission would generally consider swap activities

    involving such persons to satisfy the ``direct and significant'' test

    under section 2(i).\192\ The Commission clarifies that it expects that

    prong (iii) would encompass legal entities that engage in non-profit

    activities, as well as U.S. state, county and local governments and

    their agencies and instrumentalities. Under prong (iii), the Commission

    would generally interpret the term ``U.S. person'' to include also a

    legal entity that is not incorporated in the United States if it has

    its ``principal place of business'' in the United States. The

    Commission intends that this interpretation would generally include

    those entities that are organized outside the United States but have

    the center of direction, control, and coordination of their business

    activities in the United States.

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

    \190\ For clarity, the Commission has reordered the prongs of

    its interpretation of the term ``U.S. person.''

    \191\ For purposes of this Guidance, the Commission would

    interpret the term ``United States'' to include the United States,

    its states, the District of Columbia, Puerto Rico, the U.S. Virgin

    Islands, and any other territories or possessions of the United

    States government, or enclave of the United States government, its

    agencies or instrumentalities.

    \192\ In this respect, the Commission declines to adopt a

    commenter's recommendation that IRS regulations should be relevant

    in considering whether a person is included in the interpretation of

    the term ``U.S. person.'' The Commission believes that adopting the

    IRS's approach in the Commission's policy would be inappropriate;

    rather, consistent with CEA section 2(i), the Commission's

    interpretation of the term ``U.S. person'' focuses on persons whose

    swap activities meet the ``direct and significant'' nexus.

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

    The concept of an operating company having a principal place of

    business has been addressed by the Supreme Court. In a recent case, the

    Supreme Court described a corporation's principal place of business as

    the ``place where the corporation's high level officers direct,

    control, and coordinate the corporation's activities.'' \193\ The

    Supreme Court explained that ```principal place of business' is best

    read as referring to the place where a corporation's officers direct,

    control, and coordinate the corporation's activities. It is the place

    that Courts of Appeals have called the corporation's `nerve center.'

    And in practice it should normally be the place where the corporation

    maintains its headquarters--provided that the headquarters is the

    actual center of direction, control and coordination, i.e., the `nerve

    center,' and not simply an office where the corporation holds its board

    meetings.'' \194\ The Commission notes that commenters on the Proposed

    Guidance and Further Proposed Guidance generally did not object to the

    inclusion in the interpretation of the term ``U.S. person'' of an

    entity that has its principal place of business in the United States.

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

    \193\ See Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010)

    (determining a corporation's principal place of business for

    purposes of diversity jurisdiction).

    \194\ Id. at 92-93.

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    The Commission is of the view that the application of the principal

    place of business concept to a collective investment vehicle may

    require consideration of additional factors beyond those applicable to

    operating companies. A collective investment vehicle is an entity or

    group of related entities created for the purpose of pooling assets of

    one or more investors and channeling these assets to trade or invest to

    achieve the investment objectives of the investor(s), rather than being

    a separate, active operating business.\195\ In this context, the

    determination of where the collective investment vehicle's ``high level

    officers direct, control, and coordinate the [vehicle's] activities''--

    to apply the Hertz decision noted above--can involve several different

    factors.\196\

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

    \195\ See Further Proposed Guidance, 78 FR at 913.

    \196\ As mentioned in the Introduction, Long-Term Capital

    Portfolio LP, a Cayman Islands hedge fund advised by LTCM, collapsed

    in 1998, leading a number of creditors to provide LTCM substantial

    financial assistance under the supervision of the Federal Reserve

    Bank of New York. High level officers at LTCM's offices in

    Greenwich, Connecticut, directed, controlled and coordinated the

    activities of Long-Term Capital Portfolio LP. This hedge fund, with

    approximately $4 billion in capital and a balance sheet of just over

    $100 billion had a swap book in excess of $1 trillion notional.

    Federal Reserve Chairman Alan Greenspan testified that ``[h]ad the

    failure of LTCM triggered the seizing up of markets, substantial

    damage could have been inflicted on many market participants,

    including some not directly involved with the firm, and could have

    potentially impaired the economies of many nations, including our

    own.'' Systemic Risks to the Global Economy and Banking System from

    Hedge Fund Operations: Hearing Before the House Banking and Fin.

    Services Comm., 105th Cong., 2nd sess. (Oct. 1, 1998) (statement of

    Alan Greenspan, Chairman, Federal Reserve), available at 1998 WL

    694498.

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

    The Commission is aware that the formation and structure of

    collective investment vehicles involve a great deal of variability,

    including with regard to the formation of the legal entities that will

    hold the relevant assets and enter into transactions (including swaps)

    in order to achieve the investors' objectives. Legal, regulatory, tax

    and accounting considerations may all play a role in determining how

    the collective investment vehicle is structured and the jurisdictions

    in which the legal entities will be incorporated.\197\ Many legal

    jurisdictions around the world have promulgated specialized regimes for

    the formation of collective investment vehicles, which offer various

    legal, regulatory, tax and accounting efficiencies.\198\

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    \197\ This discussion regarding the location of a collective

    investment vehicle's principal place of business is solely for

    purposes of applying Commission swaps regulations promulgated under

    Title VII. The Commission does not intend to address here the

    interpretation of ``principal place of business'' for any other

    purpose.

    \198\ See Gerald T. Lins, et al., Hedge Funds and Other Private

    Funds: Regulation and Compliance Sec. 9:1 (Thomson Reuters 2012-

    2013 ed. 2012).

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

    In view of these circumstances, the Commission believes that for a

    collective investment vehicle, the locations where the relevant legal

    entities have registered offices, hold board meetings or maintain books

    and records are generally not relevant in determining the principal

    place of business of the collective investment vehicle. Instead, as

    stated in the Hertz case cited above, the determination should

    generally depend on the location of the ``actual center of direction,

    control and coordination,'' i.e., the ``nerve center,'' of the

    collective investment vehicle.

    Hertz focuses on the place where the ``high level officers direct,

    control, and coordinate'' the entity's activities.\199\ In this regard,

    the Commission believes that the focus should not necessarily be

    [[Page 45310]]

    on the persons who are named as directors or officers of the legal

    entities that comprise the collective investment vehicle.\200\ As noted

    above, these legal entities are merely the legal structure through

    which the investment objectives of the collective investment vehicle

    are implemented. Rather, the analysis should focus on the persons who

    are the equivalent for the collective investment vehicle to the ``high

    level officers'' of an operating company because they direct, control

    and coordinate key functions of the vehicle, such as formation of the

    vehicle or its trading and investment.

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

    \199\ See note 193 and accompanying text, supra.

    \200\ In many cases, the entities that comprise the collective

    investment vehicle may not have ``high level officers'' as

    contemplated by Hertz, and the directors of the entities may be

    individuals who are affiliated with a firm that is the legal counsel

    or administrator of the collective investment vehicle and who may

    serve as directors for many different vehicles. See Lins, supra note

    198, at Sec. 9:4.

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    The ``high level officers [who] direct, control and coordinate''

    the collective investment vehicle may be those senior personnel who

    implement the investment and trading strategy of the collective

    investment vehicle and manage its risks, and the location where they

    conduct the activities necessary to implement the investment strategies

    of the vehicle may be its center of direction, control and

    coordination. In this regard, the Commission notes that the achievement

    of the investment objectives of a collective investment vehicle

    typically depends upon investment performance and risk management.

    Investors in a collective investment vehicle seek to maximize the

    return on their investment while remaining within their particular

    tolerance for risk. Thus, the key personnel relevant to this aspect of

    the analysis are those senior personnel responsible for implementing

    the vehicle's investment strategy and its risk management. Depending on

    the vehicle's investment strategy, these senior personnel could be

    those responsible for investment selections, risk management decisions,

    portfolio management, or trade execution.\201\

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    \201\ The Commission understands that the collective investment

    vehicle may obtain the services of the relevant personnel through a

    variety of arrangements, including contracting with an asset manager

    that employs the personnel, contracting with other employers, or

    retaining the personnel as independent contractors. Thus, in this

    analysis, the Commission would generally expect to consider the

    location of the personnel who undertake the relevant activities,

    regardless of their particular employment arrangements.

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

    The achievement of a collective investment vehicle's investment

    objectives may be closely linked to its formation. Decisions made in

    the structuring and formation of the collective investment vehicle may

    have a significant effect on the performance of the vehicle. Thus, for

    purposes of identifying the vehicle's principal place of business, the

    Commission may also consider the location of the senior personnel who

    direct, control and coordinate the formation of the vehicle (i.e., the

    promoters).\202\ The location of the promoters of the collective

    investment vehicle is relevant, particularly where the vehicle has a

    specialized structure or where the promoters of the vehicle continue to

    be integral to the ongoing success of the fund, including by retaining

    overall control of the vehicle. The location where the promoters of the

    collective investment vehicle act to form the vehicle and bring it to

    commercial life is relevant in determining the center of direction,

    control and coordination of the vehicle, and those promoters may be the

    ``high level officers'' of the vehicle referred to in Hertz.\203\

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

    \202\ The promoters who form a collective investment vehicle may

    be integral to the ongoing success of the collective investment

    vehicle. In fact, the importance of the role played by the promoters

    of a legal entity has long been recognized. See generally 1A

    Fletcher Cyc. Corp. Sec. 189. For example, in Old Dominion Copper

    Mining & Smelting Co. v. Bigelow, the court drew upon English law in

    describing the promoters as follows:

    In a comprehensive sense promoter includes those who undertake

    to form a corporation and to procure for it the rights,

    instrumentalities and capital by which it is to carry out the

    purposes set forth in its charter, and to establish it as fully able

    to do its business. Their work may begin long before the

    organization of the corporation, in seeking the opening for a

    venture and projecting a plan for its development, and it may

    continue after the incorporation by attracting the investment of

    capital in its securities and providing it with the commercial

    breath of life.

    203 Mass. 159, 177 (1909), aff'd, 225 U.S. 111 (1912).

    Modern law continues to refer to the responsibility of promoters

    of legal entities. See, e.g., SEC Form D, instructions to Item 3

    (requiring information regarding the ``promoters'' of a securities

    issuer). See also In Re Charles Schwab Corp. Sec. Litig., 2010 WL

    1261705 (N.D. Cal. Mar. 30, 2010) (discussing responsibility of

    ``fund managers and promoters'' to operate a collective investment

    vehicle in accordance with its formation documents).

    The Commission generally does not intend that when the promoters

    of a collective investment vehicle serve an administrative, purely

    ministerial function of handling the flow of funds from investors

    into the vehicle, the location of these personnel would be relevant

    in this context.

    \203\ The Commission is aware that the boards of directors (or

    equivalent corporate bodies) of the legal entities that comprise a

    collective investment vehicle typically have the authority to

    appoint or remove the legal entity's investment manager,

    administrator, and auditor, and to approve major transactions

    involving the legal entity and the legal entity's audited financial

    statements. But since these functions are not key to the actual

    implementation of the investment objectives of the collective

    investment vehicle, and noting that Hertz focuses on the ``high

    level officers'' of the entity rather than its directors, the

    Commission would generally not view the boards of directors of the

    legal entities to be key personnel for the collective investment

    vehicle.

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

    Accordingly, the Commission will generally consider the principal

    place of business of a collective investment vehicle to be in the

    United States if the senior personnel responsible for either (1) the

    formation and promotion of the collective investment vehicle or (2) the

    implementation of the vehicle's investment strategy are located in the

    United States, depending on the facts and circumstances that are

    relevant to determining the center of direction, control and

    coordination of the vehicle.

    Since the Commission recognizes that the structures of collective

    investment vehicles vary greatly, the Commission believes it is useful

    to provide examples to illustrate how the Commission's approach could

    apply to a consideration of whether the ``principal place of business''

    of a collective investment vehicle is in the United States in

    particular hypothetical situations. However, because of variations in

    the structure of collective investment vehicles as well as the factors

    that are relevant to the consideration of whether a collective

    investment vehicle has its principal place of business in the United

    States under this Guidance, these examples are for illustrative

    purposes only. In addition, these examples are not intended to be

    exclusive or to preclude a determination that any particular collective

    investment vehicle has its principal place of business in the United

    States.

    Example 1. An asset management firm located in the United States

    establishes a collective investment vehicle outside the United

    States (``Fund A'').\204\ Typically, the formation of the collective

    investment vehicle by the personnel of the asset management firm

    involves the selection of firms to be the administrator, prime

    broker, custodian and placement agent for the

    [[Page 45311]]

    collective investment vehicle.\205\ The legal entities comprising

    the collective investment vehicle enter into agreements retaining

    the asset management firm as investment manager. Personnel of the

    asset management firm who are located in the United States will be

    responsible for implementing Fund A's investment and trading

    strategy and its risk management. Based on the above facts, the

    Commission would be inclined to view the principal place of business

    of Fund A as being in the United States,\206\ and therefore each of

    the legal entities that comprise Fund A would be within the

    interpretation of the term ``U.S. person.''

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

    \204\ The collective investment vehicle could be a hedge fund, a

    private equity fund, or other type of investment fund. The

    Commission is aware that the asset management firm may use any of a

    variety of structures to form the collective investment vehicle,

    which may involve one or more legal entities. In a common hedge fund

    structure, the asset management firm forms a legal entity outside

    the United States which holds the collective investment vehicle's

    assets and is the legal counterparty in its investment transactions,

    including swaps (a ``master fund''). If this structure is used, then

    typically the equity of the master fund is held by several ``feeder

    funds,'' each of which is a separate legal entity formed by the

    asset management firm with characteristics that are important to a

    different type of investor. Each investor in the collective

    investment vehicle obtains an equity interest in one of the feeder

    funds and thereby holds an indirect interest in the master fund. The

    Commission intends that this Example 1 would encompass, but not be

    limited to, a collective investment vehicle using a master/feeder

    structure such as this.

    \205\ The collective investment vehicle's administrator

    generally handles day-to-day administrative activities, such as

    operating the vehicle's bank account, issuing payment instructions,

    providing net asset calculations, calculating fees, receiving and

    processing subscriptions, preparing accounts, maintaining the

    shareholder register, arranging payments of redemption proceeds,

    coordinating communications with shareholders, and overseeing anti-

    money laundering compliance. See id. at Sec. 9:6. The prime broker

    facilitates the execution of the vehicle's investment transactions,

    including swaps. The custodian is responsible for holding the

    vehicle's assets. The placement agent markets and sells shares to

    investors.

    The Commission generally considers all of these functions,

    although important to the collective investment vehicle, to be

    ministerial functions that are generally not relevant to the

    determination of the location of a collective investment vehicle's

    principal place of business. Thus, even if all of these firms and

    all the personnel performing these functions were outside the United

    States, the Commission would nonetheless be inclined to view the

    principal place of business of Fund A as within the United States.

    Additional elements that could be relevant to the determination

    include the location of the collective investment vehicle's primary

    assets, and the location of the collective investment vehicle's

    counterparties. However, the Commission believes that the location

    of these additional elements outside the United States should

    generally not preclude an interpretation that the collective

    investment vehicle's principal place of business is in the United

    States.

    \206\ The Commission notes that elements of Example 1 are

    similar to the facts of a recent court case involving a similar

    issue--the location of a collective investment vehicle's ``center of

    main interest'' for purposes of bankruptcy law. See Bear Stearns,

    note 7 and accompanying text, supra. In Bear Stearns, the collective

    investment vehicle's ``center of main interest'' was found to be in

    the United States even though its registered office was in the

    Cayman Islands, because it had no employees or managers in the

    Cayman Islands, and its investment manager was located in New York.

    Id., 374 B.R. at 129-30. The court further observed that the

    administrator that ran the back-office operations was in the United

    States, the collective investment vehicle's books and records were

    in the United States before the foreign proceedings began, and all

    of its liquid assets were located in the United States. Id. at 130.

    In addition, investor registries were maintained in Ireland;

    accounts receivables were located throughout Europe and the United

    States; and counterparties to master repurchase and swap agreements

    were based both inside and outside the United States--but none were

    claimed to be in the Cayman Islands. Id.

    The Commission believes that Bear Stearns aligns with its view

    that the principal place of business of a collective investment

    vehicle should not be determined based on where it is organized or

    has its registered office, but rather should be based on an analysis

    of the relevant facts and circumstances. However, the Commission

    notes that under bankruptcy law various factors, particularly

    factors relating to the debtor's assets and creditors, may be

    relevant to the determination of where a debtor has its ``center of

    main interest'' for purposes of determining whether a U.S.

    bankruptcy court has jurisdiction over the matter. See, e.g., In re

    SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006) (including various

    factors in the determination of center of main interest, including

    the location of the debtor's primary assets and the location of the

    majority of the debtor's creditors). The Commission believes that

    the factors that are relevant in such bankruptcy jurisdictional

    cases differ from those that are relevant to the consideration of

    whether a collective investment vehicle has its principal place of

    business in the United States for purposes of this Guidance.

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

    Example 2. An asset management firm located outside the United

    States establishes a collective investment vehicle located outside

    the United States (``Fund B''). Personnel of the asset management

    firm who are located outside the United States will be responsible

    for implementing Fund B's investment and trading strategy and its

    risk management. However, personnel in two offices of the asset

    management firm--one of which is located outside the United States

    and the other of which is located in the United States--will be

    involved in managing Fund B's investment portfolio. Although the

    personnel in the U.S. office may act autonomously on a day-to-day

    basis, they will be under the direction of senior personnel in the

    non-U.S. office regarding how they are implementing the investment

    objectives of Fund B. In terms of the asset management firm's

    internal organization, the personnel in the U.S. office report to

    the personnel in the non-U.S. office, who also generally hold higher

    positions within the firm. Because the personnel located inside the

    United States merely facilitate the implementation of the investment

    objectives of Fund B, for which senior personnel outside the United

    States are responsible, the Commission would be inclined to view the

    principal place of business of Fund B as not being in the United

    States.\207\ As a result, assuming that Fund B is not majority-owned

    by U.S. persons (as discussed further below), Fund B would not be

    within the interpretation of the term ``U.S. person,'' and none of

    the legal entities that comprise Fund B would be U.S. persons

    (unless the legal entity was actually incorporated or organized in

    the United States).

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

    \207\ The Commission expects that in this example, this result

    would be the same if the asset management firm entered into a

    subadvisory agreement with an independent firm that employed the

    personnel in the U.S. office described in this example. That is,

    regardless of whether the U.S. personnel are employed by the asset

    management firm or a third party employer, the relevant issue is

    whether the personnel who fulfill the key functions relating to its

    formation or the achievement of its investment objectives are

    located in, or outside of, the United States.

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

    Example 3. A financial firm located in the United States

    establishes a collective investment vehicle outside the United

    States (``Fund C''). The collective investment vehicle includes a

    single legal entity organized outside the United States, the assets

    of which are segregated into several separate classes.\208\ The U.S.

    financial firm arranges with several unaffiliated investment

    management firms to manage the assets in the various classes; an

    investment management firm affiliated with the U.S. financial firm

    may also manage the assets in one or more of the classes. Some of

    these investment management firms are located in, and others

    outside, the United States. Under the terms of the contracts between

    Fund C, the U.S. financial firm and these investment management

    firms, Fund C has delegated responsibility for the overall control

    of its investment strategies to the U.S. financial firm that

    established Fund C, and the U.S. financial firm will have rights to

    reallocate Fund C's assets among the investment management firms for

    various reasons, including the U.S. financial firm's discretion

    regarding Fund C's investment strategies. Based on the above facts,

    the Commission would be inclined to view the principal place of

    business of Fund C as being in the United States, even though some

    of the investment managers involved in implementing Fund C's

    investment and trading strategy are located outside the United

    States. Therefore, Fund C (including each of the legal entities that

    comprise Fund C) would be within the interpretation of the term

    ``U.S. person.'' \209\

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

    \208\ Legal entities that may be formed with separate classes

    are known in various jurisdictions as segregated portfolio

    companies, protected cell companies or segregated accounts

    companies. A collective investment vehicle with a structure such as

    this is typically referred to as a ``hedge fund platform'' or an

    ``umbrella'' or ``multi-series'' hedge fund.

    \209\ The Commission expects that the result would generally be

    the same where the assets of Fund C are not segregated into separate

    classes.

    The Commission recognizes that the structures of collective

    investment vehicles are complex and varied, and it does not intend to

    establish bright line tests for when the principal place of business of

    a collective investment vehicle would or would not be within the United

    States. Rather, the Commission's examples above are intended to

    illustrate the considerations that would be relevant to whether a

    collective investment vehicle's principal place of business is in the

    United States, within the framework of reviewing all the relevant facts

    and circumstances.\210\

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    \210\ The Commission believes that Commission regulation 140.99,

    which provides for persons to request that the staff of the

    Commission provide written advice or guidance, would be an

    appropriate mechanism for a collective investment vehicle to seek

    guidance as to whether the principal place of business of the

    vehicle is in the United States for purposes of applying the

    Commission swaps regulations promulgated under Title VII.

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

    The Commission also understands that non-U.S. individuals,

    institutions, pension plans or operating companies may retain asset

    management firms in the United States to provide a range of asset

    management and other investment-related services. Where the individual,

    institution, pension plan or operating company is not within any

    [[Page 45312]]

    prong of the interpretation of the term ``U.S. person'' described in

    this Guidance (including prongs (iii) and (vi) which relate to

    collective investment vehicles), then the Commission generally believes

    that the person would not come within the ``U.S. person''

    interpretation solely because it retains an asset management firm

    located in the United States to manage its assets or provide other

    financial services.\211\

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

    \211\ However, this policy (that non-U.S. persons generally do

    not become U.S. persons solely by retaining U.S. asset management

    firms) would not apply to the legal entities comprising a collective

    investment vehicle that is within the interpretation of the term

    ``U.S. person.'' Rather, those legal entities would be within the

    interpretation of the term ``U.S. person'' for other reasons (e.g.,

    because the vehicle has its principal place of business in the

    United States or a majority of its direct or indirect owners are

    U.S. persons)--not solely because they had retained a U.S. asset

    management firm.

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

    Second, the Commission will include in its consideration the

    elements in the alternative version of prong (ii)(B) that was described

    in the Further Proposed Guidance (and renumbered in the Guidance as

    prong (vii)). The relevant elements in the alternative version are

    whether a legal entity is directly or indirectly majority-owned by one

    or more U.S. persons,\212\ in which one or more of these U.S. person(s)

    bears unlimited responsibility for the obligations and liabilities of

    such legal entity, and the entity is not a corporation, limited

    liability company, limited liability partnership or similar entity

    where shareholders, members or partners have limited liability.

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

    \212\ In this context, the term ``U.S. person'' refers to those

    natural persons or legal entities that meet prong (i), (ii), (iii),

    (iv), or (v) of the interpretation of ``U.S. person.''

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

    In response to comments on the Proposed Guidance, the Commission

    intends that this prong would cover entities that are directly or

    indirectly majority-owned by U.S. person(s), but not those legal

    entities that have negligible U.S. ownership interests. In the

    Commission's view, where the structure of an entity is such that the

    U.S. owners are ultimately liable for the entity's obligations and

    liabilities, the connection to activities in, or effect on, U.S.

    commerce would generally satisfy section 2(i), irrespective of the fact

    that the ownership is indirect. The Commission expects that this

    ``look-through'' aspect of the interpretation also would serve to

    discourage persons from engaging in activities outside of the Dodd-

    Frank regulatory regime by creating such indirect ownership structures.

    In the Commission's view, where one or more U.S. owners has

    unlimited responsibility for losses or nonperformance by its majority-

    owned affiliate, there is generally a direct and significant connection

    with activities in, or effect on, commerce of the United States within

    the meaning of section 2(i). Therefore, for purposes of section 2(i),

    the majority-owned entity would appropriately be considered a ``U.S.

    person.'' \213\ Unlimited liability corporations where U.S. persons

    have direct or indirect majority ownership and any such U.S. persons

    have unlimited liability for the obligations and liabilities of the

    entity would generally be covered under this prong.\214\ By contrast, a

    limited liability corporation or limited liability partnership would

    generally not be covered under this prong; the Commission also

    clarifies, in response to comments on the Further Proposed Guidance,

    that it intends that entities in other jurisdictions that are similar

    to limited liability corporations or limited liability partnerships in

    that none of the owners of such entities bear unlimited liability for

    the entity's obligations and liabilities would generally be excluded

    from this prong.

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

    \213\ When Lehman Brothers collapsed in 2008, it had a complex

    web of affiliates. This included LBIE, an unlimited liability

    company in London. At that time, it had more than 300 outstanding

    creditor and debtor balances with its affiliates amounting to more

    than $21 billion in total. What happened to LBIE is directly

    relevant to the current discussions about cross-border application

    of swaps reforms, as LBIE had more than 130,000 swaps contracts

    outstanding when it failed. Many of the Lehman Brothers entities

    were guaranteed by the parent, Lehman Brothers Holdings, in the

    United States. More than $28 billion in client assets and money were

    caught up in the bankruptcy of the UK entity. This uncertainty led,

    further, to a run on many other financial institutions when

    customers feared for their positions and collateral housed in

    overseas affiliates of other U.S. financial institutions. See Lehman

    Brothers Progress Report, note 6 and accompanying text, supra.

    \214\ Unlimited liability corporations include, solely by way of

    example, entities such as an unlimited company formed in the U.K.,

    see Brian Stewart, Doing Business in the United Kingdom Sec.

    18.02[2][c], or an unlimited liability company formed under the law

    of Alberta, British Columbia, or Nova Scotia, see Richard E.

    Johnston, Doing Business in Canada Sec. 15.04[5].

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

    The Commission has considered the comments requesting that the

    interpretation include consideration of whether the U.S. person

    majority owners have unlimited responsibility for ``all of'' the

    obligations and liabilities of the entity in connection with this prong

    of the interpretation. The Commission believes that even if there are

    some potential obligations and liabilities of the entity that may not

    flow to the U.S. persons, the risk of unlimited responsibility for

    other obligations and liabilities would generally be a sufficient nexus

    to the United States for purposes of section 2(i). Similarly, it would

    generally not be necessary for all the U.S. persons who are majority

    owners to bear unlimited responsibility (as some commenters suggested).

    Rather, if any of the U.S. persons who are direct or indirect majority

    owners bears unlimited responsibility for the obligations and

    liabilities of the entity, it would generally be covered by this prong

    of the interpretation.

    In response to requests from commenters on the Proposed Guidance,

    the Commission clarifies that it does not intend that prong (vii) would

    cover legal entities organized or domiciled in a foreign jurisdiction

    but whose swaps obligations are guaranteed by a U.S. person.\215\ To be

    clear, the Commission remains concerned, as explained in the Proposed

    Guidance, about the risks to a U.S. guarantor that flow from its

    guarantee of the swaps obligations of an entity that is organized or

    domiciled abroad.\216\ Yet, a guarantee does not necessarily provide

    for ``unlimited responsibility for the obligations and liabilities of

    the guaranteed entity'' in the same sense that the owner of an

    unlimited liability corporation bears such unlimited liability.\217\

    The Commission believes, therefore, that its concern regarding the

    risks associated with guarantee arrangements can, consistent with CEA

    section 2(i) and in the interests of international comity,

    appropriately be addressed in a more targeted fashion without broadly

    treating such guaranteed entities as U.S. persons at this time.

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

    \215\ Also, the Commission does not interpret section 2(i) to

    require that it treat a non-U.S. person as a ``U.S. person'' solely

    because it is controlled by or under common control with a U.S.

    person.

    \216\ See, e.g., Letter from Sen. Levin at 10 (``If a U.S.-based

    parent company provides an implicit or explicit guarantee,

    regardless of the form of the guarantee, to a non-U.S. subsidiary or

    affiliate, the risk is effectively transferred to the U.S. person.

    In such circumstances, the exact form of the guarantee should not

    prevent the CFTC from demanding compliance with the CFTC's

    derivatives safeguards.'').

    \217\ Since a guarantee is treated in law as a contract, a

    guarantor may be protected by legal defenses to the enforcement of

    the contract. Also, in some circumstances, a guarantee may not be

    enforceable with respect to underlying obligations that are

    materially altered without the guarantor's consent. See, e.g.,

    Debtor-Creditor Law Sec. 44.04 (Theodore Eisenberg ed., Matthew

    Bender 2005).

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

    Thus, for example, as set forth below, where a non-U.S. affiliate

    of a U.S. person has its swap dealing obligations with non-U.S.

    counterparties guaranteed by a U.S. person,\218\ the guaranteed

    affiliate generally would be required to count those swap dealing

    transactions with non-U.S. counterparties (in addition to its swap

    dealing transactions with U.S. persons) for purposes of

    [[Page 45313]]

    determining whether the affiliate exceeds a de minimis amount of swap

    dealing activity and must register as a swap dealer. The Commission

    notes that where a non-U.S. affiliate of a U.S. person has its swap

    dealing obligations with non-U.S. counterparties guaranteed by a U.S.

    person, the guarantee creates a significant risk transfer into the

    United States. In the absence of such guarantees, non-U.S.

    counterparties may be unwilling to enter into swaps with such non-U.S.

    affiliates. As for the substantive swaps requirements, as discussed

    below, Transaction-Level Requirements generally would apply to swaps

    between a non-U.S. swap dealer or non-U.S. MSP on the one hand, and a

    U.S.-guaranteed affiliate on the other hand, though such swaps may be

    subject to substituted compliance, as appropriate. The Commission

    generally expects that, in considering international comity and the

    factors set forth in the Restatement (e.g., the character of the

    activity to be regulated, the existence of justified expectations, the

    likelihood of conflicts with regulation by foreign jurisdictions), this

    approach would strike a reasonable balance in assuring that the swaps

    market is brought under the new regulatory regime as directed by

    Congress, consistent with section 2(i) of the CEA.

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    \218\ See note 267 and accompanying text, supra, for guidance

    regarding the Commission's interpretation of the term ``guarantee.''

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

    Third, the Commission will include in its interpretation of the

    term ``U.S. person'' the elements in prong (iii), (renumbered as prong

    (viii)), substantially as proposed. Commenters did not comment on, nor

    object to, this prong. The Commission clarifies that it expects that

    this prong would encompass a joint account where any one of the

    beneficial owners is a U.S. person.

    Fourth, the Commission will include in its interpretation of the

    term ``U.S. person'' the elements in the alternative prong (iv) that

    was described in the Further Proposed Guidance (renumbered in the

    Guidance as prong (vi)), with some modifications. The Commission

    understands from commenters that the determination by some collective

    investment vehicles of whether they are majority-owned by U.S. persons

    may pose practical difficulties. In response to these practical

    difficulties, the Commission has eliminated the reference to

    ``indirect'' majority ownership in this prong. As revised, this prong

    no longer refers to ``direct or indirect'' majority ownership by U.S.

    persons.

    Under alternative prong (vi), any commodity pool, pooled account,

    investment fund or other collective investment vehicle that is

    majority-owned by one or more U.S. person(s) \219\ would be deemed a

    U.S. person. For purposes of this prong, majority-owned means the

    beneficial ownership of more than 50 percent of the equity or voting

    interests in the collective investment vehicle. The Commission expects

    that the collective investment vehicle would: (1) Determine whether its

    direct beneficial owners are U.S. persons described in prong (i), (ii),

    (iii), (iv), or (v) of the term ``U.S. person,'' and (2) ``look-

    through'' the beneficial ownership of any other legal entity invested

    in the collective investment vehicle that is controlled by or under

    common control with the collective investment vehicle in determining

    whether the collective vehicle is majority-owned by U.S. persons.

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    \219\ The term ``U.S. person,'' as used in this context, refers

    to those natural persons or legal entities that meet (i), (ii),

    (iii), (iv), or (v) of the interpretation of ``U.S. person.''

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

    For example, a limited company is formed under the laws of the

    Cayman Island as a collective investment vehicle that engages in swap

    transactions. It has a single investor, which is an investment company

    registered with the Securities and Exchange Commission under the

    Investment Company Act of 1940. Shares in the registered investment

    company are only owned by United States persons and both the Cayman

    Island limited company and the registered investment company are

    sponsored by the same investment adviser. The Cayman Island limited

    company would be viewed as a ``controlled foreign corporation'' of the

    registered investment company. Because the Cayman Island limited

    company is controlled by the same investment adviser as the investor

    registered investment company, the Cayman Island limited company would

    be required to ``look through'' the registered investment company and

    would be considered majority owned by U.S. persons. Therefore, under

    revised prong (vi), the Cayman Island limited company generally would

    be a U.S. person, subject to consideration of all the facts and

    circumstances.

    As another example, a limited company is formed under the laws of

    the Cayman Island by an investment manager as a collective investment

    vehicle that engages in swap transactions as part of its investment

    strategy (``Master Fund''). It has two investors, which are also

    collective investment vehicles that were formed by the same investment

    manager for the purpose of investing in the Master Fund. One investor

    collective investment vehicle is formed under the laws of the state of

    Delaware and the other investor collective investment vehicle is a

    limited company formed under the laws of the Cayman Island. Because

    Master Fund and the two investor collective investment vehicles are

    under common control by the investment manager, the Master Fund is

    required to ``look through'' the two investor vehicles to their

    beneficial owners to determine whether it is majority owned by U.S.

    persons. Whether the Master Fund is a U.S. person will require the

    assessment of whether the majority of its equity is held indirectly by

    U.S. persons through the two investor vehicles.

    However, where a collective investment vehicle is owned in part by

    an unrelated investor collective investment vehicle, the collective

    investment vehicle need not ``look through'' the unrelated investor

    entity, but may reasonably rely upon written, bona fide representations

    from the unrelated investor entity regarding whether it is a U.S.

    person,\220\ unless the investee collective investment vehicle has

    reason to believe that such unrelated investor entity was formed or is

    operated principally for the purpose of avoiding looking through to the

    ultimate beneficial owners of that entity.\221\ The Commission expects

    that the collective investment vehicle would take reasonable ``due

    diligence'' steps with respect to its investors in making this

    determination, along the lines of the verifications that the collective

    investment vehicle may conduct in connection with other regulatory

    requirements.\222\

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

    \220\ The ability of the collective investment vehicle to rely

    on the bona fide representation of the unrelated investor entity

    does not affect the due diligence that the unrelated investor entity

    should conduct in order to make such representation to the

    collective investment vehicle.

    \221\ The Commission has applied similar anti-evasion standards

    in other contexts. See, e.g., 17 CFR 4.7(a)(1)(iv)(D) (providing

    that a passive investment vehicle will be considered a non-U.S.

    person for purposes of section 4.7 under certain circumstances

    provided that the entity was ``not formed principally for the

    purpose of facilitating investment by persons who do not qualify as

    Non-United States persons in a pool'' whose operator is claiming

    relief under that section).

    \222\ See the discussion of due diligence below, which the

    Commission believes is generally applicable to the ``due diligence''

    required by the collective investment vehicle in this context.

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

    The Commission is also including a minor modification to clarify

    that it expects that the interpretation in prong (vi) would apply

    irrespective of whether the collective investment vehicle is organized

    or incorporated in the United States. Similar to the Commission's

    analysis with respect to prong (vii) discussed above, the Commission's

    [[Page 45314]]

    policy is that the place of a collective investment vehicle's

    organization or incorporation would not necessarily be determinative of

    its status as a ``U.S. person'' for purposes of CEA section 2(i). As

    noted above, collective investment vehicles are created for the purpose

    of pooling assets from investors and channeling these assets to trade

    or invest in line with the objectives of the investors. In the

    Commission's view, these are generally passive investment vehicles that

    serve as a means to achieve the investment objectives of their

    beneficial owners, rather than being separate, active operating

    businesses. As such, the beneficial owners would be directly exposed to

    the risks created by the swaps that their collective investment

    vehicles enter into.\223\ Therefore, the Commission's policy is that if

    U.S. persons beneficially own more than 50 percent of the equity or

    voting interests in a collective investment vehicle, then the

    collective investment vehicle would ordinarily satisfy the ``direct and

    significant'' standard of CEA section 2(i).

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

    \223\ A collective investment vehicle is an arrangement pursuant

    to which funds of one or more investors are pooled together and

    invested on behalf of such investors by a manager. Typically,

    investors do not have day-to-day control over the management or

    operation of the vehicle and are essentially passive, beneficial

    owners of the vehicle's assets. Prior to participating in a

    collective investment vehicle, an investor enters into an

    arrangement with the vehicle which governs the fees collected by the

    manager of the vehicle and the investor's payout from the vehicle,

    which may include periodic payments. Typically a limited liability

    entity such as a corporation, limited partnership or limited

    liability company is used as part of the arrangement so that

    investor liability is limited to the investor's beneficial interest

    in the vehicle's assets.

    With respect to a swap between a collective investment vehicle

    and a non-U.S. swap dealer, the Commission believes that losses

    borne by the vehicle upon a default by the non-U.S. swap dealer are

    better seen as losses incurred by the investors in the collective

    investment vehicle rather than by the vehicle itself. In contrast

    with a collective investment vehicle, when an operating company

    enters into a swap with a non-U.S. swap dealer, losses borne by the

    operating company upon a default by the non-U.S. swap dealer are

    better seen as losses incurred by the operating company and only

    indirectly by its shareholders. Therefore, prong (vi) only relates

    to collective investment vehicles and does not extend to operating

    companies.

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

    The Commission is also revising its interpretation in prong (vi) to

    exclude non-U.S. publicly-offered, as opposed to publicly-traded,

    collective investment vehicles. That is, a collective investment

    vehicle that is publicly offered to non-U.S. persons, but not offered

    to U.S. persons, would generally not be included within the

    interpretation of the term U.S. person. This revision is intended to

    address comments that publicly-traded funds are only a subset of non-

    U.S. regulated collective investment vehicles and that ownership

    verification is expected to be particularly difficult for pools, funds,

    and other collective investment vehicles that are publicly

    offered.\224\

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

    \224\ The publicly-offered collective investment vehicle could

    be a UCITS (Undertakings for Collective Investment in Transferable

    Securities). See Directive 2009/65/EC of the European Parliament and

    of the Council (Jul. 13, 2009), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:302:0032:0096:EN:PDF. Under the

    Commission's interpretation of section 2(i), a UCITS would not be

    included in the term ``U.S. person,'' provided it is not offered,

    directly or indirectly, to U.S. persons.

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

    In addition, a collective investment vehicle that is publicly

    offered only to non-U.S. persons and not offered to U.S. persons

    generally would not fall within any of the prongs of the interpretation

    of the term ``U.S. person.''

    Fifth, the Commission will not include in its interpretation of the

    term ``U.S. person'' the elements in proposed prong (v), which related

    to registered commodity pool operators. The Commission agrees with

    commenters that neither the location (nor the nationality), nor the

    registration status, of the pool operator would normally, without more,

    be determinative of whether the underlying pool(s) should be included

    in its interpretation of the term ``U.S. person.'' The Commission has

    further considered that, as discussed above, the relevant elements for

    a commodity pool or other collective investment vehicle would generally

    be whether or not its principal place of business is in the United

    States or it is majority owned by U.S. persons. The Commission believes

    that proposed prong (v) could be overly broad and have the effect of

    capturing commodity pools with minimal participation of U.S. persons

    and a minimal U.S. nexus.

    Sixth, the Commission will include in its interpretation of the

    term ``U.S. person'' the elements in prong (vi) (renumbered as prong

    (iv)) relating to pension plans. In response to comments, though, the

    Commission is clarifying that it does not intend that its

    interpretation encompass pension plans that are primarily for foreign

    employees of U.S.-based entities described in prong (iii) of the

    interpretation. Also, as noted above in the discussion of collective

    investment vehicles, the Commission does not generally expect that a

    pension plan which is not a U.S. person would become a U.S. person

    simply because some of the individuals or entities that manage the

    investments of the pension plan are located or organized in the United

    States.

    Finally, the Commission will include in its interpretation of the

    term ``U.S. person'' the elements in prong (vii) (renumbered as prongs

    (ii) and (v)) pertaining to an estate or trust, with certain

    modifications to take into account the views of commenters who

    addressed this issue, and the legal and practical considerations that

    are relevant to the treatment of estates and trusts for purposes of the

    Dodd-Frank Act. The Commission agrees with the commenters who stated

    that treatment of an estate or trust should generally not depend on

    whether the income of the estate or trust is subject to U.S. tax. The

    Commission understands that whether income is subject to U.S. tax can

    depend on a variety of factors, including the source of the income,

    which may not be relevant to whether the Dodd-Frank Act should apply to

    swaps entered into by the estate or trust.

    After further consideration, the Commission will include in its

    interpretation of the term ``U.S. person'' (a) an estate if the

    decedent was a U.S. person at the time of death and (b) a trust if it

    is governed by the law of a state or other jurisdiction in the United

    States and a court within the United States is able to exercise primary

    supervision over the administration of the trust. For what it expects

    to be the relatively few estates that would use swaps (most likely for

    purposes of investment hedging), the Commission believes that the

    treatment of such swaps should generally be the same as for swaps

    entered into by the decedent during life. If the decedent was a party

    to any swaps at the time of death, then those swaps should generally

    continue to be treated in the same way after the decedent's death, when

    the swaps would most likely pass to the decedent's estate. Also, the

    Commission expects that this element of the interpretation will be

    predictable and easy to apply for natural persons planning for how

    their swaps will be treated after death, for executors and

    administrators of estates, and for the swap counterparties to natural

    persons and estates.

    With respect to trusts, the Commission expects that its approach

    would be in line with how trusts are treated for other purposes under

    law. The Commission has considered that each trust is governed by the

    laws of a particular jurisdiction, which may depend on steps taken when

    the trust was created or other circumstances surrounding the trust. The

    Commission believes that if a trust is governed by U.S. law (i.e., the

    law of a state or other jurisdiction in the United States), then it

    would generally be reasonable to treat the trust as a U.S. person for

    purposes of the Dodd-Frank Act. Another relevant element in this regard

    would be whether a court within the United States is able

    [[Page 45315]]

    to exercise primary supervision over the administration of the

    trust.\225\ The Commission expects that including this element of the

    interpretation would generally align the treatment of the trust for

    purposes of the Dodd-Frank Act with how the trust is treated for other

    legal purposes. For example, the Commission expects that if a person

    could bring suit against the trustee for breach of fiduciary duty in a

    U.S. court (and, as noted above, the trust is governed by U.S. law),

    then treating the trust as a U.S. person would generally be in line

    with how it is treated for other purposes.

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

    \225\ The Commission is aware that one element applied by the

    Internal Revenue Service to determine if a trust is a U.S. person

    for tax purposes depends on whether a court within the United States

    is able to exercise primary supervision over the administration of

    the trust. See 26 CFR 301.7701-7(a)(1)(i). The Commission believes

    that precedents developed under tax law could be relevant, as

    appropriate, in applying this aspect of its interpretation of the

    term ``U.S. person.'' However, the Commission does not intend to

    formally adopt the Internal Revenue Service test for this purpose.

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

    The Commission disagrees with commenters that the status of an

    estate or trust should be based solely on the status of the executor,

    administrator or trustee.\226\ For one thing, this would mean that the

    treatment of the estate or trust could change if, for example, the

    executor or trustee relocates its offices. The Commission also does not

    believe it would be appropriate that the treatment of a trust would

    depend solely on the identity of the beneficiaries to the trust

    because, among other reasons, the beneficiaries may be described as a

    class of persons, rather than particular persons. In the Commission's

    view, more important considerations in formulating its policy are

    whether the treatment of the estate or trust is predictable and whether

    it is in line with how the entity is treated for other purposes. The

    Commission would also consider other facts and circumstances related to

    the estate or trust that could be relevant to whether the entity should

    be within the interpretation of the term ``U.S. person'' in the context

    of section 2(i).

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

    \226\ The Commission does not intend to preclude considerations

    relating to the trustee in determining whether the trust is governed

    by U.S. law or subject to the jurisdiction of U.S. courts, if any

    such considerations are relevant. Rather, the Commission believes

    that the status of the trustee would generally not be directly

    relevant to determining if a trust should be treated as a U.S.

    person.

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    a. Due Diligence

    As described above, many commenters indicated that the information

    necessary to accurately assess the status of their counterparties as

    U.S. persons may not be available, or may be available only through

    overly burdensome due diligence, particularly where the interpretation

    includes a ``look-through'' element that considers ``direct and

    indirect'' ownership. For this reason, these commenters requested that

    the Commission's policy contemplate reasonable reliance on counterparty

    representations as to the relevant elements of the interpretation of

    the term ``U.S. person.''

    The Commission agrees with the commenters that a party to a swap

    should generally be permitted to reasonably rely on its counterparty's

    written representation in determining whether the counterparty is

    within the Commission's interpretation of the term ``U.S. person.'' In

    this context, the Commission's policy is to interpret the

    ``reasonable'' standard to be satisfied when a party to a swap conducts

    reasonable due diligence on its counterparties, with what is reasonable

    in a particular situation to depend on the relevant facts and

    circumstances. The Commission notes that under the External Business

    Conduct Rules, a swap dealer or MSP generally meets its due diligence

    obligations if it reasonably relies on counterparty representations,

    absent indications to the contrary.\227\ As in the case of the External

    Business Rules, the Commission believes that allowing for reasonable

    reliance on counterparty representations encourages objectivity and

    avoids subjective evaluations, which in turn facilitates a more

    consistent and foreseeable determination of whether a person is within

    the Commission's interpretation of the term ``U.S. person'' and the

    extent to which the Title VII requirements apply to certain cross-

    border activities.\228\

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

    \227\ See Business Conduct Standards for Swap Dealers and Major

    Swap Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012)

    (``External Business Conduct Rules''). Consistent with the

    ``reasonable reliance'' standard in the External Business Conduct

    Rules, a swap dealer or MSP may rely on the written representations

    of a counterparty to satisfy its due diligence requirements.

    However, a swap dealer or MSP should not rely on a written

    representation if it has information that would cause a reasonable

    person to question the accuracy of the representation. In other

    words, a swap dealer or MSP should not ignore red flags when relying

    on written representations to satisfy its due diligence obligations.

    Further, if agreed to by the counterparty, the written

    representations may be included in counterparty relationship

    documentation. However, a swap dealer or MSP may only rely on such

    representations in the counterparty relationship documentation if

    the counterparty agrees to timely update any material changes to the

    representations. In addition, the Commission expects swap dealers

    and MSPs to review the written representations on a periodic basis

    to ensure that they remain appropriate for the intended purpose.

    \228\ This approach is generally consistent with suggestions

    provided by commenters. For example, SIFMA suggested that the

    determination of whether a counterparty is a U.S. person should be

    made at the inception of the swap transaction based on the most

    recent representation from the counterparty, which should be renewed

    by the counterparty once per calendar year. See SIFMA (Aug. 27,

    2012) at A17.

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    b. Foreign Branch of U.S. Person

    The Commission is confirming its interpretation, as proposed, that

    a foreign branch of a U.S. person is itself a ``U.S. person.'' As the

    Commission explained in the Proposed Guidance, a branch does not have a

    legal identity separate from that of its principal entity. In this

    respect, the Commission notes that branches are neither separately

    incorporated nor separately capitalized and, more generally, the rights

    and obligations of a branch are the rights and obligations of its

    principal entity (and vice versa). Under these circumstances, the

    Commission views the activities of a foreign branch as the activities

    of the principal entity, and thus a foreign branch of a U.S. person is

    a U.S. person.

    Accordingly, the Commission declines to recognize foreign branches

    of U.S. persons separately from their U.S. principal for purposes of

    registration. That is, if the foreign branch were to be a swap dealer

    or MSP, as discussed further below, the U.S. person would be required

    to register, and the registration would encompass the foreign branch.

    Upon consideration of principles of international comity and the

    factors set forth in the Restatement, though, the Commission has

    calibrated the requirements otherwise applicable to such foreign

    branches in respects other than broadly excluding them from the U.S.

    person interpretation. For example, as discussed further below, foreign

    branches of U.S. persons may comply with Transaction-Level Requirements

    through substituted compliance, where appropriate, with respect to

    swaps with foreign counterparties, as well as with a foreign branch of

    another U.S. person. Further, non-U.S. persons may exclude swaps with

    foreign branches of registered swap dealers for purposes of determining

    whether they have exceeded the de minimis level of swap dealing

    activity under the swap dealer definition.

    The types of offices the Commission would consider to be a

    ``foreign branch'' of a U.S. bank, and the circumstances in which a

    swap is with such foreign branch, are discussed further below in

    section C below.

    [[Page 45316]]

    c. Regulation S

    The Commission has considered the recommendation by several

    commenters that the Commission follow, entirely or to some extent, the

    definition of ``U.S. person'' in the SEC's Regulation S.\229\ With

    respect to the treatment of foreign branches in particular, Regulation

    S excludes from its definition of ``U.S. person'' any agency or branch

    of a U.S. person located outside the United States if (1) the agency or

    branch operates for valid business reasons; and (2) the agency or

    branch is engaged in the business of insurance or banking, and is

    subject to substantive insurance or banking regulation in the

    jurisdiction where it is located.\230\ As the Commission noted in the

    Proposed Guidance, however, Regulation S addresses the level of

    activities (i.e., offerings of securities) conducted within the United

    States, and related customer protection issues.\231\ As such, the

    regulation's territorial approach to determining U.S. person status is,

    in the Commission's view, unsuitable for purposes of interpreting

    section 2(i), which addresses the connection with activities in and the

    risks to U.S. commerce arising from activities outside the United

    States.

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    \229\ See, e.g., MFA/AIMA (Aug. 28, 2012) at 4, 8-9; IIAC (Aug.

    27, 2012) at 3; J.P. Morgan (Aug. 27, 2012) at 3, 8-9; SocGen (Aug.

    8, 2012) at 5; ISDA (Aug. 10, 2012) at 9. See also IIB (Aug. 9,

    2012) at 3 (noting that the proposed interpretation is more

    expansive than other Commission and SEC definitions of ``U.S.

    person'' and makes it difficult to assess U.S. person status).

    Regulation S is codified at 17 CFR 230.901 through 230.905.

    \230\ See 17 CFR 230.902(k)(2)(v).

    \231\ See Offshore Offers and Sales, 55 FR 18306 (May 2, 1990).

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

    Similarly, Regulation S and the Dodd-Frank swaps provisions also

    serve fundamentally different regulatory objectives with respect to the

    treatment of collective investment vehicles. Under Regulation S, the

    SEC will consider certain investment funds and securities issuers that

    are organized in foreign jurisdictions, but owned by U.S. investors, to

    be U.S. persons unless the U.S. investors are accredited

    investors.\232\ The accredited investor condition provides a level of

    assurance that U.S. investors are entities that understand the

    consequences of investing through a foreign entity and, in effect, may

    be deemed to have waived the benefits of the U.S. securities laws. In

    contrast, the focus of Title VII is not limited to customer protection.

    Whether or not the investors in a collective investment vehicle are

    accredited investors, in the Commission's view, is irrelevant; rather,

    under section 2(i), the focus is whether the swap activities of a

    collective investment vehicle have a direct and significant connection

    with activities in, or effect on, U.S. commerce.

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

    \232\ See 17 CFR 230.902(k)(1)(viii). Also, the exception from

    the Regulation S definition of ``U.S. person'' is not available if

    any of such accredited investors are natural persons, estates or

    trusts. Id.

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

    The Commission understands that the Regulation S definition of

    ``U.S. person'' is generally understood and applied by market

    participants. However, as the foregoing examples demonstrate, the

    Regulation S definition of ``U.S. person'' could fail to capture

    persons whose activities, the Commission believes, meet the ``direct

    and significant'' jurisdictional test of CEA section 2(i)--and whose

    activities present the type of risk that Congress addressed in Title

    VII. This potential for underinclusion, together with the fact that the

    Commission has addressed commenter concerns by providing further

    details and guidance about its interpretation of the term ``U.S.

    person,'' which the Commission expects will facilitate a more

    consistent understanding of that term among market participants,

    provides the basis for not importing the Regulation S definition into

    the Commission's interpretation of CEA section 2(i).

    d. Other Clarifications

    The Commission continues to include the prefatory phrase ``include,

    but not be limited to'' in its interpretation of the term ``U.S.

    person,'' as it appeared in the Proposed Guidance. While the

    Commission's policy generally is to limit its interpretation of this

    term, for purposes of this Guidance, to persons encompassed within the

    several prongs discussed above, the Commission also expects that there

    may be circumstances that are not fully addressed by those prongs, or

    other situations where the interpretation discussed above does not

    appropriately resolve whether a person should be included in the

    interpretation of the term ``U.S. person.'' Thus, the Commission

    continues to include the prefatory phrase to indicate that there may be

    situations where a person not fully described in the interpretation

    above is appropriately treated as a ``U.S. person'' for purposes of

    this Guidance in view of the relevant facts and circumstances and a

    balancing of the various regulatory interests that may apply. In these

    situations, the Commission anticipates that the relevant facts and

    circumstances may generally include the strength of the connections

    between the person's swap-related activities and U.S. commerce; the

    extent to which such activities are conducted in the United States; the

    importance to the United States (as compared to other jurisdictions

    where the person may be active) of regulating the person's swap-related

    activities; the likelihood that including the person within the

    interpretation of ``U.S. person'' could lead to regulatory conflicts;

    and considerations of international comity.\233\ The Commission

    anticipates that it would also likely be helpful to consider how the

    person (and in particular its swap activities) is currently regulated,

    and whether such regulation encompasses the person's swap activities as

    they relate to U.S. commerce.

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

    \233\ These factors are among those relevant to whether a

    country has a basis to assert jurisdiction over an activity under

    the Restatement. See generally note 86 and accompanying text, supra.

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

    Finally, in response to commenters' requests for clarification

    regarding the scope of the applicability of the ``U.S. person''

    interpretation,\234\ the Commission confirms that its policy is to

    apply its interpretation of the term ``U.S. person'' only to swaps

    regulations promulgated under Title VII, unless provided otherwise in

    any particular regulation. Therefore, for example, the Commission does

    not intend that this Guidance address how the term ``person'' or ``U.S.

    person'' should be interpreted in connection with any other CEA

    provisions or Commission regulations promulgated thereunder.

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

    \234\ See, e.g., Goldman (Aug. 27, 2010) at 3, FOA (Aug. 13,

    2012) at 10-11; SIFMA (Aug. 27, 2012) at A14-15, FIA (Aug. 27, 2012)

    at 2-5.

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

    4. Summary

    In summary, for purposes of the application of CEA section 2(i),

    the Commission will interpret the term ``U.S. person'' generally to

    include, but not be limited to: \235\

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

    \235\ The Commission believes that Commission regulation 140.99,

    which provides for persons to request that the staff of the

    Commission provide written advice or guidance, would be an

    appropriate mechanism for a person to seek guidance as to whether it

    is a U.S. person for purposes of applying the Commission swaps

    regulations promulgated under Title VII.

    (i) Any natural person who is a resident of the United States;

    (ii) any estate of a decedent who was a resident of the United

    States at the time of death;

    (iii) any corporation, partnership, limited liability company,

    business or other trust, association, joint-stock company, fund or

    any form of enterprise similar to any of the foregoing (other than

    an entity described in prongs (iv) or (v), below) (a ``legal

    entity''), in each case that is organized or incorporated under the

    laws of a state or other jurisdiction in the United States or having

    its principal place of business in the United States;

    (iv) any pension plan for the employees, officers or principals

    of a legal entity described in prong (iii), unless the pension

    [[Page 45317]]

    plan is primarily for foreign employees of such entity;

    (v) 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;

    (vi) any commodity pool, pooled account, investment fund, or

    other collective investment vehicle that is not described in prong

    (iii) and that is majority-owned by one or more persons described in

    prong (i), (ii), (iii), (iv), or (v), except any commodity pool,

    pooled account, investment fund, or other collective investment

    vehicle that is publicly offered only to non-U.S. persons and not

    offered to U.S. persons;

    (vii) 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 directly or

    indirectly majority-owned by one or more persons described in prong

    (i), (ii), (iii), (iv), or (v) and in which such person(s) bears

    unlimited responsibility for the obligations and liabilities of the

    legal entity; and

    (viii) 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 prong (i),

    (ii), (iii), (iv), (v), (vi), or (vii).

    Under this interpretation, the term ``U.S. person'' generally means

    that a foreign branch of a U.S. person would be covered by virtue of

    the fact that it is a part, or an extension, of a U.S. person.

    For convenience of reference, this Guidance uses the terms ``U.S.

    swap dealer'' and ``U.S. MSP'' to refer to swap dealers and MSPs,

    respectively, that are within the Commission's interpretation of the

    term ``U.S. person'' under this Guidance. The terms ``non-U.S. swap

    dealer'' and ``non-U.S. MSP'' refer to swap dealers and MSPs,

    respectively, that are not within the Commission's interpretation of

    the term ``U.S. person'' under this Guidance; and the term ``non-U.S.

    person'' refers to a person that is not within the Commission's

    interpretation of the term ``U.S. person'' under this Guidance.

    B. Registration

    1. Proposed Guidance

    Under section 2(i) of the CEA, the Dodd-Frank swaps provisions,

    including the swap dealer and MSP registration provisions, do not apply

    to activities overseas unless such activities have a ``direct and

    significant connection with activities in, or effect on,'' U.S.

    commerce. In the Proposed Guidance, the Commission addressed the

    general manner in which a person's overseas swap dealing activities or

    positions may require registration as a swap dealer or MSP,

    respectively. Specifically, under the Proposed Guidance, the Commission

    would expect that a non-U.S. person whose swap dealing transactions

    with U.S. persons exceed the de minimis threshold would register as a

    swap dealer.\236\ Likewise, under the Proposed Guidance, the Commission

    would expect that a non-U.S. person who holds swaps positions where one

    or more U.S. persons are counterparties above the specified MSP

    thresholds would register as an MSP.\237\ As explained in the Proposed

    Guidance, the Commission believes that, consistent with section 2(i),

    the level of swap dealing or positions that is sufficient to require a

    person to register as a swap dealer or MSP when conducted by a person

    located in the United States would generally also meet the ``direct and

    significant'' nexus when such activities are conducted by a non-U.S.

    person with a U.S. person and in some other limited circumstances.

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

    \236\ See Proposed Guidance, 77 FR at 41218-41219.

    \237\ Id.

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

    In the consideration of whether a non-U.S. person is engaged in

    more than a de minimis level of swap dealing, the Proposed Guidance

    would generally include the notional value of any swaps between such

    non-U.S. person (or any of its non-U.S. affiliates under common

    control) and a U.S. person (other than a foreign branch of a registered

    swap dealer).\238\ Further, where the potential non-U.S. swap dealer's

    obligations are guaranteed by a U.S. person, the Commission would

    expect that the non-U.S. person would register with the Commission as a

    swap dealer when the aggregate notional value of its swap dealing

    activities (along with the swap dealing activities of its non-U.S.

    affiliates that are under common control and also guaranteed by a U.S.

    person) with U.S. persons and non-U.S. persons exceeds the de minimis

    threshold. Additionally, the Proposed Guidance clarified that the

    Commission would not expect a non-U.S. person without a guarantee from

    a U.S. person to register as a swap dealer if it does not engage in

    swap dealing with U.S. persons as part of ``a regular business'' with

    U.S. persons, even if the non-U.S. person engages in dealing with non-

    U.S. persons.

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

    \238\ Id. at 41218-20.

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

    Following a similar rationale, under the Proposed Guidance if a

    non-U.S person holds swaps positions above the requisite threshold, the

    Commission would expect such non-U.S. person to register as an MSP. In

    considering whether a non-U.S. person that is a potential MSP meets the

    applicable threshold, under the Proposed Guidance, the non-U.S. person

    would have included the notional value of: (1) any swaps entered into

    between such non-U.S. person and a U.S. person (provided that if the

    non-U.S. person's swaps are guaranteed by a U.S. person, then such

    swaps will be attributed to the U.S. guarantor and not the potential

    non-U.S. MSP); and (2) any swaps between another non-U.S. person and a

    U.S. person if the potential non-U.S. MSP guarantees the obligations of

    the other non-U.S. person thereunder.\239\

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

    \239\ Id. at 41221.

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

    2. Comments

    In general, commenters on the Proposed Guidance did not raise

    concerns or objections to the Commission's interpretation that non-U.S.

    persons who engage in more than a de minimis level of swap dealing with

    U.S. persons should be expected to register as swap dealers.\240\ A

    number of commenters argued, however, that a non-U.S. person should not

    be expected to register as a swap dealer solely by reason of being

    guaranteed by a U.S. person.\241\ SIFMA stated that the ``connection

    between a non-U.S. swap dealing entity and its U.S. guarantor creates

    too tenuous a nexus to justify registration on the basis of this

    relationship alone.'' \242\ As an alternative, SIFMA posited that only

    guarantees by a U.S. person for which there is a material likelihood of

    payment by the U.S. guarantor should be counted towards the de minimis

    calculation. To implement this recommendation, SIFMA suggested that the

    Commission establish how to determine whether the likelihood of payment

    is remote, such as a comparison of the aggregate contingent liability

    of the U.S. person

    [[Page 45318]]

    guarantor to the net equity of that guarantor.\243\

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

    \240\ One commenter, Japanese Bankers Association, stated that

    the cross-border application of Dodd-Frank is overbroad because it

    would capture even hedging transactions made by a non-U.S. swap

    dealer with a U.S. swap dealer that is making a market. The

    definition of ``dealing activity'' is ambiguous, this commenter

    asserted, and might require the non-U.S. swap dealer to register.

    See Japanese Bankers Association (Aug. 27, 2012) at 1.

    \241\ See, e.g., Goldman (Aug. 27, 2012) at 5; ISDA (Aug. 10,

    2012) at 12 (stating that, in the typical case, an intra-group

    guarantee allocates risks and activities within the corporate group

    and is not a dealing activity of the non-U.S. person); CEWG (Aug.

    27, 2012) at 6-7 (stating that the Proposed Guidance should not

    include swap guarantees for aggregation purposes because it is

    contrary to the Final Entities Rules; jurisdiction should not be

    extended to transactions between two non-U.S. persons if the swaps

    obligations of one party are guaranteed by a U.S. person because

    U.S. jurisdiction in these circumstances is not supported by law or

    existing conventions of international jurisdiction).

    \242\ SIFMA (Aug. 27, 2012) at A29.

    \243\ Id. at A29-30.

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

    Similarly, Goldman argued that it would be inconsistent with the

    Dodd-Frank Act to expect non-U.S. persons to register as swap dealers

    solely on the basis of guarantees by a U.S. parent, absent any showing

    of a ``direct and significant'' jurisdictional nexus. Goldman

    recommended that any concerns regarding potential evasion of the

    registration requirement be addressed through the Commission's exercise

    of its anti-evasion authority.\244\ ISDA agreed, suggesting that rather

    than protecting the U.S. guarantor by encouraging swap dealer

    registration of the guaranteed non-U.S. person, a better course is

    addressing the question of when (if ever) the U.S. guarantor must

    register as a swap dealer.\245\ Australian Bankers stated that the

    considerations relevant to whether a non-U.S. person (without a

    guarantee from a U.S. affiliate) is expected to register as a swap

    dealer should relate to the aggregate notional amount of swap dealing

    activities with U.S. persons within a particular asset class.\246\

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

    \244\ Goldman (Aug 27, 2012) at 5. See also CEWG (Aug. 27, 2012)

    6-7 (stating that because there is no legal basis under section 2(i)

    for asserting jurisdiction based on a guaranty, the Commission

    should amend the Proposed Guidance to clarify that a non-U.S. person

    is not subject to Commission regulation, even where a U.S. person

    guarantees either counterparty; swap dealing activity outside the

    United States that does not involve a U.S. person should not be

    subject to the Commission's jurisdiction; guarantees do not alter

    the location of activity, nor should they alter a participant's

    residency); Hong Kong Banks (Aug. 27, 2012) at 8 (arguing that swaps

    between non-U.S. persons should be excluded from the de minimis

    determination regardless of whether a counterparty is guaranteed).

    \245\ ISDA (Aug. 10, 2012) at 12.

    \246\ Australian Bankers (Aug. 27, 2012) at 4.

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

    IIAC requested that the Commission confirm that a guarantee by a

    foreign holding company would not be deemed to be a guarantee by all of

    its subsidiaries, including U.S. entities, solely as a result of the

    indirect ownership.\247\ J.P. Morgan raised concerns regarding the

    scope of the interpretation of the term a ``guarantee.'' Specifically,

    it argued that the term ``guarantee'' should not be interpreted to

    include keepwells and liquidity puts because these agreements do not

    create the same types of third-party rights as traditional guarantees

    and may be unenforceable by third parties.\248\ CEWG objected to the

    broader interpretation of the term ``guarantee'' in the Proposed

    Guidance than under the Final Product Definitions Rules,\249\ stating

    that the Commission ``must undertake a more thorough regulatory

    analysis with respect to guarantees of swaps obligations.'' \250\

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

    \247\ IIAC (Aug. 27, 2012) at 6, 8.

    \248\ J.P. Morgan (Aug. 27, 2012) at 10.

    \249\ See Further Definition of ``Swap,'' ``Security-Based

    Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;

    Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48208

    (Aug. 13, 2012) (``Final Swap Definition'').

    \250\ CEWG (Aug. 27, 2012) at 5.

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

    On the other hand, Senator Levin stated that guarantees are central

    to concerns regarding cross-border swaps, and that any guarantee,

    implicit or explicit, by a U.S. parent company to its non-U.S.

    affiliates effectively transfers risk to the U.S. parent.\251\

    Therefore, Senator Levin stated that the exact form of the guarantee

    should not limit compliance with Dodd-Frank requirements, and the list

    of relevant guarantee arrangements should be expanded to include

    arrangements involving total return swaps, credit default swaps or

    customized options that result in the foreign affiliate's activities

    creating off balance sheet liabilities for a U.S. person.\252\ Eight

    Senators commented that focusing on whether affiliates are explicitly

    ``guaranteed'' by a U.S. affiliate does not go far enough. They

    expressed concern that market pressures cause U.S. parent firms to

    stand behind their foreign affiliates even if explicit guarantees are

    not in place. The Senators suggested that other factors be considered

    to determine whether risk is effectively guaranteed such as:

    limitations on permissible transactions between the parent and

    affiliate; explicit non-guarantee disclosures to investors, regulators

    and counterparties; restrictions on operating under a common name or

    sharing employees and officers; and whether comprehensive resolution

    protocols exist in the foreign jurisdiction.\253\

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

    \251\ Letter from Sen. Levin at 10.

    \252\ Id. at 11.

    \253\ Letter from Senators Blumenthal, Boxer, Feinstein, Harkin,

    Levin, Merkley, Shaheen, and Warren (Jul. 3, 2013).

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

    AFR stated that the Commission's failure to clarify its

    interpretation of when affiliates of a ``U.S. person'' would be treated

    as guaranteed, or to capture ``the large grey area'' between explicit

    and informal guarantees, among other things, creates opportunities to

    escape Dodd-Frank regulations by shifting business overseas.\254\ AFR

    stressed that the Commission should clarify in the guidance that it

    ``intends to follow through on properly implementing these principles

    and will not enable a `race to the bottom' in which incentives are

    created for derivatives affiliates of global banks . . . to relocate to

    areas of lax regulation to take advantage of an inadequate `substituted

    compliance' regime.'' \255\

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

    \254\ AFR (Aug. 27, 2012) at 4.

    \255\ Id. at 4.

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

    3. Commission Guidance

    a. Registration Thresholds for U.S. Persons and Non-U.S. Persons,

    Including Those Guaranteed by U.S. Persons

    Under the Final Entities Rules, a person is required to register as

    a swap dealer if its swap dealing activity activities over the

    preceding 12 months exceeds the de minimis threshold of swap dealing.

    In addition, Commission regulation 1.3(ggg)(4) requires that a person

    include, in determining whether its swap dealing activities exceed the

    de minimis threshold, the aggregate notional value of swap dealing

    transactions entered by its affiliates under common control.\256\

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

    \256\ As discussed in greater detail below, in light of the

    global nature of the swaps markets, the Commission's policy is to

    interpret 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.

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

    For purposes of determining whether a U.S. person is required to

    register as a swap dealer, a U.S. person should count all of its swap

    dealing activity, whether with U.S. or non-U.S. counterparties. This

    interpretation reflects that swaps markets are global, and therefore,

    in the Commission's view, all of a U.S. person's swap dealing

    activities, whether with U.S. persons or non-U.S. persons, have the

    requisite jurisdictional nexus and potential to impact the U.S.

    financial system. Similarly, the Commission believes that all of the

    swap dealing activities of a non-U.S. person that is an affiliate of a

    U.S. person and that is guaranteed by a U.S. person (a ``guaranteed

    affiliate''),\257\ or that is an ``affiliate conduit'' of a U.S.

    person,\258\ have the requisite statutory

    [[Page 45319]]

    nexus and potential to impact the U.S. financial system. Therefore,

    under the Commission's interpretation of 2(i), a guaranteed or conduit

    affiliate \259\ should count swap dealing transactions towards the de

    minimis threshold for swap dealer registration in the same manner as a

    U.S. person. That is, in light of the global nature of the swaps

    markets, a guaranteed or conduit affiliate should count all of its swap

    dealing transactions, whether with U.S. or non-U.S. counterparties,

    towards the de minimis threshold for swap dealer registration.

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

    \257\ See note 267 and accompanying text, supra, for guidance

    regarding the Commission's interpretation of the term ``guarantee.''

    \258\ When a non-U.S. person generally would be considered to be

    an affiliate conduit is discussed below in section G. As discussed

    below, for the purposes of the Commission's interpretation of CEA

    section 2(i), the Commission believes that certain factors are

    relevant to considering whether a non-U.S. person is an ``affiliate

    conduit.'' Such factors include whether: The non-U.S. person is a

    majority-owned affiliate of a U.S. person; the non-U.S. person is

    controlling, controlled by or under common control with the U.S.

    person; the financial results of the non-U.S. person are included in

    the consolidated financial statements of the U.S. person; and the

    non-U.S. person, in the regular course of business, engages in swaps

    with non-U.S. third-parties for the purpose of hedging or mitigating

    risks faced by, or to take positions on behalf of, its U.S.

    affiliate(s), and enters into offsetting swaps or other arrangements

    with its U.S. affiliate(s) in order to transfer the risks and

    benefits of such swaps with third-parties to its U.S. affiliates.

    The term ``conduit affiliate'' generally would not include swap

    dealers or affiliates thereof.

    \259\ This Guidance uses the term ``guaranteed or conduit

    affiliate'' to refer to a non-U.S. person whose swap obligations are

    guaranteed by a U.S. person or that is an affiliate conduit.

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

    However, under the Commission's interpretation of section 2(i), a

    more circumscribed registration policy applies to non-U.S. persons that

    are not guaranteed or conduit affiliates. In this case, the Commission

    believes that the non-U.S. person should count only its swap dealing

    transactions with U.S. persons (other than foreign branches of swap

    dealers that are registered with the Commission), and with guaranteed

    affiliates towards the de minimis thresholds for swap dealer

    registration, with three exceptions, which are described below. Non-

    U.S. persons that are not guaranteed or conduit affiliates are not

    required to count swaps with a conduit affiliate towards the swap

    dealer de minimis calculation.

    Similarly, for purposes of determining whether a U.S. person is

    required to register as an MSP, as the Commission interprets section

    2(i), a U.S. person and a guaranteed or conduit affiliate should

    include all of swap positions with counterparties, whether they are

    U.S. or non-U.S. persons. With respect to whether a non-U.S. person

    must calculate whether its swap positions create exposures above the

    relevant MSP thresholds, the Commission believes, for policy reasons

    and consistent with principles of international comity, that CEA

    section 2(i) should not be interpreted to require non-U.S. persons that

    are not financial entities to include for MSP calculation purposes

    certain swap positions as explained below.

    As the Commission explained in the Proposed Guidance, in the event

    of a default or insolvency of a non-U.S. swap dealer with more than a

    de minimis level of swap dealing with U.S. persons, or a non-U.S. MSP

    with more than the threshold level of swaps positions with U.S.

    persons, the swap dealer's or MSP's U.S. counterparties could be

    adversely affected. Such an event may adversely affect numerous persons

    engaged in commerce within the United States, disrupt such commerce,

    and increase the risk of a widespread disruption to the financial

    system in the United States.

    Similar effects on U.S. persons and on the U.S. financial system

    may occur in the event of a default or insolvency of certain non-U.S.

    person with respect to swap dealing transactions in excess of the de

    minimis level, or swaps positions above the MSP threshold, entered into

    such non-U.S. persons with other non-U.S. persons whose swaps

    obligations are guaranteed by a U.S. person. The Commission interprets

    section 2(i) of the CEA to encompass swaps entered into by guaranteed

    or conduit affiliates in addition to encompassing swaps entered into by

    U.S. persons. In the final rule to further define the term ``swap,''

    the Commission found that a guarantee of a swap is a term of that swap

    that affects the price or pricing attributes of that swap, and that

    when a swap has the benefit of a guarantee, the guarantee is an

    integral part of that swap.\260\ The Commission therefore interprets

    the term ``swap'' (that is not a security-based swap or mixed swap)

    ``to include a guarantee of such swap, to the extent that a

    counterparty to a swaps position would have recourse to the guarantor

    in connection with the position.'' \261\ Because a guarantee of a swap

    is an integral part of the swap, and counterparties may not otherwise

    be willing to enter into a swap with the guaranteed affiliate, the

    affiliate would not have significant swap business if not for the

    guarantee. The Commission believes that swap activities outside the

    United States that are guaranteed by U.S. persons would generally have

    a direct and significant connection with activities in, or effect on,

    U.S. commerce in a similar manner as the underlying swap would

    generally have a direct and significant connection with activities in,

    or effect on, U.S. commerce if the guaranteed counterparty to the

    underlying swap were a U.S. person.\262\ Similarly, the Commission

    believes that swap activities outside the United States of an affiliate

    conduit would generally have a direct and significant connection with

    activities in, or effect on, U.S. commerce in a similar manner as would

    be the case if the affiliate conduit's U.S. affiliates entered into the

    swaps directly.

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

    \260\ See Final Swap Definition, 77 FR at 48225-48226. The

    Commission explained that when a swap counterparty typically uses a

    guarantee as credit support for its swaps obligations, the

    guarantor's resources are added to the analysis of the swap because

    ``the market will not trade with that counterparty at the same

    price, on the same terms, or at all without the guarantee.'' Id. The

    Commission stated that it viewed a guarantee as, generally, ``a

    collateral promise by a guarantor to answer for the debt or

    obligation of a counterparty obligor under a swap.'' Id.

    \261\ Id. at 48226 n. 187. In response to a comment that

    guarantees are contingent obligations that do not necessarily

    replicate the economics of the underlying swap, the Commission

    stated:

    The CFTC is persuaded that when a swap (that is not a security-

    based swap or mixed swap) has the benefit of a guarantee, the

    guarantee and related guaranteed swap must be analyzed together. The

    events surrounding the failure of [AIGFP] highlight how guarantees

    can cause major risks to flow to the guarantor. The CFTC finds that

    the regulation of swaps and the risk exposures associated with them,

    which is an essential concern of the Dodd- Frank Act, would be less

    effective if the CFTC did not interpret the term ``swap'' to include

    a guarantee of a swap.

    Id. at 48226.

    \262\ Congress has recognized the significance of guarantees of

    swaps obligations with respect to the activities of financial

    entities in section 210(c)(16) of the Dodd-Frank Act. There,

    Congress specifically addressed guarantees in the context of a Title

    II resolution proceeding. Section 210(c)(16) provides that, where a

    financial institution is in FDIC receivership, a ``qualified

    financial contract'' (or ``QFC,'' which includes swaps) with a

    subsidiary of that financial institution that is guaranteed by the

    financial institution cannot be terminated by a counterparty facing

    that subsidiary pursuant to the QFC based solely on the insolvency

    or receivership of the financial institution if certain conditions

    are satisfied.

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

    Accordingly, under section 2(i), the Commission intends to

    interpret section 2(i) as applying the swaps provisions of the CEA to

    swaps that are entered into by guaranteed or conduit affiliates in a

    manner similar to how section 2(i) would apply if a U.S. person had

    entered into the swap (subject to appropriate considerations of

    international comity for non-guaranteed, non-U.S. persons facing such

    guaranteed or conduit affiliates, as discussed below).

    Thus, in the case of a guaranteed or conduit affiliate, the

    Commission interprets CEA section 2(i) to provide that the guaranteed

    or conduit affiliate is expected to count toward the swap dealer de

    minimis threshold all of its swap dealing activities.\263\ Following a

    [[Page 45320]]

    similar rationale, the Commission interprets CEA section 2(i) to

    provide that a guaranteed or conduit affiliate, in calculating whether

    the applicable MSP threshold is met, would be expected to include, and

    attribute to the U.S. guarantor, the notional value of: (1) All swaps

    with U.S. and non-U.S. counterparties, and (2) any swaps between

    another non-U.S. person and a U.S. person or guaranteed affiliate, if

    the potential non-U.S. MSP guarantees the obligations of the other non-

    U.S. person thereunder.

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

    \263\ The Commission notes that the SEC Cross-Border Proposal

    agrees that ``[i]n a security-based swap transaction between two

    non-U.S. persons where the performance of at least one side of the

    transaction is guaranteed by a U.S. person, . . . the guarantee

    creates risk to the U.S. financial system and counterparties

    (including U.S. guarantors) to the same degree as if the transaction

    were entered into directly by a U.S. person.'' SEC Cross-Border

    Proposal, 78 FR at 30986. However, the SEC does not propose to

    address the risk posed by the guarantee through requiring the non-

    U.S. guaranteed affiliate to register as a security-based swap

    dealer, but rather through the application of principles of

    attribution in the major security-based swap participant definition.

    See id. at 31006.

    The Commission believes that while the SEC's proposed approach

    may be appropriate for the securities-based swaps market, it would

    not be desirable to follow a similar approach for the swaps markets

    within the Commission's jurisdiction. Due to the differing

    characteristics of the markets, such as the involvement of a much

    larger and more diverse number of commercial companies using swaps

    as compared to security-based swaps, the risks that may be

    transmitted through the interconnected financial system from the

    non-U.S. guaranteed affiliate operating as a swap dealer to the U.S.

    swaps market may not be adequately managed by the MSP structure,

    which has relatively high exposure thresholds before registration is

    required.

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

    In the Final Swap Definition, the Commission also acknowledged that

    a ``full recourse'' guarantee would have a greater effect on the price

    of a swap than a ``limited'' or ``partial recourse'' guarantee, yet

    nevertheless determined that the presence of any guarantee with

    recourse, no matter how robust, is price forming and an integral part

    of a guaranteed swap.\264\ Moreover, as the recent financial crisis has

    demonstrated, in a moment of crisis--whether at the firm-level or more

    generally, market-wide--it matters little whether the parent guarantees

    are capped or otherwise qualified. In the face of solvency concerns,

    the parent guarantor will find it necessary to assume the liabilities

    of its affiliates.\265\ For these reasons, the Commission declines to

    incorporate in the Guidance commenters' suggestions that only certain

    types of guarantees (e.g., under which there is a material likelihood

    of liability) should be considered for purposes of registration

    determinations for non-U.S. persons.

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

    \264\ Final Swap Definition, 77 FR at 48226.

    \265\ According to one commenter, these concerns may be present

    even where a guarantee is implicit, but not explicitly provided:

    A recent example of the importance of implicit guarantees is the

    collapse of Bear Stearns, which was brought down by the failure of

    non-guaranteed hedge fund affiliates. These hedge funds were foreign

    affiliates technically not guaranteed by the parent, and the

    investment by the parent company in the funds was minimal. However,

    the firm was forced to try to save the funds for reputational

    reasons and also because a fire sale of subsidiary assets could have

    seriously impacted correlated positions held by the parent company.

    . . . The example of Bear Stearns is only one among many instances

    where parent companies have been forced to rescue failing affiliates

    even in the absence of an explicit guarantee.

    AFR (Aug. 27, 2012) at 8. See also Letter from Sen. Levin, note

    216, supra.

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

    Finally, with respect to the Japanese Bankers Association's concern

    about potential constraints on their hedging activities, the Commission

    contemplates that swaps that are between foreign branches of U.S. swap

    dealers and dealing non-U.S. persons generally will be excluded from

    the swap dealer registration determination, as further described below.

    The Commission believes that under section 2(i) of the CEA, it would

    generally be appropriate for non-U.S. market participants, such as

    members of the Japanese Bankers Association, to engage in hedging

    activities with foreign branches of U.S. swap dealers without being

    expected to count such transactions for purposes of the swap dealer

    registration determination.

    The Commission also is affirming that, for purposes of this

    Guidance, the Commission would interpret the term ``guarantee''

    generally to 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.\266\ The Commission believes that it is necessary to

    interpret the term ``guarantee'' to include the different financial

    arrangements and structures that transfer risk directly back to the

    United States. In this regard, it is the substance, rather than the

    form, of the arrangement that determines whether the arrangement should

    be considered a guarantee for purposes of the application of section

    2(i).\267\

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

    \266\ See Proposed Guidance, 77 FR at 41221 n. 47.

    \267\ Thus, for example, while keepwells and liquidity puts,

    certain types of indemnity agreements, master trust agreements,

    liability or loss transfer or sharing agreements, and any other

    explicit financial support arrangements may provide for different

    third-party rights and/or address different risks than traditional

    guarantees, the Commission does not believe that these differences

    would generally be relevant for purposes of section 2(i). Under

    these agreements or arrangements, one party commits to provide a

    financial backstop or funding against potential losses that may be

    incurred by the other party, either from specific contracts or more

    generally. In the Commission's view, this is the essence of a

    guarantee.

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

    b. Aggregation

    Commission regulation 1.3(ggg)(4) requires that a person include,

    in determining whether its swap dealing activities exceed the de

    minimis threshold, the aggregate notional value of swap dealing

    transactions entered by its affiliates under common control.\268\

    Additionally, under the Proposed Guidance, a non-U.S. person, in

    determining whether its swap dealing transactions exceed the de minimis

    threshold, would include the aggregate notional value of swap dealing

    transactions entered into by its non-U.S. affiliates under common

    control but would not include the aggregate notional value of swap

    dealing transactions entered into by its U.S. affiliates.

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

    \268\ For purposes of this Guidance regarding the application of

    Commission regulation 1.3(ggg)(4), the Commission construes the

    phrase ``affiliates under common control'' with respect to

    affiliates as stated in the Final Entities Rules, which defines

    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 Final Entities Rules, 77 FR at 30631 n.

    437. Thus, for purposes of this Guidance, a reference to

    ``affiliates under common control'' with a person includes

    affiliates that are controlling, controlled by, or under common

    control with such person.

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

    Numerous commenters objected to the aggregation interpretation

    regarding swap dealer registration in the Proposed Guidance.\269\ IIB

    and Cleary, while acknowledging the Commission's evasion concerns,

    contended that the aggregation interpretation in the Proposed Guidance

    would effectively eliminate the de minimis exemption for any affiliate

    of a registered swap dealer.\270\ IIB further stated that the proposed

    aggregation interpretation would require a significant amount of

    coordination among entities within a corporate group in order to gather

    the relevant information and to reconfigure their registration plans.

    These difficulties, according to IIB, would be compounded by

    uncertainties in the proposed interpretation of the term ``U.S.

    person.'' \271\

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

    \269\ See, e.g., Cleary (Aug. 16, 2012) at 9-10; IIB (Aug. 27,

    2012) at 22-24; FOA (Aug. 13, 2012) at 11-12; ISDA (Aug. 10, 2012)

    at 11-12; SocGen (Aug. 8, 2012) at 8; Deutsche Bank (Aug. 27, 2012)

    at 4-5, FSR (Aug. 27, 2012) at 4-6.

    \270\ Cleary (Aug. 16, 2012) at 9-10; IIB (Aug. 27, 2012) at 22.

    \271\ IIB (Aug. 9, 2012) at 6.

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

    Cleary argued that the positions of a registered swap dealer should

    be excluded from the de minimis calculation by its affiliate and

    further added that such aggregation relief should be available to any

    U.S. or non-U.S. affiliates of any U.S.- or non-U.S. registered swap

    dealer.\272\ FOA recommended that the Commission consider a policy that

    would permit non-U.S. persons to not aggregate the swap dealing

    activities of their non-U.S. swap dealing affiliates under common

    control and to require aggregation only

    [[Page 45321]]

    where there is evidence that a group of non-U.S. swap dealing

    affiliates sufficiently coordinate their swap dealing activities.\273\

    ISDA asserted that the proposed asymmetric application of aggregation

    (i.e., U.S. affiliates aggregate the entire worldwide group, but non-

    U.S. affiliates aggregate only non-U.S. affiliates) would produce

    arbitrary results, citing, as an example, a group that has a U.S.

    affiliate with $500 million of swaps and a non-U.S. affiliate with $7.6

    billion of swaps with non-U.S. persons. In that scenario, the U.S.

    affiliate must register; the non-U.S. affiliate is not required to

    register.\274\

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

    \272\ Cleary (Aug. 16, 2012) at 9-10.

    \273\ FOA (Aug. 13, 2012) at 11-12. FOA argued that the Proposed

    Guidance would have a disproportionate effect by providing that a

    non-U.S. person engaging in a de minimis amount of U.S.-facing swap

    dealing activities should register as a swap dealer simply because

    its other non-U.S. affiliates under common control, in the

    aggregate, exceed the de minimis threshold, even though there is no

    coordinated effort. Id.

    \274\ ISDA (Aug. 10, 2012) at 12 (noting that if an exclusion

    from aggregation for an affiliated swap dealer's swaps were in

    place, then the group in the above example could decide which entity

    registers and thereby bring the swaps attributable to the other

    entity under the threshold).

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

    In the Further Proposed Guidance, the Commission proposed an

    alternative interpretation of the aggregation requirement in Commission

    regulation 1.3(ggg)(4). Under this alternative, a non-U.S. person would

    be expected, in the consideration of whether its swap dealing

    transactions exceed the de minimis threshold, to include the aggregate

    notional value of swap dealing transactions entered into by all its

    affiliates under common control (i.e., both non-U.S. affiliates and

    U.S. affiliates), but not include the aggregate notional value of swap

    dealing transactions of any non-U.S. affiliate under common control

    that is registered as a swap dealer.\275\ The Commission noted that the

    application of the aggregation requirement in Commission regulation

    1.3(ggg)(4) to non-U.S. affiliates of non-U.S. swap dealers may, in

    certain circumstances, impose significant burdens on such non-U.S.

    affiliates without advancing significant regulatory interests of the

    Commission. Because the conduct of swap dealing business through

    locally-organized affiliates may in some cases be required in order to

    comply with legal requirements or business practices in foreign

    jurisdictions, such non-U.S. affiliates may be numerous and it could be

    impractical to require all such non-U.S. affiliates to register as swap

    dealers. Further, the Commission's interest in registration may be

    reduced for a non-U.S. affiliate of a registered non-U.S. swap dealer

    where the non-U.S. affiliate (or group of such affiliates) engages in

    only a small amount of swap dealing activity with U.S. persons.

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

    \275\ Also, under this alternative approach, a non-U.S. person

    would not be expected to include the aggregate notional value of

    swap dealing transactions of any of its non-U.S. affiliates under

    common control where the counterparty to such affiliate is also a

    non-U.S. person.

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

    On the other hand, the Commission also noted in the Further

    Proposed Guidance that, given the borderless nature of swap dealing

    activities, a swap dealer may conduct swap dealing activities through

    various affiliates in different jurisdictions, which suggests that its

    interpretation should take into account the applicable swap dealing

    transactions entered by all of a non-U.S. person's affiliates under

    common control worldwide. Otherwise, affiliated persons may not

    register solely because their swap dealing activities are divided, such

    that each affiliate falls below the de minimis level. The Commission

    noted its concern that a policy under which such affiliates whose swap

    dealing activities individually fall below the de minimis level, but

    whose swap dealing activities in the aggregate exceed the de minimis

    level, would not register as swap dealers could provide an incentive

    for firms to spread their swap dealing activities among several

    unregistered affiliates rather than centralize their swap dealing in

    registered firms. Such a result would increase systemic risks to U.S.

    market participants and impede the Commission's ability to protect U.S.

    markets.

    Two commenters supported the alternative interpretation of the

    aggregation requirement set out in the Further Proposed Guidance.

    Greenberger/AFR stated that the aggregation requirement helps to

    prevent the spreading of risk, because without aggregation U.S. persons

    could avoid registration as swap dealers by routing their swap activity

    through non-U.S. affiliates and thereby remain under the de minimis

    threshold.\276\ Better Markets supported the alternative interpretation

    in the Further Proposed Guidance because it contemplates that non-U.S.

    persons would aggregate all swap dealing of all affiliates, including

    U.S. affiliates, except where the affiliate is registered as a swap

    dealer.\277\

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

    \276\ Greenberger/AFR (Feb. 6, 2013) at 8-9.

    \277\ Better Markets (Feb. 15, 2013) at 8-9.

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

    Other commenters were opposed to the alternative interpretation in

    the Further Proposed Guidance. SIFMA/CH/FSR stated that aggregation of

    swap dealing activity across affiliates is not appropriate in any

    circumstance.\278\ ISDA stated that application of the aggregation

    principle to non-U.S. affiliates may impose significant burdens on the

    non-U.S. affiliates without advancing significant regulatory interests,

    and expanding the scope of aggregation to include swaps of U.S.

    affiliates would exacerbate this disproportionality.\279\

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

    \278\ SIFMA/CH/FSR (Feb. 6, 2013) at A2-3

    \279\ ISDA (Feb. 6, 2013) at 3-4 (relevant affiliates are

    unlikely to have systems to monitor U.S. person status of swap

    counterparties). See also European Federation of Energy Traders

    (``EFET'') (Feb. 6, 2013) at 3-4 (arguing that cost of system to

    monitor aggregation would be substantial and relative benefits of

    requiring aggregation are small, given that equivalent regulation

    already applies, or soon will apply, in non-U.S. jurisdictions).

    ISDA, IIB and CEWG all stated that the treatment in the January

    Order of grandfathered affiliates (i.e., those affiliates engaged in

    swap dealing with U.S. persons on December 21, 2012) should be made

    permanent in order to avoid disrupting established transactional

    relationships. See ISDA (Feb. 6, 2013) at 3; IIB (Feb. 6, 2013) at

    6; CEWG (Feb. 25, 2013) at 2-4.

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

    Mitsubishi UFJ Financial Group Inc. (``Mitsubishi UFJ'') asked the

    Commission to clarify its interpretation of the term ``control'' in the

    context of a non-U.S. joint venture where only one owner controls and

    operates, and financially consolidates, the joint venture entity.\280\

    Mitsubishi UFJ stated that in this case the joint venture should be

    linked for aggregation purposes to the owner that has operational

    control, provided that the owner has at least one affiliate that is a

    registered swap dealer.\281\

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

    \280\ Mitsubishi UFJ (Feb. 1, 2013) at 3-4.

    \281\ Id. at 5.

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

    In the Further Proposed Guidance, the Commission asked commenters

    to address several questions regarding the aggregation provision. In

    particular, the Commission asked whether the alternative interpretation

    of the aggregation requirement should apply to non-U.S. persons that

    are guaranteed by a U.S. person with respect to their swaps obligations

    in the same way that it applies to non-U.S. persons that are not so

    guaranteed, and if so, should the Commission continue to construe the

    term ``guarantee'' for this purpose to mean any collateral promise by a

    guarantor to answer for the debt or obligation of an obligor under a

    swap and should the term include arrangements such as keepwells and

    liquidity puts.

    Greenberger/AFR replied to this question affirmatively, stating

    that the Commission should establish a rebuttable presumption that

    foreign affiliates are guaranteed by the parent company, and require

    clear evidence that the market has been explicitly informed that the

    parent will not stand behind affiliate liabilities in the event of

    [[Page 45322]]

    a default or bankruptcy.\282\ To do otherwise, they stated, would

    encourage swap activity through non-U.S. affiliates rather than U.S.

    persons.\283\

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

    \282\ Greenberger/AFR (Feb. 6, 2013) at 5-6.

    \283\ Id. at 6.

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

    Other commenters stated that the alternative interpretation should

    not apply to non-U.S. persons that are guaranteed by a U.S. person in

    the same way that it applies to non-U.S. persons that are not so

    guaranteed. SIFMA/CH/FSR stated that a guarantee by a U.S. person is

    not, in itself, a sufficient nexus for jurisdiction under section 2(i)

    of the CEA, since swaps may be guaranteed for a number of reasons that

    do not necessarily implicate U.S. jurisdiction.\284\ Thus, there may be

    no importation of risk to the United States through the guarantee and,

    in any event, concern about importation of risk is appropriately

    addressed where the guarantor is a prudentially regulated entity, and

    the Commission should rely on its anti-evasion authority to prevent use

    of guarantees to evade registration requirements.\285\ ISDA also stated

    that a guarantee constitutes an insufficient jurisdictional nexus, and

    that it would be consistent with international comity and regulatory

    reciprocity to regulate swaps between two non-U.S. persons primarily

    under non-U.S. regulation.\286\ Regarding the potential for risk

    transfer across borders, ISDA stated that much of the regulation

    applicable to swap dealers is not relevant to this concern--external

    and internal business conduct rules, for example, cannot assure the

    ultimate solvency of a swap dealer, and it is unclear that encouraging

    further capitalization of overseas affiliates of a U.S. guarantor,

    causing financial resources to be contributed overseas, would advance

    the stability of the U.S. financial system.\287\ The Financial Services

    Agency, Government of Japan (``Japan FSA'') also thought that a

    guarantee from a U.S. person should not, in itself, cause swaps with a

    non-U.S. person to be included in the de minimis calculation.\288\

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

    \284\ SIFMA/CH/FSR (Feb. 6, 2013) at A4.

    \285\ Id.

    \286\ ISDA (Feb. 6, 2013) at 2-3.

    \287\ Id. at 3.

    \288\ Japan FSA (Feb. 6, 2013) at 2.

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

    The Commission also asked if non-U.S. persons should not be

    expected to include in the de minimis calculation the swap dealing

    transactions of their U.S. affiliates under common control, or,

    alternatively, should the policy of the Commission contemplate that

    they would exclude from the de minimis calculation the swap dealing

    transactions of their U.S. affiliates under common control that are

    registered as swap dealers.

    Responding to this question, Greenberger/AFR stated it is important

    in any case to require aggregation across all non-U.S. affiliates of a

    global bank, in order to effectively capture transactions spread across

    multiple foreign affiliates; otherwise, it would be much easier to

    avoid registration as a swap dealer.\289\ They believe that the second

    alternative--excluding only the swap dealing transactions of U.S.

    affiliates that are registered as swap dealers--is much preferable to

    the first, because the first alternative would permit two groups of

    affiliates, one within the U.S. and another non-U.S., to both engage in

    swap dealing up to the de minimis level, which would create an

    incentive to split a swap dealing business between U.S. and non-U.S.

    affiliates.\290\ The second alternative would effectively allow a group

    of affiliates that individually and collectively fall below the de

    minimis threshold to forego registration, which they believed could be

    a sensible compromise, so long as aggregation across foreign affiliates

    is maintained.\291\

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

    \289\ Greenberger/AFR (Feb. 6, 2013) at 9.

    \290\ Id.

    \291\ Id.

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

    Several commenters were opposed to a policy under which non-U.S.

    persons would aggregate the swap dealing activities of U.S. affiliates

    that are registered swap dealers. CEWG argued that this policy could

    lead to registration of non-U.S. persons as swap dealers because of the

    activities of their U.S. affiliates, which it asserted would be

    contrary to the separation sometimes maintained between U.S. and non-

    U.S. affiliates and unsupported by any policy rationale.\292\ ISDA and

    SIFMA/CH/FSR were of the view that all persons (both U.S. and non-U.S.)

    should be able to exclude from their de minimis calculations the swaps

    of any affiliate (whether U.S. or non-U.S.) that is registered with the

    Commission as a swap dealer, because swaps by a registered swap dealer

    are subject to Dodd-Frank protections and no purpose would be served by

    attributing them to affiliated entities in order to impose swap dealer

    registration on those affiliates.\293\

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

    \292\ CEWG (Feb. 25, 2013) at 2-4.

    \293\ ISDA (Feb. 6, 2013) at 4; SIFMA/CH/FSR (Feb. 6, 2013) at

    B11-12. CEWG and ISDA also both stated that U.S. persons should in

    no event be required to aggregate swaps of non-U.S. affiliates with

    non-U.S. persons, because such swaps have insufficient nexus to the

    United States. CEWG (Feb. 25, 2013) at 2; ISDA (Feb. 6, 2013) at 4.

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

    The Mizuho Corporate Bank, Ltd. (``Mizuho'') and Sumitomo submitted

    a joint letter arguing that the swap dealing activity of U.S.

    affiliates that are registered as swap dealers should be excluded from

    aggregation because otherwise the de minimis exception would be

    effectively unavailable to non-U.S. based firms that conduct U.S.-

    facing swap dealing activity through a U.S. affiliate that is

    registered as a swap dealer.\294\ This result, in turn, would

    inappropriately disfavor these firms as compared to firms that conduct

    the same business through non-U.S. affiliates registered as swap

    dealers; the Commission's interpretation should encourage, rather than

    disfavor, registration of U.S. affiliates as swap dealers.\295\ IIB

    stated that the policy reasons for allowing the exclusion of swap

    dealing by non-U.S. affiliates registered as swap dealers also applies

    to the dealing activity of U.S affiliates that are registered.\296\

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

    \294\ Mizuho/Sumitomo (Feb. 6, 2013) at 3.

    \295\ Id. See also Japan FSA (Feb. 6, 2013) at 2 (arguing that

    the swap dealing activity of U.S. affiliates that are registered as

    swap dealers should be excluded because the affiliates are subject

    to supervision by the Commission).

    \296\ IIB (Feb. 6, 2013) at 5-6.

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

    Other commenters went further, stating that non-U.S. persons should

    not be required to aggregate the swap dealing activities of any of

    their U.S. affiliates. The Japanese Bankers Association stated U.S.

    affiliates should be excluded from the non-U.S. person's calculations

    because the U.S. persons are already subject to Dodd-Frank regulation

    as warranted by their activities.\297\ EDF Trading stated that non-U.S.

    persons that maintain minimal contacts with the United States should

    not be required to register as swap dealers due to the activities of

    their U.S. affiliates, because such a requirement would be inconsistent

    with the jurisdictional limitation in section 2(i) of the CEA; result

    in duplicative and potentially inconsistent regulatory requirements of

    multiple jurisdictions applying to the same swap activity; and

    encourage commercial firms to cease potential swap dealing activity in

    the U.S., resulting in reduced U.S. swaps market liquidity and

    fragmentation of the global swaps markets.\298\

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

    \297\ Japanese Bankers Association (Feb. 6, 2013) at 2-3. See

    also Japan FSA (Feb. 6, 2013) at 2 (arguing that all affiliates of

    Japanese financial institutions should be excluded from the de

    minimis calculation because the affiliates are supervised by Japan

    FSA on a consolidated basis).

    \298\ EDF Trading (Feb. 6, 2013) at 1-4. See also Brigard &

    Urrutia Abogados (Feb. 6, 2013) at 2 (non-U.S. persons should be

    allowed to exclude from the de minimis calculation the swap dealing

    activities of U.S. affiliates, and of any affiliate (U.S. or non-

    U.S.) that is a registered swap dealer).

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

    Last, the Commission solicited commenters' views on whether a

    person

    [[Page 45323]]

    engaged in swap dealing activities could take advantage of an

    interpretation of the aggregation provision that allows a person to

    exclude the swap dealing activities of one or more of its affiliates

    under common control. The Commission asked whether, under such an

    interpretation, a person could spread its swap dealing activities into

    multiple affiliates, each under the de minimis threshold, and therefore

    avoid the registration requirement, even though the aggregate level of

    swap dealing by the affiliates exceeds the de minimis threshold. In

    this regard, the Commission asked if any such interpretation should

    include any conditions or limits on the overall amount of swap dealing

    engaged in by unregistered persons within an affiliated group.

    Greenberger/AFR opined that any approach that did not require

    significant aggregation of swap dealing activities across affiliates

    would create the danger of risk spreading outlined in the Further

    Proposed Guidance.\299\ They stated that financial institutions could

    easily remain under the de minimis threshold and thereby avoid

    registration by routing swaps through their non-U.S. affiliates.\300\

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

    \299\ Greenberger/AFR (Feb. 6, 2013) at 8-9.

    \300\ See id. (citing press reports that U.S. banks such as

    Morgan Stanley and Goldman Sachs are using foreign entities ``in

    seriatim fashion to avoid going over the $ 8 billion test''). Making

    a similar point, Better Markets emphasized that market participants

    may be expected to implement the lowest-cost structure, considering

    all regulatory costs. Better Markets (Feb. 6, 2013) at 15.

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

    The Japanese Bankers Association stated that while the approach in

    the Further Proposed Guidance could potentially prevent evasion, it

    would do so at the cost of requiring multiple non-U.S. affiliates to

    register as swap dealers even if the group of affiliates concentrated

    its U.S. swap dealing activity in one U.S. entity.\301\ In fact, they

    argued, concentrating U.S. swap dealing activity in a U.S. entity

    should be encouraged because it facilitates Commission supervision of

    that activity.\302\ Further, they stated that to expect non-U.S.

    persons to register as swap dealers as a result of dealing activity by

    their U.S. affiliates undermines the regulatory independence of

    different jurisdictions and international understandings on regulatory

    harmonization.\303\ Similarly, EDF Trading stated that expecting

    multiple entities within a corporate group to register as swap dealers

    would be burdensome and may not advance regulatory interests, and the

    alternative in the Further Proposed Guidance would merely increase

    economic and regulatory burdens without achieving a significant

    reduction in systemic risk, because it would encourage the

    concentration of swap dealing activity in non-U.S affiliates.\304\

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

    \301\ Japanese Bankers Association (Feb. 6, 2013) at 3.

    \302\ Id.

    \303\ Id. at 3-4.

    \304\ EDF Trading (Feb. 6, 2013) at 5.

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

    SIFMA/CH/FSR were of the view that it would be burdensome for

    market participants to use multiple affiliates to avoid swap dealer

    registration, because moving swap dealing activity between affiliates

    requires a significant legal, technological and operational investment,

    and fragmenting the activity among affiliates may make it harder for a

    multinational institutions to manage risk efficiently.\305\ Along the

    same lines, IIB stated that where one entity in a corporate group is

    registered as a swap dealer, there are substantial commercial and

    credit risk incentives to centralize swap dealing in the registered

    entity, because doing so maximizes the potential to net offsetting

    transactions, uses capital more efficiently, and is operationally

    efficient.\306\ On the other hand, IIB stated that using unregistered

    entities for swap dealing would not reduce the fixed costs incurred in

    registration and that the unregistered entities in the group would

    still be subject to swap costs such as clearing, reporting and trade

    execution.\307\

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

    \305\ SIFMA/CH/FSR (Feb. 6, 2013) at A3.

    \306\ IIB (Feb. 6, 2013) at 3.

    \307\ Id.

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

    Based on the comments received on the Proposed Guidance and the

    Further Proposed Guidance, and its further review of issues related to

    the aggregation requirement, the Commission's policy is to interpret

    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.

    Further, the Commission will generally apply the aggregation principle

    (as articulated in the Final Entities Rules) such that, in considering

    whether a person is engaged in more than a de minimis level of swap

    dealing, a person (whether U.S. or non-U.S.) should generally include

    all relevant dealing swaps of all its U.S. and non-U.S. affiliates

    under common control,\308\ except that swaps of an affiliate (either

    U.S. or non-U.S.) that is a registered swap dealer are excluded, as

    discussed below. The Commission notes that this policy would ensure

    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.

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

    \308\ For purposes of this Guidance, the Commission clarifies

    that a reference to ``affiliates under common control'' with a

    person includes affiliates that are controlling, controlled by, or

    under common control with such person. See note 268, supra. Further,

    in response to a question from a commenter, the Commission clarifies

    that for this purpose, the term ``affiliates under common control''

    includes parent companies and subsidiaries, and is not limited to

    ``sister companies'' at the same organizational level. See David Mu

    (Jan. 8, 2013).

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

    Stated in general terms, the Commission's interpretation allows

    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) (inside or outside the United States) would

    generally have to register as swap dealer(s) 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 the Commission

    believes that its policy on aggregation outlined above addresses the

    concern that an affiliated group of U.S. and non-U.S. persons with

    significant swap dealing transactions with U.S. persons or guaranteed

    affiliates may not be required to register solely because such swap

    dealing activities are divided between affiliates that each fall below

    the de minimis level.

    c. Exclusion of Certain Swaps by Non-U.S. Persons From the Swap Dealer

    De Minimis Threshold

    The Proposed Guidance would generally allow a non-U.S. person to

    exclude from its de minimis threshold calculation its swaps with

    foreign branches of U.S. swap dealers. This exclusion was intended to

    allow non-U.S. persons to continue their inter-dealer swap activities

    with foreign branches of U.S. swap dealers without exceeding the de

    minimis threshold, thereby triggering a requirement to register as a

    swap dealer.

    Commenters on the Proposed Guidance, such as Goldman Sachs, argued

    that the rationale for this exclusion is equally applicable when non-

    U.S. persons that are banks or broker-dealers engage in swap dealing

    transactions with U.S. swap dealers that do not conduct overseas

    business through foreign branches. Absent a similar interpretation in

    these circumstances, the commenters argued, U.S. swap dealers would be

    at a

    [[Page 45324]]

    competitive disadvantage vis-[agrave]-vis foreign branches of U.S. swap

    dealers since non-U.S. persons would be incentivized to limit their

    dealing activities to foreign branches of U.S. swap dealers.\309\

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

    \309\ Goldman (Aug. 27, 2012) at 5-6.

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

    The Commission's policy is to generally allow non-U.S. persons that

    are not guaranteed or conduit affiliates of U.S. persons not to count

    toward their de minimis thresholds 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.\310\ The Commission believes that where the guaranteed

    affiliate of a U.S. person is registered as a swap dealer, or where the

    foreign branch is included within the swap dealer registration of its

    U.S. home office, then it is appropriate to generally permit such non-

    U.S. not to count its swap dealing transactions with those entities

    against the non-U.S. person's de minimis threshold, because in these

    cases one counterparty to the swap is a swap dealer subject to

    comprehensive swap regulation and operating under the oversight of the

    Commission.

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

    \310\ Note that if a non-U.S. person that is not a guaranteed or

    conduit affiliate of a U.S. person engages in a swap dealing

    transaction with another non-U.S. person that is not a guaranteed

    affiliate of a U.S. person (including such non-U.S. person that is a

    swap dealer), then such swap dealing transaction does not count

    toward the de minimis threshold of the unregistered, swap dealing

    party.

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

    The Commission understands that commenters are concerned that

    foreign entities, in order to avoid swap dealer status, may decrease

    their swap dealing business with foreign branches of U.S. registered

    swap dealers and guaranteed affiliates that are swap dealers.

    Therefore, the Commission's policy, based on its interpretation of

    section 2(i) of the CEA, will be that swap dealing transactions with a

    foreign branch of a U.S. swap dealer or with guaranteed affiliates that

    are swap dealers should generally be excluded from the de minimis

    calculations of non-U.S. persons that are not guaranteed or conduit

    affiliates.\311\ However, the Commission is not persuaded that similar

    concerns arise regarding foreign entities that may engage in swap

    dealing business with such persons.\312\

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

    \311\ The types of offices the Commission would generally

    consider in this regard to be a ``foreign branch'' of a U.S. bank,

    and the circumstances in which a swap would generally be treated as

    being with such foreign branch, are discussed further in section C,

    infra.

    \312\ See Goldman (Aug. 27, 2012) at 3-4.

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

    With regard to non-U.S. persons that are not guaranteed or conduit

    affiliates of U.S. persons, such non-U.S. persons also generally would

    not count toward their de minimis thresholds their swap dealing

    transactions with a guaranteed affiliate that is not a swap dealer and

    itself engages in de minimis swap dealing activity and which is

    affiliated with a swap dealer. This interpretation reflects the

    Commission's view that when the aggregate level of swap dealing by a

    non-U.S. person that is not a guaranteed affiliate, considering both

    swaps with U.S. persons and swaps with unregistered guaranteed

    affiliates (together with any swap dealing transactions that the non-

    U.S. person aggregates for purposes of the de minimis calculation as

    described below) exceeds the de minimis level of swap dealing, the non-

    U.S. person's swap dealing transactions have the requisite ``direct and

    significant connection with activities in, or effect on, commerce of

    the United States.'' \313\ The Commission believes, however, that where

    the counterparty to a swap is a guaranteed affiliate and is not a

    registered swap dealer, the Commission's regulatory concerns are

    addressed because the guaranteed affiliate engages in a level of swap

    dealing below the de minimis threshold and is part of an affiliated

    group with a swap dealer.

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

    \313\ In the Proposed Guidance, the Commission asked whether the

    place of execution or clearing is relevant to the determination of

    whether a non-U.S. person should be required to register as a swap

    dealer. The Commission's policy is that a person generally would not

    be required to register as a swap dealer if the person's only

    connection to the United States is that the person uses a U.S.-

    registered swap execution facility (``SEF'')or designated contract

    market (``DCM'') in connection with its swap dealing activities.

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

    In addition, non-U.S. persons that are not guaranteed or conduit

    affiliates of U.S. persons also generally would not count toward their

    de minimis thresholds their swap dealing transactions with a guaranteed

    affiliate where the guaranteed affiliate is guaranteed by a non-

    financial entity.\314\ This exception is appropriate given that the

    risks to the U.S. financial markets are mitigated because the U.S.

    guarantor is a non-financial entity.

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

    \314\ See CEA section 2(h)(7)(C) for a definition of financial

    entity.

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

    The Commission notes that under its interpretation of section 2(i),

    a non-U.S. person that is not a guaranteed or conduit affiliate would

    not have to count its swap dealing transactions with other non-U.S.

    persons that are not guaranteed affiliates because, in the Commission's

    view, such swap dealing activity would not have the requisite ``direct

    and significant connection with activities in, or effect on, U.S.

    commerce.''

    d. Exclusion of Certain Swaps by Non-U.S. Persons From the MSP

    Calculation

    Related to their discussion of the swap dealer de minimis

    threshold, some commenters, such as SIFMA and Citi, stated that a non-

    U.S. person should not have to include swaps with foreign branches of

    U.S. swap dealers towards the MSP calculation.\315\

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

    \315\ See SIFMA (Aug. 27, 2012) at A28-29; Citi (Aug. 27, 2012)

    at 2-3.

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

    The Commission has considered whether, under section 2(i), the

    swaps that a non-U.S. person that is not a guaranteed or conduit

    affiliate enters into with a foreign branch of a U.S. swap dealer or a

    guaranteed affiliate that is a swap dealer should be excluded from the

    calculation of the non-U.S. person's MSP registration threshold. The

    Commission notes that its policy regarding such swaps for purposes of

    the MSP registration may reasonably be distinguished from its policy

    for purposes of the swap dealer registration threshold calculation. As

    described in the Final Entities Rules, MSP registration is required for

    non-dealers with swaps positions so large as to pose systemic risk.

    This is in contrast to swap dealer registration, which is a functional

    test focused on the nature of activities conducted by a potential

    registrant. Consequently, if all swaps between a non-U.S. person and

    foreign branches of U.S. swap dealers or swap dealers that are

    guaranteed affiliates were generally excluded under the Commission's

    policy with respect to MSP registration, a market participant that

    poses systemic risk within the meaning of the MSP definition could

    potentially be relieved of the requirement to register as an MSP. The

    Commission believes that such an outcome could undermine the MSP

    registration scheme. However, the Commission is persuaded that it is

    possible to control the potential risk of the non-U.S. person's risk

    with foreign branches of U.S. swap dealers and guaranteed affiliates

    that are swap dealers under certain limited circumstances and therefore

    that limited interpretive relief from the MSP calculation requirement

    is appropriate.\316\ Thus, a non-U.S. person that is not a guaranteed

    affiliate of a U.S. person and is a financial entity generally does not

    have to count toward

    [[Page 45325]]

    its MSP threshold its exposure under swaps with foreign branches of a

    U.S. swap dealer or guaranteed affiliates that are swap dealers;

    provided, that the swap is either cleared, or the documentation of the

    swap requires the foreign branch or guaranteed affiliate to collect

    daily variation margin, with no threshold, on its swaps with such non-

    U.S. person. When this condition is met, the Commission believes that

    it would generally be appropriate for the non-U.S. person not to count

    its exposure under such swaps against its MSP threshold.

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

    \316\ The interpretation applies to non-U.S. persons that are

    not guaranteed by U.S. persons. Non-U.S. financial entities would be

    required to include swaps positions with foreign branches and

    guaranteed affiliates of U.S. persons unless they choose to comply

    with voluntary margining requirements, discussed below.

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

    The Commission notes that a non-U.S. person's swaps positions with

    guaranteed affiliates that are swap dealers and foreign branches of

    U.S. swap dealers must be addressed in the latter entities' risk

    management programs. Such programs must account for, among other

    things, overall credit exposures to non-U.S. persons.\317\ Second, the

    Commission notes that a non-U.S. person's swaps with a guaranteed

    affiliate that is a swap dealer would be included in exposure

    calculations and attributed to the U.S. guarantor for purposes of

    determining whether the U.S. guarantor's swap exposures are

    systemically-important on a portfolio basis and therefore require the

    protections provided by MSP registration.\318\

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

    \317\ See Commission regulation 23.600(c)(4)(ii), requiring swap

    dealers and MSPs to have credit risk policies and procedures that

    account for daily measurement of overall credit exposure to comply

    with counterparty credit limits, and monitoring and reporting of

    violations of counterparty credit limits performed by personnel that

    are independent of the business trading unit. See also Commission

    regulation 23.600(c)(1)(i), requiring the senior management and the

    governing body of each swap dealer and MSP to review and approve

    credit risk tolerance limits for the swap dealer or MSP.

    \318\ See Final Entities Rules at 30689, stating the

    Commission's interpretation that ``an entity's swap . . . positions

    in general would be attributed to a parent, other affiliate or

    guarantor for purposes of the major participant analysis to the

    extent that the counterparties to those position would have recourse

    to that other entity in connection with the position.'' The

    Commission stated further that ``entities will be regulated as major

    participants when they pose a high level of risk in connection with

    the swap . . . positions they guarantee.''

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

    Finally, a non-U.S. person that is not a guaranteed affiliate and

    is not a financial entity \319\ would generally not have to count

    toward its MSP thresholds its exposure under swaps with a foreign

    branch of a U.S. swap dealer or guaranteed affiliate that is a swap

    dealer. This exclusion reflects the Commission's recognition of the

    more modest risk to the U.S. financial markets from swaps activities

    with non-financial entities organized outside the United States.\320\

    Further, the Commission notes that the Basel Committee on Banking

    Supervision (``BCBS'') and the International Organization of Securities

    Commissions (``IOSCO'') have recently issued a second consultative

    document under which, if finalized, would not apply margin requirements

    to the non-centrally cleared derivatives of non-financial entities,

    given that such transactions are viewed as posing little or no systemic

    risk and are exempt from clearing mandates in most jurisdictions.\321\

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

    \319\ See CEA section 2(h)(7)(C) for a definition of financial

    entity.

    \320\ Based on data the Bank for International Settlements

    obtained from thirteen reporting countries (Australia, Belgium,

    Canada, France, Germany, Italy, Japan, the Netherlands, Spain,

    Sweden, Switzerland, the United Kingdom and the United States), at

    the end of December 2012, notional amounts outstanding for OTC

    foreign exchange derivatives, interest rate derivatives, and credit

    default swaps with non-financial customers accounted for an average

    of less than 8 percent of the total aggregate amounts outstanding

    for these asset classes. See Bank for International Settlements,

    Statistical release: OTC derivatives statistics at end-December 2012

    (May 2013), available at http://www.bis.org/publ/otc_hy1305.pdf.

    \321\ See BCBS IOSCO, Margin Requirements for Non-Centrally

    Cleared Derivatives, Second Consultative Document, at 7 (issued for

    comment March 15, 2013), available at http://www.bis.org/publ/bcbs242.pdf.

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

    e. Exclusion of Certain Swaps Executed Anonymously on a SEF, DCM, or

    Foreign Board of Trade (``FBOT'') and Cleared

    The Commission believes that when a non-U.S. person that is not a

    guaranteed or conduit affiliate enters into swaps anonymously on a

    registered DCM, SEF, or FBOT \322\ and such swaps are cleared, the non-

    U.S. person would generally not have to count such swaps against its de

    minimis threshold. The Commission understands that in these

    circumstances, the non-U.S. person would not have any prior information

    regarding its counterparty to the swap. Also, as discussed below, the

    Commission is interpreting CEA section 2(i) such that, where a swap

    between such a non-U.S. person and a U.S. person is executed

    anonymously on a registered DCM, SEF, or FBOT and cleared the non-U.S.

    person generally will satisfy all of the applicable Category A

    Transaction-Level Requirements \323\ that pertain to such a swap

    transaction. The Commission believes that the regulatory interest in

    including such swaps in the non-U.S. person's de minimis calculation is

    outweighed by the practical difficulties involved in determining

    whether the non-U.S. person should include the swap in the calculation,

    given that the non-U.S. person would have no information regarding its

    swap counterparty prior to execution of the swap.

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

    \322\ As used herein, a registered FBOT means an FBOT that is

    registered with the Commission pursuant to part 48 of the

    regulations in order to permit direct access to the FBOT's order

    entry and trade matching system from within the U.S. Among others,

    16 FBOTs that currently permit direct access for the trading of

    futures and option contracts, but not swaps, pursuant to no-action

    relief letters issued by Commission staff have submitted complete

    applications for registration. In light of the fact that registered

    FBOTs can also list swaps for trading by direct access and in view

    of the time required to properly assess registration applications

    and the interest on the part of certain FBOTs operating pursuant to

    the no-action relief in listing swaps for trading by direct access,

    the Division of Market Oversight has determined to amend the 16 no-

    action letters to permit those FBOTs, subject to certain conditions,

    to also list swaps for trading by direct access. Accordingly, all

    provisions in this document that apply to registered FBOTs also

    apply to the 16 FBOTs permitting trading by direct access pursuant

    to the amended no-action relief.

    \323\ The Commission notes that while the real-time reporting

    requirement will be satisfied for cleared swaps executed anonymously

    on a DCM or SEF, absent further affirmative actions by an FBOT, the

    requirement will not be satisfied through FBOT execution alone. See

    section G, infra.

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

    The Commission also believes that when a non-U.S. person that is

    not a guaranteed or conduit affiliate clears a swap through a

    registered derivatives clearing organization (``DCO''), such non-U.S.

    person would generally not have to count the resulting swap (i.e., the

    novated swap) against its swap dealer de minimis threshold or MSP

    threshold.\324\ 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 a swap dealer.

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

    \324\ 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).

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

    f. MSP-Parent Guarantees

    While under the Proposed Guidance swaps conducted by a non-U.S.

    person, where guaranteed by a U.S. person, would generally be

    attributed only to the U.S. person in determining who must register as

    an MSP, the Commission did not expressly address a guarantee by a non-

    U.S. person of the swaps obligations of its U.S. subsidiary. In SIFMA's

    view, the Proposed Guidance created ambiguity as to the treatment of

    guarantees between other types of entities (e.g., where a U.S. person

    is guaranteed by a non-U.S. person or where a non-U.S. person is

    guaranteed by a non-U.S. person).\325\ In

    [[Page 45326]]

    addition, Cleary noted that the Commission determined in the Final

    Entities Rules not to include a parental guarantee of a subsidiary's

    swaps in the computation of the parent's outward exposure under the MSP

    definition where the subsidiary is subject to capital oversight by the

    Commission, SEC, or an appropriate banking regulator. They asked that

    the Commission consider extending comparable treatment for parental

    guarantees where the non-U.S. subsidiary is subject to Basel-compliant

    capital oversight by another G20 prudential supervisor.\326\

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

    \325\ SIFMA (Aug. 27, 2012) at A32. Along similar lines, IIB

    commented that there might be circumstances under which a wholly-

    owned subsidiary of a person already registered as a swap dealer

    enters into swaps with U.S. persons where its obligations are

    guaranteed by the swap dealer. IIB (Aug. 27, 2012) at 25.

    \326\ Cleary (Aug. 16, 2012) at 12.

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

    Under the Commission's interpretation of section 2(i) of the CEA,

    the discussion in the Final Entities Rules regarding attribution of

    swaps positions of guaranteed persons for purposes of the MSP

    definition should generally apply to non-U.S. persons. That is, as

    applied to non-U.S. persons, where there is no guarantee or recourse to

    another person under the swap, the swap should generally be attributed

    to the person who enters into the swap, and there generally would be no

    attribution or aggregation of the swaps position with the swaps

    positions of the person's affiliates.\327\ On the other hand, where the

    counterparty to the swap would have recourse to another person, such as

    a parent guarantor, the swap should generally be attributed to the

    person to whom there is recourse. Thus, if a U.S. person enters into a

    swap guaranteed by a non-U.S. person, the swap should generally be

    attributed to the non-U.S. person, and if a non-U.S. person enters into

    a swap guaranteed by a U.S. person, the swap should generally be

    attributed to the U.S. person.

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

    \327\ See Final Entities Rules, 77 FR at 30689.

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

    However, the Commission is also cognizant that, as a matter of

    international comity, regulation of non-U.S. persons can be less

    preferable where the same regulatory outcomes can be achieved by

    regulating an affiliated U.S. person. So where the swaps of a U.S.

    person are guaranteed by a non-U.S. person, the Commission would

    consider the possibility that registration of the non-U.S. person would

    not be required if the U.S. person registers as an MSP, and there may

    be circumstances where registration of the U.S. person would be

    preferable. Also, the same considerations of international comity

    suggest that regulation of non-U.S. persons should be effected in a

    manner that generally does not interfere with non-U.S. regulation.

    Thus, the Commission would be willing to consider that the swaps

    positions of non-U.S. persons that are guaranteed by other non-U.S.

    persons may be attributed to either the non-U.S. guarantor or the

    guaranteed non-U.S. person so long as all of the swaps positions that

    would trigger MSP registration are subject to the MSP registration and

    regulatory requirements. Thus, in IIB's scenario, the non-U.S.-based

    bank may consult with the Commission and decide to register itself--or

    its subsidiaries--as an MSP. The Commission would generally not expect

    both the parent guarantor bank and the guaranteed bank to register as

    MSPs. In the Commission's view, the related risk concerns should be

    adequately addressed by requiring either the guarantor or the

    guaranteed person to register, provided that the swap activities giving

    rise to MSP registration are regulated under Dodd-Frank.

    As to Cleary's request regarding comparable treatment for certain

    parental guarantees, the Commission agrees that, as a matter of policy,

    it would generally be appropriate to extend similar treatment to

    parental guarantees of a subsidiary that is subject to comparable and

    comprehensive capital oversight by a G20 prudential supervisor. In this

    respect, the Commission views Basel-compliant capital standards as

    sufficiently comparable and comprehensive to capital oversight by the

    Commission, SEC, or banking regulator. Thus, where a subsidiary is

    subject to Basel-compliant capital standards and oversight by a G20

    prudential supervisor, the subsidiary's positions would generally not

    be attributed to a parental guarantor in the computation of the

    parent's outward exposure under the MSP definition.

    4. Summary

    The Commission's policy under this Guidance may be summarized as

    follows.

    The Commission will generally apply the aggregation principle (as

    articulated in the Final Entities Rules) such that, in considering

    whether a person is engaged in more than a de minimis level of swap

    dealing, a person (whether U.S. or non-U.S.) should generally include

    all relevant dealing swaps of all its U.S. and non-U.S. affiliates

    under common control, except that swaps of an affiliate (either U.S. or

    non-U.S.) that is a registered swap dealer are excluded. For this

    purpose, consistent with the Commission's policy on counting swap

    transactions towards the de minimis threshold for swap dealer

    registration detailed above, the dealing swaps of an affiliate under

    common control with such person would include:

    (i) In the case of a U.S. person or a guaranteed or conduit

    affiliate, all its swap dealing transactions; and

    (ii) in the case of a non-U.S. person that is not a guaranteed

    or conduit affiliate:

    a. all dealing swaps with counterparties who are U.S. persons

    (other than foreign branches of U.S. swap dealers); and

    b. all dealing swaps with guaranteed affiliates except:

    i. guaranteed affiliates that are swap dealers;

    ii. guaranteed affiliates that are not swap dealers but which

    are affiliated with a swap dealer and where the guaranteed affiliate

    itself engages in de minimis swap dealing activity;

    iii. guaranteed affiliates that are guaranteed by a non-

    financial entity.

    In addition, a non-U.S. affiliate that is not a guaranteed or

    conduit affiliate may exclude any swaps that are entered into

    anonymously on a registered DCM, SEF, or FBOT and cleared, as more

    fully discussed above.

    The Commission's interpretation would allow both U.S. persons and

    non-U.S. persons in an affiliated group to engage in unregistered swap

    dealing activity up to the de minimis level for the entire group. When

    the affiliated group nears the de minimis threshold in the aggregate,

    it would have to register a number of affiliates (inside or outside the

    United States) as swap dealers sufficient to maintain the relevant

    dealing swaps of the unregistered affiliates below the threshold.

    In determining whether a non-U.S. person holds swap positions above

    the MSP thresholds, the non-U.S. person should consider the aggregate

    notional value of:

    (i) Any swap position between it and a U.S. person;

    (ii) any swap position between it and a guaranteed affiliate

    (but its swap positions where its own obligations thereunder are

    guaranteed by a U.S. person should be attributed to that U.S. person

    and not included in the non-U.S. person's determination); and

    (iii) any swap position between another (U.S. or non-U.S.)

    person and a U.S. person or guaranteed affiliate, where it

    guarantees the obligations of the other person thereunder.

    A non-U.S. person that is not a guaranteed affiliate of a U.S.

    person and is a financial entity would generally not have to count

    toward its MSP thresholds its exposure under swaps with foreign

    branches of U.S. swap dealers or guaranteed affiliates that are swap

    dealers, provided that the swap is either cleared, or the documentation

    of the

    [[Page 45327]]

    swap requires the foreign branch or guaranteed affiliate to, and the

    swap dealer actually does, collect daily variation margin, on its swaps

    with the non-U.S. person.

    In addition, a non-U.S. person that is not a guaranteed affiliate

    and is not a financial entity \328\ would generally not have to count

    toward its MSP thresholds its exposure under swaps with a foreign

    branch or guaranteed affiliate, in each case that is a swap dealer.

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

    \328\ See CEA section 2(h)(7)(C) for a definition of financial

    entity.

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

    C. Interpretation of the Term ``Foreign Branch;'' When a Swap Should Be

    Considered To Be With the Foreign Branch of a U.S. Person That Is a

    Swap Dealer or MSP

    1. Interpretation of the Term ``Foreign Branch'' and Treatment of

    Foreign Branches

    As discussed above, the Commission considers a foreign branch of a

    U.S. person to be a part of the U.S. person. Thus, in the Proposed

    Guidance, the Commission proposed that the U.S. person would be legally

    responsible for complying with all applicable Entity-Level

    Requirements. Under this approach, the foreign branch of the U.S.

    person would not register separately as a swap dealer. The Commission

    believes that this approach is appropriate because a foreign branch of

    a U.S. swap dealer is an integral part of a U.S. swap dealer and not a

    separate legal entity.

    In the Proposed Guidance, the Commission also proposed interpreting

    2(i) so that where a swap is with a foreign branch of a U.S.-based swap

    dealer, irrespective of whether the counterparty is a U.S. person or

    non-U.S. person, the foreign branch would be expected to comply with

    most of the Transaction-Level Requirements. The Commission stated that

    this proposed approach is appropriate in light of the Commission's

    strong supervisory interests in entities that are a part or an

    extension of a U.S.-based swap dealer. The Commission also proposed

    interpreting 2(i) so that swaps between a foreign branch of a U.S.

    person and a non-U.S. person counterparty (irrespective of whether that

    non-U.S. person counterparty's obligations under the swap are

    guaranteed by a U.S. person or not) would be eligible for substituted

    compliance with respect to Category A Transaction-Level Requirements.

    As discussed further below, where the counterparty to a swap with a

    foreign branch is a non-U.S. person (whether or not swaps such non-U.S.

    person is guaranteed or otherwise supported by, or is an affiliate

    conduit of, a U.S. person), the Commission continues to be of the view

    that the swap should be eligible for substituted compliance with

    respect to Category A Transaction-Level Requirements, to the extent

    applicable, in light of the supervisory interest of the foreign

    jurisdiction in the execution and clearing of trades occurring in that

    jurisdiction. As discussed further in section F below, the Commission's

    recognition of substituted compliance would be based on an evaluation

    of whether the requirements of the home jurisdiction are comparable and

    comprehensive to the applicable requirement(s) under the CEA and

    Commission regulations based on a consideration of all relevant

    factors, including among other things: (i) The comprehensiveness of the

    foreign regulator's supervisory compliance program and (ii) the

    authority of such foreign regulator to support and enforce its

    oversight of the registrant's branch or agency with regard to such

    activities to which substituted compliance applies.

    In the January Order, the Commission gave exemptive relief from

    Transaction-Level Requirements during the pendency of the January Order

    for swaps between a foreign branch of a U.S. swap dealer or U.S. MSP

    and a non-U.S. counterparty (including a non-U.S. swap dealer or non-

    U.S. MSP). Thus, notwithstanding the Commission's view that the foreign

    branch of a U.S. swap dealer is a U.S. person, the Commission granted

    temporary relief during the pendency of the January Order for swaps

    between a foreign branch of a U.S. registrant and a non-U.S. swap

    dealer, allowing the non-U.S. swap dealer to treat the foreign branch

    as a non-U.S. person.

    In the January Order, the Commission also stated that because it

    believes a swap between two foreign branches of U.S. registrants is a

    swap between two U.S. persons, such swaps are fully subject to the

    Transaction-Level Requirements. Nevertheless, during the pendency of

    the January Order, the Commission determined it would be appropriate to

    permit foreign branches of U.S. registrants to comply only with

    transaction-level requirements required in the location of the foreign

    branch while the Commission further considered, and worked with

    international regulators regarding, the treatment of foreign branches

    of U.S. registrants. However, for purposes of this relief, the

    Commission stated that for a swap between foreign branches of U.S.

    registrants, the swap would be treated as with the foreign branch of a

    U.S. person when: (i) The personnel negotiating and agreeing to the

    terms of the swap are located in the jurisdiction of such foreign

    branch; (ii) the documentation of the swap specifies that the

    counterparty or ``office'' for the U.S. person is such foreign branch;

    and (iii) the swap is entered into by such foreign branch in its normal

    course of business (collectively the ``January Order Criteria''). If

    the swap failed to satisfy all three of the January Order Criteria, the

    Commission stated that the swap would be treated as a swap of the U.S.

    person and not as a swap of the foreign branch of the U.S. person, and

    would not be eligible for relief from transaction-level requirements

    under the January Order.\329\

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

    \329\ See the January Order, 78 FR at 873 n. 123.

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

    The Commission also stated in the January Order that as part of the

    Commission's further consideration of this issue, additional factors

    may be relevant to the consideration of whether a swap is with the

    foreign branch of a U.S. person. These factors could include, for

    example, that:

    (i) The foreign branch is the location of employment of the

    employees negotiating the swap for the U.S. person or, if the swap

    is executed electronically, the employees managing the execution of

    the swap;

    (ii) the U.S. person treats the swap as a swap of the foreign

    branch for tax purposes,

    (iii) the foreign branch operates for valid business reasons and

    is not only a representative office of the U.S. person; and

    (iv) the branch is engaged in the business of banking or

    financing and is subject to substantive regulation in the

    jurisdiction where it is located (collectively the ``Additional

    Factors'').\330\

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

    \330\ Id. at 873.

    The Commission also sought comment from market participants and

    other interested parties regarding whether it is appropriate to include

    these or other factors in the consideration of when a swap is with the

    foreign branch of a U.S. person.

    2. Comments

    The Commission received several comments on how the Commission

    should determine whether a swap is ``with a foreign branch,'' both with

    regard to swaps between a foreign branch and a non-U.S. swap dealer and

    swaps between two foreign branches of U.S. swap dealers. In addition,

    several organizations commented on the term ``foreign branch'' of a

    U.S. bank.

    Commenters stated that in determining whether a swap between a non-

    U.S. swap dealer and a non-U.S. branch of a U.S. bank is bona fide with

    the non-U.S. branch, the Commission should look to whether the swap is

    booked in the foreign branch (as defined in Regulation K), and that the

    four

    [[Page 45328]]

    additional factors that the Commission stated it was considering are

    unnecessary.\331\ These commenters stated that the first Additional

    Factor being considered (i.e., that the foreign branch is the location

    of employment of the employees negotiating the swap for the U.S. person

    or, if the swap is executed electronically, the employees managing the

    execution of the swap) should be deleted because employees that

    negotiate and agree to the terms of a swap may be located outside of

    the non-U.S. branch that books the trade for a variety of valid

    reasons.\332\ Similar arguments were made with regard to the first

    prong of the January Order Criteria (i.e., that the personnel

    negotiating and agreeing to the terms of the swap are located in the

    jurisdiction of such foreign branch).\333\ As noted above, State Street

    stated that in a global economy, foreign exchange swaps are negotiated

    24 hours a day, by parties in various locations. Therefore, the

    physical location of employees has little connection to the legal

    jurisdiction of the branch in which the swaps are booked. Determination

    of the branch in which the swap is booked is influenced by a number of

    factors, including the convenience of the swap counterparty and

    agreements between counterparties to book swaps to mutually agreeable

    and preferred locations. State Street further stated that limiting the

    ability to book transactions to a foreign branch would be inappropriate

    for U.S. dealers in foreign exchange because foreign exchange

    transactions are typically negotiated in large blocks, which combine

    the orders of a variety of asset owners, and which can include both

    U.S. persons and non-U.S. persons. Once negotiated and executed, these

    blocks are allocated to the various asset owners, and booked to the

    location preferred by the asset owner or in some cases the dealer's

    non-U.S. branch. This allows managers to trade foreign exchange more

    efficiently, using a single point of dealer contact, and ensures that

    all asset owners on whose behalf they are trading receive the same

    price. State Street also stated that the approach outlined in proposal

    would place U.S. businesses at a competitive disadvantage, as non-U.S.

    owners would be unwilling to do business that would subject them to the

    U.S. regulatory requirements.\334\

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

    \331\ See SIFMA/CH/FSR (Feb. 6, 2013) at B18-20; State Street

    (Feb. 6, 2013) at 2-4.

    \332\ See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at B18.

    \333\ Id. at B17.

    \334\ State Street (Feb. 6, 2013) at 3-4.

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

    A commenter stated that it does not strongly object to prongs 2, 3

    and 4 of the Additional Factors (that the swap is treated as a swap of

    the foreign branch for tax purposes, that the branch operates for valid

    business reasons and is not only a representative office, and that the

    branch is engaged in banking or financing and subject to substantive

    local regulation) since they could ``be reasonable indicia of a bona

    fide non-U.S. branch of a U.S. swap dealer.'' However, this commenter

    stated that each of these prongs may be challenging to properly define

    and evaluate.\335\

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

    \335\ State Street (Feb. 6, 2013) at 2.

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

    With respect to the proposed tax prong (prong 2 of the Additional

    Factors), other commenters stated that the income from a swap that is

    booked in a foreign branch of a U.S. person is subject to taxation in

    the local jurisdiction in which the foreign branch is resident, which

    demonstrates that such swaps are bona fide with the non-U.S. branch.

    The commenters further noted that a foreign tax credit is generally

    allowed for income taxes paid locally.\336\

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

    \336\ See SIFMA/CH/FSR (Feb. 6, 2013) at B18; State Street (Feb.

    6, 2013) at 2.

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

    With regard to prong 3 of the Additional Factors (that the branch

    operates for valid business reasons and is not only a representative

    office), as noted earlier, SIFMA/CH/FSR argued that the only criteria

    that is relevant in determining whether a swap is bona fide with a

    foreign branch of a U.S. swap dealer is whether the swap is booked in

    the foreign branch (as reflected in the trade confirm), with the term

    ``foreign branch'' defined with reference to Regulation K. These

    commenters stated that the definition of a foreign branch in Regulation

    K makes it clear that a foreign branch of a U.S. bank is not a

    ``representative office.'' In addition, Regulation K is a comprehensive

    regulation of the Federal Reserve Board that ensures that foreign

    branches operate for valid reasons.\337\

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

    \337\ See SIFMA/CH/FSR (Feb. 6, 2013) at B19.

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

    With regard to prong 4 of the Additional Factors (that the branch

    is engaged in banking or financing and subject to substantive local

    regulation), SIFMA/CH/FSR argue that this prong is unnecessary because,

    in addition to being regulated under Regulation K by the Federal

    Reserve, foreign branches are also subject to substantive local

    regulation and supervision, including licensing requirements and

    potentially local derivatives rules that the Commission could find to

    constitute substituted compliance. Although these commenters

    acknowledged that the nature and scope of these regulations will vary

    by jurisdiction, they state that many foreign jurisdictions require the

    same level of compliance with local regulations that U.S. regulators

    require of U.S. branches of foreign banks with regards to U.S. laws and

    regulations. They also stated that requiring foreign branches to show

    that they are subject to substantive regulation in their local

    jurisdiction so as to determine whether each swap they enter into is

    bona fide would be overly burdensome and unnecessary. In their view,

    the only relevant factor that the Commission should consider is whether

    the swap has been booked into the foreign branch, which the trade

    confirm would reflect.\338\

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

    \338\ See id. at B19-20.

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

    Conversely, one commenter argued that, consistent with clear

    evidence from the last crisis that the risks accrued by foreign

    branches, guaranteed subsidiaries, and even non-guaranteed subsidiaries

    all flow back to the parent entity, foreign branches of U.S. persons

    should under no circumstances be subject to weaker regulation than the

    parent company. This commenter also argues that there is no substantive

    difference between a branch and a subsidiary of a U.S. person in terms

    of covering derivatives losses, and that both must be held to the same

    high standards as apply to the U.S. person itself. Otherwise, the U.S.

    taxpayer will be exposed to the risk of another massive bailout.\339\

    In addition, this commenter stated that claims made by industry groups

    that foreign branches of U.S. entities should not be classified as U.S.

    persons or they will find no foreign counterparties willing to do

    business with them are absurd and unsubstantiated, and taken literally,

    seem to suggest that the Commission should exempt all overseas swap

    activity from the requirements of Title VII of the Dodd-Frank Act,

    which would directly violate Congress's clear intent.

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

    \339\ Better Markets (Feb. 15, 2013) at 2, 4-5.

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

    3. Commission Guidance

    In preparing the Guidance, the Commission has carefully considered

    commenters' concerns and recommendations related to both the

    appropriate scope of the term ``foreign branch'' for purposes of this

    Guidance and Commission consideration of when a swap should be

    considered to be ``with the foreign branch'' of a U.S. bank that is a

    swap dealer or MSP.

    a. Scope of the Term ``Foreign Branch''

    The Commission notes that foreign branches of a U.S. bank are part

    of a

    [[Page 45329]]

    U.S. bank rather than a separate legal entity, and are therefore ``U.S.

    persons.'' Nevertheless, as a policy matter, the Commission believes

    that CEA section 2(i) should be interpreted so as to exclude swap

    dealing transactions with a foreign branch of a U.S. swap dealer from

    the de minimis calculations for swap dealer or MSP registration. In

    addition, the Commission believes that CEA section 2(i) should be

    interpreted so that swaps between a foreign branch of a U.S. swap

    dealer or MSP and a non-U.S. person should be eligible for substituted

    compliance with regard to Category A Transaction-Level

    Requirements.\340\ The Commission believes that CEA section 2(i) should

    be interpreted in this manner in order to avoid the potential result

    that foreign entities would cease doing swap dealing business with

    foreign branches of U.S. registered swap dealers. However, the

    Commission notes that interpreting CEA section 2(i) in this manner

    creates a distinction between swaps with foreign branches of U.S. banks

    and swaps with the U.S. principal bank. Therefore, the Commission also

    believes that Commission consideration of both the scope of the term

    ``foreign branch'' and when a swap is with the foreign branch of a U.S.

    bank should be construed under CEA section 2(i) in a manner that does

    not create unnecessary distinctions between otherwise similar

    activities.

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

    \340\ As discussed further in section G, under the Commission's

    interpretation of 2(i), in the case of a swap with a U.S. swap

    dealer or U.S. MSP (including an affiliate of a non-U.S. person, and

    including a foreign branch of a U.S. bank that is a swap dealer or

    MSP), the parties to the swap generally would not be not eligible

    for substituted compliance with one exception--where the swap is

    between the foreign branch of a U.S. bank that is a swap dealer or

    MSP and a non-U.S. person (regardless of whether the non-U.S. person

    is guaranteed or otherwise supported by, or is an affiliate conduit

    of, a U.S. person).

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

    Therefore, the Commission interprets CEA section 2(i) such that,

    for purposes of this Guidance, the Commission will generally consider a

    ``foreign branch'' of a U.S. swap dealer or U.S. MSP to be any

    ``foreign branch'' (as defined in the applicable banking regulation) of

    a U.S. bank that is: (i) Subject to Regulation K \341\ or the FDIC

    International Banking Regulation,\342\ or otherwise designated as a

    ``foreign branch'' by the U.S. bank's primary regulator, (ii) maintains

    accounts independently of the home office and of the accounts of other

    foreign branches with the profit or loss accrued at each branch

    determined as a separate item for each foreign branch,\343\ and (iii)

    subject to substantive regulation in banking or financing in the

    jurisdiction where it is located (the ``Foreign Branch

    Characteristics''). However, in addition to the foregoing Foreign

    Branch Characteristics, the Commission will consider other relevant

    facts and circumstances in considering whether a foreign office of a

    U.S. bank is a ``foreign branch'' of a U.S. bank for purposes of this

    Guidance.

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

    \341\ Regulation K is a regulation issued by the Board of

    Governors of the Federal Reserve (``Federal Reserve Board'') under

    the authority of the Federal Reserve Act (``FRA'') (12 U.S.C. 221 et

    seq.); the Bank Holding Company Act of 1956 (``BHC Act'') (12 U.S.C.

    1841 et seq.) and the International Banking Act of 1978 (``IBA'')

    (12 U.S.C. 3101 et seq.). Regulation K sets forth rules governing

    the international and foreign activities of U.S. banking

    organizations, including procedures for establishing foreign

    branches to engage in international banking.

    Under Regulation K, 12 CFR part 211, a ``foreign branch'' is

    defined as ``an office of an organization (other than a

    representative office) that is located outside the country in which

    the organization is legally established and at which a banking or

    financing business is conducted.'' See 17 CFR 211.2(k).

    \342\ 12 CFR part 347 is a regulation issued by the Federal

    Deposit Insurance Corporation under the authority of the Federal

    Deposit Insurance Act (12 U.S.C. 1828(d)(2)), which sets forth rules

    governing the operation of foreign branches of insured state

    nonmember banks (``FDIC International Banking Regulation''). Under

    12 CFR 347.102(j), a ``foreign branch'' is defined as ``an office or

    place of business located outside the United States, its

    territories, Puerto Rico, Guam, American Samoa, the Trust Territory

    of the Pacific Islands, or the Virgin Islands, at which banking

    operations are conducted, but does not include a representative

    office.''

    \343\ The Commission notes that national banks operating foreign

    branches are required under section 25 of the Federal Reserve Act,

    12 U.S.C. 604a, to conduct the accounts of each foreign branch

    independently of the accounts of other foreign branches established

    by it and of its home office, and are required at the end of each

    fiscal period to transfer to its general ledger the profit or loss

    accrued at each branch as a separate item.

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

    Further, for purposes of this Guidance, the Commission interprets

    CEA section 2(i) so that generally a foreign branch of a U.S. bank

    could include an office of a foreign bank that satisfies the foregoing

    Foreign Branch Characteristics. However, a foreign branch of a U.S.

    bank would generally not include an affiliate of a U.S. bank that is

    incorporated or organized as a separate legal entity.

    In considering the scope of the term ``foreign branch,'' the

    Commission agrees with commenters that stated that Regulation K of the

    Federal Reserve Board's regulations provides a useful reference because

    Regulation K provides a comprehensive regime for regulation of foreign

    branches that ensures that foreign branches of U.S. banks operate for

    valid reasons and are not ``representative offices.'' Similarly, the

    Commission believes that the FDIC International Banking Regulation

    provides a useful reference for U.S. banks that have foreign branches

    which are subject to FDIC jurisdiction.\344\

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

    \344\ See notes 341 and 342 above and accompanying text for

    additional information regarding the definition of a ``foreign

    branch'' in Regulation K and the FDIC International Banking

    Regulation.

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

    In addition, regardless of a foreign branch of a U.S. bank is

    subject to Regulation K or the FDIC International Banking Regulation or

    is otherwise designated as a ``foreign branch'' by the U.S. bank's

    primary regulator, the Commission believes that CEA section 2(i) should

    be interpreted so that, for purposes of this Guidance, a foreign branch

    of a U.S. bank should generally also be subject to substantive

    regulation in banking or financing in the jurisdiction where it is

    located. Finally, the Commission believes that in order for a foreign

    office of a U.S. bank to be viewed as a ``foreign branch'' for purposes

    of this Guidance, another factor should generally be present--the

    foreign branch should maintain its accounts independently of the home

    office and of the accounts of other foreign branches, and at the end of

    each fiscal period the U.S. bank should transfer to its general ledger

    the profit or loss accrued at each branch as a separate item.\345\

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

    \345\ The Commission notes that section 25 of the Federal

    Reserve Act, 12 U.S.C. 604a, states that national banking

    associations with $1 million or more in capital and surplus may file

    an application with the Board of Governors of the Federal Reserve

    System for permission to exercise certain powers, including

    establishment of foreign branches. In addition, section 25(9)

    requires that every national banking association operating foreign

    branches conduct the accounts of each foreign branch independently

    of the accounts of other foreign branches established by it and of

    its home office, and at the end of each fiscal period transfer to

    its general ledger the profit or loss accrued at each branch as a

    separate item.

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

    b. Commission Consideration of Whether a Swap Is With a Foreign Branch

    of a U.S. Bank

    With regard to Commission consideration of whether a swap by a U.S.

    bank through a foreign office should be considered to be ``with a

    foreign branch'' of the U.S. person for purposes of the de minimis

    calculations for swap dealer and MSP registration \346\ or application

    of the Transaction-Level Requirements \347\ under this Guidance, the

    Commission has carefully considered the comments submitted on this

    question.

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

    \346\ See section B, supra.

    \347\ See section G, infra.

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

    SIFMA/CH/FSR stated that the only criteria that is relevant in

    determining whether a swap is bona fide with a foreign branch of a U.S.

    swap dealer is whether the swap is booked in the foreign branch (as

    reflected in the trade confirmation), with the term ``foreign branch''

    defined with reference to Regulation K. However, the

    [[Page 45330]]

    Commission's view is that the trade confirmation generally is not

    relevant for purposes of determining whether to treat a swap as being

    with a foreign branch of a U.S. bank rather than with the U.S.

    principal bank. In reality, because the foreign branch of a U.S. bank

    is not a separate legal entity, the U.S. principal bank would generally

    be the party that is ultimately responsible for a swap with its foreign

    branch. The Commission's view is that a foreign branch of a U.S. bank

    should be considered a ``U.S. person'' under this Guidance because it

    is a part of the U.S. bank. Moreover, Better Markets has argued that

    foreign branches of U.S. banks as well as foreign subsidiaries and

    affiliates should be treated exactly the same as U.S. persons in all

    respects under this Guidance.

    However, in light of principles of international comity and giving

    consideration to comments that state that foreign branches of U.S.

    banks will be at a competitive disadvantage if foreign branches of U.S.

    banks are not treated the same as non-U.S. persons, the Commission

    believes that in considering whether a swap should be considered as

    being with the foreign branch of a U.S. bank under this Guidance, all

    of the facts and circumstances are relevant. In particular, the

    Commission's view is that if all of the following factors are present,

    generally the swap should be considered to be with the foreign branch

    of a U.S. bank for purposes of this Guidance:

    (i) The employees negotiating and agreeing to the terms of the

    swap (or, if the swap is executed electronically, managing the

    execution of the swap), other than employees with functions that are

    solely clerical or ministerial, are located in such foreign branch

    or in another foreign branch of the U.S. bank;

    (ii) the foreign branch or another foreign branch is the office

    through which the U.S. bank makes and receives payments and

    deliveries under the swap on behalf of the foreign branch pursuant

    to a master netting or similar trading agreement, and the

    documentation of the swap specifies that the office for the U.S.

    bank is such foreign branch;

    (iii) the swap is entered into by such foreign branch in its

    normal course of business;

    (iv) the swap is treated as a swap of the foreign branch for tax

    purposes; and

    (v) the swap is reflected in the local accounts of the foreign

    branch.

    However, if material terms of the swap are negotiated or agreed to

    by employees of the U.S. bank located in the United States, the

    Commission believes that generally the swap should be considered to be

    with the U.S. principal bank, rather than its foreign branch, for

    purposes of this Guidance.

    The Commission also believes that the factors enumerated above

    would be relevant both to an analysis of whether a swap should be

    considered to be between a foreign branch of a U.S. bank and a non-U.S.

    swap dealer and an analysis of whether a swap should be considered to

    be between two foreign branches of U.S. banks. The Commission discusses

    each of the enumerated factors in more detail below.

    The first of the five factors enumerated above is similar to prong

    1 of the Additional Factors (whether the employees negotiating the swap

    for the U.S. person are located in the foreign branch, or if the swap

    is executed electronically, the employees managing the execution of the

    swap); however, the first factor above considers whether the employees

    negotiating and agreeing to the terms of the swap are located in any

    foreign branch of the U.S. bank. This modification addresses the

    objection of commenters that stated that employees that negotiate and

    agree to swaps are often located outside the foreign branch for bona

    fide reasons.\348\ However, to the extent that material terms of the

    swap are negotiated or agreed by employees of the U.S. bank located in

    the United States, the Commission believes that generally the swap

    should be considered to be with the U.S. principal bank for purposes of

    this Guidance.

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

    \348\ See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at B18; State

    Street (Feb. 6, 2013) at 2-4.

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

    The second factor above is similar to prong (ii) of the January

    Order Criteria (that the documentation of the swap specifies that the

    counterparty or ``office'' for the U.S. person is such foreign branch).

    However, because a foreign branch of a U.S. bank is not a separate

    legal entity, the Commission believes that the U.S. principal bank

    generally should be considered to be the counterparty for purposes of

    this Guidance irrespective of whether the foreign branch is named as

    the counterparty in the swap documentation. Therefore, the Commission

    has modified the second factor, consistent with its other

    interpretations of section 2(i), so that it makes no reference to the

    foreign branch as counterparty. Rather, the second factor above relates

    to whether the foreign branch or another foreign branch is the office

    through which the U.S. bank makes and receives payments and deliveries

    under the swap on behalf of the foreign branch pursuant to a master

    netting or similar trading agreement, and whether the documentation of

    the swap specifies that the office for the U.S. bank is such foreign

    branch. This modification is consistent with the ISDA Master Agreement,

    which requires that each party specify an ``office'' for each swap,

    which is where a party ``books'' a swap and/or the office through which

    the party makes and receives payments and deliveries.

    The third factor above (whether the swap is entered into by such

    foreign branch in its normal course of business) is the same as prong

    (iii) in the January Order Criteria discussed above. The Commission is

    concerned about the material terms of a swap being negotiated or agreed

    by employees of the U.S. bank that are located in the United States and

    then routed to a foreign branch in order for the swap to be treated as

    a swap with the foreign branch for purposes of the de minimis

    calculations for swap dealer and MSP registration or application of the

    Transaction-Level Requirements under this Guidance.

    The fourth factor above (whether the swap is treated as a swap of

    the foreign branch for tax purposes) is the same as prong 2 of the

    Additional Factors. The Commission notes that State Street stated that

    it does not strongly object to prongs 2, 3 and 4 of the Additional

    Factors (that the swap is treated as a swap of the foreign branch for

    tax purposes, that the branch operates for valid business reasons and

    is not only a representative office, and that the branch is engaged in

    banking or financing and subject to substantive local regulation) since

    they could ``be reasonable indicia of a bona fide non-U.S. branch of a

    U.S. swap dealer.'' However, State Street stated that each of these

    prongs may be challenging to properly define and evaluate.\349\ Other

    commenters stated that the income from a swap that is booked in a

    foreign branch of a U.S. person is subject to taxation in the local

    jurisdiction in which the foreign branch is resident, which

    demonstrates that such swaps are bona fide with the non-U.S.

    branch.\350\ The Commission notes that the fourth factor above only

    refers to whether the tax treatment of the swap is consistent with the

    swap being treated as a swap of the foreign branch for tax purposes.

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

    \349\ See State Street (Feb. 6, 2013) at 2.

    \350\ See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at B18.

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

    The fifth factor above focuses on whether the swap is reflected in

    the accounts of the foreign branch. The Commission believes that where

    a swap is bona fide with the foreign branch of a U.S. bank, it

    generally would be

    [[Page 45331]]

    reflected in the foreign branch's accounts.

    D. Description of the Entity-Level and Transaction-Level Requirements

    Title VII of the Dodd-Frank Act establishes a comprehensive new

    regulatory framework for swap dealers and MSPs that Congress enacted

    with the goal of reducing systemic risk and enhancing market

    transparency. Under this framework, a swap dealer or MSP must, among

    other things, comport with certain standards (and regulations as the

    Commission may promulgate) governing risk management, internal and

    external business conduct, and reporting. Further, swap dealers and

    MSPs are required to comply with all of the requirements applicable to

    swap dealers and MSPs for all their swaps, not just the swaps that make

    them a swap dealer or MSP.

    Even before the Commission published the Proposed Guidance, a

    number of commenters recommended that the Commission, in interpreting

    the cross-border applicability of the Dodd-Frank Act swaps provisions,

    should distinguish between requirements that apply at an entity level

    (i.e., to the firm as a whole) as compared to those that apply at a

    transactional level (i.e., to the individual swap transaction or

    trading relationship).\351\ These commenters argued that requirements

    that relate to the core operations of a firm and should be applied to

    the entity as a whole would include the capital and related prudential

    requirements and recordkeeping, as well as certain risk mitigation

    requirements (e.g., information barriers and the designation of a chief

    compliance officer). The commenters stated that other requirements,

    such as margin, should apply on transaction-by-transaction basis and

    only to swaps with U.S. counterparties.

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

    \351\ See, e.g., SIFMA (Feb. 3, 2011); ISDA (Jan. 24, 2011);

    Cleary (Sept. 20, 2011); Barclays Bank PLC, BNP Paribas S.A.,

    Deutsche Bank AG, Royal Bank of Canada, The Royal Bank of Scotland

    Group PLC, Societe Generale, and UBS AG (Jan. 11, 2011); Barclays

    Bank PLC, BNP Paribas S.A., Credit Suisse AG, Deutsche Bank AG,

    HSBC, Nomura Securities International, Inc., Rabobank Nederland,

    Royal Bank of Canada, The Royal Bank of Scotland Group PLC, Societe

    Generale, The Toronto-Dominion Bank, and UBS AG (Feb. 17, 2011).

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

    Commenters on the Proposed Guidance generally supported the

    division of Dodd-Frank's swaps provisions (and Commission regulations

    thereunder) into Entity-Level and Transaction-Level Requirements.\352\

    Certain of these commenters, however, made specific recommendations for

    reclassification of some of these Requirements, which are discussed in

    section E below.

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

    \352\ See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug. 27, 2012)

    at 2; Clearing House (Aug. 27, 2012) at 22.

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

    The Commission agrees with the commenters that the various Dodd-

    Frank Act swaps provisions applicable to swap dealers and MSPs can be

    conceptually separated into Entity-Level Requirements, which apply to a

    swap dealer or MSP firm as a whole, and Transaction-Level Requirements,

    which apply on a transaction-by-transaction basis. Descriptions of each

    of the Entity-Level Requirements under this Guidance are set out

    immediately below, followed by descriptions of the Transaction-Level

    Requirements. Additional information related to the categorization of

    Entity-Level and Transaction-Level Requirements is discussed in section

    E.

    1. Description of the Entity-Level Requirements

    The Entity-Level Requirements under Title VII of the Dodd-Frank Act

    and the Commission's regulations promulgated thereunder relate to: (i)

    Capital adequacy; (ii) chief compliance officer; (iii) risk management;

    (iv) swap data recordkeeping; (v) swap data repository reporting (``SDR

    Reporting''); and (vi) physical commodity large swaps trader reporting

    (``Large Trader Reporting''). The Entity-Level Requirements apply to

    registered swap dealers and MSPs across all their swaps without

    distinctions as to the counterparty or the location of the swap

    (although under this Guidance in some circumstances the availability of

    substituted compliance may vary based on whether the counterparty is a

    U.S. person or a non-U.S. person).

    The Entity-Level Requirements are split into two categories. The

    first category of Entity-Level Requirements includes capital adequacy,

    chief compliance officer, risk management, and swap data recordkeeping

    under Commission regulations 23.201 and 23.203 (except certain aspects

    of swap data recordkeeping relating to complaints and sales materials)

    (``First Category''). The second category of Entity-Level Requirements

    includes SDR Reporting, certain aspects of swap data recordkeeping

    relating to complaints and marketing and sales materials under

    Commission regulations 23.201(b)(3) and 23.201(b)(4) and Large Trader

    Reporting (``Second Category'').

    Each of the Entity-Level Requirements is discussed in the

    subsections that follow.

    a. First Category of Entity-Level Requirements

    i. Capital Adequacy

    Section 4s(e)(2)(B) of the CEA specifically directs the Commission

    to set capital requirements for swap dealers and MSPs that are not

    subject to the capital requirements of U.S. prudential regulators

    (hereinafter referred to as ``non-bank swap dealers or MSPs'').\353\

    With respect to the use of swaps that are not cleared, these

    requirements must: ``(1) [h]elp ensure the safety and soundness of the

    swap dealer or major swap participant; and (2) [be] appropriate for the

    risk associated with the non-cleared swaps held as a swap dealer or

    major swap participant.'' \354\ Pursuant to section 4s(e)(3), the

    Commission proposed regulations, which would require non-bank swap

    dealers and MSPs to hold a minimum level of adjusted net capital (i.e.,

    ``regulatory capital'') based on whether the non-bank swap dealer or

    MSP is: (i) Also a FCM; (ii) not an FCM, but is a non-bank subsidiary

    of a bank holding company; or (iii) neither an FCM nor a non-bank

    subsidiary of a bank holding company.\355\ The primary

    [[Page 45332]]

    purpose of the capital requirement is to reduce the likelihood and cost

    of a swap dealer's or MSP's default by requiring a financial cushion

    that can absorb losses in the event of the firm's default.

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

    \353\ See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the CEA

    explicitly requires the adoption of rules establishing capital and

    margin requirements for swap dealers and MSPs, and applies a

    bifurcated approach that requires each swap dealer and MSP for which

    there is a U.S. prudential regulator to meet the capital and margin

    requirements established by the applicable prudential regulator, and

    each swap dealer and MSP for which there is no prudential regulator

    to comply with the Commission's capital and margin regulations. See

    7 U.S.C. 6s(e). Further, systemically important financial

    institutions (``SIFIs'') that are not FCMs would be exempt from the

    Commission's capital requirements, and would comply instead with

    Federal Reserve Board requirements applicable to SIFIs, while

    nonbank (and non-FCM) subsidiaries of U.S. bank holding companies

    would calculate their Commission capital requirement using the same

    methodology specified in Federal Reserve Board regulations

    applicable to the bank holding company, as if the subsidiary itself

    were a bank holding company. The term ``prudential regulator'' is

    defined in CEA section 1a(39) as the Board of Governors of the

    Federal Reserve System, the Office of the Comptroller of the

    Currency, the Federal Deposit Insurance Corporation, the Farm Credit

    Administration, and the Federal Housing Finance Agency. See 7 U.S.C.

    1a(39). In addition, in the proposed capital regulations for swap

    dealers and MSPs, the Commission solicited comment regarding whether

    it would be appropriate to permit swap dealers and MSPs to use

    internal models for computing market risk and counterparty credit

    risk charges for capital purposes if such models had been approved

    by a foreign regulatory authority and were subject to periodic

    assessment by such foreign regulatory authority. See Capital

    Requirements of Swap Dealers and Major Swap Participants, 76 FR

    27802 (May 12, 2011) (``Proposed Capital Requirements'').

    \354\ See 7 U.S.C. 6s(e)(3)(A).

    \355\ See 7 U.S.C. 6s(e). See also Proposed Capital

    Requirements, 76 FR at 27817 (``The Commission's capital proposal

    for [swap dealers] and MSPs includes a minimum dollar level of $20

    million. A non-bank [swap dealer] or MSP that is part of a U.S. bank

    holding company would be required to maintain a minimum of $20

    million of Tier 1 capital as measured under the capital rules of the

    Federal Reserve Board. [A swap dealer] or MSP that also is

    registered as an FCM would be required to maintain a minimum of $20

    million of adjusted net capital as defined under [proposed] section

    1.17. In addition, [a swap dealer] or MSP that is not part of a U.S.

    bank holding company or registered as an FCM would be required to

    maintain a minimum of $20 million of tangible net equity, plus the

    amount of the [swap dealer's] or MSP's market risk exposure and OTC

    counterparty credit risk exposure.'').

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

    ii. Chief Compliance Officer

    Section 4s(k) requires that each swap dealer and MSP designate an

    individual to serve as its chief compliance officer (``CCO'') and

    specifies certain duties of the CCO.\356\ Pursuant to section 4s(k),

    the Commission adopted regulation 3.3, which requires swap dealers and

    MSPs to designate a CCO who would be responsible for administering the

    firm's compliance policies and procedures, reporting directly to the

    board of directors or a senior officer of the swap dealer or MSP, as

    well as preparing and filing with the Commission a certified report of

    compliance with the CEA. The chief compliance function is an integral

    element of a firm's risk management and oversight and the Commission's

    effort to foster a strong culture of compliance within swap dealers and

    MSPs.

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

    \356\ See 7 U.S.C. 6s(k).

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

    iii. Risk Management

    Section 4s(j) of the CEA requires each swap dealer and MSP to

    establish internal policies and procedures designed to, among other

    things, address risk management, monitor compliance with position

    limits, prevent conflicts of interest, and promote diligent

    supervision, as well as maintain business continuity and disaster

    recovery programs.\357\ The Commission adopted implementing regulations

    23.600, 23.601, 23.602, 23.603, 23.605, and 23.606).\358\ The

    Commission also adopted regulation 23.609, which requires certain risk

    management procedures for swap dealers or MSPs that are clearing

    members of a DCO.\359\ Collectively, these requirements help to

    establish a robust and comprehensive internal risk management program

    for swap dealers and MSPs, which is critical to effective systemic risk

    management for the overall swaps market.

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

    \357\ 7 U.S.C. 6s(j).

    \358\ Swap Dealer and Major Swap Participant Recordkeeping,

    Reporting, and Duties Rules; Futures Commission Merchant and

    Introducing Broker Conflicts of Interest Rules; and Chief Compliance

    Officer Rules for Swap Dealers, Major Swap Participants, and Futures

    Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (``Final Swap

    Dealer and MSP Recordkeeping Rule'') (relating to risk management

    program, monitoring of position limits, business continuity and

    disaster recovery, conflicts of interest policies and procedures,

    and general information availability, respectively).

    \359\ Customer Clearing Documentation, Timing of Acceptance for

    Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 9,

    2012) (``Final Customer Documentation Rules''). Also, swap dealers

    must comply with Commission regulation 23.608, which prohibits swap

    dealers providing clearing services to customers from entering into

    agreements that would: (i) disclose the identity of a customer's

    original executing counterparty; (ii) limit the number of

    counterparties a customer may trade with; (iii) impose counterparty-

    based position limits; (iv) impair a customer's access to execution

    of a trade on terms that have a reasonable relationship to the best

    terms available; or (v) prevent compliance with specified time

    frames for acceptance of trades into clearing.

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

    iv. Swap Data Recordkeeping (Except Certain Aspects of Swap Data

    Recordkeeping Relating to Complaints and Sales Materials)

    CEA section 4s(f)(1)(B) requires swap dealers and MSPs to keep

    books and records for all activities related to their business.\360\

    Sections 4s(g)(1) and (4) require swap dealers and MSPs to maintain

    trading records for each swap and all related records, as well as a

    complete audit trail for comprehensive trade reconstructions.\361\

    Pursuant to these provisions, the Commission adopted regulations

    23.201and 23.203, which require swap dealers and MSPs to keep records

    including complete transaction and position information for all swap

    activities, including documentation on which trade information is

    originally recorded. Pursuant to Commission regulation 23.203, records

    of swaps must be maintained for the duration of the swap plus 5 years,

    and voice recordings for 1 year, and records must be ``readily

    accessible'' for the first 2 years of the 5 year retention period. Swap

    dealers and MSPs also must comply with Parts 43, 45 and 46 of the

    Commission's regulations, which, respectively, address the data

    recordkeeping and reporting requirements for all swaps subject to the

    Commission's jurisdiction, including swaps entered into before the date

    of enactment of the Dodd-Frank Act (``pre-enactment swaps'') and swaps

    entered into on or after the date of enactment of the Dodd-Frank Act

    but prior to the compliance date of the swap data reporting rules

    (``transition swaps'').\362\

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

    \360\ 7 U.S.C. 6s(f)(1)(B).

    \361\ 7 U.S.C. 6s(g)(1).

    \362\ See 17 CFR part 46; Swap Data Recordkeeping and Reporting

    Requirements: Pre-Enactment and Transition Swaps, 76 FR 22833 (Apr.

    25, 2011) (``Proposed Data Rules'').

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

    b. Second Category of Entity-Level Requirements

    i. SDR Reporting

    CEA section 2(a)(13)(G) requires all swaps, whether cleared or

    uncleared, to be reported to a registered SDR.\363\ CEA section 21

    requires SDRs to collect and maintain data related to swaps as

    prescribed by the Commission, and to make such data electronically

    available to particular regulators under specified conditions related

    to confidentiality.\364\ Part 45 of the Commission's regulations (and

    Appendix 1 thereto) sets forth the specific swap data that must be

    reported to a registered SDR, along with attendant recordkeeping

    requirements; and part 46 addresses recordkeeping and reporting

    requirements for pre-enactment and transition swaps (``historical

    swaps''). The fundamental goal of part 45 of the Commission's

    regulations is to ensure that complete data concerning all swaps

    subject to the Commission's jurisdiction is maintained in SDRs where it

    will be available to the Commission and other financial regulators for

    fulfillment of their various regulatory mandates, including systemic

    risk mitigation, market monitoring and market abuse prevention. Part 46

    supports similar goals with respect to pre-enactment and transition

    swaps and ensures that data needed by regulators concerning

    ``historical'' swaps is available to regulators through SDRs. Among

    other things, data reported to SDRs will enhance the Commission's

    understanding of concentrations of risks within the market, as well as

    promote a more effective monitoring of risk profiles of market

    participants in the swaps market. The Commission also believes that

    there are benefits that will accrue to swap dealers and MSPs as a

    result of the timely reporting of comprehensive swap transaction data

    and consistent data standards for recordkeeping, among other things.

    Such benefits include more robust risk monitoring and management

    capabilities for swap dealers and MSPs, which in turn will improve the

    monitoring of their current swaps market positions.

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

    \363\ 7 U.S.C. 2(a)(13)(G).

    \364\ 7 U.S.C. 24a.

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

    [[Page 45333]]

    ii. Swap Data Recordkeeping Relating to Complaints and Marketing and

    Sales Materials

    CEA section 4s(f)(1) requires swap dealers and MSPs to ``make such

    reports as are required by the Commission by rule or regulation

    regarding the transactions and positions and financial condition of the

    registered swap dealer or MSP.'' \365\ Additionally, CEA section 4s(h)

    requires swap dealers and MSPs to ``conform with such business conduct

    standards . . . as may be prescribed by the Commission by rule or

    regulation.'' \366\ Pursuant to these provisions, the Commission

    promulgated final rules that set forth certain reporting and

    recordkeeping for swap dealers and MSPs.\367\ Commission Regulation

    23.201 states that ``[e]ach swap dealer and major swap participant

    shall keep full, complete, and systematic records of all activities

    related to its business as a swap dealer or major swap participant.''

    Such records must include, among other things, ``[a] record of each

    complaint received by the swap dealer or major swap participant

    concerning any partner, member, officer, employee, or agent,'' \368\ as

    well as ``[a]ll marketing and sales presentations, advertisements,

    literature, and communications.'' \369\

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

    \365\ 7 U.S.C. 6s(f)(1).

    \366\ 7 U.S.C. 6s(h)(1); see 7 U.S.C. 6s(h)(3).

    \367\ Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 20128.

    \368\ 17 CFR 23.201(b)(3)(i).

    \369\ 17 CFR 23.201(b)(4).

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

    iii. Physical Commodity Large Swaps Trader Reporting (Large Trader

    Reporting)

    CEA section 4t authorizes the Commission to establish a large

    trader reporting system for significant price discovery swaps (of which

    the economically equivalent swaps subject to part 20 of the

    Commission's regulations are a subset).\370\ Pursuant thereto, the

    Commission adopted its Large Trader Reporting rules (part 20 of the

    Commission's regulations), which require routine reports from swap

    dealers, among other entities, that hold significant positions in swaps

    that are linked, directly or indirectly, to a prescribed list of U.S.-

    listed physical commodity futures contracts.\371\ Additionally, Large

    Trader Reporting requires that swap dealers, among other entities,

    comply with certain recordkeeping obligations.

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

    \370\ 7 U.S.C. 6t.

    \371\ Large Trader Reporting for Physical Commodity Swaps, 76 FR

    43851 (July 22, 2011). The rules require routine position reporting

    by clearing organizations, as well as clearing members and swap

    dealers with reportable positions in the covered physical commodity

    swaps. The rules also establish recordkeeping requirements for

    clearing organizations, clearing members and swap dealers, as well

    as traders with positions in the covered physical commodity swaps

    that exceed a prescribed threshold. In general, the rules apply to

    swaps that are linked, directly or indirectly, to either the price

    of any of the 46 U.S. listed physical commodity futures contracts

    the Commission enumerates (Covered Futures Contracts) or the price

    of the physical commodity at the delivery location of any of the

    Covered Futures Contracts.

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

    2. Description of the Transaction-Level Requirements

    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.

    The Transaction-Level Requirements--with the exception of external

    business conduct standards--relate to both risk mitigation and market

    transparency. Certain of these requirements, such as clearing and

    margining, serve to lower a firm's risk of failure. In that respect,

    these Transaction-Level Requirements could be classified as Entity-

    Level Requirements. Other Transaction-Level Requirements--such as trade

    confirmation, swap trading relationship documentation, and portfolio

    reconciliation and compression--also serve important risk mitigation

    functions, but are less closely connected to risk mitigation of the

    firm as a whole and thus are more appropriately applied on a

    transaction-by-transaction basis. Likewise, the requirements related to

    trade execution, trade confirmation, daily trading records, and real-

    time public reporting have a closer nexus to the transparency goals of

    the Dodd-Frank Act, as opposed to addressing the risk of a firm's

    failure.

    As a result, whether a particular requirement of Title VII should

    apply on a transaction-by-transaction basis in the context of cross-

    border activity for purposes of section 2(i) of the CEA requires the

    Commission to exercise some degree of judgment. Nevertheless, in the

    interest of comity principles, the Commission believes that the

    Transaction-Level Requirements may be applied on a transaction-by-

    transaction basis. The Transaction-Level Requirements are split into

    two categories. All of the Transaction-Level Requirements except

    external business conduct standards are in Category A. The external

    business conduct standards are in Category B.

    Each of the Transaction-Level Requirements is discussed below.

    a. Category A: Risk Mitigation and Transparency

    i. Required Clearing and Swap Processing

    Section 2(h)(1) of the CEA requires a swap to be submitted for

    clearing to a DCO if the Commission has determined that the swap is

    required to be cleared, unless one of the parties to the swap is

    eligible for an exception from the clearing requirement and elects not

    to clear the swap.\372\ Clearing via a DCO mitigates the counterparty

    credit risk between swap dealers or MSPs and their counterparties.

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

    \372\ 7 U.S.C. 2(h)(1), (7).

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

    Commission regulations implementing the first designations of swaps

    for required clearing were published in the Federal Register on

    December 13, 2012.\373\ Under Commission regulation 50.2, all persons

    executing a swap that is included in a class of swaps identified under

    Commission regulation 50.4 must submit such swap to an eligible DCO for

    clearing as soon as technologically practicable after execution, but in

    any event by the end of the day of execution.

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

    \373\ Clearing Requirement Determination Under Section 2(h) of

    the CEA, 77 FR 74284 (Dec. 13, 2012) (``Clearing Requirement

    Determination'').

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

    Regulation 50.4 establishes required clearing for certain classes

    of swaps. Currently, those classes include, for credit default swaps:

    Specified series of untranched North American CDX indices and European

    iTraxx indices; and for interest rate swaps: Fixed-to-floating swaps,

    basis swaps, forward rate agreements referencing U.S. Dollar, Euro,

    Sterling, and Yen, and overnight index swaps referencing U.S. Dollar,

    Euro, and Sterling. Each of the six classes is further defined in

    Commission regulation 50.4. Swaps that have the specifications

    identified in the regulation are required to be cleared and must be

    cleared pursuant to the rules of any eligible DCO \374\ unless an

    exception or exemption specified in the CEA or the Commission's

    regulations applies.

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

    \374\ A DCO's eligibility to clear swaps that are required to be

    cleared pursuant to section 2(h)(1)(A) of the CEA and part 50 of the

    Commission's regulations is governed by regulation 39.5(a), relating

    to DCO eligibility.

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

    Generally, if a swap is subject to CEA section 2(h)(1)(A) and part

    50 of the Commission's regulations, it must be cleared through an

    eligible DCO, unless: (i) One of the counterparties is eligible for and

    elects the end-user exception

    [[Page 45334]]

    under Commission regulation 50.50; \375\ or (ii) both counterparties

    are eligible for and elect an inter-affiliate exemption under

    Commission regulation 50.52.\376\ To elect either the End-User

    Exception or the Inter-Affiliate Exemption, the electing party or

    parties and the swap must meet certain requirements set forth in the

    regulations.

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

    \375\ See End-User Exception to the Clearing Requirement for

    Swaps, 77 FR 42560 (July 19, 2012) (``End-User Exception'').

    \376\ The Commission has adopted an exemption from required

    clearing for swaps between certain affiliated entities. Exemption

    for Swaps Between Certain Affiliated Entities, 78 FR 21750 (Apr. 11,

    2013) (``Inter-Affiliate Exemption'').

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

    Closely connected with the clearing requirement are the following

    swap processing requirements: (i) Commission regulation 23.506, which

    requires swap dealers and MSPs to submit swaps promptly for clearing;

    and (ii) Commission regulations 23.610 and 39.12, which establish

    certain standards for swap processing by DCOs and/or swap dealers and

    MSPs that are clearing members of a DCO.\377\ Together, required

    clearing and swap processing requirements promote safety and soundness

    of swap dealers and MSPs, and mitigate the credit risk posed by

    bilateral swaps between swap dealers or MSPs and their

    counterparties.\378\

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

    \377\ 17 CFR 23.506 and 23.610. See also Final Customer

    Documentation Rules, 77 FR 21278.

    \378\ See section H regarding the application of required

    clearing rules to market participants that are not registered as

    swap dealers or MSPs, including the circumstances under which the

    parties to such swaps would be eligible for substituted compliance.

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

    ii. Margin and Segregation Requirements For Uncleared Swaps

    Section 4s(e) of the CEA requires the Commission to set margin

    requirements for swap dealers and MSPs that trade in swaps that are not

    cleared.\379\ The margin requirements ensure that outstanding current

    and potential future risk exposures between swap dealers and their

    counterparties are collateralized, thereby reducing the possibility

    that swap dealers or MSPs take on excessive risks without having

    adequate financial backing to fulfill their obligations under the

    uncleared swap. In addition, with respect to swaps that are not

    submitted for clearing, section 4s(l) requires that a swap dealer or

    MSP notify the counterparty of its right to request that funds provided

    as margin be segregated, and upon such request, to segregate the funds

    with a third-party custodian for the benefit of the counterparty. In

    this way, the segregation requirement enhances the protections offered

    through margining uncleared swaps and thereby provides additional

    financial protection to counterparties. The Commission is working with

    foreign and domestic regulators to develop and finalize appropriate

    regulations for margin and segregation requirements.

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

    \379\ See 7 U.S.C. 6s(e). See also Margin Requirements for

    Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 FR

    23732, 23733-23740 (Apr. 28, 2011) (``Proposed Margin

    Requirements''). Section 4s(e) explicitly requires the adoption of

    rules establishing margin requirements for swap dealers and MSPs,

    and applies a bifurcated approach that requires each swap dealer and

    MSP for which there is a prudential regulator to meet the margin

    requirements established by the applicable prudential regulator, and

    each swap dealer and MSP for which there is no prudential regulator

    to comply with the Commission's margin regulations. In contrast, the

    segregation requirements in section 4s(1) do not use a bifurcated

    approach--that is, all swap dealers and MSPs are subject to the

    Commission's regulations regarding notice and third party custodians

    for margin collected for uncleared swaps.

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

    iii. Trade Execution

    Integrally linked to the clearing requirement is the trade

    execution requirement, which is intended to bring the trading of swaps

    that are required to be cleared and are made available to trade onto

    regulated exchanges or execution facilities. Specifically, section

    2(h)(8) of the CEA provides that unless a clearing exception applies

    and is elected, a swap that is subject to a clearing requirement must

    be executed on a DCM or SEF, unless no such DCM or SEF makes the swap

    available to trade.\380\ Commission regulations implementing the

    process for a DCM or SEF to make a swap available to trade were

    published in the Federal Register on June 4, 2013.\381\ Under

    Commission regulations 37.10 and 38.12, respectively, a SEF or DCM may

    submit a determination for Commission review that a mandatorily cleared

    swap is available to trade based on enumerated factors. By requiring

    the trades of mandatorily cleared swaps that are made available to

    trade to be executed on an exchange or an execution facility--each with

    its attendant pre- and post-trade transparency and safeguards to ensure

    market integrity--the trade execution requirement furthers the

    statutory goals of financial stability, market efficiency, and enhanced

    transparency.

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

    \380\ See 7 U.S.C. 2(h)(8).

    \381\ See Process for a Designated Contract Market or Swap

    Execution Facility To Make a Swap Available to Trade, Swap

    Transaction Compliance and Implementation Schedule, and Trade

    Execution Requirement Under the Commodity Exchange Act, 78 FR 33606

    (Jun. 4, 2013).

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

    iv. Swap Trading Relationship Documentation

    CEA section 4s(i) requires each swap dealer and MSP to conform to

    Commission standards for the timely and accurate confirmation,

    processing, netting, documentation and valuation of swaps. Pursuant

    thereto, Commission regulation 23.504(a) requires swap dealers and MSPs

    to ``establish, maintain and enforce written policies and procedures''

    to ensure that the swap dealer or MSP executes written swap trading

    relationship documentation.\382\ Under Commission regulation 23.504(b),

    the swap trading relationship documentation must include, among other

    things: All terms governing the trading relationship between the swap

    dealer or MSP and its counterparty; credit support arrangements;

    investment and re-hypothecation terms for assets used as margin for

    uncleared swaps; and custodial arrangements.\383\ Further, the swap

    trading relationship documentation requirement applies to all swaps

    with registered swap dealers and MSPs. In addition, Commission

    regulation 23.505 requires swap dealers and MSPs to document certain

    information in connection with swaps for which exceptions from required

    clearing are elected.\384\ Swap documentation standards facilitate

    sound risk management and may promote standardization of documents and

    transactions, which are key conditions for central clearing, and lead

    to other operational efficiencies, including improved valuation.

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

    \382\ See also Confirmation, Portfolio Reconciliation, Portfolio

    Compression, and Swap Trading Relationship Documentation

    Requirements for Swap Dealers and Major Swap Participants; 77 FR

    55904 (Sept. 11, 2012) (``Final Confirmation Rules'').

    \383\ The requirement under section 4s(i) relating to trade

    confirmations is a Transaction-Level Requirement. Accordingly,

    Commission regulation 23.504(b)(2) requires a swap dealer's and

    MSP's swap trading relationship documentation to include all

    confirmations of swaps, will apply on a transaction-by-transaction

    basis.

    \384\ See also Final Confirmation Rules, 77 FR 55964.

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

    v. Portfolio Reconciliation and Compression

    CEA section 4s(i) directs the Commission to prescribe regulations

    for the timely and accurate processing and netting of all swaps entered

    into by swap dealers and MSPs. Pursuant to CEA section 4s(i), the

    Commission adopted regulations (23.502 and 23.503), which require swap

    dealers and MSPs to perform portfolio reconciliation and compression,

    respectively, for all swaps.\385\ Portfolio reconciliation is a

    [[Page 45335]]

    post-execution risk management tool to ensure accurate confirmation of

    a swap's terms and to identify and resolve any discrepancies between

    counterparties regarding the valuation of the swap. Portfolio

    compression is a post-trade processing and netting mechanism that is

    intended to ensure timely, accurate processing and netting of

    swaps.\386\ Regulation 23.503 requires all swap dealers and MSPs to

    establish policies and procedures for terminating fully offsetting

    uncleared swaps, when appropriate, and periodically participating in

    bilateral and/or multilateral portfolio compression exercises for

    uncleared swaps with other swap dealers or MSPs or conducted by a third

    party.\387\ The rule also requires policies and procedures for engaging

    in such exercises for uncleared swaps with non-swap dealers and non-

    MSPs upon request. Further, participation in multilateral portfolio

    compression exercises is mandatory for dealer-to-dealer trades.

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

    \385\ See id.

    \386\ For example, the reduced transaction count may decrease

    operational risk as there are fewer trades to maintain, process, and

    settle.

    \387\ See Confirmation, Portfolio Reconciliation, and Portfolio

    Compression Requirements for Swap Dealers and Major Swap

    Participants, 75 FR 81519 (Dec. 28, 2010) (``Confirmation NPRM'').

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

    vi. Real-Time Public Reporting

    Section 2(a)(13) of the CEA directs the Commission to promulgate

    rules providing for the public availability of swap transaction and

    pricing data on a real-time basis.\388\ In accordance with this

    mandate, the Commission promulgated part 43, which provides that all

    ``publicly reportable swap transactions'' must be reported and publicly

    disseminated, and which establishes the method, manner, timing and

    particular transaction and pricing data that must be reported by

    parties to a swap transaction.\389\ Additionally, the Commission

    adopted regulation 23.205, which directs swap dealers and MSPs to

    undertake such reporting and to have the electronic systems and

    procedures necessary to transmit electronically all information and

    data required to be reported in accordance with part 43.\390\ The real-

    time dissemination of swap transaction and pricing data supports the

    fairness and efficiency of markets and increases transparency, which in

    turn improves price discovery and decreases risk (e.g., liquidity

    risk).\391\

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

    \388\ See 7 U.S.C. 2(a)(13). See also Real-Time Public Reporting

    of Swap Transaction Data, 77 FR 1182, 1183 (Jan. 9, 2012) (``Final

    Real-Time Reporting Rule'').

    \389\ Part 43 defines a ``publicly reportable swap transaction''

    as (i) any swap that is an arm's-length transaction between two

    parties that results in a corresponding change in the market risk

    position between the two parties; or (ii) any termination,

    assignment, novation, exchange, transfer, amendment, conveyance, or

    extinguishing of rights or obligations of a swap that changes the

    pricing of a swap. See Final Real-Time Reporting Rule, 77 FR 1182.

    \390\ Final Swap Dealer and MSP Recordkeeping Rule, 77 FR at

    20205.

    \391\ See Final Real-Time Reporting Rule, 77 FR at 1183.

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

    vii. Trade Confirmation

    Section 4s(i) of the CEA \392\ requires that each swap dealer and

    MSP must comply with the Commission's regulations prescribing timely

    and accurate confirmation of swaps. The Commission has adopted

    regulation 23.501, which requires, among other things, a timely and

    accurate confirmation of swap transactions (which includes execution,

    termination, assignment, novation, exchange, transfer, amendment,

    conveyance, or extinguishing of rights or obligations of a swap) among

    swap dealers and MSPs by the end of the first business day following

    the day of execution.\393\ Timely and accurate confirmation of swaps--

    together with portfolio reconciliation and compression--are important

    post-trade processing mechanisms for reducing risks and improving

    operational efficiency.\394\

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

    \392\ 7 U.S.C. 6s(i).

    \393\ See also Final Confirmation Rules, 77 FR 55904.

    \394\ In addition, the Commission notes that regulation

    23.504(b)(2) requires that the swap trading relationship

    documentation of swap dealers and MSPs must include all

    confirmations of swap transactions.

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

    viii. Daily Trading Records

    Pursuant to CEA section 4s(g), the Commission adopted regulation

    23.202, which requires swap dealers and MSPs to maintain daily trading

    records, including records of trade information related to pre-

    execution, execution, and post-execution data that is needed to conduct

    a comprehensive and accurate trade reconstruction for each swap. The

    final rule also requires that records be kept of cash or forward

    transactions used to hedge, mitigate the risk of, or offset any swap

    held by the swap dealer or MSP.\395\ Accurate and timely recordkeeping

    regarding all phases of a swap transaction can serve to greatly enhance

    a firm's internal supervision, as well as the Commission's ability to

    detect and address market or regulatory abuses or evasion.

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

    \395\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR

    20128.

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

    b. Category B: External Business Conduct Standards

    Pursuant to CEA section 4s(h), the Commission has adopted external

    business conduct rules, which establish business conduct standards

    governing the conduct of swap dealers and MSPs in dealing with their

    counterparties in entering into swaps.\396\ Broadly speaking, these

    rules are designed to enhance counterparty protection by significantly

    expanding the obligations of swap dealers and MSPs towards their

    counterparties. Under these rules, swap dealers and MSPs will be

    required, among other things, to conduct due diligence on their

    counterparties to verify 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.

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

    \396\ See 7 U.S.C. 6s(h). See also External Business Conduct

    Rules, 77 FR at 9822-9829.

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

    E. Categorization of Entity-Level and Transaction-Level Requirements

    As noted above, even before the Commission published the Proposed

    Guidance, a number of commenters recommended that the Commission, in

    interpreting the cross-border applicability of the Dodd-Frank Act swaps

    provisions, should distinguish between requirements that apply at an

    entity level (i.e., to the firm as a whole) as compared to those that

    apply at a transactional level (i.e., to the individual swap

    transaction or trading relationship).\397\ The Commission agrees with

    such commenters, and generally expects that it may apply its policies

    differently depending on the category (Entity-Level or Transaction-

    Level) or sub-category (First or Second Category of Entity-Level

    Requirements or Category A or B of the Transaction-Level Requirements)

    into which such requirement falls, subject to its further consideration

    of all of the relevant facts and circumstances.

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

    \397\ See note 351, supra.

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

    After giving further consideration to the categorization in the

    Proposed Guidance, including comments received in this area, this

    Guidance makes a few minor modifications to the proposed categorization

    of Entity-Level and Transaction-Level Requirements, as described below.

    1. Categorization Under the Proposed Guidance

    The Proposed Guidance separated the Entity-Level Requirements into

    two subcategories. The first included capital adequacy, chief

    compliance officer, risk management, and swap data

    [[Page 45336]]

    recordkeeping, all of which relate to risks to a firm as a whole. The

    second proposed subcategory included SDR Reporting and Large Trader

    Reporting, which relate directly to the Commission's market oversight.

    The Proposed Guidance separated the Transaction-Level Requirements

    into two subcategories, ``Category A'' and ``Category B.'' The

    ``Category A'' Transaction-Level Requirements relate to risk mitigation

    and transparency: (1) Clearing and swap processing; (2) margining and

    segregation for uncleared swaps; (3) trade execution; (4) swap trading

    relationship documentation; (5) portfolio reconciliation and

    compression; (6) real-time public reporting; (7) trade confirmation;

    and (8) daily trading records.

    The ``Category B'' Transaction-Level Requirements--the external

    business conduct standards--are those requirements that may not be

    necessary to apply to swaps between non-U.S. persons taking place

    outside the United States. With respect to these swaps, the Commission

    believes that foreign regulators may have a relatively stronger

    supervisory interest in regulating sales practices concerns than the

    Commission.

    2. Comments

    Commenters generally supported the division of Dodd-Frank's swaps

    provisions (and Commission regulations thereunder) into Entity-Level

    and Transaction-Level Requirements.\398\ Certain of these commenters,

    however, made specific recommendations for reclassification of some of

    these Requirements.

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

    \398\ See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug. 27, 2012)

    at 2; Clearing House (Aug. 27, 2012) at 22.

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

    a. Reporting and Trade-Execution Requirements

    With regard to reporting and trade-execution requirements, a number

    of commenters argued that all forms of swaps reporting, including SDR

    Reporting and Large Trader Reporting, should be treated as Transaction-

    Level Requirements and thereby could be eligible for substituted

    compliance for certain transactions with non-U.S. counterparties.\399\

    In their view, SDR Reporting--like real-time public reporting--is

    implemented on a swap-by-swap basis and more closely linked to market

    transparency than risk mitigation. Credit Suisse noted that the

    Commission's bifurcated approach to SDR Reporting and real-time public

    reporting creates unnecessary complications. It argued that both sets

    of reporting requirements should apply to a non-U.S. swap dealer only

    when dealing with U.S. persons (excluding foreign branches of U.S. swap

    dealers).\400\

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

    \399\ See, e.g., SIFMA (Aug. 27, 2012) at A4, A34, A35; Credit

    Suisse (Aug. 27, 2012) at 10; Association for Financial Markets in

    Europe (AFME) (Aug. 24, 2012) at 8-9.

    \400\ Credit Suisse (Aug. 27, 2012) at 10.

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

    ISDA believed that real-time public reporting and trade execution

    should be treated like the external business conduct rules. It argued

    that these rules relate to pre-trade price discovery and market

    structure and client protections.\401\ Similarly, J.P. Morgan commented

    that the real-time public reporting and trade execution requirements

    should not apply to transactions between non-U.S. swap dealers or non-

    U.S. MSPs and non-U.S. counterparties, arguing that these requirements

    do not reduce market risk but rather promote price competition.\402\

    IIB stated that the Commission should treat mandatory trade execution,

    real-time public reporting and daily trading records as ``Category B''

    Transaction-Level Requirements, since these requirements are intended

    to give customers enhanced access to the best pricing and affect not

    only individual counterparties but the overall market.\403\

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

    \401\ ISDA (Aug. 27, 2012) at 11. Similarly, Australian Bankers

    stated that the real-time public reporting and trade execution

    requirements should be treated in the same manner as the external

    business conduct standards and have no application to transactions

    involving a non-U.S. swap dealer and its non-U.S. counterparties.

    Australian Bankers (Aug. 27, 2012) at 5. See also SIFMA (Aug. 27,

    2012) at A37 (stating that real-time public reporting should be

    treated in the same way as external business conduct standards and,

    in particular, should not apply to non-U.S. swap entities or non-

    U.S. branches for transactions with non-U.S. persons).

    \402\ See also The Clearing House (Aug. 27, 2012) at 22 (stating

    that no pre- or post-trade transparency rules or conflict of

    interest rules should apply to transactions with non-U.S.

    counterparties. These rules should be treated similarly to the

    external business conduct rules--excluded from the Transaction-Level

    and Entity-Level categories, and not applied at all to transactions

    between a non-U.S. entity (including a non-U.S. branch of a U.S.

    entity) and its non-U.S. counterparty, regardless of whether that

    counterparty is guaranteed by, or a conduit for, a U.S. person).

    \403\ IIB (Aug. 27, 2012) at 17, 32-33. IIB further stated that

    application of these pre- and post-trade requirements to swaps

    between non-U.S. persons outside the United States would raise

    ``serious, unprecedented'' concerns relating to the sovereignty of

    foreign markets. IIB (Aug. 27, 2012) at 34.

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

    On the other hand, Senator Levin stated that reporting and trade

    execution requirements should be applied broadly to all swaps of non-

    U.S. swap dealers and non-U.S. MSPs that are affiliates of U.S.

    financial institutions, so as to provide transparency regarding their

    swap activities and to protect the U.S. financial system.\404\ He

    stated that standard trade execution helps to ensure that complex swaps

    are properly booked, and reporting discourages ``below-the-radar''

    transactions involving complex swaps.\405\

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

    \404\ Letter from Sen. Levin at 11-12.

    \405\ Id.

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

    b. Swap Trading Relationship Documentation, Portfolio Reconciliation

    and Compression, Daily Trading Records and External Business Conduct

    Standards

    Sumitomo stated that certain Transaction-Level Requirements,

    including swap trading relationship documentation, portfolio

    reconciliation and compression, daily trading records, and external

    business conduct standards, should instead be classified as Entity-

    Level Requirements. It contended that these are not logically linked to

    particular transactions and would be required to be conducted on a

    daily basis per counterparty.\406\ IATP stated that portfolio

    compression and reconciliation requirements are critical to a firm's

    central risk mitigation functions and therefore should be classified as

    Entity-Level Requirements. This commenter also argued that margin,

    segregation and other requirements for swaps that are so designated by

    non-U.S. affiliates of U.S. persons as to be unclearable should be

    regulated under the Entity-Level Requirements.\407\

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

    \406\ Sumitomo (Aug. 24, 2012) at 3.

    \407\ IATP (Aug. 27, 2012) at 7.

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

    Similarly, Senator Levin stated that clearing, margin and portfolio

    reconciliation and compression requirements and external business

    conduct standards should be applied to all swaps of non-U.S. swap

    dealers and non-U.S. MSPs that are affiliates of U.S. financial

    institutions.\408\ In the Senator's view, margin requirements are

    critical safeguards against rapidly increasing losses, portfolio

    reconciliation and compression procedures help to maintain an accurate

    understanding of the size and nature of a firm's swaps positions, and

    external business conduct standards encourage integrity in the swaps

    markets.\409\ Societe Generale also stated that rules relating to

    confirmation processing and portfolio reconciliation and compression

    should be categorized as Entity-Level Requirements, explaining that

    these all relate to the functioning of a swap dealer's ``back office''

    operations and are tied to its trading systems. As a result,

    implementing confirmation rules, for

    [[Page 45337]]

    example, for swaps with U.S. persons only is ``extremely difficult from

    a technological standpoint.'' \410\

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

    \408\ Letter from Sen. Levin at 11-12.

    \409\ Id.

    \410\ SocGen (Aug. 8, 2012) at 6 (stating that banks with a

    centralized booking model will face technological difficulties in

    applying confirmation processing and portfolio reconciliation and

    compression rules only with respect to U.S. persons, and that a

    requirement to apply these rules to all customers (even non-U.S.

    persons) is inconsistent with international comity). See also

    Australian Bankers (Aug. 27, 2012) at 5 (stating that portfolio

    reconciliation and compression requirements should be categorized as

    Entity-Level Requirements, as they are critical to risk mitigation

    and back-office functions).

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

    IIB recommended that the daily trading records requirements

    (Commission regulation 23.202) be categorized as a Category B

    Transaction-Level Requirement. It reasoned that this rule is most

    relevant when a non-U.S. swap dealer or non-U.S. MSP is trading with a

    U.S. person to whom it owes U.S. sales practice obligations and for

    whom the Commission's interest in addressing market abuses is highest.

    It also noted that the obligation to make and retain records of pre-

    execution oral conversations, a principal element of the rule, is most

    likely to give rise to conflicts with foreign privacy laws.\411\

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

    \411\ IIB (Aug. 27, 2012) at 32-33.

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

    c. Internal Conflicts of Interest Requirement

    IIB noted that the internal conflicts of interest requirement

    (Commission regulation 23.605) is categorized as an Entity-Level

    Requirement in the Proposed Guidance. It stated that internal research

    conflicts of interest procedures are intended to promote the integrity

    of research reports to customers, and that internal clearing conflicts

    of interest procedures are intended to promote client access to better

    pricing on execution and clearing. As a result, IIB views the

    Commission's interest in applying these requirements to non-U.S.

    clients as minimal and recommends that the internal conflicts of

    interest requirement be categorized as a new ``Category B'' Entity-

    Level Requirement.\412\

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

    \412\ IIB (Aug. 27, 2012) at 32. This would render internal

    conflicts of interest requirements applicable only in connection

    with personnel of its research department or clearing unit preparing

    research reports for use with, or providing clearing services to,

    respectively, U.S. persons.

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

    d. Position Limits and Anti-Manipulation Rules

    SIFMA stated that position limits and anti-manipulation rules,

    which were not addressed in the Proposed Guidance, should be

    categorized as Transaction-Level Requirements and, therefore, be

    eligible for relief in some circumstances. They argued that these rules

    have a close nexus to market transparency, as opposed to risk

    mitigation of a firm's failure.\413\

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

    \413\ SIFMA (Aug. 27, 2012) at A35-36.

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

    3. Commission Guidance

    In general, the Commission would apply the Dodd-Frank provisions

    differently depending on the category (Entity-Level or Transaction-

    Level) or sub-category (First or Second Category of Entity-Level

    Requirements or Category A or B of the Transaction-Level Requirements)

    into which such requirement falls. Therefore, the Commission has

    carefully reviewed comments on the classification of the Entity-Level

    Requirements and Transaction-Level Requirements, as well as comments

    regarding whether and how Entity-Level and Transaction-Level

    Requirements should apply to swaps between various types of

    counterparties, and under what circumstances the Commission's policy

    should contemplate that various swaps should generally be eligible for

    substituted compliance, or provide that certain of the Commission's

    requirements would generally not apply.

    After careful consideration, the Commission would generally treat

    swaps requirements as Entity-Level Requirements and Transaction-Level

    Requirements largely in accordance with the Proposed Guidance, with

    certain minor modifications described below.

    a. Entity-Level Requirements

    Consistent with CEA section 2(i), the Commission would treat the

    following requirements as Entity-Level Requirements, as proposed:

    Capital adequacy, chief compliance officer, risk management, swap data

    recordkeeping, SDR Reporting, and Large Trader Reporting.

    At the core of a robust internal risk controls system is the firm's

    capital--and particularly, how the firm identifies and manages its risk

    exposure arising from its portfolio of activities.\414\ Equally

    foundational to the financial integrity of a firm is an effective

    internal risk management process, which must be comprehensive in scope

    and reliant on timely and accurate data regarding its swap activities.

    To be effective, such a system must have a strong and independent

    compliance function. These internal controls-related requirements--

    namely, the requirements related to chief compliance officer, risk

    management, swap data recordkeeping--are designed to serve that end.

    Given their functions, the Commission's policy is that these

    requirements should be applied on a firm-wide basis to effectively

    address risks to the swap dealer or MSP as a whole, and should be

    classified as Entity-Level Requirements.

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

    \414\ By way of illustration, consistent with the purpose of the

    capital requirement, which is intended to reduce the likelihood and

    cost of a swap dealer's default by requiring a financial cushion, a

    swap dealer's or MSP's capital requirements would be set on the

    basis of its overall portfolio of assets and liabilities.

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

    SDR Reporting and Large Trader Reporting relate more closely to

    market transparency and to the Commission's market surveillance

    program. Among other things, data reported to SDRs will enhance the

    Commission's understanding of concentrations of risks within the

    market, as well as promote a more effective monitoring of risk profiles

    of market participants in the swaps market. Large Trader Reporting,

    along with an analogous reporting system for futures contracts, is

    essential to the Commission's ability to conduct effective surveillance

    of markets in U.S. physical commodity futures and economically

    equivalent swaps. Given the functions of these reporting requirements,

    the Commission's view is that each requirement generally should be

    applied across swaps, irrespective of the counterparty or the location

    of the swap, in order to ensure that the Commission has a comprehensive

    and accurate picture of market activities. Otherwise, the intended

    value of these requirements would be significantly compromised, if not

    undermined. Therefore, the Commission's policy is to generally treat

    SDR Reporting and Large Trader Reporting as Entity-Level Requirements.

    The Commission did not address in the Proposed Guidance whether

    position limits and anti-manipulation provisions should fall in the

    Entity-Level or Transaction-Level Requirements category. It is the

    Commission's view that these provisions relate more to market

    integrity, as opposed to the financial integrity of a firm, and it is

    essential that they apply regardless of the counterparty's status (U.S.

    person or not) in order to fully achieve the underlying purpose of

    these respective provisions. Accordingly, these requirements are

    outside the scope of this Guidance. However, the monitoring of position

    limits under Commission regulation 23.601 is included in the Entity-

    Level Requirements under this Guidance.

    After considering the input of market participants and others

    through the comment process, and giving further consideration to how

    the language in CEA section 2(i) should be interpreted for purposes of

    applying the Entity-

    [[Page 45338]]

    Level Requirements and permitting substituted compliance, the

    Commission's policy is to treat the Entity-Level Requirements in

    subcategories largely as proposed.

    As explained above, Entity-Level Requirements ensure that

    registered swap dealers and MSPs implement and maintain a comprehensive

    and robust system of internal controls to ensure the financial

    integrity of the firm, and in turn, the protection of the financial

    system. In this respect, the Commission has strong supervisory

    interests in applying the same rigorous standards, or comparable and

    comprehensive standards, to non-U.S. swap dealers and non-U.S. MSPs

    whose swap activities or positions are substantial enough to require

    registration under the CEA. Requiring such swap dealers and MSPs to

    rigorously monitor and address the risks they incur as part of their

    day-to-day businesses would lower the registrants' risk of default--and

    ultimately protect the public and the financial system.

    Therefore, the Commission contemplates that non-U.S. swap dealers

    and non-U.S. MSPs will comply with all of the First Category of Entity-

    Level Requirements. In addition, consistent with principles of

    international comity, substituted compliance may be available for these

    Entity-Level Requirements in certain circumstances, as explained

    further below. In contrast, with regard to Entity-Level Requirements in

    the Second Category, substituted compliance should generally be

    available only where the counterparty is a non-U.S. person.\415\

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

    \415\ In addition, as noted in section G below, reflecting its

    interpretation of CEA section 2(i), the Commission generally

    contemplates that U.S. swap dealers and MSPs would comply in full

    with the Entity-Level Requirements (regardless of whether the

    Entity-Level Requirements are classified as being in the First

    Category or Second Category), without substituted compliance

    available. This interpretation also applies to swaps with U.S. swap

    dealers or U.S. MSPs that are affiliates of non-U.S. persons.

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

    i. The First Category--Capital Adequacy, Chief Compliance Officer, Risk

    Management, and Swap Data Recordkeeping (Except for Certain

    Recordkeeping Requirements)

    The Commission's policy generally is to treat the requirements

    related to capital adequacy, chief compliance officer, risk management,

    and swap data recordkeeping (except swap data recordkeeping relating to

    complaints and marketing and sales materials under Commission

    regulations 23.201(b)(3) and 23.201(b)(4), respectively) in the First

    Category. These requirements address and manage risks that arise from a

    firm's operation as a swap dealer or MSP. Collectively, they constitute

    a firm's first line of defense against financial, operational, and

    compliance risks that could lead to a firm's default.

    The First Category is identical to the first subcategory proposed

    by the Commission in the Proposed Guidance, except that the

    Commission's policy is to treat swap data recordkeeping under part 43

    and part 46 of the Commission's regulations and swap data recordkeeping

    related to complaints and marketing and sales materials under

    Commission regulations 23.201(b)(3) and 23.201(b)(4) as part of the

    ``Second Category'' of Entity-Level Requirements. As noted above, for

    Entity-Level Requirements in the First Category, substituted compliance

    generally would be available for a non-U.S. swap dealer or non-U.S. MSP

    (including one that is an affiliate of a U.S. person) regardless of

    whether the counterparty is a U.S. person or a non-U.S. person.\416\ In

    contrast, for Entity-Level Requirements in the Second Category,

    substituted compliance generally would be available for a non-U.S. swap

    dealer or MSP only where the counterparty is a non-U.S. person.

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

    \416\ As explained in section G below, the Commission's policy

    is that where a swap dealer or MSP is a U.S. person, all of the

    entity-level requirements would generally apply in full (without

    substituted compliance available), regardless of the type of

    counterparty.

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

    ii. The Second Category--SDR Reporting, Certain Swap Data Recordkeeping

    Requirements and Large Trader Reporting

    The Commission's policy retains SDR Reporting in the Second

    Category, as proposed. SDR Reporting furthers the goals of the Dodd-

    Frank Act to reduce systemic risk, increase transparency and promote

    market integrity. Specifically, data reported to SDRs under the SDR

    Reporting rules provide the Commission with information necessary to

    better understand and monitor concentrations of risk, as well as risk

    profiles of individual market participants for cleared and uncleared

    swaps.

    The Commission believes that retaining SDR Reporting in the Second

    Category would be appropriate. Consistent with section 2(i), the

    Commission's policy is that U.S. swap dealers or MSPs (including those

    that are affiliates of a non-U.S. person) generally should comply in

    full with all of the Entity-Level Requirements, including SDR

    Reporting. Further, non-U.S. swap dealers and non-U.S. MSPs (including

    those that are affiliates of a U.S. person), generally should comply

    with SDR Reporting, and substituted compliance should be available (to

    the extent applicable) only where the swap counterparty is a non-U.S.

    person, provided that the Commission has direct access (including

    electronic access) to the relevant swap data that is stored at the

    foreign trade repository.\417\

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

    \417\ See section G, infra, for additional information on the

    application of the Entity-Level Requirements.

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

    The Commission contemplates treating swap data recordkeeping

    related to complaints and marketing and sales materials under

    Commission regulations 23.201(b)(3) and 23.201(b)(4) as part of the

    ``Second Category'' because, in the Commission's view, non-U.S. swap

    dealers and non-U.S. MSPs (including those that are affiliates of a

    U.S. person) generally should comply with SDR Reporting. Further,

    substituted compliance should be available for non-U.S. swap dealers or

    MSPs, to the extent applicable, only where the swap counterparty is a

    non-U.S. person.

    Large Trader Reporting furthers the goals of the Dodd-Frank Act to

    reduce systemic risk, increase transparency and promote market

    integrity. Large Trader Reporting, in conjunction with the Commission's

    large trader reporting system for futures contracts, is essential to

    the Commission's ability to conduct effective surveillance of markets

    in U.S. physical commodity futures and economically equivalent swaps.

    Given the regulatory function of Large Trader Reporting, the

    Commission's policy is to apply these requirements to non-U.S. persons

    whose trading falls within its scope to the same extent as U.S.

    persons. Accordingly, as discussed further in section G below, the

    Commission would not recognize substituted compliance in place of

    compliance with Large Trader Reporting.

    b. Transaction-Level Requirements

    As previously noted, whether a particular Dodd-Frank Act

    requirement should apply on a transaction-by-transaction basis in the

    context of cross-border activity for purposes of section 2(i) of the

    CEA requires the exercise of some degree of judgment. Nevertheless,

    bearing in mind principles of international comity, the Commission

    anticipates that, in general, the Transaction-Level Requirements may be

    applied on a transaction-by-transaction basis.

    The Commission's policy contemplates treating as Transaction-Level

    Requirements all of the requirements that the Commission proposed to

    include. Thus, the

    [[Page 45339]]

    Transaction-Level Requirements are: (1) Required clearing and swap

    processing; (2) margining and segregation for uncleared swaps; (3)

    trade execution; (4) swap trading relationship documentation; (5)

    portfolio reconciliation and compression; (6) real-time public

    reporting; (7) trade confirmation; (8) daily trading records; and (9)

    external business conduct standards.

    The Commission contemplates treating the Transaction-Level

    Requirements in two subcategories, designated as Category A and

    Category B, largely as proposed. Generally, these categories reflect

    how the Commission generally contemplates applying various Transaction-

    Level Requirements to various types of counterparties, and in guiding

    the consideration of when substituted compliance will be available

    under this Guidance.\418\

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

    \418\ Substituted compliance is discussed in section F, infra.

    The application of the Category A Transaction-Level Requirements and

    eligibility for substituted compliance is discussed in section

    IV.G.4. The application of the Category B Transaction-Level

    Requirements is discussed in section IV.G.5. The application of

    certain CEA provisions and certain Entity and Transaction-Level

    Requirements to non-registrants is discussed in section IV.H.

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

    i. The Category A Transaction-Level Requirements

    The ``Category A'' Transaction-Level Requirements relate to risk

    mitigation and transparency, and included the first eight Transaction-

    Level requirements referenced above.

    The Commission does not believe it would be appropriate to treat,

    as suggested by commenters, swap trading relationship documentation,

    portfolio reconciliation and compression, daily trading records and

    external business conduct standards as Entity-Level Requirements. The

    Commission recognizes that firms may find a certain degree of

    operational efficiency in applying these requirements on a firm-wide

    basis. On the other hand, the Commission expects that treatment of

    these as Transaction-Level Requirements should allow for greater

    flexibility in terms of whether and how Dodd-Frank requirements apply.

    For example, under the Proposed Guidance, the Commission would not

    interpret section 2(i) generally to apply the Dodd-Frank's clearing

    requirement to a swap between a non-U.S. swap dealer and a non-U.S.

    counterparty. In the Commission's judgment, allowing swap trading

    relationship documentation, portfolio reconciliation and compression

    and external business conduct standards to be applied on a transaction

    basis would not undermine the underlying regulatory objectives and,

    yet, will give due recognition to the home jurisdiction's supervisory

    interest. Consistent with this rationale, the Commission would treat

    margin, segregation, and related requirements as Transaction-Level

    Requirements.

    The Commission also is retaining the trade execution requirement,

    as proposed, in Category A. The trade execution requirement is intended

    to bring the trading of mandatorily cleared swaps that are made

    available to trade onto regulated exchanges or execution facilities. By

    requiring the trades of mandatorily cleared swaps that are made

    available to trade to be executed on an exchange or an execution

    facility--each with its attendant pre- and post-trade transparency and

    safeguards to ensure market integrity--the trade execution requirement

    furthers the statutory goals of promoting financial stability, market

    efficiency and enhanced transparency.

    The Commission's policy will treat real-time public reporting as a

    Transaction-Level Requirement. However, for the reasons discussed

    below, the Commission clarifies that it does not intend that its policy

    would preclude a market participant from applying real-time public

    reporting with respect to swap transactions that are not necessarily

    subject to this Transaction-Level Requirement if doing so would be more

    efficient for the market participant.

    Part 43 of the Commission's regulations and part 45 of the

    Commission's regulations, respectively, prescribe the data fields that

    are to be included in real-time public reporting and SDR Reporting

    reports with respect to a reportable swap transaction.\419\

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

    \419\ See generally Final Real-Time Reporting Rule, 77 FR at

    1250-1266; Swap Data Recordkeeping and Reporting Requirements, 77 FR

    2136, 2210-2224 (Jan. 13, 2012) (``Final Data Rules''). Part 43

    applies to reports of swap transaction and pricing data to a

    registered SDR, in order that the SDR can publicly disseminate such

    data pursuant to part 43 and Appendix A to part 43 as soon as

    technologically practicable after execution of the publicly

    reportable swap. Final Real-Time Reporting Rule, 77 FR 1249. Under

    part 45, counterparties report creation data for the swap--including

    all primary economic terms (``PET'') data and confirmation data--as

    well as continuation data also as soon as technologically

    practicable. See Final Data Rules, 77 FR at 2149-2151, 2199-2202.

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

    The Commission understands from commenters that in certain

    circumstances, reporting part 43 and part 45 data for the same swap

    transaction in separate reports (``two stream reporting'') could

    accommodate market participants that have a transactional structure

    and/or systems that are designed or suited to send separate

    submissions.\420\ However, the Commission also recognizes that in other

    circumstances, permitting market participants to include part 43 and

    part 45 data for the same swap transaction in a single report (``single

    stream reporting'') could optimize efficiency.\421\

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

    \420\ See Final Real-Time Reporting Rule, 77 FR 1237 (Jan. 9,

    2012) (noting that `` . . . coordination is expected to reduce costs

    by allowing reporting parties, SEFs and DCMs to send one set of data

    to an SDR for the purpose of satisfying the requirements of both

    rules.''); id. at 1210 (noting that '' . . . although reporting

    parties may use the same data stream for reporting regulatory data

    and real-time data, Commission regulation 43.4(d)(2) clarifies the

    intent of the Proposing Release: The reporting requirements for

    SEFs, DCMs and reporting parties for real-time public reporting

    purposes are separate from the requirement to report to an SDR for

    regulatory reporting purposes.'').

    \421\ Final Data Rules, 77 FR 2150, 2182. If SDR Reporting and

    real-time public reporting do not both apply to a swap transaction,

    market participants that have connected to registered SDRs and

    employed single stream reporting infrastructure and systems may be

    required to change such systems to bifurcate the part 43 and part 45

    data sets, which are generated and transmitted in a single report.

    The Commission understands that such bifurcation could occur due to

    the manner with which Transaction-Level and Entity-Level

    requirements apply to the particular swap transaction.

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

    The Commission anticipated that reporting parties might elect to

    use one data reporting stream for both SDR Reporting and real-time

    public reporting under part 45 and part 43 respectively, to reduce

    costs and optimize efficiency, and many market participants have chosen

    to build and integrate single stream reporting systems.\422\ The

    Commission is aware that, as commenters have stated, categorizing SDR

    Reporting under part 45 as an Entity-Level requirement and real-time

    public reporting under part 43 as a Transaction-Level requirement

    could, in certain circumstances, negate the benefits of single stream

    reporting, and could present challenges to market participants who have

    built single stream reporting infrastructure.

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

    \422\ Real-Time Public Reporting of Swap Transaction Data, 77 FR

    1217. See also Final Data Rules, 77 FR at 2182.

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

    In view of these concerns, the Commission would, in general, treat

    real-time public reporting as a Transaction-Level Requirement. However,

    the Commission does not intend that its policy would preclude a market

    participant from applying real-time public reporting with respect to

    swap transactions that are not necessarily subject to this Transaction-

    Level Requirement if, for example, this would allow the market

    participant to realize efficiency gains from single stream reporting or

    otherwise as discussed above.

    [[Page 45340]]

    ii. The Category B Transaction-Level Requirements (External Business

    Conduct Standards)

    As proposed, the Commission's policy will treat external business

    conduct standards as a ``Category B'' Transaction-Level Requirement for

    purposes of the general application of this Transaction-Level

    Requirement to various categories of swap counterparties.\423\ External

    business conduct standards are oriented toward customer-protection.

    Among other obligations, the external business conduct rules generally

    require registrants to conduct due diligence on their counterparties to

    verify eligibility to trade (including eligible contract participant

    status), refrain from engaging in abusive market practices, 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. In the Commission's

    view, such rules have an attenuated link to, and are distinguishable

    from, market-oriented protections such as the trade execution mandate.

    Additionally, the Commission believes that the foreign jurisdictions in

    which non-U.S. persons are located are likely to have a significant

    interest in the type of business conduct standards that would be

    applicable to transactions with such non-U.S. persons within their

    jurisdiction. Because the Commission believes that foreign regulators

    may have a relatively stronger supervisory interest in regulating sales

    practices concerns related to swaps between non-U.S. persons taking

    place outside the United States than the Commission, the Commission

    believes that generally it is appropriate that the business conducts

    standards of the home jurisdiction, rather than those established by

    the Commission, apply to such transactions between non-U.S. persons.

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

    \423\ The application of the Category B Transaction-Level

    Requirements to swap dealers and MSPs is discussed in section

    IV.G.5.

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

    After reviewing the comments on internal conflicts of interest

    procedures, the Commission has given consideration to whether to treat

    internal conflicts of interest rules relating to clearing under

    Commission regulation 23.605 under Category B of the Transaction-Level

    Requirements. The Commission considered the view of commenters that

    stated that this particular requirement is generally more akin to the

    external business conduct standards and, as such, can reasonably be

    expected to be narrowly targeted to apply only with respect to U.S.

    clients, without undermining the regulatory benefits associated with

    the rule. However, because the Commission believes that internal

    conflicts of interest related to clearing should be applied on a firm-

    wide basis, the Commission's policy is that this requirement generally

    should be treated as an Entity-Level Requirement as proposed.

    The Commission also has considered whether internal conflicts of

    interest procedures relating to research should be treated as Entity-

    Level Requirements as proposed. These informational and supervisory

    firewalls are designed to ensure that research reports are free from

    undue influence by the firm's trading personnel. As a practical matter,

    it is generally difficult, if not impossible, to establish and maintain

    such safeguards on a transaction or client basis. Because the

    Commission believes that these firewalls, in order to achieve their

    regulatory purpose, should be applied on a firm-wide basis, the

    Commission's policy is that internal conflicts of interest procedures

    relating to research generally should be treated as Entity-Level

    Requirements.

    F. Substituted Compliance

    1. Proposed Guidance

    In the Proposed Guidance, the Commission stated that a cross-border

    policy that allows for flexibility in the application of the CEA while

    ensuring the high level of regulation contemplated by the Dodd-Frank

    Act and avoiding potential conflicts between U.S. regulations and

    foreign law is consistent with principles of international comity. To

    that end, the Commission set forth a general framework for substituted

    compliance. Under this ``substituted compliance'' regime, the

    Commission may determine that certain laws and regulations of a foreign

    jurisdiction are comparable to and as comprehensive as a corresponding

    category of U.S. laws and regulations. If the Commission makes such a

    determination, then an entity or transaction in that foreign

    jurisdiction that is subject to the category of U.S. laws and

    regulations for which comparability is determined will be deemed to be

    in compliance therewith if that entity or transaction complies with the

    corresponding foreign laws and regulations.

    2. Comments

    Several commenters urged the Commission to use a principles-based

    approach and to review the legal regime as a whole, rather than

    evaluate comparability on an issue-by-issue basis.\424\ A commenter

    supported the Commission's view that comparable does not mean

    identical, and urged the Commission to place an emphasis on shared

    principles and mutual recognition.\425\

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

    \424\ See, e.g., SIFMA, (Aug. 27, 2012) at 3, A46; State Street

    (Aug. 27, 2012) at 3; Global Financial Markets Association

    (``GFMA'') (Aug. 27, 2012) at 2; Association for Financial Markets

    in Europe (``AFME'') (Aug. 27, 2012) at 2; J.P. Morgan (Aug. 13,

    2012) at 5; Australian Bankers (Aug. 27, 2012) at 2; Japanese

    Bankers Association (Aug. 27, 2012) at 3; Comissao de Valores

    Mobiliarios (``CVM'') (Aug. 27, 2012) at 2.

    \425\ See, e.g., FSR (Aug. 27, 2012) at 6-7.

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

    Some commenters stated that foreign jurisdiction laws and

    regulations are unlikely to be identical to those in the United States

    and that they thus support the Commission's proposed ``outcomes based

    approach'' to evaluating whether foreign regulatory requirements meet

    Dodd-Frank normative objectives.\426\ One of these commenters stated

    that in some cases foreign regulators would be faced with several

    challenges, noting that in ``light touch'' or principle-based

    regulatory jurisdictions, commodity derivatives data collection and

    surveillance is weak or even non-existent, as is concomitant

    enforcement.\427\

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

    \426\ See IATP (Aug. 27, 2012) at 11-12; IIAC (Aug. 27, 2012) at

    2, 9-11.

    \427\ See IATP (Aug. 27, 2012) at 11-12.

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

    Commenters stressed the need to avoid imposing duplicative or

    conflicting regulatory requirements which could result in unnecessary

    costs.\428\ Commenters urged the Commission to engage in a dialogue

    with other regulators \429\ and to build on work done at the

    international level.\430\

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

    \428\ See, e.g., ICI (Aug. 23, 2012) at 7-11; Capital Markets

    (Aug. 24, 2012) at 5-6.

    \429\ See Deutsche Bank, Aug. 27, 2012 at 5-6; Lloyds (Aug. 24,

    2012) at 2.

    \430\ See Australian Securities and Investments Commission; Hong

    Kong Monetary Authority; Monetary Authority of Singapore; Reserve

    Bank of Australia; Securities and Futures Commission, Hong Kong

    (Aug. 27, 2012) at 3-4.

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

    Some commenters expressed the view that substituted compliance

    should not require Commission approval if the applicable foreign

    regulator promulgates applicable regulations in accordance with G20

    commitments, or that a presumption that foreign rules are comparable

    should apply if the rules are consistent with G20 principles.\431\ Some

    commenters urged the Commission to take what they described as an

    [[Page 45341]]

    ``equivalence approach'' similar to EMIR in the European Union,\432\ by

    making substituted compliance determinations based on recognition of

    ``equivalent'' jurisdictions and not of individual firms.\433\ The

    European Commission stated that EU firms dealing with U.S.

    counterparties would always be subject to the Dodd-Frank Act, while

    U.S. firms dealing with EU counterparties could not be subject to EU

    rules if the EU decides to grant equivalence to the United States. The

    European Commission stated that it is difficult to understand why

    comparable foreign legislation in the EU should not be sufficient.\434\

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

    \431\ See CEWG (Aug. 27, 2012) at 7; CVM (Aug. 27, 2012) at 2;

    ICI (Aug. 23, 2012) at 9; IIB (Aug. 27, 2012) at 38-39; Hong Kong

    Banks (Aug. 27, 2012) at 2, 10, 14, 15; Korea Federation of Banks

    (``Korea Banks'') (Aug. 27, 2012) at 2-3; The Clearing House (Aug.

    27, 2012) at 3-4, 31-35.

    \432\ See Australian Securities and Investments Commission; Hong

    Kong Monetary Authority; Monetary Authority of Singapore; Reserve

    Bank of Australia; Securities and Futures Commission, Hong Kong

    (Aug. 27, 2012) at 2-3.

    \433\ See Deutsche Bank (Aug. 27, 2012) at 6.

    \434\ See European Commission (Aug. 24, 2012) at 4.

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

    Commenters, including foreign regulators, requested that the

    Commission more clearly outline the circumstances under which a

    particular foreign jurisdiction would be acceptable for substituted

    compliance purposes.\435\ Commenters stressed the need for

    comparability determinations to be transparent.\436\ One commenter

    stated that comparability determinations should allow for notice and

    comment.\437\ Another commenter stated that there should be a procedure

    for appeals, that memoranda of understanding (``MOUs'') should form the

    framework for comparability determinations, and that the Commission

    should develop a process for periodic review of comparability

    determinations.\438\

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

    \435\ See, e.g., Financial Services Authority (United Kingdom)

    (Aug. 24, 2012) at 3.

    \436\ See IIB (Aug. 27, 2012) at 40; American Bankers

    Association, (Aug. 27, 2012) at 2; IATP (Aug. 27, 2012) at 11.

    \437\ See American Bankers Association (Aug. 27, 2012) at 2.

    \438\ See IATP (Aug. 27, 2012) at 11-13.

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

    Some commenters found the Commission's proposed approach to

    substituted compliance too narrow or limiting. The European Securities

    and Markets Authority (``ESMA'') stated that when equivalence or

    substituted compliance is granted for an entire jurisdiction,

    registration should not be a prerequisite before substituted compliance

    can apply. ESMA also stated that the Commission's approach is quite

    limited because it is applied not uniformly but ``chapter by chapter,''

    which ESMA represents contradicts what they described as EMIR's

    concepts of equivalence and mutual recognition.\439\ Japan FSA and Bank

    of Japan expressed concern that the scope of application of substituted

    compliance is too narrow and requested that it be extended to avoid

    overlap or conflict with foreign regulations.\440\ Other commenters

    stated that the approach being taken toward substituted compliance was

    narrow and not in accordance with comity.\441\ However, another

    commenter stated that substituted compliance procedures are an inferior

    option to direct compliance with Commission regulations. This commenter

    stated that the Commission does not violate principles of international

    comity by extending the cross-border application to cover how ``U.S.

    persons'' operate in foreign jurisdictions, particularly when those

    jurisdictions lack the laws and/or regulatory capacity to prevent

    damage to the U.S. economy resulting from counterparty defaults

    originating in foreign affiliate swaps.\442\

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

    \439\ See ESMA (Aug. 27, 2012) at 3-4.

    \440\ See Japan FSA and Bank of Japan (Aug. 13, 2012) at 2-3.

    \441\ See SIFMA (Aug. 27, 2012) at 3, A46; Futures Industry

    Association (FIA), (Aug. 27, 2012) at 5-7.

    \442\ See IATP (Aug. 27, 2012) at 2-3.

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

    Another commenter stated that substituted compliance should be

    expanded to a broader category of swap transactions, specifically, to

    the trade execution requirement.\443\

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

    \443\ See Tradeweb Markets LLC (Aug. 27, 2012) at 4.

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

    Some commenters urged the Commission to clarify which law is

    ``substituted'' for U.S. law and allow swap entities to determine which

    jurisdictions' laws apply where it could be more than one.\444\

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

    \444\ See SIFMA (Aug. 27, 2012) at A48; Deutsche Bank (Aug. 27,

    2012) at 6.

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

    Some commenters expressed concern regarding the timing of reform in

    other jurisdictions, urging the Commission to delay substituted

    compliance implementation or provide a grace period for these

    jurisdictions.\445\

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

    \445\ See, e.g., CFA Institute (Aug. 27, 2012) at 3; Financial

    Services Authority (United Kingdom) (Aug. 24, 2012) at 3; Barclays

    (Aug. 27, 2012) at 2; ICAP Group (Aug. 27, 2012) at 2; IIB (Aug. 27,

    2012) at 39.

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

    Some commenters urged the Commission not to allow substituted

    compliance or to use it only sparingly, pointing out the risks of

    substituted compliance by the Commission. For example, one commenter

    contended that substituted compliance fails to ensure rigorous

    regulation of derivatives markets and so should not be allowed for

    foreign subsidiaries of U.S. parents as these subsidiaries pose a

    severe risk to the U.S. economy.\446\ This commenter also stated that

    substituted compliance should only be used in ``rare circumstances''

    and only after such rules in foreign jurisdictions have come into

    existence,\447\ stating that the Commission ``cannot, through its use

    of comity, consider other countries' interests to the total derogation

    of Congress's intent to protect U.S. taxpayers.'' \448\ Citizen and

    taxpayer groups contended that substituted compliance should not be

    permitted when the swap transaction is with a U.S. counterparty,\449\

    including subsidiaries of a U.S. person.\450\

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

    \446\ See Greenberger (Aug. 27, 2012) at 20-24.

    \447\ See Greenberger (Aug. 27, 2012) at 3, 19, 22-23.

    \448\ See Greenberger (Aug. 27, 2012) at 19.

    \449\ See Public Citizen (Aug. 27, 2012) at 13, 16, 19.

    \450\ See Better Markets (Aug. 27, 2012) at 10.

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

    Commenters also urged that, to the extent substituted compliance is

    permitted, a rigorous approach be applied, including examining the

    history of enforcement in a foreign jurisdiction, the ability to revoke

    substituted compliance where necessary, the ability of the public to

    comment on substituted compliance applications, periodic review of the

    application of substituted compliance and a requirement that the

    applicant immediately inform the Commission of any material changes in

    its jurisdiction.\451\

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

    \451\ See, e.g., Better Markets (Aug. 27, 2012) at 10-11; Public

    Citizen (Aug. 27, 2012) at 13, 16, 19.

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

    With regard to SDR Reporting, some commenters disagreed with the

    Commission that a foreign trade repository must allow Commission access

    to information to be considered comparable, arguing that comparability

    should be based solely on the foreign jurisdiction's regulatory

    regime,\452\ or that access is unnecessary where swaps are between non-

    U.S. counterparties.\453\ In contrast, another commenter stated that

    open access to foreign swap data repositories is necessary to ensure

    that foreign surveillance of transaction-level swaps data flow

    requirements is comparable and comprehensive.\454\

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

    \452\ See Deutsche Bank (Aug. 27, 2012) at 6.

    \453\ See Japanese Bankers Association (Aug. 27, 2012) at 10.

    \454\ See IATP (Aug. 27, 2012) at 6-7.

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

    International regulators have continued to express commitment to

    the Pittsburgh G20 reforms of OTC derivatives regulation, including a

    commitment to harmonize cross-border regulations and allow for

    substituted compliance or equivalence arrangements when appropriate.

    However, no international consensus has emerged regarding the

    implementation of such reforms or the

    [[Page 45342]]

    circumstances under which substituted compliance should be permitted.

    In an April 18, 2013 letter to Treasury Secretary Lew, nine

    international financial regulators expressed concern about

    fragmentation in the OTC derivatives market as a result of lack of

    regulatory coordination, noting that ``[a]n approach in which

    jurisdictions require that their own domestic regulatory rules be

    applied to their firms' derivatives transactions taking place in

    broadly equivalent regulatory regimes abroad is not sustainable.''

    \455\ The letter expressed concern that such an approach would lead the

    global derivatives market to ``recede into localized and less efficient

    structures, impairing the ability of business across the globe to

    manage risk.'' The letter also suggested, among other things, that

    cross-border rules be adopted that would not result in duplicative or

    conflicting requirements through substituted compliance or equivalence

    arrangements, and that a reasonable transition period and measures be

    provided to foreign entities to ensure a smooth transition.\456\

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

    \455\ See letter to Treasury Secretary Lew regarding cross-

    border OTC derivatives regulation from Deputy Prime Minister Taro

    Aso, Minister of State for Finance Services, Government of Japan;

    Commissioner Michel Barnier, Commissioner for Internal Markets and

    Services, European Commission; Minister Pravin Gordhan, Minister of

    Finance, Government of South Africa; Minister Guido Mantega,

    Ministry of Finance, Government of Brazil; Minister Pierre

    Moscovici, Ministry of Finance, Government of France; Chancellor

    George Osborne, Chancellor of the Exchequer, Government of the

    United Kingdom; Minister Wolfgang Sch[auml]uble, Ministry of

    Finance, Government of Germany; Minister Anton Siluanov, Minister of

    Finance, Government of Russia; and Minister Eveline Widmer-Schlumpf,

    Finance Minister, Government of Switzerland (``Nine International

    Regulators'') (Apr. 18, 2013). See also letter to Treasury Secretary

    Lew from Sens. Kirsten E. Gillibrand, Thomas R. Carper, Kay R.

    Hagan, Heidi Heitkamp, Michael F. Bennet, and Charles E. Schumer

    (June 26, 2013) (advocating domestic and international harmonization

    of derivatives regulation).

    \456\ Id.

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

    A group of 25 organizations from numerous nations responded by

    asserting that the letter to Treasury Secretary Lew ``appears to place

    a higher priority on preventing `fragmentation' in global financial

    markets than on effective management of global financial risks.'' \457\

    Emphasizing that the global financial crisis of 2008-2009 caused ``mass

    unemployment, home foreclosures, and cutbacks in key public services,''

    these organizations argued that ``[s]ince G-20 nations have not yet met

    their 2009 Pittsburgh commitment to put in place effective derivatives

    regulation by the close of 2012, the first priority should be to

    complete this crucial element of financial oversight.'' \458\ Although

    these organizations recognized the challenge of effectively regulating

    the global financial markets, they asserted that ``the path to

    addressing these challenges does not lie in further delays that prevent

    any nation from acting until every jurisdiction globally has agreed on

    a similar approach.'' \459\ Instead, these organizations urged the

    international community ``to coordinate around a shared high level of

    financial oversight, and in the meantime to support the efforts of

    individual nations to ensure that the scope of their financial

    regulation properly captures all transactions, wherever conducted, that

    affect the safety and stability of each national financial system.''

    \460\

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

    \457\ See letter to Nine International Regulators from ActionAid

    International; AFL-CIO (American Federation of Labor And Congress of

    Industrial Organizations); Americans for Financial Reform; Berne

    Declaration; Center of Concern; The Centre for Research on

    Multinational Corporations (SOMO); Centre national de

    coop[eacute]ration au d[eacute]veloppement, CNCD-11.11.11; CGIL--

    Italian General Confederation of Labour; Consumer Federation of

    America; Global Progressive Forum; IBON International; The

    International Institute for Monetary Transformation; Institute for

    Agriculture and Trade Policy (IATP); Institute for Policy Studies,

    Global Economy Project; Jubilee Debt Campaign, UK; Kairos Europe

    (Brussels); Missionary Oblates--USP (Washington, DC); Oxfam; Red

    Latinoamericana sobre Deuda, Desarrollo y Derechos--LATINDADD; Stamp

    Out Poverty; Tax Justice Network; UBUNTU Forum; War on Want; WEED

    (World Economy, Ecology, and Development); and World Development

    Movement (Jul. 1, 2013).

    \458\ Id.

    \459\ Id.

    \460\ Id.

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

    3. Overview of the Substituted Compliance Regime

    Once registered, a non-U.S. swap dealer or non-U.S. MSP would

    become subject to all of the substantive requirements under Title VII

    of the Dodd-Frank Act that apply to registered swap dealers or MSPs. In

    other words, the requirements under Title VII of the Dodd-Frank Act

    related to swap dealers and MSPs apply to all registered swap dealers

    and MSPs, irrespective of where they are based.

    Consistent with CEA section 2(i) and comity principles, the

    Commission's policy generally is that eligible entities may comply with

    a substituted compliance regime under certain circumstances, subject,

    however, to the Commission's retention of its examination authority

    \461\ and its enforcement authority. To the extent that the substituted

    compliance regime applies, the Commission generally would permit a non-

    U.S. swap dealer or MSP, U.S. bank that is a swap dealer or MSP with

    respect to its foreign branches,\462\ or non-U.S. non-registrant that

    is a guaranteed or conduit affiliate, as applicable, to substitute

    compliance with the requirements of the relevant home jurisdiction's

    law and regulations (or in the case of foreign branches of a bank, the

    foreign location of the branch) in lieu of compliance with the

    attendant Entity-Level Requirements and/or Transaction-Level

    Requirements under the CEA and Commission regulations, provided that

    the Commission finds that such home jurisdiction's requirements (or in

    the case of foreign branches of a bank, the foreign location of the

    branch) are comparable with and as comprehensive as the corollary

    area(s) of regulatory obligations encompassed by the Entity- and

    Transaction-Level Requirements. Significantly, the Commission will rely

    upon an outcomes-based approach to determine whether these requirements

    achieve the same regulatory objectives of the Dodd-Frank Act. An

    outcomes-based approach in this context means that the Commission is

    likely to review the requirements of a foreign jurisdiction for rules

    that are comparable to and as comprehensive as the requirements of the

    Dodd-Frank Act, but it will not require that the foreign jurisdiction

    have identical requirements to those

    [[Page 45343]]

    established under the Dodd-Frank Act. This approach builds on the

    Commission's longstanding policy of recognizing comparable regulatory

    regimes based on international coordination and comity principles with

    respect to cross-border activities involving futures (and options on

    futures).\463\ The Commission anticipates that its approach also will

    require close consultation, cooperation, and coordination among the

    Commission and relevant foreign regulators regarding ongoing compliance

    efforts. To date, the Commission notes that it has engaged in many

    multilateral and bilateral consultations and efforts to coordinate on

    the substance of OTC derivatives reform efforts.

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

    \461\ Under Commission regulations 23.203 and 23.606, all

    records required by the CEA and the Commission's regulations to be

    maintained by a registered swap dealer or MSP shall be maintained in

    accordance with Commission regulation 1.31 and shall be open for

    inspection by representatives of the Commission, the United States

    Department of Justice, or any applicable prudential regulator.

    In the January Order, the Commission noted that an applicant for

    registration as a swap dealer or MSP must file a Form 7-R with the

    National Futures Association and that Form 7-R was being modified at

    that time to address existing blocking, privacy or secrecy laws of

    foreign jurisdictions that applied to the books and records of swap

    dealers and MSPs acting in those jurisdictions. See 78 FR at 871-872

    n. 107. The modifications to Form 7-R were a temporary measure

    intended to allow swap dealers and MSPs to apply for registration in

    a timely manner in recognition of the existence of the blocking,

    privacy, and secrecy laws. The Commission clarifies that the change

    to Form 7-R impacts the registration application only and does not

    modify the Commission's authority under the CEA and its regulations

    to access records held by registered swap dealers and MSPs.

    Commission access to a registrant's books and records is a

    fundamental regulatory tool necessary to properly monitor and

    examine each registrant's compliance with the CEA and the

    regulations adopted pursuant thereto. The Commission has maintained

    an ongoing dialogue on a bilateral and multilateral basis with

    foreign regulators and with registrants to address books and records

    access issues and may consider appropriate measures where requested

    to do so.

    \462\ The types of offices which the Commission would consider

    to be a ``foreign branch'' of a U.S. bank, and the circumstances in

    which a swap is with such foreign branch, are discussed further in

    section IV.C.3, supra.

    \463\ For example, under part 30 of the Commission's

    regulations, if the Commission determines that compliance with the

    foreign regulatory regime would offer comparable protection to U.S.

    customers transacting in foreign futures and options and there is an

    appropriate information-sharing arrangement between the home

    supervisor and the Commission, the Commission has permitted foreign

    brokers to comply with their home regulations (in lieu of the

    applicable Commission regulations), subject to appropriate

    conditions. See, e.g., Foreign Futures and Options Transactions, 67

    FR 30785 (May 8, 2002); Foreign Futures and Options Transactions, 71

    FR 6759 (Feb. 9, 2009).

    Upon promulgating part 30, the Commission stated that it

    ``intends to monitor closely the application of this regulatory

    scheme for the offer and sale of foreign futures and foreign options

    in the U.S. and to make adjustments in these rules, as necessary,

    based, in part, on it experience in administering the exemptive

    procedure [i.e., 30.10 relief] as well as other requests for

    interpretations of the provisions herein.'' Foreign Futures and

    Foreign Options Transactions, 52 FR 28980, 28993 (Aug. 5, 1987). For

    example, the Commission has expanded part 30 to allow 30.10-exempt

    foreign brokers to act as introducing brokers for the purpose of

    executing linked U.S. transactions on behalf of U.S. customers under

    certain circumstances. The Commission also promulgated regulation

    30.12 to allow unlicensed ``local'' brokers located outside the

    United States to execute trades through the customer omnibus account

    of an FCM or 30.10 exempt foreign broker, again under certain

    circumstances. The Commission expects that the substituted

    compliance process contemplated by this Guidance may similarly

    evolve.

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

    In part, because many foreign jurisdictions have been implementing

    OTC derivatives reforms in an incremental manner, the Commission's

    comparability determinations may be made on a requirement-by-

    requirement basis, rather than on the basis of the foreign regime as a

    whole. For example, many jurisdictions have moved more quickly to

    implement reporting to trade repositories, and so the Commission may

    focus first on comparability with those requirements. In addition, in

    making its comparability determinations, the Commission may include

    conditions that take into account timing and other issues related to

    coordinating the implementation of reform efforts across jurisdictions.

    A non-U.S. swap dealer or non-U.S. MSP, a U.S. bank that is a swap

    dealer or MSP with respect to its foreign branches, or non-U.S. non-

    registrant that is a guaranteed or conduit affiliate, to the extent

    applicable under this Guidance, may comply with regulations in its home

    jurisdiction (or in the case of foreign branches of a bank, the foreign

    location of the branch) to the extent that the Commission determines

    that these requirements are comparable to, and as comprehensive as, the

    corollary areas of the CEA and Commission regulations.\464\ As noted

    above, however, the home jurisdiction's requirements do not have to be

    identical to the Dodd-Frank Act requirements. Moreover, the Commission

    notes, however, that entities relying on substituted compliance may be

    required to comply with certain of the Dodd-Frank Act requirements

    where comparable and comprehensive regulation in their home

    jurisdiction (or in the case of foreign branches of a bank, the foreign

    locations of the branches) are determined to be lacking.\465\

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    \464\ As stated in note 88, for purposes of this Guidance, the

    terms ``home jurisdiction'' or ``home country'' are used

    interchangeably and refer to the jurisdiction in which the person or

    entity is established, including the European Union. Further, the

    Commission clarifies that where a non-U.S. swap dealer (or non-U.S.

    MSP), or a non-U.S. non-registrant that is a guaranteed or conduit

    affiliate, transacts outside the home jurisdiction, substituted

    compliance is available and they may comply with the comparable and

    comprehensive requirements of the home jurisdiction, provided that

    they comply with such requirements in that other jurisdiction.

    \465\ The Commission recognizes that substantial progress has

    been made in other jurisdictions towards implementing OTC

    derivatives reform. For example, EMIR requires financial

    counterparties, including hedge funds, to clear OTC derivatives

    contracts subject to the clearing obligation through a central

    counterparty registered or recognized in accordance with EMIR. EMIR

    also requires such entities to comply with EMIR's risk mitigation

    techniques for uncleared OTC derivatives contracts; risk mitigation

    techniques include, confirmation, portfolio reconciliation,

    compression, valuation and dispute resolution. Lastly, EMIR requires

    financial counterparties to report all derivatives contracts to a

    trade repository registered or recognized in accordance with EMIR.

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    In evaluating whether a particular category of foreign regulatory

    requirement(s) is comparable and comprehensive to the applicable

    requirement(s) under the CEA and Commission regulations, the Commission

    will take into consideration all relevant factors, including but not

    limited to, the comprehensiveness of those requirement(s), the scope

    and objectives of the relevant regulatory requirement(s), the

    comprehensiveness of the foreign regulator's supervisory compliance

    program, as well as the home jurisdiction's authority to support and

    enforce its oversight of the registrant. In this context, comparable

    does not necessarily mean identical. Rather, the Commission would

    evaluate whether the home jurisdiction's regulatory requirement is

    comparable to and as comprehensive as the corresponding U.S. regulatory

    requirement(s).

    In response to comments requesting greater clarity with respect to

    the substituted compliance determinations, the Commission notes that a

    comparability analysis would begin with a consideration of the

    regulatory objectives of a foreign jurisdiction's regulation of swaps

    and swaps market participants. In this regard, the Commission will

    first look to foreign regulator's swap-specific regulations. The

    Commission recognizes, however, that jurisdictions may not have swap-

    specific regulations in some areas, and instead may have regulatory or

    supervisory regimes that achieve comparable and comprehensive

    regulatory objectives as the Dodd-Frank Act requirements, but on a more

    general, entity-wide, or prudential, basis.\466\ In addition, portions

    of a foreign regulatory regime may have similar regulatory objectives,

    but the means by which these objectives are achieved with respect to

    swaps market activities may not be clearly defined, or may not

    expressly include specific regulatory elements that the Commission

    concludes are critical to achieving the regulatory objectives or

    outcomes required under the CEA and the Commission's regulations. In

    these circumstances, the Commission anticipates that, as part of its

    broader efforts to consult and coordinate with foreign jurisdictions,

    it will work with the regulators and registrants in these jurisdictions

    to consider alternative approaches that may result in a determination

    that substituted compliance applies.\467\

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    \466\ The Commission notes that, of the 35 provisionally

    registered non-U.S. swap dealers as of July 12, 2013, all but one of

    them are banking entities that are subject to prudential supervision

    by banking supervisors in their home jurisdictions or affiliates of

    such banks. By comparison, 19 of the provisionally registered U.S.

    swap dealers and MSPs are not regulated by a prudential supervisor

    or the SEC.

    \467\ The Commission notes that such alternatives are available

    for both Entity- and Transaction-Level Requirements, but are more

    likely appropriate for Entity-Level Requirements.

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    The approaches used will vary depending on the circumstances

    relevant to each jurisdiction. One example would include coordinating

    with the foreign regulators in developing appropriate regulatory

    [[Page 45344]]

    changes or new regulations, particularly where changes or new

    regulations already are being considered or proposed by the foreign

    regulators or legislative bodies. As another example, the Commission

    may, after consultation with the appropriate regulators and market

    participants, include in its substituted compliance determination a

    description of the means by which certain swaps market participants can

    achieve substituted compliance within the construct of the foreign

    regulatory regime. The identification of the means by which substituted

    compliance is achieved would be designed to address the regulatory

    objectives and outcomes of the relevant Dodd-Frank Act requirements in

    a manner that does not conflict with a foreign regulatory regime and

    reduces the likelihood of inconsistent regulatory obligations. For

    example, the Commission may specify that swap dealers and MSPs in the

    jurisdiction undertake certain recordkeeping and documentation for swap

    activities that otherwise is only addressed by the foreign regulatory

    regime with respect to financial activities generally. In addition, the

    substituted compliance determination may include provisions for summary

    compliance and risk reporting to the Commission to allow the Commission

    to monitor whether the regulatory outcomes are being achieved. By using

    these approaches, in the interest of comity, the Commission would seek

    to achieve its regulatory objectives with respect to the Commission's

    registrants that are operating in foreign jurisdictions in a manner

    that works in harmony with the regulatory interests of those

    jurisdictions.\468\

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    \468\ The Commission anticipates that non-U.S. swap dealers and

    MSPs may require additional time after a Substituted Compliance

    Determination in order to phase in compliance with the relevant

    requirements of the jurisdiction in which the non-US swap dealer or

    MSP is established. The Commission and its staff intend to address

    the need for any further transitional relief at the time that the

    subject Substituted Compliance Determination is made.

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    4. Process for Comparability Determinations

    Any comparability analysis will be based on a comparison of

    specific foreign requirements against specific related CEA provisions

    and Commission regulations in 13 categories of regulatory obligations

    and will consider the factors described above. After receiving a

    submission from an applicant, the resulting comparability determination

    would be made by the Commission with regard to each of the 13

    categories of regulatory obligations, as appropriate. More

    specifically, the Commission could determine that a particular set of

    foreign laws and regulations provides a sufficient basis for an

    affirmative finding of comparability with respect to a relevant area of

    regulatory obligations. Where no comparability determination can be

    made,\469\ the non-U.S. swap dealer or non-U.S. MSP, U.S. bank that is

    a swap dealer or MSP with respect to its foreign branches, or non-

    registrant, to the extent applicable under this Guidance, may be

    required to comply with the applicable Entity- or Transactional-Level

    requirements under the CEA and Commission regulations.

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

    \469\ A finding of comparability may not be possible for a

    number of reasons, including the fact that the foreign jurisdiction

    has not yet implemented or finalized particular requirements.

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

    Anyone who is eligible for substituted compliance may apply, either

    individually or collectively, as may foreign regulators. Persons who

    may request a comparability determination include: (i) Foreign

    regulators, (ii) an individual non-U.S. entity, or group of non-U.S.

    entities; (iii) a U.S. bank that is a swap dealer or MSP with respect

    to its foreign branches; \470\ or (iv) a trade association, or other

    group, on behalf of similarly-situated entities. Persons requesting a

    comparability determination may want to coordinate their application

    with other market participants and their home regulators to simplify

    and streamline the process. Once a comparability determination is made

    for a jurisdiction, it will apply for all entities or transactions in

    that jurisdiction to the extent provided in the determination, as

    approved by the Commission.

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

    \470\ As previously noted, where the counterparty to a swap with

    a foreign branch is a non-U.S. person (whether or not such non-U.S.

    person is guaranteed or otherwise supported by, or is an affiliate

    conduit of, a U.S. person), the Commission continues to be of the

    view that compliance with comparable and comprehensive requirements

    in the foreign jurisdiction should be permitted in light of the

    supervisory interest of the foreign jurisdiction in the swaps

    transacted in that jurisdiction, together with the fact that foreign

    branches of U.S. swap dealers or U.S. MSPs are subject generally to

    direct or indirect oversight by U.S. regulators because they are

    part of a U.S. person. As discussed further in section IV.F.3,

    supra, the Commission's recognition of substituted compliance would

    be based on an evaluation of whether the requirements of the home

    jurisdiction are comparable and comprehensive to the applicable

    requirement(s) under the CEA and Commission regulations based on a

    consideration of all relevant factors, including among other things:

    (i) The comprehensiveness of the foreign regulator's supervisory

    compliance program and (ii) the authority of such foreign regulator

    to support and enforce its oversight of the registrant's branch or

    agency with regard to such activities to which substituted

    compliance applies.

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

    Generally, the Commission would expect that the applicant, at a

    minimum, state with specificity the factual and legal basis for

    requesting that the Commission find that a particular set of foreign

    laws and regulations is comparable to, and as comprehensive as,

    particular Dodd-Frank Act requirements as described above; include with

    specificity all applicable legislation, rules, and policies; and

    provide an assessment whether the objectives of the two regulatory

    regimes are comparable and comprehensive.\471\ If the applicant is a

    registered swap dealer or MSP, it also would generally be helpful to

    understand the capacity in which the applicant is licensed with the

    applicant's regulator(s) in its home country and whether the applicant

    is in good standing.

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

    \471\ The Commission may, as it deems appropriate and necessary,

    conduct an on-site examination of the applicant, as well as consult

    with the applicant's home regulator regarding the status of the

    applicant. For certain matters, the Commission may request an

    opinion of counsel.

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

    The Commission expects that the comparability analysis process

    would, in most cases, involve consultation with the regulators in each

    jurisdiction for which a substituted compliance application has been

    submitted so that the Commission may better analyze the compliance

    regime of a jurisdiction. Consultations are particularly important in

    the near future because many jurisdictions are in the process of

    finalizing and implementing their derivatives reforms incrementally and

    the Commission's comparability determinations may need to take into

    account the timing of regulatory reforms that have been proposed or

    finalized, but not yet implemented.

    Further, the Commission expects that, in connection with a

    determination that substituted compliance is appropriate, it would

    enter into an appropriate MOU or similar arrangement between the

    Commission and the relevant foreign regulator(s). Existing information-

    sharing and/or enforcement arrangements would be indicative of a

    foreign supervisor's ability to share information and otherwise work

    with the Commission. However, going forward, the Commission and

    relevant foreign supervisor(s) would need to establish supervisory MOUs

    or other arrangements that provide for information sharing and

    cooperation in the context of supervising swap dealers and MSPs. The

    Commission contemplates that such a supervisory MOU would establish the

    type of coordination activities that would continue on an ongoing basis

    between the Commission and the foreign supervisor(s), including topics

    such as procedures for confirming continuing oversight activities,

    access to

    [[Page 45345]]

    information,\472\ on-site visits, and notification procedures in

    certain situations.\473\

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    \472\ As previously noted, the Commission observes that under

    section 4s(j)(3) and (4) of the CEA and Commission regulation

    23.606, a registered swap dealer or MSP must make all records

    required to be maintained in accordance with Commission regulation

    1.31 available to the Commission promptly upon request to

    representatives of the Commission. The Commission reserves this

    right to access records held by registered swap dealers and MSPs,

    including those that are non-U.S. persons who may comply with the

    Dodd-Frank recordkeeping requirement through substituted compliance.

    See also 7 U.S.C. 6s(f); 17 CFR 23.203.

    \473\ In this regard, the Commission has started working with

    foreign regulators to prepare for such arrangements.

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

    The Commission expects that an applicant would notify the

    Commission of any material changes to information submitted in support

    of a comparability determination (including, but not limited to,

    changes in the relevant supervisory or regulatory regime) as the

    Commission's comparability determination may no longer be valid.

    Within four years of issuing any Substituted Compliance

    Determination, the Commission will reevaluate its initial determination

    to ascertain whether any changes should be made to its finding and

    shall reissue the relevant Commission action, conditionally or

    unconditionally, as it deems appropriate.

    SDR Reporting and real-time public reporting would generally be

    eligible for substituted compliance, as outlined above, but only if the

    Commission has direct access to all of the reported swap data elements

    that are stored in a foreign trade repository. The Commission intends

    that direct access would generally include, at a minimum, real time,

    direct electronic access to the data and the absence of any legal

    impediments to the Commission's access to the data. Due to the

    technical nature of this inquiry, a comparability evaluation for SDR

    Reporting and real-time public reporting would generally entail a

    detailed comparison and technical analysis. The Commission notes that

    while direct access to swap data is a threshold matter to be addressed

    in a comparability evaluation, a more particularized analysis would

    generally be necessary to determine whether the data stored in a

    foreign trade repository provides for effective Commission use, in

    furtherance of the regulatory purposes of the Dodd-Frank Act.

    Comparability determinations for SDR Reporting and real-time public

    reporting would generally take into account whether the Commission may

    effectively access and use data stored in foreign trade repositories,

    both in isolation and when compared to and aggregated with swap data

    from other foreign trade repositories, as well as registered SDRs. At a

    minimum, effective use would generally require that the data elements

    stored in foreign trade repositories are sufficient to permit

    comparison and aggregation, and that all transactions with comparable

    required data elements, otherwise required to be reported to a

    registered SDR, are available in the foreign trade repository.

    5. Conflicts Arising Under Privacy and Blocking Laws

    Potential and actual conflicts between the Commission's regulations

    and the privacy and blocking laws of some non-U.S. jurisdictions may,

    in certain circumstances, limit or prohibit the disclosure of data that

    is required to be reported under the Dodd-Frank Act and implementing

    regulations.\474\ For example, the Commission's part 45 and part 46

    swap data reporting rules establish swap data recordkeeping and SDR

    reporting requirements applicable to reporting counterparties. Among

    other requirements, these rules prescribe certain reporting data fields

    for all swaps subject to the Commission's jurisdiction, including the

    identity of each counterparty to a swap. The privacy laws of some non-

    U.S. jurisdictions may, however, restrict or prohibit the disclosure by

    a reporting party or registrant of a non-reporting party's identity. In

    some jurisdictions, this privacy restriction may be overcome if the

    counterparty consents to the disclosure. In others, the restriction may

    take the form of a blocking statute which acts as an absolute

    prohibition to the disclosure of information, creating a direct

    conflict with the requirements of the Dodd-Frank Act.

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

    \474\ Section 727 of the Dodd Frank Act added to the CEA new

    section 2(a)(13)(G), which requires all swaps, whether cleared or

    uncleared, to be reported to registered SDRs. Section 21 of the CEA,

    added by section 728 of the Dodd Frank Act, directs the Commission

    to prescribe standards that specify the data elements for each swap

    that shall be collected and maintained by each registered SDR. Part

    45 of the Commission's regulations establishes swap data

    recordkeeping and SDR reporting requirements; part 46 establishes

    similar requirements for pre-enactment and transition swaps

    (collectively, ``historical swaps'').

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

    The Commission recognizes that, notwithstanding the importance of

    swap data to its mandate under the Dodd-Frank Act, its regulations may

    be in conflict with the blocking, privacy, and/or secrecy laws of other

    jurisdictions. The Commission is mindful of the challenges presented by

    such circumstances and continues to work on a bilateral and

    multilateral basis with foreign regulators to address these issues.

    Where appropriate, the Commission may consider reasonable alternatives

    that allow the Commission to fulfill its mandate while respecting the

    regulatory interests of other jurisdictions. In that regard, where a

    real conflict of laws exists, the Commission strongly encourages

    regulators and registrants to consult directly with its staff.

    6. Clearing

    a. Clearing Venues

    With respect to acceptable clearing venues, the Commission notes

    that section 2(h)(1) of the CEA provides that swaps subject to the

    clearing requirement must be submitted for clearing to a registered DCO

    or a DCO that is exempt from registration under the CEA.\475\

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

    \475\ As noted above, EMIR requires financial counterparties,

    including hedge funds, to clear OTC derivatives contracts subject to

    the clearing obligation through a CCP registered or recognized in

    accordance with EMIR.

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

    The Commission has previously recognized the role of foreign-based

    clearing organizations, including in the context of FBOTs.

    Specifically, in the final rules pertaining to Registration of Foreign

    Boards of Trade, the Commission required that an FBOT, in order to be

    registered, clear through a clearing organization that either is

    registered with the Commission as a DCO or observes the Principles for

    Financial Market Infrastructures (``PFMIs'').\476\ Other relevant

    requirements in the FBOT final rules include, among other things, that

    the clearing organization be in good regulatory standing in its home

    country.

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

    \476\ Registration of Foreign Boards of Trade, 76 FR 80674,

    80681-80682 (Dec. 23, 2011) (the PFMIs are the successor standards

    to the Recommendations for Central Counterparties (``RCCPs''), which

    were issued jointly by the Committee on Payment and Settlement

    Systems (``CPSS'') and the Technical Committee of IOSCO).

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

    In addition, in the final rules adopting the Inter-Affiliate

    Exemption, the Commission permitted eligible affiliated counterparties

    that are located in certain jurisdictions to satisfy a condition to

    electing the exemption (requiring counterparties to clear their swaps

    with third-parties) by clearing the swap through a registered DCO or a

    clearing organization that is subject to supervision by appropriate

    government authorities in the clearing organization's home country and

    that has been assessed to be in compliance with the PFMIs.\477\

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

    \477\ Inter-Affiliate Exemption, 78 FR at 21784 (adopting 17 CFR

    50.52(b)(4)(i)(E)).

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    [[Page 45346]]

    More recently, in the final rulemaking adopting Core Principles and

    Other Requirements for Swap Execution Facilities, the Commission noted

    that under section 5b(h) of the CEA it has discretionary authority to

    exempt DCOs, conditionally or unconditionally, from the applicable DCO

    registration requirements.\478\ Thus, the Commission has discretion to

    exempt from registration DCOs that, at a minimum, are subject to

    comparable and comprehensive supervision by another regulator. The

    Commission further noted that it had not yet exercised its

    discretionary authority to exempt DCOs from registration. The

    Commission explained that, notwithstanding that there were no exempt

    DCOs at that time, certain swaps executed on a SEF could be cleared at

    an exempt DCO, if and when the Commission determined to exercise its

    authority to exempt DCOs from applicable registration requirements, at

    which time the Commission would likely address, among other things, the

    conditions and limitations applicable to clearing swaps for customers

    subject to section 4d(f) of the CEA.\479\

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

    \478\ Specifically, section 5b(h) of the CEA provides that

    ``[t]he Commission may exempt, conditionally or unconditionally, a

    derivatives clearing organization from registration under this

    section for the clearing of swaps if the Commission determines that

    the [DCO] is subject to comparable, comprehensive supervision and

    regulation by the Securities and Exchange Commission or the

    appropriate government authorities in the home country of the

    organization.'' 7 U.S.C. 7a-1(h). See also Core Principles and Other

    Requirements for Swap Execution Facilities, 78 FR 33476, 33591 (Jun.

    4, 2013) (adopting 17 CFR 37.701) (``Part 37 SEF Regulations'').

    \479\ Id. at 33534.

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    The conditions that may have to be met for a clearing organization

    to be eligible to qualify as an exempt DCO could include, among other

    things: (i) The Commission having entered into an appropriate

    memorandum of understanding or similar arrangement with the relevant

    foreign supervisor in the clearing organization's home country and (ii)

    the clearing organization having been assessed to be in compliance with

    the PFMIs.\480\ The use of the PFMIs, an international standard that is

    substantially similar to the requirements for registered DCOs under

    part 39 of the Commission's regulations, would be consistent with the

    Commission's determination in the context of FBOTs.\481\

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

    \480\ The PFMIs were developed with significant input and public

    comment from market participants, and benefited from broad

    participation of market regulators and prudential supervisors from

    multiple nations. The PFMIs were approved by both IOSCO's Technical

    Committee and the CPSS and published in April 2012.

    \481\ The Commission recognizes that certain DCOs registered

    with the Commission also may be authorized, licensed, or recognized

    by a foreign authority. The Commission continues to work on a

    bilateral basis with such non-US authorities with respect to issues

    of central counterparty supervision. The Commission also

    participates in multilateral discussions with its foreign

    counterparts through a number of international groups.

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

    The Commission notes that its exemptive authority under CEA section

    5b(h) is entirely discretionary. Accordingly, the Commission is not

    compelled to exempt any clearing organization from the DCO registration

    requirements, even upon a finding that a facility is ``subject to

    comparable, comprehensive supervision and regulation'' by another

    regulator.

    b. Foreign End-Users

    One of the conditions of the Inter-Affiliate Exemption, known as

    the ``treatment of outward-facing swaps'' condition, generally requires

    the clearing of swaps between affiliated counterparties and their

    unaffiliated counterparties.\482\ Pursuant to Commission regulation

    50.52(b)(4)(i)(C), eligible affiliate counterparties \483\ can satisfy

    the treatment of outward-facing swaps condition by complying with the

    requirements of an exception or exemption under section 2(h)(7) of the

    CEA or part 50 of the Commission's regulations. Pursuant to section

    2(h)(7) of the CEA, also known as the end-user exception, a

    counterparty to a swap that is subject to the clearing requirement

    \484\ may elect not to clear the swap provided that such counterparty

    meets the conditions of section 2(h)(7)(A)(i)-(iii) of the CEA and the

    attendant regulations.\485\

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

    \482\ See Clearing Exemption for Swaps Between Certain

    Affiliated Entities, 78 FR 21749; Commission regulation

    50.52(b)(4)(i).

    \483\ As such term is defined in Commission regulation 50.52(a).

    \484\ See Clearing Requirement Determination, 77 FR 74284.

    \485\ See End-User Exception to the Clearing Requirement for

    Swaps, 77 FR 42560.

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

    For the purposes of the Inter-Affiliate Exemption, consistent with

    section 2(i), the Commission will permit a non-U.S. person eligible

    affiliate counterparty to satisfy Commission regulation

    50.52(b)(4)(i)(C) for swaps entered into with an unaffiliated non-US

    person that is not otherwise subject to the CEA (``Foreign End-User''),

    under certain circumstances. The Foreign End-User may elect the end-

    user exception as if the provisions of sections 2(h)(7)(A)(i) and (ii)

    of the CEA apply to the Foreign End-User and the Foreign End-User

    elects not to clear the swap.\486\

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

    \486\ If the Foreign End-User is an issuer of securities under,

    or required to file reports pursuant to, the Securities Exchange Act

    of 1934 (``SEC Filer''), then the Foreign End-User must obtain the

    approval to enter into uncleared swaps from an appropriate committee

    of the SEC Filer's board of directors (or governing body). See

    section 2(j) of the CEA. The Commission considers a counterparty

    controlled by an SEC Filer to be an SEC Filer itself for the

    purposes of the end-user exception. See 77 FR 42570.

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

    Accordingly, a Foreign End-User may elect not to clear a swap if

    (1) the Foreign End-User and non-US person eligible affiliate

    counterparty are not located in a foreign jurisdiction in which the

    Commission has determined that a comparable and comprehensive clearing

    requirement exists and that the exceptions and/or exemptions thereto

    are comparable and comprehensive; \487\ (2) the Foreign End-User is not

    a financial entity as provided in section 2(h)(7)(A)(i) of the CEA; and

    (3) the Foreign End-User enters into the swap to hedge or mitigate

    commercial risk as provided in section 2(h)(7)(A)(ii) of the CEA.\488\

    In the interests of international comity, the Commission will not

    require the Foreign End-User to satisfy the provisions of section

    2(h)(7)(A)(iii) of the CEA which require the end-user to notify the

    Commission how it generally meets its financial obligations associated

    with entering into non-cleared swaps.\489\

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

    \487\ In these situations, the counterparties should comply with

    laws of the foreign jurisdiction. See Commission regulations

    50.52(b)(4)(i)(B) and (D).

    \488\ Foreign End-Users may look to Commission regulation

    50.50(c) in order to determine whether a swap hedges or mitigates

    commercial risk.

    \489\ This guidance is only applicable to Commission regulation

    50.52(b)(4)(i)(C); all other persons electing the End-User Exception

    must comply with the requirements of section 2(h)(7) of the CEA and

    Commission regulation 50.50.

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    G. Application of the Entity-Level and Transaction-Level Requirements

    to Swap Dealers and MSPs

    This section sets forth the Commission's policy on application of

    the Entity-Level and Transaction-Level Requirements to swap dealers and

    MSPs, including when swaps generally would be eligible for substituted

    compliance.

    1. Comments

    As noted in section E above, commenters generally supported the

    division of Dodd-Frank's swaps provisions (and Commission regulations

    thereunder) into Entity-Level and Transaction-Level Requirements for

    purposes of this Guidance. Certain of these commenters, however, made

    specific recommendations for

    [[Page 45347]]

    reclassification of some of these requirements.\490\

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

    \490\ See section E, supra.

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

    In addition, some commenters addressed perceived disparities in the

    application of Transaction-Level Requirements to U.S. swap dealers,

    stating that transactions between U.S. swap dealers and non-U.S.

    counterparties should be eligible for substituted compliance for

    Transaction-Level Requirements so as to avoid putting U.S. swap dealers

    at a competitive disadvantage.\491\

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

    \491\ See SIFMA (Aug. 27, 2012) at A36. See also State Street

    (Aug. 27, 2012) at 2; IIB (Aug. 27, 2012) at 27-28; The Clearing

    House (Aug. 27, 2012) at 4, 27.

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

    Other commenters supported the Commission's proposed application of

    the Transaction-Level Requirements to the transactions of U.S. persons

    with non-U.S. persons.\492\ One commenter stated that the Transaction-

    Level Requirements should apply to transactions by registered swap

    dealers and MSPs with U.S. persons.\493\

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

    \492\ See Public Citizen (Aug. 27, 2012) at 13 (arguing that

    substituted compliance should not be permitted when the swap

    involves a U.S. counterparty and that Transaction-Level Requirements

    should be required for counterparties that are non-U.S. persons).

    See also IATP (Aug. 27, 2012) at 7-8 (recommending that Transaction-

    Level Requirements apply to transactions between non-U.S. swap

    dealers or MSPs and a U.S. person who is not a swap dealer or MSP).

    \493\ See IIAC (Aug. 27, 2012) at 8.

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

    Several commenters objected to the applicability of certain

    Transaction-Level Requirements to transactions between two non-U.S.

    parties.\494\ One commenter stated that Transaction-Level Requirements

    should never apply to swaps between counterparties that are both non-

    U.S. persons.\495\

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

    \494\ See, e.g., Clearing House (Aug. 27, 2012) at 22-24

    (arguing that pre- and post-trade transparency rules should not

    apply to interactions with non-U.S. customers); SIFMA (Aug. 27,

    2012) at A37 (stating that real-time public reporting requirements

    would be inappropriate for swaps involving only non-U.S.

    counterparties).

    \495\ See Australian Bankers (Aug. 27, 2012) at 5, A8.

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

    With respect to external business conduct standards, one commenter

    stated that these standards should not apply to swaps between U.S. swap

    entities and non-U.S. persons because the Commission's supervisory

    interest in these transactions are less implicated when the

    counterparty is a non-U.S. person.\496\ Other commenters also stated

    that the external business conduct standards should not apply to

    transactions between two non-U.S. persons.\497\

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

    \496\ See SIFMA (Aug. 27, 2012) at A38.

    \497\ See Australian Bankers (Aug. 27, 2012) at 4, A10. See also

    IIAC (Aug. 27, 2012) at 8 (agreeing that external business conduct

    standards should not apply to swaps between non-U.S. swap dealers

    and MSPs and non-U.S. counterparties (whether or not guaranteed by a

    U.S. person)).

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

    2. Commission Guidance

    The Commission has carefully considered the comments on Entity-

    Level and Transaction-Level Requirements. With regard to U.S. swap

    dealers and U.S. MSPs, the Commission's policy is that they generally

    would be expected to comply in full with all of the Entity-Level

    Requirements and Transaction-Level Requirements, without substituted

    compliance available. The Commission's policy would apply regardless of

    whether the counterparty to the swap is a U.S. person or non-U.S.

    person. This is consistent with the Commission's traditional approach

    to registered FCMs, wherein a person, once registered as an FCM, is

    subject to the full panoply of regulations applicable to such

    registrants, without distinctions based on whether the counterparties

    are U.S. or non-U.S. counterparties.

    Further, the Commission believes that its cross-border policy and

    interpretation with respect to U.S. swap dealers and MSPs must be

    informed by the purposes of the Dodd-Frank Act. As discussed earlier,

    the Dodd-Frank Act was enacted to reduce systemic risk, increase

    transparency, and promote market integrity within the financial system

    by, among other things, providing for the comprehensive regulation of

    swap dealers and MSPs. In doing so, Congress understood the highly

    integrated nature of the global swaps business, with regard to both

    individual firms and the market at large, and that risk to U.S. firms

    and in turn, U.S. financial markets may arise anywhere in the world.

    In view of the policy goals underlying the Dodd-Frank Act swaps

    reforms, the Commission's view is that U.S. swap dealers and MSPs

    should be fully subject to the robust oversight contemplated by the

    Dodd-Frank Act, without regard to whether their counterparty is a U.S.

    or non-U.S person. These firms are conducting their swap dealing

    business within the territory of the United States. That some of their

    business may be directed to foreign clients does not diminish the

    Commission's obligation to ensure that swaps between U.S. swap dealers

    and MSPs and their counterparties are subject to Dodd-Frank's financial

    safeguards and transparency requirements, to the fullest extent.

    Therefore, in the Commission's view, substituted compliance is

    incompatible with the Commission's ability to effectively discharge its

    statutory responsibilities.

    For substantially the same reasons, the Commission believes that

    full U.S. regulation of U.S. swap dealers and MSPs, even when they

    transact swaps with non-U.S. counterparties, is a reasonable exercise

    of U.S. jurisdiction under the principles of foreign relations law.

    Among the factors supporting this exercise of U.S. jurisdiction are the

    links between the U.S. swap dealers and MSPs and their swap activities

    to U.S. commerce, and the generally accepted importance of regulating

    the activities of these entities both to the United States and the

    international financial system.\498\ In addition, having an agency of

    the U.S. government serve as the primary regulator of U.S. entities is

    generally consistent with normal expectations and with traditions of

    the international system.\499\ To the extent that other countries have

    an interest in regulating transactions with their nationals, the

    Commission notes that the U.S. regulatory scheme for swap dealers and

    MSPs does not preclude other countries from imposing their regulations

    if they consider it necessary for transactions affecting their

    interests.\500\ As discussed below, the Commission will work with other

    regulators to avoid, and resolve where necessary, direct conflicts, as

    well as to reduce unnecessary burdens. The Commission observes that

    very few conflicts between the foreign regimes and Dodd-Frank Act

    requirements have been identified as part of many multilateral and

    bilateral consultations between staff of the CFTC and their foreign

    counterparts. For these purposes, conflict means that actions required

    for compliance under one jurisdiction's law are prohibited under the

    other jurisdiction's law, or compliance with the regulations of both

    jurisdictions is otherwise impossible.

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

    \498\ See Restatement secs. 403(2)(a)-(c), 403(2)(e).

    \499\ See Restatement secs. 403(2)(d), 403(2)(f).

    \500\ See Restatement sec. 403(2)(g).

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

    With regard to non-U.S. swap dealers or MSPs (including those that

    are affiliates of a U.S. person), the Commission's policy is that these

    firms should be subject to all of the Entity-Level Requirements, but

    under certain circumstances substituted compliance should be available

    (except with regard to Large Trader Reporting). The Commission's policy

    with regard to the application of Transaction-Level Requirements to

    non-U.S. swap dealers or MSPs, and the availability of substituted

    compliance, depends in part on the type of counterparty to the swap

    transaction.

    The foreign branch of a U.S. bank that is a swap dealer or MSP is

    expected to

    [[Page 45348]]

    comply in full with the Entity-Level Requirements, without substituted

    compliance available, because it is not a separate legal entity.\501\

    In some circumstances the Commission's policy is that a foreign branch

    of a U.S. swap dealer or MSP would be expected to comply in full with

    Category A Transaction-Level Requirements where its counterparty is a

    U.S. person. However, as further explained below, substituted

    compliance would generally be available to a foreign branch of a U.S.

    bank with regard to Category A Transaction-Level Requirements where the

    counterparty to a swap transaction is a non-U.S. person or a foreign

    branch of a U.S. bank that is a swap dealer or MSP. In addition, the

    Commission's policy with regard to the application of the Category B

    Transaction-Level Requirements is explained below.

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

    \501\ The types of offices the Commission would consider to be a

    ``foreign branch'' of a U.S. bank, and the circumstances in which a

    swap is with such foreign branch, are discussed further in section

    C, supra.

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

    Below, the Commission describes its policies regarding how Entity-

    Level and Transaction-Level Requirements should apply to both U.S. and

    non-U.S. swap dealers and MSPs, and to foreign branches of a U.S. banks

    that are swap dealers and MSPs, as well as the circumstances under

    which substituted compliance would be available.

    3. Application of the Entity-Level Requirements to Swap Dealers and

    MSPs

    In this section, the Commission discusses its policy regarding the

    application of the Entity-Level Requirements to swap dealers and MSPs

    in cross-border transactions under its interpretation of 2(i), as well

    as the circumstances under which such swaps would be eligible for

    substituted compliance.

    Section a discusses the Commission's view on the application of

    Entity-Level Requirements to swaps with U.S. swap dealers and U.S.

    MSPs, including subsidiaries and affiliates of non-U.S. persons, and

    foreign branches of U.S. swap dealers or U.S. MSPs, under CEA section

    2(i).

    Section b discusses the Commission's view on the application of

    Entity-Level Requirements to swaps with non-U.S. swaps dealers and

    MSPs, including subsidiaries and affiliates of U.S. persons.

    The Commission's policy on application of the Entity-Level

    Requirements to swap dealers and MSPs, as well as substituted

    compliance, is discussed below and summarized in Appendix C to this

    Guidance, which should be read in conjunction with the rest of the

    Guidance.

    a. To U.S. Swap Dealers and MSPs

    As explained above, U.S. swap dealers and U.S. MSPs generally would

    be expected to comply in full with all of the Entity-Level

    Requirements, without substituted compliance available. The

    Commission's policy generally would apply regardless of whether the

    counterparty to the swap is a U.S. person or non-U.S. person.

    Because under this Guidance the term ``U.S. person'' includes

    corporations, partnerships, limited liability companies, and other

    legal entities (as discussed above), the foregoing interpretation also

    applies to affiliates of non-U.S. persons that are U.S. swap dealers or

    U.S. MSPs. It also applies to U.S. banks that are swap dealers or MSPs

    when the swap is with their foreign branch. In this case, because a

    foreign branch of a U.S. bank is an integral part of the U.S. principal

    entity and has no separate legal existence, and the U.S. principal bank

    is the entity that registers as a swap dealer or MSP, under the

    Commission's interpretation of CEA section 2(i), the U.S. bank

    (principal entity) would be the party ultimately responsible for

    compliance with the Entity-Level Requirements for the entire legal

    entity.

    b. To Non-U.S. Swap Dealers and MSPs

    Consistent with CEA section 2(i), the Commission would expect non-

    U.S. swap dealers and non-U.S. MSPs to comply with all of the Entity-

    Level Requirements. This policy also applies to foreign affiliates of a

    U.S. person that are independently required to register as swap dealers

    or MSPs and to comply with applicable Dodd-Frank Act requirements.

    However, in considering whether substituted compliance is available

    to a non-U.S. swap dealer or MSP with respect to particular Entity-

    Level Requirements, the Commission would consider it relevant whether

    the Entity-Level Requirement is classified in the First Category or

    Second Category (and with respect to the Second Category, whether the

    counterparty is a U.S. person).

    The Commission recognizes that non-U.S swap dealers or MSPs are

    likely to have their principal swap business in their home

    jurisdiction, and in consideration of international comity principles,

    is interpreting CEA section 2(i) such that such non-U.S swap dealers or

    MSPs generally would be eligible for substituted compliance with regard

    to Entity-Level Requirements in the First Category (i.e., capital

    adequacy, chief compliance officer, risk management, and swap data

    recordkeeping, except certain aspects of swap data recordkeeping

    relating to complaints and marketing and sales materials \502\).\503\

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

    \502\ See 17 CFR 23.201(b)(3), (4).

    \503\ As noted in the Proposed Guidance, the Commission

    anticipates that non-U.S. swap dealers and non-U.S. MSPs will likely

    have their principal swap business in their home jurisdiction. In

    these circumstances, the Commission notes that the home regulator

    would have a primary relationship to the swap dealer or MSP, which,

    coupled with the firm-wide focus of the Entity-Level Requirements,

    supports generally making the non-U.S. registrant eligible for

    substituted compliance. Therefore, consistent with the Proposed

    Guidance, the Commission believes that it is appropriate to make

    non-U.S. swap dealers and MSPs eligible for substituted compliance

    with respect to Entity-Level Requirements in the First Category

    where the non-U.S. swap dealers or non-U.S. MSPs are subject to

    comparable regulation in their home jurisdiction.

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

    With respect to Entity-Level Requirements in the First Category, as

    noted by commenters on the Proposed Guidance, an affiliate of a U.S.

    swap dealer that is guaranteed by such U.S. swap dealer (or guaranteed

    by a U.S.-based parent or other affiliate of such swap dealer) may

    under certain circumstances be required to register as a swap dealer

    based on its swap dealing activity solely with non-U.S. persons,

    including those non-U.S. persons that are neither guaranteed affiliates

    or affiliate conduits of U.S. persons. Commenters have represented that

    some corporate groups may be required to register many of these

    guaranteed affiliates as swap dealers, even though such affiliates

    provide swap dealing services only to non-U.S. markets, and that many

    of such guaranteed affiliates exist only because the law of the local

    jurisdiction requires that a subsidiary be incorporated in the

    jurisdiction in order to enter into swaps with counterparties located

    in such jurisdiction. The Commission recognizes that certain structural

    conditions required to comply with the regulatory obligations of swap

    dealers may be burdensome for a corporate group with many of these

    guaranteed affiliates due to the requirement that such obligations be

    complied with at the individual entity level (e.g., Commission

    regulations Sec. Sec. 3.3 (Chief compliance officer), 23.600 (Risk

    Management Program for swap dealers and major swap participants),

    23.601 (Monitoring of position limits), 23.602 (Diligent supervision),

    23.603 (Business continuity and disaster recovery), and 23.606 (General

    information: Availability for disclosure and inspection)).

    [[Page 45349]]

    Specifically, the Commission notes that Commission regulations

    Sec. Sec. 3.3 (Chief compliance officer), 23.600 (Risk Management

    Program for swap dealers and major swap participants), 23.601

    (Monitoring of position limits), 23.602 (Diligent supervision), 23.603

    (Business continuity and disaster recovery), and 23.606 (General

    information: Availability for disclosure and inspection) mandate that

    each swap dealer in a corporate group under common control individually

    establish policies, procedures, governance structures, reporting lines,

    operational units, and systems specified in the rules. Thus, the

    Commission would consider relief, subject to appropriate conditions and

    restrictions to be determined, that would permit guaranteed affiliates

    in a corporate group under common control that do not enter into swaps

    with U.S. persons to comply with such regulations by establishing

    consolidated policies, procedures, governance structures, reporting

    lines, operational units, and systems, thereby increasing operational

    efficiencies and lessening the economic burden on these groups with

    respect to their guaranteed affiliates that do not directly face U.S.

    persons when engaging in swaps activities.\504\ The Commission notes,

    however, that any such relief would require a consolidated program to

    manage the risks of the included guaranteed affiliates on an

    individual, rather than a net, basis.

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

    \504\ ``Swaps activities'' are defined in Commission regulation

    23.600(a)(7).

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

    The Commission encourages interested parties to contact the

    Director of the Division of Swap Dealer and Intermediary Oversight to

    discuss the necessary conditions and restrictions of appropriate

    relief.

    The Commission clarifies that, in the interest of international

    comity and for the purpose of permitting efficiencies in compliance

    programs, it would remain open to considering (or directing its staff

    to consider) relief, subject to appropriate conditions and restrictions

    to be determined, that would permit guaranteed affiliates in a

    corporate group under common control (that do not enter into swaps with

    U.S. persons or U.S. guaranteed affiliates or affiliate conduits of

    U.S. persons) to comply with certain of such regulations on a

    consolidated or group basis. The Commission notes, however, that any

    such relief would require a consolidated program to manage the risks of

    the included guaranteed affiliates on an individual, rather than a net,

    basis.

    With respect to one of the Entity-Level Requirements in the Second

    Category, SDR Reporting (i.e., SDR Reporting and swap data

    recordkeeping related to complaints and marketing and sales

    materials),\505\ the Commission interprets CEA section 2(i) such that

    swap dealers or MSPs that are not U.S. persons generally would be

    eligible for substituted compliance only with respect to swaps where

    the counterparty is a non-U.S. person that is not a guaranteed or

    conduit affiliate.

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

    \505\ See 17 CFR 23.201(b)(3), (4).

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

    With respect to the other Entity-Level Requirement in the Second

    Category (i.e., swap data recordkeeping related to complaints and

    marketing and sales materials),\506\ the Commission interprets CEA

    section 2(i) such that swap dealers or MSPs that are not U.S. persons

    generally would be eligible for substituted compliance only with

    respect to swaps where the counterparty is a non-U.S. person. However,

    as explained below, with respect to Large Trader Reporting, the

    Commission's policy would not recognize substituted compliance in place

    of compliance with Large Trader Reporting.

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

    \506\ See id.

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

    Specifically, with respect to SDR Reporting, the Commission

    interprets CEA section 2(i) such that substituted compliance may be

    available to non-U.S. swap dealers and non-U.S. MSPs (whether or not

    such swap dealers or MSPs are affiliates of or are guaranteed by U.S.

    persons) for swaps with non-U.S. counterparties, provided that the

    Commission has direct access (including electronic access) to the

    relevant swap data that is stored at the foreign trade repository. The

    Commission believes that this ensures that the Commission will have

    access to information that is critical to its oversight of these

    entities even where substituted compliance with regard to SDR Reporting

    would be applicable under this Guidance.\507\ However, the Commission

    interprets section 2(i) as applied to these requirements such that

    substituted compliance generally would not be available for non-U.S.

    swap dealers and non-U.S. MSPs (whether or not such swap dealers or

    MSPs are guaranteed by U.S. persons) with respect to swaps with U.S.

    counterparties. The Commission believes that in general, application of

    these requirements, without eligibility for substituted compliance, is

    appropriate given its strong supervisory interest in a swap between a

    registered swap dealer or MSP and a U.S. counterparty.

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

    \507\ As the Commission noted in the Proposed Guidance, data

    reported to SDRs is critical to ensure that the Commission has a

    comprehensive and accurate picture of swap dealers and MSPs that are

    its registrants, including the gross and net counterparty exposures

    of swaps of all swap dealers and MSPs, to the greatest extent

    possible. Therefore, the Commission's view is that non-U.S. swap

    dealers and non-U.S. MSPs generally should be expected to report all

    of their swaps to a registered SDR. At the same time, the Commission

    recognized the interests of foreign jurisdictions with respect to

    swaps between a non-U.S. swap dealer or non-U.S. MSP with a non-U.S.

    counterparty. Therefore, the Commission would interpret section 2(i)

    so that swaps between non-U.S. swap dealers or MSPs with non-U.S.

    counterparties generally are eligible for substituted compliance

    with regard to SDR Reporting, but only if the Commission has direct

    access to all of the reported swap data elements that are stored at

    a foreign trade repository.

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

    However, with regard to the SDR reporting requirements, for the

    future, the Commission has agreed to continue to work collaboratively

    and to consider any unforeseen implementation effects that might arise

    in the application of our respective rules. The Commission will

    continue discussions with other international partners with a view to

    establishing a more generalized system that would allow, on the basis

    of these countries' implementation of the G-20 commitments, an

    extension of the treatment the EU and the CFTC will grant to each

    other.

    With regard to certain aspects of swap data recordkeeping that

    relate to complaints and marketing and sales materials, the Commission

    interprets CEA section 2(i) such that non-U.S. swap dealers or non-U.S.

    MSPs generally would be eligible for substituted compliance with

    respect to swaps with non-U.S. counterparties.\508\

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

    \508\ In the Proposed Guidance, the Commission included all of

    the swap data recordkeeping requirements of regulations 23.201 and

    23.203 in the proposed first subcategory of Entity-Level

    Requirements. 77 FR at 41225. In this Guidance, swap data

    recordkeeping related to complaints and marketing and sales

    materials under regulations 23.201(b)(3) and 23.201(b)(4),

    respectively, are being moved from the First Category to the Second

    Category because the Commission does not believe that substituted

    compliance generally should be available for requirements relating

    to complaints and marketing and sales materials where the

    counterparty is a U.S. person. This policy pertains equally to swaps

    with foreign affiliates of a U.S. person that are required to

    independently register as swap dealers and to comply with applicable

    Entity-Level Requirements.

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

    To the extent that swap data reported to a foreign trade repository

    would include data regarding the physical commodity swaps covered by

    Large Trader Reporting, the Commission--even if provided with direct

    access to such data--would still likely be required to convert it to

    ``futures equivalent'' positional data in order to render it comparable

    to the data obtained through Large Trader Reporting, which contemplates

    conversion by the entity required to

    [[Page 45350]]

    report data to the Commission.\509\ Given that Large Trader Reporting

    is intended to enable the Commission, in a prompt and efficient manner,

    to identify significant traders in the covered physical commodity swaps

    and to collect data on their trading activity in order to reconstruct

    market events, the time and resources expended by the Commission in

    conversion could significantly impede its market surveillance efforts.

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

    \509\ Large Trader Reporting provides the Commission with data

    regarding large positions in swaps that are linked, directly or

    indirectly, to a discrete list of U.S.-listed physical commodity

    futures contracts, in order to enable the Commission to implement

    and conduct effective surveillance of these economically equivalent

    swaps and futures. To facilitate surveillance efforts and the

    monitoring of trading across the swaps and futures markets, swaps

    positions must be converted to equivalent positions of the related

    U.S. futures contract (``futures equivalents'') for reporting

    purposes; reportable thresholds are also defined in terms of

    ``futures equivalents.''

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

    The Commission notes further that its interpretation of CEA section

    2(i) to permit substituted compliance with comparable and comprehensive

    regimes in certain circumstances recognizes the interests of foreign

    jurisdictions with respect to swaps between non-U.S. persons. Large

    Trader Reporting, however, reflects a very specific interest of the

    Commission in conducting effective surveillance of markets in swaps

    that have been determined to be economically equivalent to certain

    U.S.-listed physical commodity futures contracts. In light of this

    specific Commission interest--which is reflected in the particularized

    scope and methodology of Large Trader Reporting--and in light of the

    anticipated impediments to obtaining directly comparable positional

    data through any foreign swap data reporting regime, the Commission's

    policy would not recognize substituted compliance in place of

    compliance with Large Trader Reporting.

    4. Application of the ``Category A'' Transaction-Level Requirements to

    Swap Dealers and MSPs

    This section discusses the Commission's guidance on the application

    of the Category A Transaction Level Requirements to the parties to a

    swap where one of the parties is a registered swap dealer or MSP,\510\

    including when substituted compliance may be available to various types

    of counterparties.

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

    \510\ Some of the Transaction-Level and Entity-Level

    Requirements also are applicable to market participants that are not

    swap dealers or MSPs, which are referred to herein as non-

    registrants. See section H, infra, for a discussion of the

    Commission's interpretation of how these requirements would apply to

    non-registrants under CEA section 2(i).

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

    As noted above, the Category A Transaction Level Requirements

    include: (1) Required clearing and swap processing; (2) margining and

    segregation requirements for uncleared swaps; (3) trade execution; (4);

    swap trading relationship documentation; (5) portfolio reconciliation

    and compression; (6) real-time public reporting; (7) trade

    confirmation; and (8) daily trading records.\511\

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

    \511\ The categorization of Transaction-Level Requirements into

    Categories A and B is discussed in section E, supra. See Appendix B

    for a descriptive list of the Category A and Category B requirements

    and Appendix D for a table summarizing the application of the

    Category A Transaction-Level Requirements to Swap Dealers and MSPs.

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

    The Commission's policy on application of the Category A

    Transaction-Level Requirements is summarized in Appendix D to this

    Guidance, which should be read in conjunction with the rest of the

    Guidance.

    a. Swaps With U.S. Swap Dealers and MSPs

    As explained above, where one of the counterparties to a swap is a

    U.S. swap dealer or U.S. MSP, under the Commission's interpretation of

    CEA section 2(i), the Commission would generally expect the parties to

    the swap to comply with Category A Transaction-Level Requirements with

    respect to the transaction, without regard to whether the other

    counterparty to the swap is a U.S. person or a non-U.S. person.

    Because the Commission interprets section 2(i) so that the term

    ``U.S. person'' would include any legal entity organized or

    incorporated under the laws of the United States or having its

    principal place of business in the United States, this interpretation

    also would apply where one of the parties to the swap is a U.S. swap

    dealer or U.S. MSP that is an affiliate of a non-U.S. person.\512\ In

    addition, because the Commission considers a foreign branch of a U.S.

    person to be a part of the U.S. person, the foregoing interpretation

    also applies to swaps with foreign branches of a U.S. bank that is a

    swap dealer or MSP (although in some circumstances substituted

    compliance may be available as explained below).

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

    \512\ See the Proposed Guidance, 77 FR 1218.

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

    Further, as explained above, with regard to substituted compliance,

    where one of the counterparties to a swap is a U.S. swap dealer or U.S.

    MSP (including those that are affiliates of a non-U.S. person), other

    than a foreign branch of a U.S. bank that is a swap dealer or MSP, the

    Commission's policy is that substituted compliance generally would not

    be available for the Category A Transaction-Level Requirements, without

    regard to whether the other counterparty is a U.S. person or a non-U.S.

    person. The Commission has a strong supervisory interest in ensuring

    that the Category A Transaction-Level Requirements apply to swaps with

    a U.S. swap dealer or MSP.\513\

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

    \513\ Consistent with the foregoing rationale, the Commission

    takes the view that a U.S. branch of a non-U.S. swap dealer or MSP

    would be subject to Transaction-Level requirements, without

    substituted compliance available. As discussed above, a branch does

    not have a separate legal identity apart from its principal entity.

    Therefore, the Commission considers a U.S. branch of a non-U.S. swap

    dealer or non-U.S. MSP to be a non-U.S. person (just as the

    Commission considers a foreign branch of a U.S. person to be a U.S.

    person). Nevertheless, the Commission also recognizes its strong

    supervisory interest in regulating the dealing activities that occur

    with the United States, irrespective of the counterparty (just as

    the Commission allows for substituted compliance for foreign

    branches in certain instances to take into account the strong

    supervisory interest of local regulators).

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

    Similarly, under the Commission's interpretation of 2(i), where a

    swap is between a foreign branch of a U.S. bank that is a swap dealer

    or MSP, on the one hand, and a U.S. person on the other, the

    Commission's policy is that substituted compliance generally would not

    be available with respect to the Category A Transaction-Level

    Requirements. In this case, the Commission also has a strong

    supervisory interest in ensuring that the Category A Transaction-Level

    Requirements fully apply to the transaction because it views the swap

    transaction as being between two U.S. persons. The Commission believes

    that this approach is appropriate in light of the Commission's strong

    supervisory interests in entities that are part or an extension of a

    U.S. swap dealer or U.S. MSP.

    However, where a swap is between two foreign branches of U.S. banks

    that are both swap dealers or MSPs, the Commission believes that the

    interests of foreign regulators in applying their transaction-level

    requirements to a swap taking place in their jurisdiction, together

    with the fact that foreign branches of U.S. swap dealers or U.S. MSPs

    are subject generally to direct or indirect oversight by U.S.

    regulators, weigh in favor of allowing substituted compliance with

    comparable and comprehensive foreign regulatory requirements (to the

    extent applicable).

    In addition, where a swap is between the foreign branch of a U.S.

    bank that is a swap dealer or MSP, on the one hand, and a non-U.S.

    person on the other

    [[Page 45351]]

    (regardless of whether the non-U.S. person is a guaranteed or conduit

    affiliate), as a policy matter, the Commission believes that

    substituted compliance should be available (if otherwise applicable).

    In this case, even though the Commission considers the foreign branch

    of a U.S. person to be a U.S. person, the Commission believes that the

    interests of foreign regulators in applying their transaction-level

    requirements to a swap taking place in their jurisdiction, together

    with the fact that foreign branches of U.S. swap dealers or U.S. MSPs

    are subject generally to direct or indirect oversight by U.S.

    regulators because they are part of a U.S. person, may weigh in favor

    of allowing substituted compliance with comparable and comprehensive

    foreign regulatory requirements (to the extent applicable) where the

    counterparty to the foreign branch is a non-U.S. person.

    In a modification to the Proposed Guidance, where a swap between

    the foreign branch of a U.S. swap dealer or U.S. MSP and a non-U.S.

    person (that is not a guaranteed or conduit affiliate) takes place in a

    foreign jurisdiction other than Australia, Canada, the European Union,

    Hong Kong, Japan, or Switzerland,\514\ the Commission's policy is to

    interpret CEA section 2(i) so that counterparties may comply with the

    transaction-level requirements applicable to entities domiciled or

    doing business in the foreign jurisdiction where the foreign branch is

    located, rather than the Transaction-Level Requirements that would

    otherwise be applicable, if two elements are present. First, the

    aggregate notional value (expressed in U.S. dollars and measured on a

    quarterly basis) of the swaps of all U.S. swap dealer's foreign

    branches in foreign jurisdictions other than Australia, Canada, the

    European Union, Hong Kong, Japan, or Switzerland does not exceed five

    percent of the aggregate notional value (expressed in U.S. dollars and

    measured on a quarterly basis) of all of the swaps of the U.S. swap

    dealer. Second, the U.S. person maintains records with supporting

    information to verify that the first element is present, as well as to

    identify, define, and address any significant risk that may arise from

    the non-application of the Transaction-Level Requirements. The

    Commission believes this policy is appropriate because U.S. swap

    dealers' dealing activities through branches or agencies in

    jurisdictions other than the six jurisdictions referenced above, though

    not significant in many cases, may be nevertheless an integral element

    of their global business. The Commission notes that this exception is

    not available in the six jurisdictions referenced above because the

    Commission has received, or expects to receive in the near term, a

    request for substituted compliance determinations for transactions in

    these jurisdictions.

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

    \514\ Market participants or regulators in all of these

    jurisdictions have submitted requests for Substituted Compliance

    Determinations.

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

    Although the foreign branch of a U.S. registrant would not register

    separately as a swap dealer or MSP, the Commission interprets 2(i) in a

    manner that would permit the U.S. registrant to task its foreign branch

    to fulfill its regulatory obligations with respect to the Category A

    Transaction-Level Requirements. The Commission would generally consider

    compliance by the foreign branch to constitute compliance with these

    Transaction-Level Requirements. However, under the Commission's

    interpretation of 2(i), the U.S. person (principal entity) would remain

    responsible for compliance with the Category A Transaction-Level

    Requirements.

    b. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs

    Under the Commission's interpretation of CEA section 2(i), where a

    swap is between a non-U.S. swap dealer or non-U.S. MSP (including an

    affiliate of a U.S. person), on the one hand, and a U.S. person (other

    than a foreign branch of a U.S. swap dealer or MSP), on the other, the

    Commission would generally expect the parties to comply with Category A

    Transaction-Level Requirements with respect to the transaction.\515\

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

    \515\ Under the Commission's futures regulatory regime, any

    person located outside the U.S. that seeks to serve as an

    intermediary to U.S. persons trading on a U.S. designated contract

    market or in foreign futures and option contracts is required to

    register in the appropriate category and comply with related

    regulations, absent the availability of an exemption from

    registration (e.g., relief pursuant to Commission regulation 30.10

    in the foreign futures and option context).'' See, e.g., Commission

    regulation 30.4.

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

    The Commission notes, however, that where a swap is executed

    anonymously between any non-U.S. person, whether a swap dealer or an

    MSP, and a U.S. person (other than a foreign branch of a U.S. swap

    dealer or MSP) on a registered DCM or SEF and cleared, the non-U.S.

    person will generally be considered to have satisfied each of the eight

    Category A Transaction-Level Requirements that apply to such a swap

    transaction as a consequence of being so executed on a DCM or SEF.

    Thus, neither the non-U.S. person (nor its U.S. person counterparty)

    will need to take any further steps to comply with the Category A

    Transaction-Level Requirements in connection with such a

    transaction.\516\

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

    \516\ However, non-U.S. swap dealers and MSPs must satisfy the

    daily trading record requirement found in Commission regulation

    23.202(a)(1).

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

    In making this determination, the Commission observes that where a

    cleared swap transaction is executed anonymously on a registered DCM or

    SEF, certain independent requirements that apply to DCM and SEF

    transactions generally, pursuant to the CEA or the Commission's

    regulations, will ensure that four of the eight Category A Transaction-

    Level Requirements will be met for such transactions--required clearing

    and swap processing,\517\ trade execution,\518\ real-time public

    reporting,\519\ and trade confirmation.\520\

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

    \517\ Pursuant to Commission regulations 37.702 and 38.601, each

    SEF and DCM must coordinate with each DCO to which it submits

    transactions for clearing in the development of rules and procedures

    to facilitate prompt and efficient transaction processing to meet

    the requirements of Commission regulation 39.12(b)(7). Commission

    regulation 39.12(b)(7)(ii) requires a DCO to accept or reject swaps

    executed on a SEF or DCM for clearing ``as quickly after execution

    as would be technologically practicable if fully automated systems

    were used.'' See also 17 CFR 23.506(a); 39.12(b)(7)(iii); Final

    Customer Documentation Rules, 77 FR at 21306-21310. As stated in the

    Final Customer Documentation Rules, these rules, taken as a whole,

    ``require SEFs, DCMs, swap dealers, MSPs, and DCOs to coordinate in

    order to facilitate real time acceptance or rejection of trades for

    clearing.'' Id. at 21296.

    \518\ CEA section 2(h)(8)(A) provides that transactions in swaps

    subject to the trade execution mandate must be executed on a

    registered DCM or SEF, or a SEF that has been exempted from

    registration. The Commission clarifies that the trading mandate

    under CEA section 2(h)(8)(A) is satisfied by trading on a registered

    DCM or SEF or a SEF that has been exempted from registration.

    \519\ Parties that execute a swap transaction on a DCM or SEF

    meet their real-time public reporting obligations by operation of a

    set of Commission regulations that essentially delegate the

    obligations to the DCM or SEF on which the transaction was executed,

    and the SDR to which the DCM or SEF reports the transaction.

    Specifically, Commission regulation 43.3(a)(2) provides that a party

    to a publicly reportable swap transaction satisfies its real-time

    reporting obligations by executing a publicly reportable swap

    transaction on or pursuant to the rules of a registered SEF or DCM.

    In turn, Commission regulation 43.3(b)(1) requires a SEF or DCM to

    transmit swap transaction and pricing data to a registered SDR, as

    soon as technically practicable after the publicly reportable swap

    transaction has been executed on or pursuant to the rules of such

    trading platform or facility. Finally, Commission regulation

    43.3(b)(2) requires a registered SDR to ensure that swap transaction

    and pricing data is publicly disseminated, as soon as

    technologically practicable after such data is received from a

    registered SEF or DCM.

    \520\ See Commission regulation 23.501(a)(4)(i) (``Any swap

    transaction executed on a swap execution facility or designated

    contract market shall be deemed to satisfy the requirements of this

    section, provided that the rules of the swap execution facility or

    designated contract market establish that confirmation of all terms

    of the transactions shall take place at the same time as

    execution''); 37.6(b); Part 37 SEF Regulations, 78 FR at 33585 (``A

    swap execution facility shall provide each counterparty to a

    transaction that is entered on or pursuant to the rules of the swap

    execution facility with a written record of all of the terms of the

    transaction which shall legally supersede any previous agreement and

    serve as confirmation of the transaction. The confirmation of all

    terms shall take place at the same time as execution . . . '').

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

    [[Page 45352]]

    For a combination of reasons, the Commission also believes that the

    four remaining Transaction-Level Requirements do not, or should not,

    apply to cleared, anonymous DCM or SEF transactions. So, for instance,

    the fact that the DCM or SEF swap transaction will be cleared, obviates

    the need for margining or segregation requirements applicable to

    uncleared swaps. Two other Category A Transaction-Level Requirements--

    swap trading relationship documentation and portfolio reconciliation

    and compression--would not apply because the Commission regulations

    that establish those requirements make clear that they do not apply to

    cleared DCM or SEF transaction.\521\ The last requirement--the daily

    trading records requirement \522\--would only be applicable to the non-

    U.S. swap dealer and only with regard to pre-trade execution swaps.

    However, because the non-U.S. swap dealer will have no information

    about its counterparty where the swap is executed anonymously, the

    Commission is of the view that, as a matter of international comity,

    CEA section 2(i) should not be interpreted to apply all of the daily

    trading records requirements to such a swap.\523\

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

    \521\ See 17 CFR 23.504(a)(1) (``The requirements of this

    section [swap trading relationship documentation] shall not apply to

    . . . swaps executed on a board of trade designated as a contract

    market under section 5 of the Act or to swaps executed anonymously

    on a swap execution facility under section 5h of the Act, provided

    that such swaps are cleared by a derivatives clearing organization .

    . .''); 23.502(d) (``Nothing in this section [portfolio

    reconciliation] shall apply to a swap that is cleared by a

    derivatives clearing organization''); 23.503(c) (``Nothing in this

    section [portfolio compression] shall apply to a swap that is

    cleared by a derivatives clearing organization.'').

    \522\ See 17 CFR 23.202.

    \523\ The Commission is of the view that CEA section 2(i) should

    not be interpreted to apply the daily trading records requirements,

    with the exception of those found in Commission regulation

    23.202(a)(1).

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

    In addition, the Commission is interpreting CEA section 2(i) such

    that, where a swap between a non-U.S. person, regardless of its swap

    dealer or MSP status, and a U.S. person is executed anonymously on an

    FBOT registered with the Commission pursuant to part 48 and cleared the

    non-U.S. person will generally be considered to have satisfied the

    Category A Transaction-Level Requirements that pertain to such a swap

    transaction. Some of the requirements will be satisfied by requirements

    levied by regulation on the FBOT and some will be satisfied because a

    registered FBOT is analogous to a DCM and is subject to comprehensive

    supervision and regulation in its home country that is comparable to

    that exercised over a DCM by the Commission. Thus, neither the non-U.S.

    person (nor its U.S. person counterparty) will need to take any further

    steps to satisfy the applicable Category A Transaction-Level

    Requirements in connection with such a transaction.\524\

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

    \524\ However, a non-U.S. swap dealer or non-U.S. MSP must

    satisfy the daily trading record requirement found in Commission

    regulation 23.202(a)(1).

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

    In making this determination, the Commission observes that where a

    cleared swap transaction is executed anonymously on a registered FBOT,

    the FBOT, similar to a DCM, based on certain independent requirements

    that apply to DCM transactions generally pursuant to the CEA or the

    Commission's regulations, will ensure that two of the eight Category A

    Transaction-Level Requirements will be satisfied for such transactions:

    Required clearing and swap processing \525\ and trade execution.\526\

    The Commission notes that while the real-time reporting requirement

    will be satisfied for cleared swaps executed anonymously on a DCM by

    operation of the Commission's real-time reporting regulations, absent

    further affirmative actions by an FBOT, the real-time public reporting

    requirements will not be satisfied through FBOT execution alone.\527\

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

    \525\ As discussed above, pursuant to Commission regulation

    48.7(c)(1)(ii), all contracts, including swaps, made available in

    the U.S. by a registered FBOT must be cleared. The clearing

    organization must be either a DCO or must observe international

    clearing standards: The RCCP or the successor standards, PFMI.

    \526\ See discussion of clearing at section IV.F.6, supra. The

    Commission clarifies that the trading mandate under CEA section

    2(h)(8)(A) is satisfied by trading on a registered FBOT.

    \527\ Pursuant to Commission regulation 48.8(a)(9), the

    registered FBOT must ensure that all transaction data relating to

    each swap transaction, including price and volume, are reported as

    soon as technologically practicable after execution of the swap

    transaction to a SDR that is either registered with the Commission

    or has an information sharing arrangement with the Commission. While

    Commission regulation 43(b)(2) requires that an SDR ensure that swap

    transaction and pricing data is publicly disseminated as soon as

    technologically practicable after such data is received from a

    registered SEF, DCM or reporting party, it does not specifically

    require public dissemination of swap transaction and pricing data

    from the FBOT. Therefore, in order for the FBOT to ensure that the

    real-time public reporting requirement is satisfied, the FBOT must

    either report the data to the public itself or enter into an

    arrangement with the SDR to which the data are reported pursuant to

    which the SDR agrees to publicly disseminate the data as soon as

    technologically practicable.

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

    For a combination of reasons, including the fact that the swap will

    be cleared, the Commission also is of the view that the remaining

    Transaction-Level Requirements do not apply to such transactions

    executed on a registered FBOT. For instance, the fact that the swap

    will be cleared, as required by regulation 48.7(c)(1)(ii), renders

    inapplicable the margining or segregation requirements for uncleared

    swaps. As the Commission observed above with respect to swaps executed

    anonymously on DCMs, certain of the other Category A Transaction-Level

    Requirements would not apply to the swap. Consistent with this

    determination, three of the other Category A Transaction-Level

    Requirements--swap trading relationship documentation, portfolio

    reconciliation and compression and trade confirmation--would not apply

    to the swap executed on a registered FBOT because the underlying

    Commission regulations themselves do not apply those requirements to

    cleared DCM or SEF transactions. The last requirement--the daily

    trading records requirement--would only be applicable to the non-U.S.

    swap dealer and only with regard to pre-trade execution swaps. However,

    because the non-U.S. swap dealer will have no information about its

    counterparty where the swap is executed anonymously on a registered

    FBOT, the Commission is of the view that, as a matter of international

    comity, CEA section 2(i) should be interpreted such that certain of the

    daily trading records requirements also would not apply to the

    swap.\528\

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

    \528\ The Commission is of the view that CEA section 2(i) should

    not be interpreted to apply the daily trading records requirements,

    with the exception of those found in Commission regulation

    23.202(a)(1).

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

    In addition, for the reasons discussed in the next two sections,

    where a swap is between a non-U.S. swap dealer or non-U.S. MSP, on the

    one hand, and a non-U.S. person that is a guaranteed or conduit

    affiliate, on the other, under the Commission's interpretation of 2(i),

    the Commission would generally expect the parties to comply with the

    Category A Transaction-Level Requirements.\529\

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

    \529\ Where one of the parties to the swap is a conduit

    affiliate, the Commission would generally expect the parties to the

    swap only to comply with (to the extent that the Inter-Affiliate

    Exemption is elected), the conditions of the Inter-Affiliate

    Exemption, including the treatment of outward-facing swaps condition

    in Commission regulation 50.52(b)(4)(i). In addition, the part 43

    real-time reporting requirements must be satisfied.

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

    However, where a swap is between a non-U.S. swap dealer or non-U.S.

    MSP (including an affiliate of a U.S. person), on the one hand, and a

    non-U.S. person

    [[Page 45353]]

    that is not a guaranteed or conduit affiliate, on the other, under the

    Commission's interpretation of 2(i), the Commission would not expect

    the parties to the swap to comply with the Category A Transaction-Level

    Requirements.\530\ In this case, the Commission believes that generally

    there may be a relatively greater supervisory interest on the part of

    foreign regulators with respect to transactions between two

    counterparties that are non-U.S. persons so that application of the

    Category A Transaction-Level Requirements may not be warranted.\531\

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

    \530\ Thus, for example, a swap between a registered non-U.S.

    swap dealer and a German person would not be subject to Category A

    Transaction-Level Requirements.

    \531\ Where the counterparty to a non-U.S. swap dealer or non-

    U.S. MSP is an international financial institution such as the World

    Bank, the Commission also generally would not expect the parties to

    the swap to comply with the Category A Transaction-Level

    Requirements, even if the principal place of business of the

    international financial institution were located in the United

    States.

    For this purpose, the Commission would consider the

    international financial institutions to be the institutions listed

    as such in the Final Entities Rules, 77 FR at 30692 n. 1180, which

    include the International Monetary Fund, International Bank for

    Reconstruction and Development, International Development

    Association, International Finance Corporation, Multilateral

    Investment Guarantee Agency, the Inter-American Development Bank,

    and the Inter-American Investment Corporation. Even though some or

    all of these international financial institutions may have their

    principal place of business in the United States, the Commission

    would generally not consider the application of the Category A

    Transaction-Level Requirements to be warranted, for the reasons of

    the traditions of the international system discussed in the Final

    Entities Rules.

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

    With regard to substituted compliance, where a swap is between a

    non-U.S. swap dealer or non-U.S. MSP (including an affiliate of a U.S.

    person), on the one hand, and a U.S. person (other than a foreign

    branch of a U.S. bank swap dealer or U.S. MSP), on the other, the

    Commission's policy is that substituted compliance would generally not

    be available for the Category A Transaction-Level Requirements. The

    Commission believes that this approach is appropriate in this case

    because the Commission has a strong interest in ensuring that the swap

    fully complies with the Category A Transaction Level Requirements,

    without substituted compliance. A number of related reasons support

    this conclusion. As discussed above, a major purpose of Title VII is to

    control the potential harm to U.S. markets that can arise from risks

    that are magnified or transferred between parties via swaps. As also

    discussed above, swaps between U.S. persons and non-U.S. persons

    inherently raise the possibility of such risk magnification and

    transfer. The Category A Transaction Level Requirements are designed to

    constrain such risk magnification and transfer. The United States thus

    has a strong interest in applying the Dodd-Frank Act requirements,

    rather than substitute requirements adopted by non-U.S. authorities, to

    swaps with U.S. persons. Exercise of U.S. jurisdiction with respect to

    the Category A Transaction Level Requirements over swaps between U.S.

    persons and non-U.S. persons is a reasonable exercise of jurisdiction

    because of the strong U.S. interest in minimizing the potential risks

    that may flow to the U.S. economy as a result of such swaps.\532\

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

    \532\ See Restatement secs. 403(2)(a) (effect on territory of

    regulating state), 403(2)(c) (importance of regulated activity to

    the regulating state); 403 cmt. b (weight to be given to

    reasonableness factors depends on circumstances).

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

    Even though substituted compliance is not available with respect to

    swaps between a non-U.S. swap dealer or non-U.S. MSP, on the one hand,

    and a U.S. person (other than a foreign branch of a U.S. bank swap

    dealer or U.S. MSP), on the other, a market participant would be deemed

    in compliance with the relevant Dodd-Frank requirements where it

    complies with requirements in its home jurisdiction that are

    essentially identical to the Dodd-Frank requirements. Whether the home

    jurisdiction's requirements are essentially identical to the corollary

    Dodd-Frank requirements would be evaluated on a provision-by-provision

    basis. The Commission intends that a finding of essentially identical

    generally would be made through Commission action but in appropriate

    cases could be made through staff no-action.

    Based on the foregoing principles, the Commission staff issued a

    no-action letter related to risk mitigation.\533\ The Commission staff

    found that the Commission and the EU have essentially identical rules

    in important areas of risk mitigation for the largest counterparty swap

    market participants. Specifically, the Commission staff determined that

    under the European Market Infrastructure Regulation (EMIR), the EU has

    adopted risk mitigation rules that are essentially identical to certain

    provisions of the Commission's business conduct standards for swap

    dealers and major swap participants. In areas such as confirmation,

    portfolio reconciliation, portfolio compression, valuation, and dispute

    resolution, the Commission staff found that the respective regimes are

    essentially identical. The Commission staff determined that where a

    swap/OTC derivative is subject to concurrent jurisdiction under US and

    EU risk mitigation rules, compliance under EMIR will achieve compliance

    with the relevant Commission rules because they are essentially

    identical.\534\

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

    \533\ See No-Action Relief for Registered Swap Dealers and Major

    Swap Participants from Certain Requirements under Subpart I of Part

    23 of Commission Regulations in Connection with Uncleared Swaps

    Subject to Risk Mitigation Techniques under EMIR, CFTC Letter No.

    13-45 (Jul. 11, 2013) (``Risk Mitigation Letter'').

    \534\ The Risk Mitigation Letter provides an example of when

    requirements in a foreign jurisdiction would be essentially

    identical to Dodd-Frank requirements. See id.

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

    However, where the swap is between a non-U.S. swap dealer or non-

    U.S. MSP (including an affiliate of a U.S. person) and a foreign branch

    of a U.S. bank that is a swap dealer or MSP, as a policy matter, the

    Commission believes that substituted compliance should be available for

    the Category A Transaction-Level Requirements, to the extent

    applicable. Under substituted compliance, a counterparty can choose to

    follow a foreign jurisdiction's rules even though those rules are not

    essentially identical, provided that the regime is comparable and

    comprehensive. The Commission believes that international comity

    principles support taking this more flexible approach where the

    transaction, although it involves a U.S. person, takes place in a

    foreign jurisdiction.

    In addition, where a swap is between a non-U.S. swap dealer or non-

    U.S. MSP (including an affiliate of a U.S. person), on the one hand,

    and a non-U.S. person that is a guaranteed or conduit affiliate, on the

    other, substituted compliance may be available to satisfy the Category

    A Transaction Level Requirements, to the extent applicable, as

    discussed in the next two sections.

    c. Swaps With a Non-U.S. Person Guaranteed by a U.S. Person

    i. Proposed Guidance

    In the Proposed Guidance, with respect to swaps between a non-U.S.

    swap dealer or non-U.S. MSP, on the one hand, and a non-U.S.

    counterparty on the other hand, the Commission proposed to interpret

    CEA section 2(i) such that a non-U.S. swap dealer or non-U.S. MSP would

    be expected to comply with the Category A Transaction-Level

    Requirements for swaps where the non-U.S. counterparty's performance is

    guaranteed, or otherwise supported by, a U.S. person.\535\ In

    consideration of international comity principles, the Commission

    further proposed to interpret CEA section 2(i) so as to

    [[Page 45354]]

    permit substituted compliance for these Transaction-Level Requirements.

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

    \535\ See Proposed Guidance, 77 FR 41288.

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

    The Commission explained that it proposed to interpret section 2(i)

    in this manner because, where a non-U.S. counterparty's swaps

    obligations are guaranteed by a U.S. person, the risk of non-

    performance by the counterparty rests with the U.S. person that is the

    guarantor of performance or payment. If the non-U.S. person defaults on

    its obligations under the swaps, then the U.S. person guarantor will be

    held responsible (or would bear the cost) to settle those obligations.

    In circumstances in which a U.S. person ultimately bears the risk of

    non-performance of a counterparty to a swap with a non-U.S. swap dealer

    or non-U.S. MSP, the Commission noted its strong regulatory interest in

    performance by both parties to the swap, and hence proposed to apply

    these Transaction-Level Requirements.\536\

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

    \536\ See id.

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

    ii. Comments

    Some commenters concurred in the Commission's emphasis on a

    guarantee by a U.S. person as an interpretive guidepost. IATP, for

    example, stated that ``the U.S. person's guarantee is a crucial

    criterion for the Commission's determination of whether a non-U.S.

    person would be subject to compliance with Dodd-Frank or whether

    substituted compliance would be appropriate.'' \537\ Similarly, AFR, in

    commenting on the Proposed Order, expressed concern about U.S. taxpayer

    exposure to ``foreign affiliates of U.S. banks whose liabilities are

    guaranteed (implicitly or explicitly) by the parent company.'' \538\

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

    \537\ See IATP (Aug. 27, 2012) at 3-4.

    \538\ See AFR (Aug. 14, 2012) at 1-2.

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

    Other commenters, by contrast, stated that: (1) The Transaction-

    Level Requirements should never apply to swaps between counterparties

    that are both non-U.S. persons; \539\ (2) the Commission should exclude

    the swap dealing transactions of a non-U.S. person where the

    counterparties to the swaps are, themselves, non-U.S. persons,

    irrespective of whether such counterparties' obligations are guaranteed

    by the U.S. person; \540\ and (3) section 2(i) does not provide a legal

    basis for jurisdiction over a swap between non-U.S. persons based on a

    guaranty by a U.S. person because guarantees ``do not alter the

    location of activity.'' \541\ In a similar vein, IIB stated that the

    Commission's proposed treatment of guarantees based on its concern that

    the U.S. guarantor is exposed to risks incurred by one of its non-U.S.

    affiliates, ``is unduly broad.'' \542\

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

    \539\ See Australian Bankers (Aug. 27, 2012) at A8.

    \540\ See Sumitomo (Aug. 24, 2012) at 3. Sumitomo added that, at

    a minimum, the Commission should exclude swaps obligations in excess

    of a capped guaranty. Id.

    \541\ See CEWG (Aug. 27, 2012) at 6-7.

    \542\ See IIB (Aug. 27, 2012) at 14-15.

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

    IIB explained that guarantees are a very common way for U.S.

    multinational corporations (both financial and non-financial) to

    provide credit support for their non-U.S. subsidiaries. According to

    IIB, parent credit support enables these subsidiaries to hedge their

    risks cost-effectively in the markets in which they operate, thereby

    reducing the cost of risk management and therefore the costs of

    operations.\543\ Citi noted that ordinary course parent support

    commitments, general payment guarantees and capital maintenance

    commitments are often necessary to enter foreign banking markets. It

    added that U.S. multinationals also guarantee obligations of local

    subsidiaries so that their subsidiaries can effectively hedge risks in

    local markets.\544\

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

    \543\ Id. at 15-16.

    \544\ See Citi (Aug. 27, 2012) at 4-9.

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

    IIB argued that these arrangements ``are in stark contrast to

    circumstances where an unregulated foreign `shell' affiliate is used

    for purposes of entering into significant swap dealing activity outside

    the scope of Dodd-Frank and systematically transferring the market and

    credit risks arising from the activity to a U.S. affiliate.'' \545\

    Accordingly, IIB maintained that application of Transaction-Level

    Requirements where a non-U.S. counterparty to a non-U.S. swap dealer or

    non-U.S. MSP is guaranteed by a U.S. person is unnecessary because the

    Commission already has adopted an anti-evasion rule to address such

    schemes.\546\

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

    \545\ See IIB (Aug. 27, 2012) at 20.

    \546\ Id. See also Sullivan & Cromwell (Aug. 13, 2012) at 7

    (``the counterparty should be considered a non-U.S. person for

    purposes of the regulatory requirements, provided that the

    transactions are not being conducted by the non-U.S. persons as an

    evasion''); The Clearing House (Aug. 27, 2012) at 17 (stating that

    ``[a]ny guaranteed entity of a U.S. Person should only include

    `shell' entities that have transferred substantially all of their

    market and credit risk to a U.S. Person (excluding non-financial

    entities) or any entities created to evade U.S. swaps rules.'');

    Citi (Aug. 27, 2012) at 4-9 (``. . . Title VII should not apply to

    non-U.S. subsidiaries on the basis of guarantees . . . where such

    subsidiaries are bona fide companies.'').

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

    Commenters stated that in many instances, the Commission's concerns

    about a guarantee by a U.S. person can be addressed as a safety and

    soundness matter by the Federal Reserve Board when it supervises both

    the guarantor and its subsidiaries; further, where the U.S. providing a

    guarantee is itself a swap dealer or MSP, it also will be subject to

    Title VII requirements.\547\ In a related vein, the Commission was

    urged to adopt an exception from its proposed treatment of a non-U.S.

    counterparty with a guarantee from a U.S. person if either: (1) The

    counterparty is subject to U.S. capital requirements or comparable

    foreign (i.e., Basel-compliant) capital requirements; or (2) the

    guarantor is a U.S. bank holding company.\548\

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

    \547\ See Sullivan & Cromwell (Aug. 13, 2012) at 15.

    \548\ See IIB (Aug. 27, 2012) at 17-18.

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

    IIB also stated that the Commission should tie the application of

    Title VII requirements to the cross-border activities of U.S.-

    guaranteed foreign subsidiaries to the significance of the risk to the

    United States arising from the underlying guaranteed activity--that is,

    where the existence of a guarantee gives rise to direct and significant

    risks to the United States.\549\ Otherwise, IIB stated, ``the level of

    risk to the United States is too contingent, remote or low to justify

    application of U.S. regulation in the face of strong and more direct

    non-U.S. regulatory interests.'' \550\ Under such an approach, IIB

    stated, the Commission should adopt an exception from its proposed

    treatment of a non-U.S. counterparty with a guarantee from a U.S.

    person if the non-U.S. counterparty is not a financial entity and is

    entering into the transaction for hedging or risk mitigation

    purposes.\551\ More particularly, IIB posited, if the level of the non-

    U.S. counterparty's swap activity is insubstantial in relation to its

    net equity, or if the aggregate potential liability of the U.S.

    guarantor with respect to the non-U.S. counterparty's swap activity is

    insubstantial in relation to the net equity of the guarantor, then the

    risk to the United States will not be significant and Transaction-Level

    Requirements should not be applied.\552\

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

    \549\ Id. at 15-16, 18-19.

    \550\ Id. at 4.

    \551\ Id. at 16-17.

    \552\ Id. at 15-16.

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

    Many of the comments on this topic stated that the Commission's

    proposal in this regard would result in adverse competitive

    consequences.\553\ Others,

    [[Page 45355]]

    though, objected that Transaction-Level Requirements should not apply

    to entities guaranteed by U.S. persons because non-U.S. counterparties

    will likely be unwilling to agree to the legal documents necessary to

    comply with those requirements.\554\ And others stated that the

    proposed interpretation will not achieve the objective of mitigating

    counterparties' exposure to the credit risks of swap dealers because

    the U.S. guarantor's exposure in this scenario is to the credit risk of

    the guaranteed non-U.S. counterparty, not to the non-U.S. swap dealer

    that is transacting with that guaranteed non-U.S. counterparty.\555\

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

    \553\ See End Users Coalition (Aug. 27, 2012) at 3 (Commission's

    proposal may disadvantage non-U.S. affiliates of U.S. end-users

    whose non-U.S. counterparties may require guarantees to do

    business); Citi (Aug. 27, 2012) at 4-9 (applying Transaction-Level

    Rules in these circumstances would place U.S. multinationals at a

    severe competitive disadvantage relative to foreign-based

    corporations, as their subsidiaries abroad would have to either

    forgo parent support or comply with different transaction-level

    rules than those of the local market); IIB (Aug. 27, 2012) at 18

    (non-U.S. persons that register as swap dealers due to their trading

    with U.S. persons would be disadvantaged vis-[agrave]-vis non-U.S.

    firms that do not have a U.S. swap dealing business because only the

    former would be obligated to comply with the Transaction-Level

    Requirements for swaps with U.S.-guaranteed counterparties);

    Sullivan & Cromwell (Aug. 13, 2012) at 6 (Title VII should not apply

    to the non-U.S. operations and activities of an entity simply

    because it has a U.S. parent that provides a guarantee because this

    would impose duplicative regulation and unnecessary costs on non-

    U.S. operations that are already subject to local foreign rules and

    regulations).

    \554\ See Hong Kong Banks (Aug. 27, 2012) at 4-5.

    \555\ See, e.g., ISDA (Aug. 10, 2012) at 10.

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

    Citi commented that if Transaction-Level Requirements were to be

    applied to swaps of non-U.S. persons whose obligations were guaranteed

    by a U.S. person, then U.S.-based firms may be forced to remove parent

    support from their overseas subsidiaries in order to remain

    competitive. It argued that this would cause significant additional

    capital, resources, and personnel to be moved abroad so that these non-

    U.S. subsidiaries could manage swap risk on a stand-alone basis which,

    it averred, would fragment and harm the safety and soundness of U.S.-

    based firms, U.S. swaps markets, and the U.S. economy.\556\

    Accordingly, it urged the Commission to further study the issue of

    guarantees before finalizing its cross-border guidance.\557\

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

    \556\ See Citi (Aug. 27, 2012) at 4-9.

    \557\ Id. See also CEWG (Aug. 27, 2012) at 4-5 (recommending

    that the Commission ``undertake a more thorough regulatory analysis

    with respect to guarantees of swaps obligations'').

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

    One commenter requested that the Commission clarify the scope of a

    ``guarantee'' that can trigger application of Transaction-Level

    Requirements in these circumstances.\558\ Another objected to the scope

    of the term ``guarantee'' if it were defined to include not only a

    guarantee of payment or performance of swaps obligations, but also

    other formal arrangements to support the ability of a person to perform

    its obligations (such as liquidity puts and keepwell agreements).\559\

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

    \558\ See Hong Kong Banks at 4-5.

    \559\ See CEWG (Aug. 27, 2012) at 4-5.

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

    iii. Commission Guidance

    Under this Guidance, with respect to swaps between a non-U.S. swap

    dealer or non-U.S. MSP (including an affiliate of a U.S. person) on the

    one hand, and a non-U.S. counterparty on the other hand where the non-

    U.S. counterparty's performance is guaranteed (or otherwise supported

    by) a U.S. person, the Commission would generally expect the parties to

    the swap to comply with all of the Category A Transaction-Level

    Requirements. The Commission believes that this policy is warranted in

    light of the significant regulatory interest in managing and reducing

    the risks to U.S. firms, markets and commerce from such transactions.

    Further, this policy is based on the Commission's view that the failure

    to apply Category A Transaction-Level Requirements to such swaps could

    leave a significant gap in the regulation of risks presented by swap

    activities undertaken by U.S. firms. However, as proposed, the

    Commission's policy contemplates that substituted compliance (to the

    extent applicable) could satisfy the Category A Transaction-Level

    Requirements that otherwise might apply to such swaps, as further

    discussed below.

    In response to commenters that requested clarification of the

    nature of the guarantee of a non-U.S. counterparty by a U.S. person

    that will trigger the application of Transaction-Level Requirements to

    swaps with non-U.S. swap dealers or non-U.S. MSPs, the Commission

    references the approach set forth in the final rule further defining

    the term ``swap,'' among others.\560\ That is, for this purpose, a

    guarantee of a swap is a collateral promise by a guarantor to answer

    for the debt or obligation of a counterparty obligor under a swap.\561\

    Thus, to the extent that the non-U.S. swap dealer or non-U.S. MSP would

    have recourse to the U.S. guarantor in connection with its swaps

    position, the Commission would generally expect such non-U.S. swap

    dealer or MSP to comply with the Category A Transaction-Level

    Requirements for such a guaranteed swap (although substituted

    compliance may satisfy compliance with such requirements to the extent

    it is applicable, as discussed above). This interpretation also is

    consistent with the interpretation related to the MSP definition that

    the Commission set forth in the Final Entities Rules.\562\

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

    \560\ See Final Swap Definition, 77 FR at 48225-48227. The

    interpretation herein applies only to a swap that is not a security-

    based swap or a mixed swap.

    \561\ Id. at 48226 n.186.

    \562\ See Final Entities Rules, 77 FR at 30689 (``[A]n entity's

    swap or security-based swaps positions in general would be

    attributed to a parent, other affiliate or guarantor for purposes of

    major participant analysis to the extent that counterparties to

    those positions would have recourse to that other entity in

    connection with the position. Positions would not be attributed in

    the absence of recourse.'').

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

    Conversely, where a non-U.S. swap dealer or non-U.S. MSP enters

    into a swap with a non-U.S. counterparty that does not have a guarantee

    as so described from a U.S. person and is not an affiliate conduit, the

    Commission's view is that the Transaction-Level Requirements should not

    apply.\563\ Considerations relevant to application of the Transaction-

    Level Requirements also relate to persons guaranteeing swaps

    obligations. As noted in the proposal, the Transaction-Level

    Requirements with respect to required clearing and swap processing,

    margin (and segregation), and portfolio reconciliation and compression

    can serve to significantly mitigate risks to the swap dealer's

    counterparties, and by extension, the risk to the U.S. person

    guaranteeing the non-U.S. counterparty's obligations under the swap.

    Other Transaction-Level Requirements--trade confirmation, swap trading

    relationship documentation, and daily trading records--protect the

    counterparties to the swap, and thus also protect a U.S. person that

    guarantees a non-U.S. counterparty's obligations under the swap, by

    ensuring that swaps are properly documented and recorded.

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

    \563\ The Commission agrees with commenters who stated that

    Transaction-Level Requirements should not apply if a non-U.S. swap

    dealer or non-U.S. MSP relies on a written representation by a non-

    U.S. counterparty that its obligations under the swap are not

    guaranteed with recourse by a U.S. person. Such an approach is

    consistent with Commission practice in other contexts such as the

    external business conduct rules.

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

    In the Commission's view, because Congress directed that the trade

    execution requirement apply to swaps that are subject to the clearing

    requirement and made available to trade, it is appropriate for the

    trade execution requirement to apply to those cross-border swaps that

    are subject to the clearing mandate and are made available to trade.

    The Commission believes that both requirements--the clearing mandate

    and trade execution requirement--are of fundamental importance to the

    management and reduction of risks posed by swap activities of market

    participants. Requiring swaps to be traded on a regulated exchange or

    execution facility provides market participants with

    [[Page 45356]]

    greater pre- and post-trade transparency. Real-time public reporting

    improves price discovery by requiring that swap and pricing data be

    made publicly available. Taken together, the trade execution and real-

    time public reporting Transaction-Level Requirements provide important

    information to market participants and regulators with resulting

    efficiency in the marketplace. This, in turn, facilitates risk

    management which benefits swap counterparties and also serves to reduce

    the likelihood that a U.S. guarantor will be called upon to satisfy a

    non-U.S. counterparty's swaps obligations.\564\

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

    \564\ Accordingly, the Commission disagrees with commenters who

    objected to the proposed interpretation on the ground that it would

    not advance the goal of mitigating the risk of credit exposure of

    the guarantor U.S. person to the non-U.S. swap dealer or non-U.S.

    MSP. The Transaction-Level Requirements also serve to protect

    against risk to the guarantor U.S. person by reducing the likelihood

    that its obligations under the guarantee will be called upon in the

    first instance.

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

    Further, in the Final Swap Definition, the Commission found that a

    guarantee of a swap is a term of that swap that affects the price or

    pricing attributes of that swap. The Commission therefore concluded

    that when a swap has the benefit of a guarantee, the guarantee is an

    integral part of that swap. The Commission explained that typically

    when a swap counterparty uses a guarantee as credit support for its

    swaps obligations, the guarantor's resources are added to the analysis

    of the swap because ``the market will not trade with that counterparty

    at the same price, on the same terms, or at all without the

    guarantee.'' \565\

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

    \565\ See Final Swap Definition, 77 FR 48225-48226.

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

    For all the foregoing reasons, the Commission disagrees with

    commenters that asserted that it should not, or lacks the legal

    authority to, interpret CEA section 2(i) as to apply to swaps where one

    counterparty is a non-U.S. swap dealer or a non-U.S. MSP and the other

    counterparty is a non-U.S. person whose obligations under the swap are

    guaranteed by a U.S. person. Where a U.S. person provides a guarantee

    of a non-U.S. counterparty's swaps obligations for which there is

    recourse to the U.S. person, where that guarantee is a term of the swap

    and affects the price or pricing attributes of that swap, and where the

    Transaction-Level Requirements serve to protect and mitigate risk to

    that U.S. person guarantor, the Commission believes that such swaps,

    either individually or in the aggregate, have a direct and significant

    connection with activities in, or effect on, U.S. commerce.

    The application of Dodd-Frank Act requirements to swaps of non-U.S.

    persons whose swaps obligations are guaranteed by U.S. persons is also

    consistent with foreign relations law. As noted in the discussion above

    regarding the application of these requirements to swaps of U.S.

    persons with non-U.S. persons, a major purpose of Title VII is to

    control the potential harm to U.S. markets that can arise from risks

    that are magnified or transferred between parties via swaps. Similarly,

    a guarantee--which is an integral part of a swap--can lead to the

    transfer of risk from the guaranteed non-U.S. person to the U.S.

    guarantor. Because Category A Transaction Level Requirements are

    designed to mitigate such risk transfer, the Commission believes there

    is a strong interest in applying the Dodd-Frank Act requirements to

    swaps of non-U.S. persons that are guaranteed by U.S. persons.\566\

    However, the Commission also understands the countervailing interest of

    home country regulators in such swaps, and therefore believes that

    substituted compliance should generally be available in this context.

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

    \566\ See generally note 532 and related discussion, supra.

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

    The Commission also disagrees with commenters that suggested that

    its interpretation on this score should apply only to certain

    guaranteed swaps (e.g., not to swaps by non-financial entities entered

    into for hedging or risk mitigation purposes), or only to in certain

    circumstances (e.g., where the guaranteed non-U.S. counterparty's swap

    activity is a certain percentage of its net equity or the aggregate

    potential liability of the U.S. guarantor with respect to the non-U.S.

    counterparty's swaps obligations is a certain percentage of the

    guarantor's net equity), or only to a certain extent (e.g., to swaps

    obligations in excess of a capped guarantee). In the Final Swap

    Definition, the Commission acknowledged that a ``full recourse''

    guarantee would have a greater effect on the price of a swap than a

    ``limited'' or ``partial recourse'' guarantee, yet nevertheless

    determined that the presence of any guarantee with recourse, no matter

    how robust, is price forming and an integral part of a guaranteed

    swap.\567\

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

    \567\ Id. at 48226.

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

    The Commission similarly believes that the presence of any

    guarantee with recourse by a U.S. person of the swaps obligations of a

    non-U.S. counterparty to a swap with a non-U.S. swap dealer or non-U.S.

    MSP suffices to justify the application of Transaction-Level

    Requirements that swap. Therefore, as noted above, to the extent that a

    non-U.S. swap dealer or non-U.S. MSP would have recourse to the U.S.

    guarantor in connection with its swaps position, the Commission would

    generally expect such non-U.S. swap dealer or MSP to comply with the

    Category A Transaction-Level Requirements for such a guaranteed swap

    (although substituted compliance may satisfy compliance with such

    requirements to the extent it is applicable). Although the Commission

    believes all relevant facts and circumstances should be analyzed, as a

    general matter the Commission is of the view that the purpose for which

    the non-U.S. counterparty is entering into the swap, or the net equity

    of the non-U.S. counterparty or the guarantor, or the extent of the

    guarantee, would generally not warrant a different conclusion.

    Finally, the Commission disagrees with commenters that urged it to

    limit its interpretation in this regard to cases of evasion, or to

    exclude from the scope of its interpretation those swaps in which the

    non-U.S. counterparty is subject to appropriate capital requirements or

    the guarantor is a U.S. bank holding company. The events surrounding

    the collapse of AIGFP highlight how guarantees can cause major risks to

    flow to the guarantor. ``AIGFP's obligations were guaranteed by its

    highly rated parent company . . . an arrangement that facilitated easy

    money via much lower interest rates from the public markets, but

    ultimately made it difficult to isolate AIGFP from its parent, with

    disastrous consequences.'' \568\

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

    \568\ AIG Report, supra note 5, at 20.

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

    The Commission's view is that the protections and mitigation of

    risk exposures afforded by the Category A Transaction-Level

    Requirements would be rendered far less effective if in the case of

    swaps where one counterparty is a non-U.S. swap dealer or a non-U.S.

    MSP and the other counterparty is a non-U.S. person guaranteed by a

    U.S. person such requirements only apply when such swaps are part of a

    scheme to evade the Dodd-Frank Act. Further, while capital requirements

    are an important element of the Title VII regime to reduce systemic

    risk,\569\ the

    [[Page 45357]]

    comprehensive regulatory structure established by the Dodd-Frank Act

    goes beyond such requirements. The CEA, as amended by the Dodd-Frank

    Act, also requires the imposition of the Transaction-Level Requirements

    \570\ except to the extent that section 2(i) limits their application

    to cross-border transactions or activities. Therefore, the Commission

    believes that, rather than excluding the swaps at issue from the scope

    of the Title VII regulatory regime, with the corresponding increase in

    risk to U.S. persons and to the U.S. financial system, in most cases

    compliance with the Category A Transaction-Level Requirements is

    appropriate where non-U.S. swap dealers and non-U.S. MSPs that enter

    into swaps with non-U.S. counterparties guaranteed by a U.S. person.

    Further, the Commission does not believe that a different

    interpretation should be taken solely because applicable capital

    requirements are satisfied.\571\

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

    \569\ CEA section 4s(e)(1) provides that each registered swap

    dealer and MSP for which there is a prudential regulator shall meet

    such minimum capital requirements as the applicable prudential

    regulator shall prescribe, but that each registered swap dealer and

    MSP for which there is not a prudential regulator shall meet such

    minimum capital requirements as the Commission shall prescribe.

    \570\ See Appendix B for information regarding the Transaction-

    Level Requirements and the provisions of the CEA which they

    implement.

    \571\ In the Final Entities Rules, the Commission stated that it

    does ``not believe that it is necessary to attribute a person's swap

    or security-based swaps positions to a parent or other guarantor if

    the person is already subject to capital regulation by the CFTC or

    SEC (i.e., swap dealers, security-based swap dealers, MSPs, major

    security-based swap participants, FCMs and broker-dealers) or if the

    person is a U.S. entity regulated as a bank in the United States.

    Positions of those regulated entities already will be subject to

    capital and other requirements, making it unnecessary to separately

    address, via major participant regulations, the risks associated

    with guarantees of those positions.'' See Final Entities Rules, 77

    FR at 30689. The Commission continued, ``As a result of this

    interpretation, holding companies will not be deemed to be major

    swap participants as a result of guarantees to certain U.S. entities

    that are already subject to capital regulation.'' Id. at 30689 n.

    1134. Subsequently, in the Final Swap Definition, the Commission

    stated that ``[a]s a result of interpreting the term `swap' (that is

    not a security-based swap or mixed swap) to include a guarantee of

    such swap, to the extent that a counterparty to a swaps position

    would have recourse to the guarantor in connection with the

    position, and based on the reasoning set forth [in the Final

    Entities Rules] in connection with major swap participants, the CFTC

    will not deem holding companies to be swap dealers as a result of

    guarantees to certain U.S. entities that are already subject to

    capital regulation.'' See Final Swap Definition, 77 FR at 48266

    n.188. The Commission's conclusion that capital compliance and

    prudential regulation, in certain circumstances, can obviate the

    need for registration as a swap dealer or MSP does not bear upon,

    and is not inconsistent with, the Commission's interpretation herein

    that notwithstanding capital compliance and prudential regulation,

    Transaction-Level Requirements may be applied where a non-U.S. swap

    dealer or non-U.S. MSP enters into a swap with a non-U.S.

    counterparty whose obligations under that swap are guaranteed, with

    recourse, by a U.S. person.

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

    In addition, the Commission believes that this Guidance, which

    contemplates a system of substituted compliance in accordance with

    principles of international harmonization, may allow non-U.S. swap

    dealers and non-U.S. MSPs to comply, in appropriate circumstances, with

    their home-country requirements when transacting with non-U.S.

    counterparties whose swaps obligations are guaranteed with recourse by

    U.S. persons. The Commission believes that the substituted compliance

    regime contemplated by the Guidance will facilitate equivalent

    regulatory treatment of equivalent swaps without undermining the swaps

    reforms enacted by Congress in Title VII.

    d. Swaps With a Non-U.S. Person That is an Affiliate Conduit

    i. Proposed Guidance

    The Commission proposed to interpret CEA section 2(i) such that the

    Category A Transaction-Level Requirements would apply to a swap if at

    least one of the parties to the swap is an ``affiliate conduit.'' Under

    the Proposed Guidance, an affiliate conduit exists when: (1) A non-U.S.

    person that is majority-owned, directly or indirectly, by a U.S.

    person; (2) the non-U.S. person regularly enters into swaps with one or

    more of its U.S. affiliates of its U.S. person owner; and (3) the

    financial results of such non-U.S. person are included in the

    consolidated financial statements of its U.S. person owner.\572\ The

    Commission explained that it believed the proposed application of

    Transaction-Level Requirements was necessary because, ``given the

    nature of the relationship between the conduit and the U.S. person, the

    U.S. person is directly exposed to risks from and incurred by'' the

    affiliate conduit.\573\ The Commission further indicated that it was

    concerned that a U.S. swap dealer or U.S. MSP would utilize affiliate

    conduits to conduct swaps outside the Dodd-Frank regulatory regime.

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

    \572\ See Proposed Guidance, 77 FR at 41229.

    \573\ Id.

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

    ii. Comments

    The commenters who addressed the Commission's proposed approach to

    affiliate conduits expressed concerns about what they felt was an

    overly broad scope of the term ``affiliate conduit.'' Several of these

    commenters stated that the non-U.S. affiliate conduit concept should be

    omitted from the Guidance.\574\ SIFMA stated that the term ``regular''

    is too vague in that ``it does not account for the purpose of the

    inter-affiliate swap, the relative amount of the conduit's risk

    transferred, the nature of the transferred risk, or whether some or all

    of the risk is transferred.''\575\ SIFMA also commented that activities

    of a non-U.S. affiliate conduit do not satisfy the requisite nexus to

    the United States under section 2(i) to justify different treatment

    from other non-U.S. counterparties. Further, SIFMA stated that where

    substituted compliance is unavailable, a non-U.S. swap dealer

    transacting with an affiliate conduit is subject to applicable

    Transaction-Level Requirements, which could cause non-U.S. swap dealers

    to cease doing business with non-U.S. affiliate conduits.\576\ As an

    alternative, SIFMA recommended that the proposed affiliate conduit

    provision that the conduit ``regularly enter into swaps'' should be

    replaced with a provision that the conduit ``regularly enter[ ] into

    swaps with one or more other U.S. affiliates of the U.S. person for the

    purpose of transferring to that U.S. person all risk of swap

    activity.''

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

    \574\ SIFMA (Aug. 27, 2012) at A22-23; IIB at (Aug. 27, 2012) at

    20-21; Hong Kong Banks (Aug. 27, 2012) at 13.

    \575\ SIFMA (Aug. 27, 2012) at A23. See also IIAC (stating that

    the Commission should clarify the meaning of ``regularly enters into

    swaps with . . . affiliates'' and circumstances under which the

    Commission would interpret the financials of a non-U.S. counterparty

    to be combined with the financial statements of the U.S. person for

    purposes of applying Transaction-Level Requirements to transactions

    by U.S. persons that might be using conduits to avoid such

    requirements) (Aug. 27, 2012) at 8.

    \576\ SIFMA (Aug. 27, 2012) at A22.

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

    Other commenters raised similar objections concerning the scope of

    the affiliate conduit provision. Goldman stated that the proposed

    description of an affiliate conduit was so broad that ``an entity could

    be rendered a conduit by executing even a single trade despite the fact

    that the entity otherwise would be eligible for substituted compliance,

    or would not fall within Title VII's jurisdiction at all.'' \577\ Such

    a broad definition, in Goldman's view, will result in competitive

    disparities for foreign affiliates of U.S.-based swap dealers and may

    even cover non-financial entities attempting to hedge risk.\578\ SIFMA

    added that the concept

    [[Page 45358]]

    of indirect majority ownership is imprecise and its application to non-

    U.S. affiliate conduits is unclear.\579\ Hong Kong Banks believed that

    the conduit proposal is unnecessary since its activities would be

    captured in the registration process.\580\ Peabody stated that the

    application of Transaction-Level Requirements to affiliate conduits

    seemingly contradicts the Proposed Guidance's treatment of foreign

    affiliates as non-U.S. persons.\581\ If the affiliate conduit concept

    remains in the Guidance, SIFMA requested that the Commission clarify

    whether or not swap dealers may rely on a counterparty's

    representations as to its non-U.S.-affiliate's conduit status.\582\

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

    \577\ Goldman (Aug. 27, 2012) at 6. See also Japanese Bankers

    Association (Aug. 27, 2012) at 11 (stating that it is difficult to

    determine under the Proposed Guidance when a counterparty is a

    conduit for a U.S. person, and that the conduit provisions should

    not be implemented).

    \578\ Goldman (Aug. 27, 2012) at 6. See also Peabody (Aug. 27.

    2012) at 3 (stating that applying the Dodd-Frank requirements to

    swaps entered into or booked by affiliates of commercial end-users

    outside the United States to hedge or mitigate commercial risks of

    activities outside the United States will create an overlapping (and

    potentially inconsistent) tangle of international laws that will

    increase costs and potential liabilities associated with such swaps,

    and materially undermine their utility and risk mitigation benefits;

    stating further that foreign entities wishing to avoid becoming

    subject to Dodd-Frank requirements will decline to enter into swaps

    with such affiliates, thereby decreasing market liquidity,

    increasing market risk competition, imposing higher commercial

    costs, and resulting in higher prices for customers and downstream

    consumers, and would put U.S. business at a competitive disadvantage

    in global markets).

    \579\ SIFMA (Aug. 27, 2012) at A24.

    \580\ Hong Kong Banks (Aug. 27, 2012) at 13.

    \581\ Peabody (Aug. 28, 2012) at 2-3.

    \582\ SIFMA (Aug. 27, 2012) at A24. SIFMA stated that the

    determination of whether a counterparty to a swap is a non-U.S.

    affiliate conduit should be made at the inception of the swap based

    on the most recent updated representation from the counterparty,

    which should be renewed by the counterparty once per calendar year.

    Id. at A25.

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

    IIB stated that the Commission should withdraw its proposal on

    affiliate conduits and instead, where there is clear circumvention,

    rely on its existing anti-evasion authority.\583\ It added that the

    Commission's proposal for the ``conduit'' treatment of a foreign entity

    that ``regularly'' engages in back-to-back swaps with a U.S. affiliate

    is unjustifiably broad. IIB also stated that the proposed standard is

    inconsistent with statutory standards for the extraterritorial

    application of Title VII, and that there is no basis to conclude that

    inter-affiliate swaps create direct and significant risk to the United

    States simply because they occur ``regularly.'' \584\

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

    \583\ IIB (Aug. 27, 2012) at 20-21.

    \584\ Id. at 19.

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

    iii. Commission Guidance

    In the Proposed Guidance, the Commission explained that it believed

    the proposed application of Transaction-Level Requirements was

    necessary because, ``given the nature of the relationship between the

    conduit and the U.S. person, the U.S. person is directly exposed to

    risks from and incurred by'' the affiliate conduit.\585\ The Commission

    further indicated that it was concerned that a U.S. swap dealer or U.S.

    MSP would utilize affiliate conduits to conduct swaps outside the Dodd-

    Frank regulatory regime.

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

    \585\ See Proposed Guidance, 77 FR at 41229.

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

    For purposes of this policy statement, the Commission is clarifying

    that an affiliate conduit encompasses those entities that function as a

    conduit or vehicle for U.S. persons conducting swaps transactions with

    third-party counterparties. In response to comments received, the

    Commission is identifying some of the factors that the Commission

    believes are relevant to determining whether a non-U.S. person is an

    ``affiliate conduit'' of a U.S. person. As explained in greater detail

    below, modifications to the Proposed Guidance with regard to the term

    ``affiliate conduit'' are intended to respond to commenters' concerns

    about a lack of clarity on the scope of the term affiliate conduit and

    to better identify those non-U.S. affiliates whose swap activities,

    either individually or in the aggregate, have a direct and significant

    connection with activities in, or effect on, U.S. commerce as a result

    of their relationship with their U.S. affiliates. Specifically, the

    Commission is modifying the factors that might be relevant to the

    consideration of whether a non-U.S. affiliate of a U.S. person is an

    affiliate conduit by: (1) clarifying the meaning of ``regularly enters

    into swaps,'' and in particular, the activities of a non-U.S.

    counterparty that renders it an affiliate conduit; and (2) adding the

    concept of ``control.''

    As the Commission understands, it is common for large global

    companies to centralize their hedging or risk-management activities in

    one or more affiliates (informally referred to as a ``treasury

    conduit'' or ``conduit''). Under this structure, the conduit may enter

    into swaps with its affiliates and then enter into offsetting swaps

    with third-parties. In other cases, the conduit may enter into swaps

    with third-parties as agent for its affiliates. In either case, the

    conduit functions as a vehicle by which various affiliates engage in

    swaps with third-parties (i.e., the market). This paradigm promotes

    operational efficiency and prudent risk management by enabling a

    company to manage its risks on a consolidated basis at a group

    level.\586\ Accordingly, based on comments, rather than considering

    whether a non-U.S. person ``regularly enters into swaps'' with one or

    more of its U.S. affiliates of its U.S. person owner, the Commission

    will generally consider whether the non-U.S. person, in the regular

    course of business, engages in swaps with non-U.S. third-parties for

    the purpose of hedging or mitigating risks faced by, or to take

    positions on behalf of, its U.S. affiliates, and enters into offsetting

    swaps or other arrangements with its U.S. affiliates in order to

    transfer the risks and benefits of such swaps with third-parties to its

    U.S. affiliates.

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

    \586\ One market participant described the functions of such a

    conduit and its relationship with respect to other affiliates within

    the corporate group in the following manner:

    Many business enterprises, including [Prudential Financial Inc.,

    or ``PFI''], elect to operate in a manner that assigns specific

    functions to related and commonly-controlled affiliates. With regard

    to swap transactions, it has long been our practice, as an

    enterprise-type company with separate legal entities that are

    commonly owned by PFI to use one affiliate, Prudential Global

    Funding LLC (``PGF''), to directly face the market as a ``conduit''

    to hedge the net commercial and financial risk of the various

    operating affiliates within PFI. Under this practice, only PGF

    (i.e., the conduit) is required to trade with external market

    participants, while the internal affiliates within PFI trade

    directly with the PGF. The use of PGF as the single conduit for the

    various operating affiliates within PFI diminishes the demands on

    PFI's financial liquidity, operational assets and management

    resources, as affiliates within PFI avoid having to establish

    independent relationships and unique infrastructure to face the

    market. Moreover, use of PGF as a conduit within PFI permits the

    netting of our affiliates' trades (e.g., one affiliate is hedging

    floating rates while another is hedging fixed rates). This

    effectively reduces the overall risk of PFI and our affiliates, and

    allows us to manage fewer outstanding positions with external market

    participants.

    The Prudential Insurance Company of America (Feb. 17, 2011) at

    2.

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

    The Commission recognizes the significant benefits associated with

    a corporate group's use of a single entity to conduct the group's

    market-facing swap business. The Commission also believes, though, that

    in this situation the risks resulting from swaps of the entity that

    faces the market as a conduit on behalf of its affiliates in fact

    reside with those affiliates; that is, while the swaps are entered into

    by the conduit, through back-to-back swaps or other arrangements the

    conduit passes the risks and benefits of those swaps to its

    affiliates.\587\ Where the conduit is located outside the United

    States, but is owned and controlled by a U.S. person, the Commission

    believes that to recognize the economic reality of the situation, the

    conduit's swaps should be attributed to the U.S. affiliate(s). The fact

    that the conduit is located outside the United States does not alter

    the economic reality that its swaps are undertaken for the benefit of,

    and at the economic risk of, the U.S. affiliate(s), and more broadly,

    for the corporate group that is owned and controlled by a U.S. person.

    Under these circumstances, the Commission believes that the swap

    activities of the non-U.S. conduit may meet the ``direct and

    [[Page 45359]]

    significant'' jurisdictional nexus within the meaning of CEA section

    2(i).\588\

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

    \587\ See The Prudential Insurance Company of America (Feb. 17,

    2011); Kraft Foods (``Kraft'') (Feb. 11, 2011).

    \588\ In this respect, it is irrelevant whether the risk is

    wholly or partly transferred back to the U.S. affiliate(s); the

    jurisdictional nexus is met by reason of the trading relationship

    between the conduit and the affiliated U.S. persons.

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

    Further, in order to facilitate a consistent application of the

    term affiliate conduit and to mitigate any undue burden or complexity

    for market participants in assessing affiliate conduit status, the

    Commission clarifies that its policy contemplates that a market

    participant may reasonably rely on counterparty representations as to

    its non-U.S. affiliate conduit status.\589\

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

    \589\ This is consistent with the Commission's approach to the

    determination of whether a counterparty is a ``U.S. person.'' See

    section IV.A, supra.

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

    Finally, the Commission notes in response to commenters that an

    affiliate conduit would not necessarily be guaranteed by its parent. As

    one market participant explained, ``centralized hedging centers are

    generally evaluated as wholly-owned subsidiaries of the corporate group

    that do not require additional credit support, such as a parent

    guaranty or collateral.'' \590\ Therefore, the Commission believes that

    it is reasonable and appropriate to interpret CEA section 2(i) in a

    manner that recognizes an affiliate conduit as a separate category of

    counterparty whose swaps with non-U.S. persons may be subject to

    certain Transaction-Level Requirements. Specifically, where one of the

    parties to the swap is a conduit affiliate, the Commission would

    generally expect the parties to the swap only to comply with (to the

    extent that the Inter-Affiliate Exemption is elected), the conditions

    of the Inter-Affiliate Exemption, including the treatment of outward-

    facing swaps condition in Commission regulation 50.52(b)(4)(i). In

    addition, the part 43 real-time reporting requirements must be

    satisfied.

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

    \590\ See Kraft (Feb. 11, 2011) at 3.

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

    In summary, for the purposes of the Commission's interpretation of

    CEA section 2(i), the Commission believes that certain factors are

    relevant to considering whether a non-U.S. person is an ``affiliate

    conduit.'' Such factors include whether:

    (i) the non-U.S. person is a majority-owned affiliate \591\ of a

    U.S. person;

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

    \591\ Commission regulation 1.3(ggg)(6)(i) defines ``majority-

    owned affiliates'' as follows:

    [C]ounterparties to a swap are majority-owned affiliates if one

    counterparty directly or indirectly owns a majority interest in the

    other, or if a third party directly or indirectly owns a majority

    interest in both counterparties to the swap, where `majority

    interest' is the right to vote or direct the vote of a majority of a

    class of voting securities of an entity, the power to sell or direct

    the sale of a majority of a class of voting securities of an entity,

    or the right to receive upon dissolution or the contribution of a

    majority of the capital of a partnership.

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

    (ii) the non-U.S. person is controlling, controlled by or under

    common control \592\ with the U.S. person;

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

    \592\ Commission regulation 1.3(ggg)(4)(i) refers to an ``entity

    controlling, controlled by or under common control with the

    person.'' Final Entities Rules elaborated on this provision,

    stating:

    For these purposes, we interpret control to mean 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. This is

    consistent with the definition of ``control'' and ``affiliate'' in

    connection with Exchange Act rules regarding registration

    statements. See Exchange Act rule 12b-2. . . .

    77 FR 30631 n. 437, and

    [I]f a parent entity controls two subsidiaries which both engage

    in activities that would cause the subsidiaries to be covered by the

    dealer definitions, then each subsidiary must aggregate the swaps or

    security-based swaps that result from both subsidiaries' dealing

    activities in determining if either subsidiary qualifies for the de

    minimis exception.

    Id. at n. 438.

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

    (iii) the financial results of the non-U.S. person are included

    in the consolidated financial statements of the U.S. person; and

    (iv) the non-U.S. person, in the regular course of business,

    engages in swaps with non-U.S. third-party(ies) for the purpose of

    hedging or mitigating risks faced by, or to take positions on behalf

    of, its U.S. affiliate(s), and enters into offsetting swaps or other

    arrangements with its U.S. affiliate(s) in order to transfer the

    risks and benefits of such swaps with third-party(ies) to its U.S.

    affiliates.

    Other facts and circumstances also may be relevant. The Commission does

    not intend that the term ``conduit affiliate'' would include affiliates

    of swap dealers.

    5. Application of the ``Category B'' Transaction-Level Requirements to

    Swap Dealers and MSPs

    This section discusses the Commission's policy on the application

    of the Category B Transaction-Level Requirements to swaps in which at

    least one of the parties to the swap is a registered swap dealer or

    MSP. As noted earlier, the Category B Transaction Level Requirements

    pertain to external business conduct standards which the Commission

    adopted pursuant to CEA section 4s(b) as a Category B Transaction-Level

    Requirement.\593\

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

    \593\ The categorization of Transaction-Level Requirements into

    Categories A and B is discussed in section E, supra. See Appendix B

    for a descriptive list of the Category A and Category B requirements

    and Appendix D for a table summarizing the application of the

    Category A Transaction-Level Requirements to Swap Dealers and MSPs.

    The Appendices to this Guidance should be read in conjunction with

    this section and the rest of the Guidance.

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

    Consistent with the Proposed Guidance, the Commission will

    generally interpret CEA section 2(i) so that the Category B

    Transaction-Level Requirements (i.e., the external business conduct

    standards) either do or do not apply to the swap, based on the

    counterparties to the swap, as explained below. Under this

    interpretation, substituted compliance is generally not expected to be

    applicable with regard to the Category B Transaction-Level Requirements

    under this Guidance.\594\

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

    \594\ See Appendix E to this Guidance for a summary of these

    requirements and the discussion in section D, supra.

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

    In considering whether Category B Transaction-Level Requirements

    are applicable, the Commission would generally consider whether the

    swap is with a:

    (i) U.S. swap dealer or U.S. MSP (including affiliates of non-

    U.S. persons);

    (ii) foreign branch of a U.S. bank that is a swap dealer or MSP;

    or

    (iii) non-U.S. swap dealer or non-U.S. MSP (including an

    affiliate of a U.S. person).

    Specifically, as explained more below, where a swap is with a U.S.

    swap dealer or U.S. MSP, the parties to the swap generally should be

    subject to the Category B Transaction-Level Requirements in full,

    regardless of whether the other counterparty to the swap is a U.S.

    person or a non-U.S. person. However, in the case of a foreign branch

    of a U.S. bank that is a swap dealer or MSP, or a non-U.S. swap dealer

    or non-U.S. MSP, the parties to the swap should generally only be

    subject to the Category B Transaction-Level Requirements when the

    counterparty to the swap is a U.S. person (other than a foreign branch

    of a U.S. bank that is a swap dealer or MSP). Conversely, under the

    Commission's interpretation of 2(i), where a swap is between a non-U.S.

    swap dealer or non-U.S. MSP (including an affiliate of a U.S. person)

    and a non-U.S. counterparty (regardless of whether the non-U.S.

    counterparty is a guaranteed or conduit affiliate), the parties to the

    swap would not be expected to comply with the Category B Transaction-

    Level Requirements. The reasons for the Commission's policies are

    discussed below.

    The application of the Category B Transaction-Level Requirements is

    summarized in Appendix E to this Guidance, which should be read in

    conjunction with the rest of this Guidance.

    a. Swaps With U.S. Swap Dealers and U.S. MSPs

    As explained above, where a swap is with a U.S. swap dealer or U.S.

    MSP (including an affiliate of a non-U.S. person), the Commission's

    policy is that the parties to the swap should be subject

    [[Page 45360]]

    to the Category B Transaction-Level Requirements in full, regardless of

    whether the counterparty is a U.S. person or a non-U.S. person, without

    substituted compliance available.

    b. Swaps With Foreign Branches of a U.S. Bank That Is a Swap Dealer or

    MSP

    In the case of a swap with a foreign branch of a U.S. bank that is

    a swap dealer or MSP, the Commission's policy is that the Category B

    Transaction-Level Requirements should apply only if the counterparty to

    the swap is a U.S. person (other than a foreign branch of a U.S. bank

    that is a swap dealer or MSP).\595\

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

    \595\ For the reasons discussed in note 531, supra, where the

    counterparty to the swap is an international financial institution,

    the Commission also generally would not expect the parties to the

    swap to comply with the Category B Transaction-Level Requirements,

    even if the principal place of business of the international

    financial institution were located in the United States.

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

    The Commission believes that where a swap is between a foreign

    branch of a U.S. bank that is a swap dealer or MSP \596\ and a U.S.

    person (other than a foreign branch of a U.S. bank that is a swap

    dealer or MSP), the swap has a direct and significant connection with

    activities in, or effect on, U.S. commerce. Because of the significant

    risks to U.S. persons and the financial system presented by such swap

    activities, under the Commission's interpretation of CEA section 2(i),

    generally the parties to the swap should comply with the Category B

    Transaction Level Requirements. Whenever a swap involves at least one

    counterparty that is a U.S. person, the Commission believes it has a

    strong supervisory interest in regulating and enforcing Transaction-

    Level Requirements, including external business conduct standards. In

    this case, the Commission believes the transaction should be viewed as

    being between two U.S. persons. For these reasons, the Commission's

    policy under section 2(i) is that substituted compliance would not be

    available.\597\

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

    \596\ See section C, supra, regarding the definition of a

    foreign branch and the determination of when a swap transaction is

    with a foreign branch for purposes of this Guidance.

    \597\ In this case, although the foreign branch would not

    register separately as a swap dealer, the Commission interprets 2(i)

    in a manner that would permit the U.S. person to task its foreign

    branch to fulfill its regulatory obligations with respect to the

    Category B Transaction-Level Requirements. The Commission would

    consider compliance by the foreign branch or agency to constitute

    compliance with these Transaction-Level Requirements. However, under

    the Commission's interpretation of 2(i), the U.S. person (principal

    entity) would remain responsible for compliance with the Category B

    Transaction-Level Requirements.

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

    However, where the swap is between a foreign branch of a U.S. bank

    that is a swap dealer or MSP, on the one hand, and a non-U.S. person on

    the other (whether or not such non-U.S. person is a guaranteed or

    conduit affiliate), the Commission believes that the interests of the

    foreign jurisdiction in applying its own transaction-level requirements

    to the swap are sufficiently strong that the Category B Transaction-

    Level Requirements generally should not apply under section 2(i). In

    this case, even though the Commission considers a foreign branch of a

    U.S. bank that is a swap dealer or MSP to be a U.S. person, the

    Commission believes that because the counterparty is a non-U.S. person

    and the swap takes place outside the United States, foreign regulators

    may have a relatively stronger supervisory interest in regulating and

    enforcing sales practices related to the swap. Therefore, in light of

    international comity principles, the Commission believes that

    application of the Category B Transaction-Level Requirements may not be

    warranted in this case. Therefore, under the Commission's

    interpretation of section 2(i), the parties to the swap generally would

    not be expected to comply with the Category B Transaction-Level

    Requirements.

    The Commission believes that, in the context of the Category B

    Transaction-Level Requirements, the same reasoning also should apply to

    a swap between two foreign branches of U.S. banks that are each swap

    dealers or MSPs. Just as the Commission would have a strong supervisory

    interest in regulating and enforcing sales practices associated with

    activities taking place within the United States, the foreign

    regulators would have a similar claim to overseeing sales practices

    occurring within their jurisdiction.

    Accordingly, the Commission interprets CEA section 2(i) so that

    where a swap is between the foreign branch of a U.S. bank that is a

    swap dealer or MSP, on the one hand, and either a non-U.S. person or a

    foreign branch of a U.S. bank that is a swap dealer or MSP, on the

    other, the parties to the swap generally would not be expected to

    comply with the Category B Transaction-Level Requirements.

    c. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs

    Under the Commission's interpretation of 2(i), where a swap is

    between a non-U.S. swap dealer or non-U.S. MSP (including an affiliate

    of a U.S. person), on the one hand, and a U.S. person, on the other,

    the parties to the swap generally would be expected to comply with the

    Category B Transaction-Level Requirements.\598\ In the Commission's

    view, in this case, the swap should be subject to the provisions of

    Title VII of the Dodd-Frank Act and Commission implementing

    regulations, including the Category B Transaction-Level Requirements.

    Because of the significant risks to U.S. persons and the financial

    system presented by swap activities outside the United States where one

    of the counterparties to the swap is a U.S. person (whether inside or

    outside the United States), the Commission believes that a U.S.

    person's swap activities with a non-U.S. counterparty has the requisite

    direct and significant connection with activities in, or effect on,

    U.S. commerce under CEA section 2(i) to apply the Category B

    Transaction-Level Requirements to the transaction.

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

    \598\ As noted above, for the reasons discussed in note 531,

    where the counterparty to the swap is an international financial

    institution, the Commission also generally would not expect the

    parties to the swap to comply with the Category B Transaction-Level

    Requirements, even if the principal place of business of the

    international financial institution were located in the United

    States.

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

    The Commission observes that, where a swap between a non-U.S. swap

    dealer and a U.S. person is executed anonymously on a registered DCM or

    SEF and cleared by a registered DCO,\599\ the Category B Transaction-

    Level Requirements would not be applicable.\600\

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

    \599\ As discussed in greater detail above, the Commission notes

    that there are no exempt DCOs at this time. If and when the

    Commission determines to exercise its authority to exempt DCOs from

    applicable registration requirements, the Commission would likely

    address, among other things, the conditions and limitations

    applicable to clearing swaps for customers subject to section 4d(f)

    of the CEA.

    \600\ See 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 swap dealers and 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); 23.450(h) (not requiring swap dealers and MSPs to

    have a reasonable basis to believe that a Special Entity has a

    qualified, independent representative if the transaction with the

    Special Entity is initiated on a DCM or SEF and the swap dealer or

    MSP does not know the identity of the Special Entity prior to

    execution); 23.451(b)(2)(iii) (disapplying the prohibition on

    entering into swaps with a governmental Special Entity within two

    years after any contribution to an official of such governmental

    Special Entity if the swap is initiated on a DCM or SEF and the swap

    dealer or MSP does not know the identity of the Special Entity prior

    to execution).

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

    Because a registered FBOT is analogous to a DCM, the Commission is

    of the view that the requirements

    [[Page 45361]]

    likewise would not be applicable where such a swap is executed

    anonymously on a registered FBOT and cleared.

    Conversely, under the Commission's interpretation of 2(i), where a

    swap is between a non-U.S. swap dealer or non-U.S. MSP (including an

    affiliate of a U.S. person) and a non-U.S. counterparty (regardless of

    whether the non-U.S. counterparty is a guaranteed or conduit

    affiliate), the parties to the swap would not be expected to comply

    with the Category B Transaction-Level Requirements. The Commission

    believes that regulators may have a relatively stronger supervisory

    interest in regulating the Category B Transaction-Level Requirements

    related to swaps between non-U.S. persons taking place outside the

    United States than the Commission, and that therefore applying the

    Category B Transaction-Level Requirements to these transactions may not

    be warranted. The Commission notes that just as the Commission would

    have a strong supervisory interest in regulating and enforcing the

    Category B Transaction-Level Requirements associated with activities

    taking place in the United States, foreign regulators would have a

    similar claim to overseeing sales practices for swaps occurring within

    their jurisdiction.

    For the reasons stated in section b above, under the Commission's

    interpretation of section 2(i), where a swap is between a non-U.S. swap

    dealer or non-U.S. MSP (including an affiliate of a U.S. person), on

    the one hand, and the foreign branch of a U.S. bank that is a swap

    dealer or MSP, on the other, the parties to the swap generally would

    not be expected to comply with the Category B Transaction-Level

    Requirements.

    As noted previously, under the 2(i) interpretations, substituted

    compliance is generally not expected to be applicable to the Category B

    Transaction-Level Requirements under this Guidance.\601\

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

    \601\ See Appendix E to this Guidance for a summary of these

    requirements and the discussion in section E, supra.

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

    H. Application of the CEA's Swap Provisions and Commission Regulations

    to Market Participants That Are Not Registered as a Swap Dealer or MSP

    This section sets forth the Commission's general policy on

    application of the CEA's swaps provisions and Commission regulations to

    swap counterparties that are not registered as swap dealers or MSPs

    (``non-registrants''), including the circumstances under which the

    counterparties would be eligible for substituted compliance.

    Several of the CEA's swaps provisions and Commission regulations--

    namely, those relating to required clearing, trade execution, real-time

    public reporting, Large Trader Reporting, SDR Reporting, and swap data

    recordkeeping (collectively, the ``Non-Registrant Requirements'')

    \602\--also apply to persons or counterparties other than a swap dealer

    or MSP. In this section, the Commission sets forth the Commission's

    policy on application of these Non-Registrant Requirements to cross-

    border swaps in which neither counterparty is a swap dealer or MSP

    (i.e., all other market participants including ``financial entities,''

    as defined in CEA section 2(h)(7)(C)).\603\

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

    \602\ See section IV.D, supra. Part 45 of the Commission's

    regulations requires swap counterparties that are not swap dealers

    or MSPs to keep ``full, complete and systematic records, together

    with all pertinent data and memoranda'' with respect to each swap to

    which they are a counterparty. See 17 C.F. R. 45.2. Such records

    must include those demonstrating that they are entitled, with

    respect to any swap, to make use of the clearing exception in CEA

    section 2(h)(7). Swap counterparties that are not swap dealers or

    MSPs must also comply with the Commission's regulations in part 46,

    which address the reporting of data relating to pre-enactment swaps

    and data relating to transition swaps.

    \603\ Nothing in this Guidance should be construed to address

    the ability of a foreign board of trade to offer swaps to U.S.

    persons pursuant to part 48 of the Commission's regulations.

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

    Section 1 discusses the Commission's policy under CEA section 2(i)

    with regard to the application of the Non-Registrant Requirements to

    cross-border swaps between two non-registrants where one (or both) of

    the counterparties to the swap is a U.S. person. Substituted compliance

    is not applicable where one (or both) swap counterparties is a U.S.

    person.

    Section 2 discusses the Commission's policy under CEA section 2(i)

    with regard to the application of the Non-Registrant Requirements to

    cross-border swaps between two non-registrants where both

    counterparties to the swap are non-U.S. persons. The eligibility of

    various counterparties to such swaps for substituted compliance is also

    addressed in section 2.

    The application of the specified Dodd-Frank provisions and

    Commission regulations specified below to swaps between counterparties

    that are neither swap dealers nor MSPs is summarized in Appendix F to

    this Guidance, which should be read in conjunction with the rest of

    this Guidance.

    1. Swaps Between Non-Registrants Where One or More of the Non-

    Registrants is a U.S. Person

    As noted in the Proposed Guidance, to manage risks in a global

    economy, U.S. persons may need to, and frequently do, transact swaps

    with both U.S. and non-U.S. counterparties. The swap activities of U.S.

    persons, particularly those with global operations, frequently occur

    outside of U.S. borders.

    With regard to cross-border swaps between two non-registrants where

    one (or both) of the counterparties to the swap is a U.S. person

    (including an affiliate of a non-U.S. person), the Commission's

    interprets CEA 2(i) such that the parties to the swap generally would

    be expected to comply with the Non-Registrant Requirements. As the

    Commission noted in the Proposed Guidance, the risks to U.S. persons

    and the U.S. financial system do not depend on the location of the swap

    activities of U.S. persons.\604\ Where one or both of the

    counterparties to a swap between two non-registrants is a U.S. person,

    the Commission believes that the U.S. persons' swap activities (whether

    inside or outside the United States)--due their presence in the U.S.

    and relationship to U.S. commerce--have a direct and significant

    connection with activities in, or effect on, U.S. commerce. Therefore,

    the Commission's policy is that where a swap transaction is between

    non-registrants, and one or more of the counterparties is a U.S.

    person, generally the parties to the swap will be expected to comply in

    full with the Non-Registrant Requirements.\605\ In addition, where one

    or more of the counterparties to a swap between non-registrants is a

    U.S. person, the Commission's policy generally is that

    [[Page 45362]]

    substituted compliance is not available, for the reasons discussed

    below.

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

    \604\ See Proposed Guidance, 77 FR 41234 n. 138. Further, in the

    Proposed Guidance, the Commission stated that it believes that

    section 2(i) does not require a transaction-by-transaction

    determination that a particular swap outside the United States has a

    direct and significant connection with activities in, or effect on,

    commerce of the United States in order to apply the swaps provisions

    of the CEA to such transactions; rather, it is the aggregate of such

    activities and the aggregate connection of such activities with

    activities in the U.S. or effect on U.S. commerce that warrants

    application of the CEA swaps provisions to all such activities. See

    Hoffmann-La Roche, 542 U.S. at 168 (responding that respondents'

    recommendation that the court should take account of comity

    considerations on a case by case basis is ``too complex to prove

    workable'').

    \605\ For the reasons discussed in note 531, supra, one or more

    of the counterparties to a swap between non-registrants is an

    international financial institution, the Commission generally would

    not expect the parties to the swap to comply with the Non-Registrant

    Requirements, even if the principal place of business of the

    international financial institution were located in the United

    States.

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

    As noted in section D above, the Dodd-Frank Act's required clearing

    and swap processing requirements protect counterparties from the

    counterparty credit risk of their original counterparties, which in

    turn, protects against the accumulation of systemic risk because of the

    risk mitigation benefits offered by central clearing. Similarly, the

    trade execution and real-time public reporting requirements serve to

    promote both pre- and post-trade transparency which, in turn, enhance

    price discovery and decrease risk. Together, these requirements serve

    an essential role in protecting U.S. market participants and the

    general market against financial losses. The Commission cannot fully

    and responsibly fulfill its charge to protect the U.S. markets and

    market participants through a substituted compliance regime where one

    counterparty is a U.S. person. Accordingly, the Commission's policy is

    to expect full compliance with the Non-Registrant Requirements relating

    to required clearing, trade execution, and real-time public reporting

    with regard to any swaps between non-registrants where one or both of

    the counterparties is a U.S. person. For substantially the same

    reasons, application of U.S. requirements in these transactions is a

    reasonable exercise of U.S. jurisdiction under principles of foreign

    relations law.\606\

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

    \606\ See Restatement Sec. Sec. 403(2)(a)-(c).

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

    Large Trader Reporting provides the Commission with data regarding

    large positions in swaps with a direct or indirect linkage to specified

    U.S.-listed physical commodity futures contracts, in order to enable

    the Commission to implement and conduct effective surveillance of these

    economically equivalent swaps and futures. To facilitate the monitoring

    of trading across the swaps and futures markets, swaps positions must

    be converted to futures equivalents for reporting purposes; reportable

    thresholds are also defined in terms of futures equivalents. As

    discussed in further detail in section G above, in light of the very

    specific interest of the Commission in conducting effective

    surveillance of markets in swaps that have been determined to be

    economically equivalent to U.S. listed physical commodity futures

    contracts, and given the anticipated impediments to obtaining directly

    comparable positional data through any foreign swap data reporting

    regime, the Commission's policy is to construe CEA section 2(i) in a

    manner that would not recognize substituted compliance in lieu of

    compliance with Large Trader Reporting.

    As noted in section E, data reported under the SDR Reporting rules

    provide the Commission with information necessary to better understand

    and monitor concentrations of risk, as well as risk profiles of

    individual market participants. Swap data recordkeeping is an important

    component of an effective internal risk management process. Therefore,

    the Commission's policy is that generally both SDR Reporting and swap

    data recordkeeping should apply in full where one of the counterparties

    to a swap between two non-registrants (non-swap dealers or non-MSPs) is

    a U.S. person.

    As noted above, the clearing of swaps through a DCO mitigates

    counterparty credit risk and collateralizes the credit exposures posed

    by swaps. Section 2(h)(1) of the CEA requires a swap to be submitted

    for clearing to a registered DCO or a DCO that is exempt from

    registration under the CEA, if the Commission has determined that the

    swap is required to be cleared.\607\ The Commission has adopted a

    clearing requirement determination pursuant to the CEA and rules under

    part 50 of the Commission's regulations such that certain classes of

    swaps are required to be cleared, unless counterparties to the swap

    qualify for an exception or exemption from clearing under the CEA or

    part 50 of the Commission's regulations.\608\ In the final rules

    adopting the Inter-Affiliate Exemption, the Commission stated that a

    U.S. person that enters into any swap that is required to be cleared is

    subject to the clearing requirements of the CEA and part 50 of the

    Commission's regulations.\609\ Accordingly, in the context of this

    Guidance, the Commission's policy is that the clearing requirement

    under section 2(h)(1) and part 50 of the Commission's regulations

    applies in full to a swap where at least one of the counterparties to

    the swap is a U.S. person, without substituted compliance available.

    But substituted compliance may be available with respect to the

    clearing requirement for swaps between, on the one hand, a U.S. swap

    dealer or U.S. MSP acting through its foreign branch or a non-U.S.

    person that is a guaranteed or conduit affiliate, and on the other

    hand, a non-U.S. swap dealer, non-U.S. MSP or other non-U.S. person.

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

    \607\ The Commission notes that under CEA section 5b(h), the

    Commission has discretionary authority to exempt DCOs, conditionally

    or unconditionally, from the applicable DCO registration

    requirements. Specifically, section 5b(h) of the Act provides that

    ``[t]he Commission may exempt, conditionally or unconditionally, a

    derivatives clearing organization from registration under this

    section for the clearing of swaps if the Commission determines that

    the [DCO] is subject to comparable, comprehensive supervision and

    regulation by the Securities and Exchange Commission or the

    appropriate government authorities in the home country of the

    organization.'' Thus, the Commission has discretion to exempt from

    registration DCOs that, at a minimum, are subject to comparable and

    comprehensive supervision by another regulator. The Commission

    further notes that it has not yet exercised its discretionary

    authority to exempt DCOs from registration, and that until such time

    as the Commission determines to exercise such authority, swaps

    subject to the clearing requirement must be submitted to registered

    DCOs for clearing.

    \608\ In addition to the End-User Exception under CEA section

    2(h)(7), which is codified in Commission regulation 50.50, as noted

    above, the Commission has adopted an exemption from required

    clearing for swaps between certain affiliated entities, codified at

    Commission regulation 50.52. See Inter-Affiliate Exemption, 78 FR

    21750.

    \609\ Id. at 21765 (requiring, among other conditions, that

    eligible affiliate counterparties electing the exemption from

    clearing for the inter-affiliate swap must clear their swaps with

    unaffiliated counterparties, and permitting eligible affiliate

    counterparties located in foreign jurisdictions to clear such swaps

    pursuant to their applicable foreign jurisdictions' clearing regime,

    if the Commission determines that such regime is comparable and

    comprehensive to the U.S. clearing mandate).

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

    With respect to the clearing requirement, the Commission has

    previously addressed both the scope and process of a comparability

    determination, which also would apply to the extent that substituted

    compliance is applicable under this Guidance.\610\

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

    \610\ In particular, in the Inter-Affiliate Exemption, the

    Commission permitted eligible affiliate counterparties located

    outside of the U.S. to comply with a condition of the exemption to

    clear their swaps with unaffiliated counterparties (not located in

    the U.S.), to the extent such swaps are subject to the clearing

    requirement under section 2(h)(1) of the CEA, by complying with the

    requirements of a foreign jurisdiction's clearing mandate, including

    any exception or exemption granted under the foreign clearing

    mandate, provided that the Commission determines that: (i) such

    foreign jurisdiction's clearing mandate is comparable and

    comprehensive, but not necessarily identical, to the clearing

    requirement established under the CEA and part 50 of the

    Commission's regulations, and (ii) the exception or exemption is

    determined to be comparable to an exception or exemption provided

    under the CEA or part 50 of the Commission's regulations. See 17 CFR

    50.52(b)(4)(i).

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

    As for the process for determining comparability of a foreign

    jurisdiction's clearing mandate, the Commission has also previously

    stated that it will review the comparability and comprehensiveness of a

    foreign jurisdiction's clearing mandate by reviewing: (i) The foreign

    jurisdiction's laws and regulations with respect to its mandatory

    clearing regime (i.e., jurisdiction-specific review) and (ii) the

    foreign jurisdiction's clearing determinations with respect to each

    class of swaps for which the

    [[Page 45363]]

    Commission has issued a clearing determination under Commission

    regulation 50.4 (i.e., product-specific review).\611\ In determining

    whether an exemption or exception under a comparable foreign mandate is

    comparable to an exception or exemption under the CEA or part 50, the

    Commission anticipates that it would review, for comparability

    purposes, the foreign jurisdiction's laws and regulations with respect

    to its mandatory clearing regime, as well as the relevant exception or

    exemption, and would exercise broad discretion to determine whether the

    requirements and objectives of such exemption are consistent with those

    under the comparable foreign clearing regime.

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

    \611\ The Commission further explained that comparability will

    not require a regime identical to the clearing framework established

    under the CEA and the Commission regulations. Rather, the Commission

    anticipates that it will make jurisdiction-specific comparability

    determinations by comparing the regulatory requirements of a foreign

    jurisdiction's clearing regime with the requirements and objectives

    of the Dodd-Frank Act. The Commission further noted that it

    anticipates that the product-specific comparability determination

    will necessarily be made on the basis of whether the applicable swap

    is included in a class of swaps covered under Commission regulation

    50.4.

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

    The Commission is also of the view that where a swap is executed

    anonymously on a registered DCM or SEF between two non-registrants and

    cleared by a registered DCO, and one (or both) of the counterparties to

    the swap is a U.S. person, neither party to the swap should be required

    to comply with the Non-Registrant Requirements that otherwise apply to

    the swap, with the exception of Large Trader Reporting,\612\ SDR

    Reporting, and swap data recordkeeping.\613\ The Commission notes that

    in this case, the DCM or SEF will fulfill the required clearing, trade

    execution,\614\ and real-time public reporting requirements that apply

    to the swap.

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

    \612\ The Commission's part 20 regulations set forth large

    trader reporting rules for physical commodity swaps. See 76 FF 43851

    (Jul. 22, 2011). Part 20 requires routine swaps position reports

    from clearing organizations, clearing members and swap dealers, and

    establishes certain non-routine reporting requirements for large

    swaps traders. Among other things, part 20 requires that a reporting

    entity, as defined in Commission regulation 20.1, disclose the

    identity of the counterparty in respect of which positional

    information is being reported in large swap trader reports and

    associated filings. See 76 FR. 43851 at 43863-4 n.11.

    \613\ The Dodd-Frank Act added to the CEA provisions requiring

    the retention and reporting of data related to swap transactions.

    Section 727 of the Dodd-Frank Act added section 2(a)(13)(g), which

    requires that all swaps, whether cleared or uncleared, be reported

    to an SDR. Section 728 of the Dodd-Frank Act added section 21(b),

    which directs the Commission to prescribe standards for swap data

    recordkeeping and reporting. Section 723 of the Dodd-Frank Act added

    section 2(h)(5), which addresses the reporting of swap data for

    swaps executed before the enactment of the Dodd-Frank Act and swaps

    executed on or after the date of its enactment. The Commission's

    swap data reporting and recordkeeping requirements are found in part

    45, which establishes swap data recordkeeping and SDR reporting

    requirements; and part 46, which establishes swap data recordkeeping

    and SDR reporting requirements for pre-enactment and transition

    swaps (collectively, ``historical swaps''). See 77 FR 2136 (Jan. 13,

    2012) (part 45); 77 FR 35200 (June 12, 2012) (part 46). Under both

    part 45 and part 46 (collectively, the ``swap data reporting

    rules'') reporting parties have swap data reporting obligations. The

    swap data reporting rules further prescribe certain data fields that

    must be included in swap data reporting. See Appendix 1 to part 45;

    Appendix 1 to part 46. For all swaps subject to the Commission's

    jurisdiction, each counterparty must be identified by means of a

    single legal entity identifier (``LEI'') in all swap data reporting

    pursuant to parts 45 and 46. A reporting counterparty, as defined in

    Commission regulations 45.1 and 46.1, respectively, has obligations

    that include providing certain data to the SDR relating to the

    primary economic terms (``PET'') of the swap, including the LEI of

    the non-reporting counterparty.

    \614\ The Commission clarifies that the trading mandate under

    CEA section 2(h)(8)(A) is satisfied by trading on a registered DCM

    or SEF or a SEF that is exempt from registration.

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

    Further, the Commission is of the view that where a swap is

    executed anonymously between two non-registrants on a registered FBOT

    and cleared and one (or both) of the counterparties to the swap is a

    U.S. person, neither party to the swap (as is the case when the swap is

    executed anonymously on a DCM) should be required to comply with the

    Non-Registrant Requirements that otherwise apply to the swap, with the

    exception of Large Trader Reporting, SDR Reporting and swap data

    recordkeeping. The Commission notes that in this case, the registered

    FBOT, as would the DCM, will fulfill the required clearing and trade

    execution requirements \615\ that apply to the swap but not, without

    further action, the real-time public reporting requirements.

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

    \615\ The Commission clarifies that the trading mandate under

    CEA section 2(h)(8)(A) is satisfied by trading on a registered FBOT.

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

    The Commission expects that derivatives markets and regulatory

    regimes will continue to evolve in the future. In order to ensure a

    level playing field, promote participation in transparent markets, and

    promote market efficiency, the Commission will, through staff no action

    letters, extend appropriate time-limited transitional relief to certain

    European Union-regulated multilateral trading facilities (MTFs), in the

    event that the Commission's trade execution requirement is triggered

    before March 15, 2014. Such relief would be available through March

    15th for MTFs that have multilateral trading schemes, a sufficient

    level of pre- and post-trade price transparency, non-discriminatory

    access by market participants, and an appropriate level of oversight.

    In addition, the Commission will consult with the European Commission

    in giving consideration to extending regulatory relief to European

    Union-regulated trading platforms that are subject to requirements that

    achieve regulatory outcomes that are comparable to those achieved by

    the requirements for SEFs. Both parties will assess progress in January

    2014.

    2. Swaps Between Non-Registrants That Are Both Non-U.S. Persons

    As noted above, where a swap is between two non-U.S. persons and

    neither counterparty is required to register as a swap dealer or MSP,

    the Commission proposed interpreting CEA section 2(i) so as not to

    apply the Non-Registrant Requirements,\616\ with the exception of Large

    Trader Reporting.\617\

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

    \616\ See the Proposed Guidance, 77 FR 41234-41235.

    \617\ See id. at 41234 n. 139, 41235.

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

    Section a discusses the Commission's policy on application of Large

    Trader Reporting to swaps between two non-registrants that are not U.S.

    persons. Section b discusses the application of the other Non-

    Registrant Requirements to swaps between two non-registrants that are

    not U.S. persons, where each of the counterparties to the swap is a

    guaranteed or conduit affiliate, and the availability of substituted

    compliance for the parties to such swaps. Section c discusses the

    Commission's policy on application of the Non-Registrant Requirements

    other than Large Trader Reporting to swaps between non-registrants that

    are not U.S. persons where neither or only one of the counterparties is

    a guaranteed or conduit affiliate.

    a. Large Trader Reporting

    Large Trader Reporting requires routine positional reports from

    clearing members in addition to clearing organizations and swap

    dealers. As is the case with swap dealers, routine reports are required

    from clearing members to the extent that they hold significant

    positions in the swaps subject to Large Trader Reporting--swaps that

    are directly or indirectly linked to specified U.S.-listed physical

    commodity futures contracts. Routine reporting provides essential

    visibility into the trading activity of large market participants,

    which enables the Commission to conduct effective surveillance of

    markets in swaps and futures that have been determined to be

    economically equivalent. Given the

    [[Page 45364]]

    linkage of the swaps covered by Large Trader Reporting to U.S. futures

    markets, the Commission believes that any non-U.S. clearing member that

    holds positions in such swaps that are significant enough to trigger

    routine reporting obligations is engaged in activities that have a

    direct and significant connection with activities in, or effect on,

    commerce of the United States. Consistent with the Proposed Guidance,

    the Commission's policy, in light of its interpretation of CEA section

    2(i), is that any such non-U.S. clearing member should report all

    reportable positions to the Commission.\618\

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

    \618\ To the extent that they transact in the physical commodity

    swaps covered by the Commission's Large Trader Reporting rules, non-

    U.S. clearing members also should maintain the records required by

    such rules.

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

    Large Trader Reporting also establishes recordkeeping requirements

    for traders with significant positions in the covered physical

    commodity swaps. Given the vital role that Large Trader Reporting plays

    in ensuring that the Commission has access to comprehensive data

    regarding trading activity in swaps linked to U.S. futures, the

    Commission's policy, in light of its interpretation of CEA section

    2(i), is that non-U.S. persons with positions that meet the prescribed

    recordkeeping thresholds should comply with the prescribed

    recordkeeping requirements. The Commission notes that traders, which

    are not swap dealers or clearing members with routine Large Trader

    Reporting obligations, may generally keep books and records regarding

    their transactions in the covered physical commodity swaps and produce

    them for inspection by the Commission in the record retention format

    that such traders have developed in the normal course of their business

    operations.

    b. Swaps Where Each of The Counterparties Is Either a Guaranteed or

    Conduit Affiliate

    In contrast to the Proposed Guidance, where a swap is between two

    non-registrants that are not U.S. persons, and each of the

    counterparties to the swap is a guaranteed or conduit affiliate,\619\

    the parties to the swap generally should be expected to comply with the

    Non-Registrant Requirements with respect to the transaction. However,

    where at least one of the parties to the swap is an ``affiliate

    conduit,'' the Commission would generally expect the parties to the

    swap only to comply with (to the extent that the Inter-Affiliate

    Exemption is elected), the conditions of the Inter-Affiliate Exemption,

    including the treatment of outward-facing swaps condition in Commission

    regulation 50.52(b)(4)(i). In addition, the part 43 real-time reporting

    requirements must be satisfied.

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

    \619\ As noted above, this Guidance uses the term ``guaranteed

    or conduit affiliate'' to refer to a non-U.S. person that is

    guaranteed by a U.S. person or that is an affiliate conduit.

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

    The Commission has not interpreted CEA section 2(i) so as to

    include a guaranteed or conduit affiliate in the interpretation of the

    term ``U.S. person'' solely because of the guarantee or affiliation.

    Where each of the counterparties to the swap are non-registrants that

    are guaranteed or conduit affiliates, the Commission believes that the

    risks to U.S. persons and to the U.S. financial system sufficiently

    increase so that the additional measure of applying the Non-Registrant

    Requirements to the swap is warranted (but with substituted compliance

    available, to the extent applicable).\620\ The Commission notes that in

    the case of guarantees by U.S. persons, if there is a default by the

    non-U.S. person, the U.S. guarantor generally would be held responsible

    to settle the obligations. In the case of affiliate conduits, a non-

    U.S. affiliate could effectively operate as a conduit for the U.S.

    person, and could be used to execute swaps with counterparties in

    foreign jurisdictions, outside the Dodd-Frank Act regulatory regime.

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

    \620\ The Commission proposed to interpret section 2(i) so that

    the Non-Registrant Requirements would not apply to swaps between two

    non-registrants (whether or not one or more counterparties was

    guaranteed by a U.S. person), with the exception of Large Trader

    Reporting. The Commission noted in the Proposed Guidance that it

    intended to review the issue of affiliate conduits. See Proposed

    Guidance, 77 FR 1234-41235.

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

    Therefore, where a swap is between two non-registrants that are

    guaranteed or conduit affiliates, the Commission believes that the swap

    has a ``direct and significant connection with activities in, or effect

    on, commerce of the United States'' within the meaning of CEA section

    2(i) so that certain Entity-Level and Transaction-Level Requirements

    would apply to the swap counterparties. Consistent with section 2(i),

    however, the Commission's policy generally is to make the parties to

    the swap eligible for substituted compliance (except with regard to

    Large Trader Reporting, and provided that SDR Reporting would be

    eligible for substituted compliance only if the Commission has direct

    access to all of the reported swap data elements that are stored at a

    foreign trade repository).

    c. Swaps Where Neither or Only One of the Parties is a Guaranteed or

    Conduit Affiliate

    With respect to swaps between two non-registrants where neither or

    only one party is a guaranteed or conduit affiliate, the Commission's

    policy is that the parties to the swap generally should not be expected

    to comply with the Non-Registrant Requirements, except as described

    below.

    As discussed above, where a counterparty to a swap is a guaranteed

    or conduit affiliate, the risks to U.S. persons and to the U.S.

    financial system increase. In the case of guarantees by U.S. persons,

    if there is a default by the non-U.S. person, the U.S. guarantor would

    be held responsible to settle the obligations. In the case of affiliate

    conduits, a non-U.S. affiliate could effectively operate as a

    ``conduit'' for the U.S. person, and could be used to execute swaps

    with counterparties in foreign jurisdictions, outside the Dodd-Frank

    Act regulatory regime. Nevertheless, the Commission also recognizes

    that foreign jurisdictions may have an interest in regulating swaps

    between two non-registrants where both counterparties to the swap are

    non-U.S. persons. Therefore, consistent with international comity

    principles, the Commission would generally expect the parties to the

    swap only to comply with (to the extent that the Inter-Affiliate

    Exemption is elected), the conditions of the Inter-Affiliate Exemption,

    including the treatment of outward-facing swaps condition in Commission

    regulation 50.52(b)(4)(i), and Large Trader Reporting. The Commission

    believes that this policy strikes the right balance between U.S.

    interests in regulating such a swap and the interest of foreign

    regulators.

    V. Appendix A--The Entity-Level Requirements

    A. First Category of Entity-Level Requirements

    The First Category of Entity-Level Requirements includes capital

    adequacy, chief compliance officer, risk management, and swap data

    recordkeeping (except certain aspects of swap data recordkeeping

    relating to complaints and sales materials).

    1. Capital Adequacy

    Section 4s(e)(2)(B) of the CEA specifically directs the Commission

    to set capital requirements for swap dealers and MSPs that are not

    subject to the capital requirements of U.S. prudential regulators

    (hereinafter referred to as ``non-bank swap dealers or

    [[Page 45365]]

    MSPs'').\621\ With respect to the use of swaps that are not cleared,

    these requirements must: ``(1) [h]elp ensure the safety and soundness

    of the swap dealer or major swap participant; and (2) [be] appropriate

    for the risk associated with the non-cleared swaps held as a swap

    dealer or major swap participant.'' \622\ Pursuant to section 4s(e)(3),

    the Commission proposed regulations, which would require non-bank swap

    dealers and MSPs to hold a minimum level of adjusted net capital (i.e.,

    ``regulatory capital'') based on whether the non-bank swap dealer or

    MSP is: (i) also a FCM; (ii) not an FCM, but is a non-bank subsidiary

    of a bank holding company; or (iii) neither an FCM nor a non-bank

    subsidiary of a bank holding company.\623\ The primary purpose of the

    capital requirement is to reduce the likelihood and cost of a swap

    dealer's or MSP's default by requiring a financial cushion that can

    absorb losses in the event of the firm's default.

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

    \621\ See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the CEA

    explicitly requires the adoption of rules establishing capital and

    margin requirements for swap dealers and MSPs, and applies a

    bifurcated approach that requires each swap dealer and MSP for which

    there is a U.S. prudential regulator to meet the capital and margin

    requirements established by the applicable prudential regulator, and

    each swap dealer and MSP for which there is no prudential regulator

    to comply with the Commission's capital and margin regulations. See

    7 U.S.C. 6s(e). Further, systemically important financial

    institutions (``SIFIs'') that are not FCMs would be exempt from the

    Commission's capital requirements, and would comply instead with

    Federal Reserve Board requirements applicable to SIFIs, while

    nonbank (and non-FCM) subsidiaries of U.S. bank holding companies

    would calculate their Commission capital requirement using the same

    methodology specified in Federal Reserve Board regulations

    applicable to the bank holding company, as if the subsidiary itself

    were a bank holding company. The term ``prudential regulator'' is

    defined in CEA section 1a(39) as the Board of Governors of the

    Federal Reserve System, the Office of the Comptroller of the

    Currency, the Federal Deposit Insurance Corporation, the Farm Credit

    Administration, and the Federal Housing Finance Agency. See 7 U.S.C.

    1a(39). In addition, in the proposed capital regulations for swap

    dealers and MSPs, the Commission solicited comment regarding whether

    it would be appropriate to permit swap dealers and MSPs to use

    internal models for computing market risk and counterparty credit

    risk charges for capital purposes if such models had been approved

    by a foreign regulatory authority and were subject to periodic

    assessment by such foreign regulatory authority. See Proposed

    Capital Requirements, 76 FR 27802.

    \622\ See 7 U.S.C. 6s(e)(3)(A).

    \623\ See 7 U.S.C. 6s(e). See also Proposed Capital

    Requirements, 76 FR 27802. ``The Commission's capital proposal for

    [swap dealers] and MSPs includes a minimum dollar level of $20

    million. A non-bank [swap dealer] or MSP that is part of a U.S. bank

    holding company would be required to maintain a minimum of $20

    million of Tier 1 capital as measured under the capital rules of the

    Federal Reserve Board. [A swap dealer] or MSP that also is

    registered as an FCM would be required to maintain a minimum of $20

    million of adjusted net capital as defined under [proposed] section

    1.17. In addition, an [swap dealer] or MSP that is not part of a

    U.S. bank holding company or registered as an FCM would be required

    to maintain a minimum of $20 million of tangible net equity, plus

    the amount of the [swap dealer's] or MSP's market risk exposure and

    OTC counterparty credit risk exposure.'' See id. at 27817.

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

    2. Chief Compliance Officer

    Section 4s(k) requires that each swap dealer and MSP designate an

    individual to serve as its chief compliance officer (``CCO'') and

    specifies certain duties of the CCO.\624\ Pursuant to section 4s(k),

    the Commission adopted regulation 3.3, which requires swap dealers and

    MSPs to designate a CCO who would be responsible for administering the

    firm's compliance policies and procedures, reporting directly to the

    board of directors or a senior officer of the swap dealer or MSP, as

    well as preparing and filing with the Commission a certified report of

    compliance with the CEA. The chief compliance function is an integral

    element of a firm's risk management and oversight and the Commission's

    effort to foster a strong culture of compliance within swap dealers and

    MSPs.

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

    \624\ See 7 U.S.C. 6s(k).

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

    3. Risk Management

    Section 4s(j) of the CEA requires each swap dealer and MSP to

    establish internal policies and procedures designed to, among other

    things, address risk management, monitor compliance with position

    limits, prevent conflicts of interest, and promote diligent

    supervision, as well as maintain business continuity and disaster

    recovery programs.\625\ The Commission adopted implementing regulations

    (23.600, 23.601, 23.602, 23.603, 23.605, and 23.606).\626\ The

    Commission also adopted regulation 23.609, which requires certain risk

    management procedures for swap dealers or MSPs that are clearing

    members of a derivatives clearing organization (``DCO'').\627\

    Collectively, these requirements help to establish a robust and

    comprehensive internal risk management program for swap dealers and

    MSPs, which is critical to effective systemic risk management for the

    overall swaps market.

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

    \625\ 7 U.S.C. 6s(j).

    \626\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR

    20128 (relating to risk management program, monitoring of position

    limits, business continuity and disaster recovery, conflicts of

    interest policies and procedures, and general information

    availability, respectively).

    \627\ Customer Documentation Rule, 77 FR 21278. Also, swap

    dealers must comply with Commission regulation 23.608, which

    prohibits swap dealers providing clearing services to customers from

    entering into agreements that would: (i) Disclose the identity of a

    customer's original executing counterparty; (ii) limit the number of

    counterparties a customer may trade with; (iii) impose counterparty-

    based position limits; (iv) impair a customer's access to execution

    of a trade on terms that have a reasonable relationship to the best

    terms available; or (v) prevent compliance with specified time

    frames for acceptance of trades into clearing.

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

    i. Swap Data Recordkeeping (Except Certain Aspects of Swap Data

    Recordkeeping Relating to Complaints and Sales Materials)

    CEA section 4s(f)(1)(B) requires swap dealers and MSPs to keep

    books and records for all activities related to their business.\628\

    Sections 4s(g)(1) and (4) require swap dealers and MSPs to maintain

    trading records for each swap and all related records, as well as a

    complete audit trail for comprehensive trade reconstructions.\629\

    Pursuant to these provisions, the Commission adopted regulations

    23.201and 23.203, which require swap dealers and MSPs to keep records

    including complete transaction and position information for all swap

    activities, including documentation on which trade information is

    originally recorded. Pursuant to regulation 23.203, records of swaps

    must be maintained for the duration of the swap plus 5 years, and voice

    recordings for 1 year, and records must be ``readily accessible'' for

    the first 2 years of the 5 year retention period. Swap dealers and MSPs

    also must comply with Parts 43, 45 and 46 of the Commission's

    regulations, which, respectively, address the data recordkeeping and

    reporting requirements for all swaps subject to the Commission's

    jurisdiction, including swaps entered into before the date of enactment

    of the Dodd-Frank Act (``pre-enactment swaps'') and swaps entered into

    on or after the date of enactment of the Dodd-Frank Act but prior to

    the compliance date of the swap data reporting rules (``transition

    swaps'').\630\

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

    \628\ 7 U.S.C. 6s(f)(1)(B).

    \629\ 7 U.S.C. 6s(g)(1).

    \630\ 17 CFR part 46; Proposed Data Rules, 76 FR 22833.

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

    B. Second Category of Entity-Level Requirements

    The Second Category of Entity-Level Requirements includes SDR

    Reporting, certain aspects of swap data recordkeeping relating to

    complaints and marketing and sales materials under Commission

    regulations 23.201(b)(3) and 23.201(b)(4) and Large Trader Reporting.

    1. SDR Reporting

    CEA section 2(a)(13)(G) requires all swaps, whether cleared or

    uncleared, to be reported to a registered SDR.\631\ CEA section 21

    requires SDRs to collect and maintain data related to swaps as

    prescribed by the Commission, and to

    [[Page 45366]]

    make such data electronically available to particular regulators under

    specified conditions related to confidentiality.\632\ Part 45 of the

    Commission's regulations (and Appendix 1 thereto) sets forth the

    specific swap data that must be reported to a registered SDR, along

    with attendant recordkeeping requirements; and part 46 addresses

    recordkeeping and reporting requirements for pre-enactment and

    transition swaps (``historical swaps''). The fundamental goal of the

    part 45 rules is to ensure that complete data concerning all swaps

    subject to the Commission's jurisdiction is maintained in SDRs where it

    will be available to the Commission and other financial regulators for

    fulfillment of their various regulatory mandates, including systemic

    risk mitigation, market monitoring and market abuse prevention. Part 46

    supports similar goals with respect to pre-enactment and transition

    swaps and ensures that data needed by regulators concerning

    ``historical'' swaps is available to regulators through SDRs. Among

    other things, data reported to SDRs will enhance the Commission's

    understanding of concentrations of risks within the market, as well as

    promote a more effective monitoring of risk profiles of market

    participants in the swaps market. The Commission also believes that

    there are benefits that will accrue to swap dealers and MSPs as a

    result of the timely reporting of comprehensive swap transaction data

    and consistent data standards for recordkeeping, among other things.

    Such benefits include more robust risk monitoring and management

    capabilities for swap dealers and MSPs, which in turn will improve the

    monitoring of their current swaps market positions.

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

    \631\ 7 U.S.C. 2(a)(13)(G).

    \632\ 7 U.S.C. 24a.

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

    2. Swap Data Recordkeeping Relating to Complaints and Marketing and

    Sales Materials

    CEA section 4s(f)(1) requires swap dealers and MSPs to ``make such

    reports as are required by the Commission by rule or regulation

    regarding the transactions and positions and financial condition of the

    registered swap dealer or major swap participant.'' \633\ Additionally,

    CEA section 4s(h) requires swap dealers and MSPs to ``conform with such

    business conduct standards . . . as may be prescribed by the Commission

    by rule or regulation.'' \634\ Pursuant to those authorities, the

    Commission promulgated final rules that set forth certain reporting and

    recordkeeping for swap dealers and MSPs.\635\ Commission Regulation

    23.201 states that ``[e]ach swap dealer and major swap participant

    shall keep full, complete, and systematic records of all activities

    related to its business as a swap dealer or major swap participant.''

    Such records must include, among other things, ``[a] record of each

    complaint received by the swap dealer or major swap participant

    concerning any partner, member, officer, employee, or agent,'' \636\ as

    well as ``[a]ll marketing and sales presentations, advertisements,

    literature, and communications.'' \637\

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

    \633\ 7 U.S.C. 6s(f)(1).

    \634\ 7 U.S.C. 6s(h)(1). See 7 U.S.C. 6s(h)(3).

    \635\ Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 20128.

    \636\ 17 CFR 23.201(b)(3)(i).

    \637\ 17 CFR 23.201(b)(4).

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

    3. Physical Commodity Large Swaps Trader Reporting (Large Trader

    Reporting)

    CEA section 4t \638\ authorizes the Commission to establish a large

    trader reporting system for significant price discovery swaps (of which

    the economically equivalent swaps subject to the Commission's part 20

    rules are a subset). Pursuant thereto, the Commission adopted its Large

    Trader Reporting rules (part 20 of the Commission regulations), which

    require routine reports from swap dealers, among other entities, that

    hold significant positions in swaps that are linked, directly or

    indirectly, to a prescribed list of U.S.-listed physical commodity

    futures contracts.\639\ Additionally, Large Trader Reporting requires

    that swap dealers, among other entities, comply with certain

    recordkeeping obligations.

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

    \638\ 7 U.S.C. 6t.

    \639\ Large Trader Reporting for Physical Commodity Swaps, 76 FR

    43851. The rules require routine position reporting by clearing

    organizations, as well as clearing members and swap dealers with

    reportable positions in the covered physical commodity swaps. The

    rules also establish recordkeeping requirements for clearing

    organizations, clearing members and swap dealers, as well as traders

    with positions in the covered physical commodity swaps that exceed a

    prescribed threshold. In general, the rules apply to swaps that are

    linked, directly or indirectly, to either the price of any of the 46

    U.S.-listed physical commodity futures contracts the Commission

    enumerates (Covered Futures Contracts) or the price of the physical

    commodity at the delivery location of any of the Covered Futures

    Contracts.

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

    VI. Appendix B--The Transaction-Level Requirements

    The Transaction-Level Requirements cover a range of Dodd-Frank

    requirements: some of the requirements more directly address financial

    protection of swap dealers (or MSPs) and their counterparties; others

    address more directly market efficiency and/or price discovery.

    Further, some of the Transaction-Level Requirements can be classified

    as Entity-Level Requirements and applied on a firm-wide basis across

    all swaps or activities. Nevertheless, in the interest of comity

    principles, the Commission believes that the Transaction-Level

    Requirements may be applied on a transaction-by-transaction basis.

    A. Category A: Risk Mitigation and Transparency

    1. Required Clearing and Swap Processing

    Section 2(h)(1) of the CEA requires a swap to be submitted for

    clearing to a DCO if the Commission has determined that the swap is

    required to be cleared, unless one of the parties to the swap is

    eligible for an exception from the clearing requirement and elects not

    to clear the swap.\640\ Clearing via a DCO mitigates the counterparty

    credit risk between swap dealers or MSPs and their counterparties.

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

    \640\ 7 U.S.C. 2(h)(1), (7).

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

    Commission regulations implementing the first designations of swaps

    for required clearing were published in the Federal Register on

    December 13, 2012.\641\ Under Commission regulation 50.2, all persons

    executing a swap that is included in a class of swaps identified under

    Commission regulation 50.4 must submit such swap to an eligible

    derivatives clearing organization (DCO) for clearing as soon as

    technologically practicable after clearing, but in any event by the end

    of the day of execution.

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

    \641\ 77 FR 72284.

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

    Regulation 50.4 establishes required clearing for certain classes

    of swaps. Currently, those classes include, for credit default swaps:

    Specified series of untranched North American CDX indices and European

    iTraxx indices; and for interest rate swaps: Fixed-to-floating swaps,

    basis swaps, forward rate agreements referencing U.S. Dollar, Euro,

    Sterling, and Yen, and overnight index swaps referencing U.S. Dollar,

    Euro, and Sterling. Each of the six classes is further defined in

    Commission regulation 50.4. Swaps that have the specifications

    identified in the regulation are required to be cleared and must be

    cleared pursuant to the rules of any eligible DCO unless an exception

    or exemption specified in the CEA or the Commission's regulations

    applies.

    Generally, if a swap is subject to Section 2(h)(1)(A) of the CEA

    and part 50 of the Commission's regulations, it must be cleared through

    an eligible DCO, unless: (i) One of the counterparties is eligible for

    and elects

    [[Page 45367]]

    the End-User Exception under Commission regulation 50.50; \642\ or (ii)

    both counterparties are eligible for and elect an Inter-Affiliate

    Exemption under Commission regulation 50.52. To elect either the end-

    user exception or the Inter-Affiliate Exemption, the electing party or

    parties and the swap must meet certain requirements set forth in the

    regulations.

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

    \642\ See End-User Exception to the Clearing Requirement for

    Swaps, 77 FR 42560 (Jul. 19, 2012).

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

    Closely connected with the clearing requirement are the following

    swap processing requirements: (i) Commission regulation 23.506, which

    requires swap dealers and MSPs to submit swaps promptly for clearing;

    and (ii) Commission regulations 23.610 and 39.12, which establish

    certain standards for swap processing by DCOs and/or swap dealers and

    MSPs that are clearing members of a DCO.\643\ Together, required

    clearing and swap processing requirements promote safety and soundness

    of swap dealers and MSPs, and mitigate the credit risk posed by

    bilateral swaps between swap dealers or MSPs and their

    counterparties.\644\

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

    \643\ See Final Customer Documentation Rules, 77 FR 21278.

    \644\ See section IV.H, supra, regarding the application of

    required clearing rules to market participants that are not

    registered as swap dealers or MSPs, including the circumstances

    under which the parties to such swaps would be eligible for

    substituted compliance.

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

    2. Margin and Segregation Requirements for Uncleared Swaps

    Section 4s(e) of the CEA requires the Commission to set margin

    requirements for swap dealers and MSPs that trade in swaps that are not

    cleared.\645\ The margin requirements ensure that outstanding current

    and potential future risk exposures between swap dealers and their

    counterparties are collateralized, thereby reducing the possibility

    that swap dealers or MSPs take on excessive risks without having

    adequate financial backing to fulfill their obligations under the

    uncleared swap. In addition, with respect to swaps that are not

    submitted for clearing, section 4s(l) requires that a swap dealer or

    MSP notify the counterparty of its right to request that funds provided

    as margin be segregated, and upon such request, to segregate the funds

    with a third-party custodian for the benefit of the counterparty. In

    this way, the segregation requirement enhances the protections offered

    through margining uncleared swaps and thereby provides additional

    financial protection to counterparties. The Commission is working with

    foreign and domestic regulators to develop and finalize appropriate

    regulations for margin and segregation requirements.

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

    \645\ See 7 U.S.C. 6s(e). See also Proposed Margin Requirements,

    76 FR at 23733-23740. Section 4s(e) explicitly requires the adoption

    of rules establishing margin requirements for swap dealers and MSPs,

    and applies a bifurcated approach that requires each swap dealer and

    MSP for which there is a prudential regulator to meet the margin

    requirements established by the applicable prudential regulator, and

    each swap dealer and MSP for which there is no prudential regulator

    to comply with the Commission's margin regulations. In contrast, the

    segregation requirements in section 4s(1) do not use a bifurcated

    approach--that is, all swap dealers and MSPs are subject to the

    Commission's rule regarding notice and third party custodians for

    margin collected for uncleared swaps.

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

    3. Trade Execution

    Integrally linked to the clearing requirement is the trade

    execution requirement, which is intended to bring the trading of

    mandatorily cleared swaps that are made available to trade onto

    regulated exchanges or execution facilities. Specifically, section

    2(h)(8) of the CEA provides that unless a clearing exception applies

    and is elected, a swap that is subject to a clearing requirement must

    be executed on a DCM or SEF, unless no such DCM or SEF makes the swap

    available to trade.\646\ Commission regulations implementing the

    process for a DCM or SEF to make a swap available to trade were

    published in the Federal Register on June 4, 2013.\647\ Under

    Commission regulations 37.10 and 38.12, respectively, a SEF or DCM may

    submit a determination for Commission review that a mandatorily cleared

    swap is available to trade based on enumerated factors. By requiring

    the trades of mandatorily cleared swaps that are made available to

    trade to be executed on an exchange or an execution facility--each with

    its attendant pre- and post-trade transparency and safeguards to ensure

    market integrity--the trade execution requirement furthers the

    statutory goals of financial stability, market efficiency, and enhanced

    transparency.

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

    \646\ See 7 U.S.C. 2(h)(8).

    \647\ 78 FR 33606.

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

    4. Swap Trading Relationship Documentation

    CEA section 4s(i) requires each swap dealer and MSP to conform to

    Commission standards for the timely and accurate confirmation,

    processing, netting, documentation and valuation of swaps.\648\

    Pursuant thereto, Commission regulation 23.504(a) requires swap dealers

    and MSPs to ``establish, maintain and enforce written policies and

    procedures'' to ensure that the swap dealer or MSP executes written

    swap trading relationship documentation.\649\ Under Commission

    regulation 23.504, the swap trading relationship documentation must

    include, among other things: all terms governing the trading

    relationship between the swap dealer or MSP and its counterparty;

    credit support arrangements; investment and re-hypothecation terms for

    assets used as margin for uncleared swaps; and custodial

    arrangements.\650\ Further, the swap trading relationship documentation

    requirement applies to all swaps with registered swap dealers and MSPs.

    In addition, Commission regulation 23.505 requires swap dealers and

    MSPs to document certain information in connection with swaps for which

    exceptions from required clearing are elected.\651\ A robust swap

    documentation standard may promote standardization of documents and

    transactions, which are key conditions for central clearing, and lead

    to other operational efficiencies, including improved valuation and

    risk management.

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

    \648\ See 7 U.S.C. 6s(i).

    \649\ See Final Confirmation Rules, 77 FR 55904.

    \650\ The requirements under section 4s(i) relating to trade

    confirmations is a Transaction-Level Requirement. Accordingly,

    Commission regulation 23.504(b)(2) requires a swap dealer's and

    MSP's swap trading relationship documentation to include all

    confirmations of swaps, will apply on a transaction-by-transaction

    basis.

    \651\ See Final Confirmation Rules, 77 FR at 55964.

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

    5. Portfolio Reconciliation and Compression

    CEA section 4s(i) directs the Commission to prescribe regulations

    for the timely and accurate processing and netting of all swaps entered

    into by swap dealers and MSPs. Pursuant to CEA section 4s(i), the

    Commission adopted regulations (23.502 and 23.503), which require swap

    dealers and MSPs to perform portfolio reconciliation and compression,

    respectively, for all swaps.\652\ Portfolio reconciliation is a post-

    execution risk management tool to ensure accurate confirmation of a

    swap's terms and to identify and resolve any discrepancies between

    counterparties regarding the valuation of the swap. Portfolio

    compression is a post-trade processing and netting mechanism that is

    intended to ensure timely, accurate processing and netting of

    swaps.\653\ Regulation 23.503 requires all swap dealers and MSPs to

    participate in bilateral compression exercises and/or multilateral

    portfolio compression

    [[Page 45368]]

    exercises conducted by a third party.\654\ The rule also requires

    policies and procedures for engaging in such exercises for uncleared

    swaps with non-swap dealers and non-MSPs upon request. Further,

    participation in multilateral portfolio compression exercises is

    mandatory for dealer-to-dealer trades.

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

    \652\ See id.

    \653\ For example, the reduced transaction count may decrease

    operational risk as there are fewer trades to maintain, process, and

    settle.

    \654\ See 17 CFR 23.503(c); Confirmation NPRM, 75 FR 81519.

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

    6. Real-Time Public Reporting

    Section 2(a)(13) of the CEA also directs the Commission to

    promulgate rules providing for the public availability of swap

    transaction and pricing data on a real-time basis.\655\ In accordance

    with this mandate, the Commission promulgated part 43 of its

    regulations, which provide that all ``publicly reportable swap

    transactions'' must be reported and publicly disseminated, and which

    establish the method, manner, timing and particular transaction and

    pricing data that must be reported by parties to a swap

    transaction.\656\ The real-time dissemination of swap transaction and

    pricing data supports the fairness and efficiency of markets and

    increases transparency, which in turn improves price discovery and

    decreases risk (e.g., liquidity risk).\657\

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

    \655\ See 7 U.S.C. 2(a)(13). See also Real-Time Reporting Rule,

    77 FR 1183.

    \656\ Part 43 defines a ``publicly reportable swap transaction''

    as: (i) Any swap that is an arm's-length transaction between two

    parties that results in a corresponding change in the market risk

    position between the two parties; or (ii) any termination,

    assignment, novation, exchange, transfer, amendment, conveyance, or

    extinguishing of rights or obligations of a swap that changes the

    pricing of a swap. See Real-Time Reporting Rule, 77 FR 1182.

    Additionally, the Commission adopted regulation 23.205, which

    directs swap dealers and MSPs to undertake such reporting and to

    have the electronic systems and procedures necessary to transmit

    electronically all information and data required to be reported in

    accordance with part 43. See Final Swap Dealer and MSP Recordkeeping

    Rule, 77 FR 20205.

    \657\ See Real-Time Reporting Rule, 77 FR 1183.

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

    7. Trade Confirmation

    Section 4s(i) of the CEA \658\ requires that each swap dealer and

    MSP must comply with the Commission's regulations prescribing timely

    and accurate confirmation of swaps. The Commission has adopted

    regulation 23.501, which requires, among other things, a timely and

    accurate confirmation of swap transactions (which includes execution,

    termination, assignment, novation, exchange, transfer, amendment,

    conveyance, or extinguishing of rights or obligations of a swap) among

    swap dealers and MSPs by the end of the first business day following

    the day of execution.\659\ Timely and accurate confirmation of swaps--

    together with portfolio reconciliation and compression--are important

    post-trade processing mechanisms for reducing risks and improving

    operational efficiency.\660\

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

    \658\ 7 U.S.C. 6s(i).

    \659\ See Final Confirmation Rules, 77 FR 55904.

    \660\ In addition, the Commission notes that regulation

    23.504(b)(2) requires that the swap trading relationship

    documentation of swap dealers and MSPs must include all

    confirmations of swap transactions.

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

    8. Daily Trading Records

    Pursuant to section CEA 4s(g), the Commission adopted regulation

    23.202, which requires swap dealers and MSPs to maintain daily trading

    records, including records of trade information related to pre-

    execution, execution, and post-execution data that is needed to conduct

    a comprehensive and accurate trade reconstruction for each swap. The

    final rule also requires that records be kept of cash or forward

    transactions used to hedge, mitigate the risk of, or offset any swap

    held by the swap dealer or MSP.\661\ Accurate and timely recordkeeping

    regarding all phases of a swap transaction can serve to greatly enhance

    a firm's internal supervision, as well as the Commission's ability to

    detect and address market or regulatory abuses or evasion.

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

    \661\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR

    20128.

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

    B. Category B: External Business Conduct Standards

    Pursuant to CEA section 4s(h), the Commission has adopted external

    business conduct rules, which establish business conduct standards

    governing the conduct of swap dealers and MSPs in dealing with their

    counterparties in entering into swaps.\662\ Broadly speaking, these

    rules are designed to enhance counterparty protection by significantly

    expanding the obligations of swap dealers and MSPs towards their

    counterparties. Under these rules, swap dealers and MSPs will be

    required, among other things, to conduct due diligence on their

    counterparties to verify 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.

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

    \662\ See 7 U.S.C. 6s(h). See also External Business Conduct

    Rules, 77 FR 9822-9829.

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

    VII. Appendix C--Application of the Entity-Level Requirements to Swap

    Dealers and MSPs *

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

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

    U.S. Swap Dealer or MSP (including an Apply.

    affiliate of a non-U.S. person). Also

    applies when acting through a foreign

    branch.\1\

    Non-U.S. Swap Dealer or MSP (including First Category: \2\ Substituted

    an affiliate of a U.S. person).. Compliance.

    Second Category: \3\ Apply for

    U.S. counterparties;

    Substituted Compliance for SDR

    reporting with non-U.S.

    counterparties that are not

    guaranteed or conduit

    affiliates; Substituted

    compliance (except for Large

    Trader Reporting) with non-

    U.S. counterparties.\4\

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

    * The Appendices to the Guidance should be read in conjunction with the

    rest of the Guidance.

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

    \1\ Both Entity-Level and Transaction-Level Requirements are the

    ultimate responsibilities of the U.S.-based swap dealer or MSP.

    \2\ First Category is capital adequacy, Chief Compliance Officer, risk

    management, and swap data recordkeeping (except Commission regulations

    23.201(b)(3) and (4)).

    \3\ Second Category is SDR Reporting, certain aspects of swap data

    recordkeeping relating to complaints and marketing and sales materials

    (Commission regulations 23.201(b)(3) and (4)), and Large Trader

    Reporting.

    \4\ Substituted compliance does not apply to Large Trader Reporting,

    i.e., non-U.S. persons that are subject to part 20 would comply with

    it in the same way that U.S. persons comply. With respect to the SDR

    Reporting requirement, the Commission may make substituted compliance

    available only if direct access to swap data stored at a foreign trade

    repository is provided to the Commission.

    [[Page 45369]]

    VIII. Appendix D--Application of the Category A Transaction-Level

    Requirements to Swap Dealers and MSPs *

    (Category A includes (1) Clearing and swap processing; (2) Margining

    and segregation for uncleared swaps; (3) Trade Execution; (4) Swap

    trading relationship documentation; (5) Portfolio reconciliation and

    compression; (6) Real-time public reporting; (7) Trade confirmation;

    and (8) Daily trading records).**

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

    U.S. Person (other than Non-U.S. Person

    Foreign Branch of U.S. Foreign Branch of U.S. Guaranteed by, or Non-U.S. Person Not Guaranteed by, and

    Bank that is a Swap Bank that is a Swap Affiliate Conduit \1\ Not an Affiliate Conduit \1\ of, a

    Dealer or MSP) Dealer or MSP of, a U.S. Person U.S. Person

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

    U.S. Swap Dealer or MSP (including Apply.................. Apply.................. Apply................. Apply.

    an affiliate of a non-3U.S. person).

    Foreign Branch of U.S. Bank that is Apply.................. Substituted Compliance. Substituted Substituted Compliance.\2\

    a Swap Dealer or MSP. Compliance.\2\

    Non-U.S. Swap Dealer or MSP Apply.................. Substituted Compliance. Substituted Compliance Do Not Apply.

    (including an affiliate of a U.S.

    person).

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

    * The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.

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

    ** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would expect the parties to the swap to comply with the

    conditions of the Inter-Affiliate Exemption, including the treatment of outward-facing swaps condition in Commission regulation 50.52(b)(4)(i).

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

    \1\ Factors that are relevant to the consideration of whether a non-U.S. person is an ``affiliate conduit'' include whether: (i) the non-U.S. person is

    majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the

    U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging

    or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with

    such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial

    results of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be

    relevant.

    \2\ Under a limited exception, where a swap between the foreign branch of a U.S. swap dealer or U.S. MSP and a non-U.S. person (that is not a guaranteed

    or conduit affiliate) takes place in a foreign jurisdiction other than Australia, Canada, the European Union, Hong Kong, Japan, or Switzerland, the

    counterparties generally may comply only with the transaction-level requirements in the foreign jurisdiction where the foreign branch is located if

    the aggregate notional value of all the swaps of the U.S. swap dealer's foreign branches in such countries does not exceed 5% of the aggregate

    notional value of all of the swaps of the U.S. swap dealer, and the U.S. person maintains records with supporting information for the 5% limit and to

    identify, define, and address any significant risk that may arise from the non-application of the Transaction-Level Requirements.

    Notes:

    \1\ The swap trading relationship documentation requirement applies to all transactions with registered swap dealers and MSPs.

    \2\ Participation in multilateral portfolio compression exercises is mandatory for dealer to dealer trades.

    IX. Appendix E--Application of the Category B Transaction-Level

    Requirements to Swap Dealers and MSPs *

    (Category B is External Business Conduct Standards).

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

    U.S. Person (other than Non-U.S. Person

    Foreign Branch of U.S. Foreign Branch of U.S. Guaranteed by, or Non-U.S. Person Not Guaranteed by, and

    Bank that is a Swap Bank that is a Swap Affiliate Conduit \1\ Not an Affiliate Conduit \1\ of, a U.S.

    Dealer or MSP) Dealer or MSP of, a U.S. Person Person

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

    U.S. Swap Dealer or MSP (including Apply.................. Apply.................. Apply................. Apply.

    an.

    affiliate of a non-U.S. person).....

    U.S. Swap Dealer or MSP (when it Apply.................. Do Not Apply........... Do Not Apply.......... Do Not Apply.

    solicits and negotiates through a

    foreign subsidiary or affiliate).

    Foreign Branch of U.S. Bank that is Apply.................. Do Not Apply........... Do Not Apply.......... Do Not Apply.

    a Swap Dealer or MSP.

    Non-U.S. Swap Dealer or MSP Apply.................. Do Not Apply........... Do Not Apply.......... Do Not Apply.

    (including an affiliate of a U.S.

    person).

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

    *The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.

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

    \1\ Factors that are relevant to the consideration of whether a non-U.S. person is an ``affiliate conduit'' include whether: (i) the non-U.S. person is

    majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the

    U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging

    or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with

    such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial

    results of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be

    relevant.

    [[Page 45370]]

    X. Appendix F--Application of Certain Entity-Level and Transaction-

    Level Requirements to Non-Swap Dealer/Non-MSP Market Participants*

    (The relevant Dodd-Frank requirements are those relating to: clearing,

    trade execution, real-time public reporting, Large Trader Reporting,

    SDR Reporting and swap data recordkeeping).**

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

    Non-U.S. Person Non-U.S. Person Not

    U.S. Person (including Guaranteed by, or Guaranteed by, or

    an affiliate of non- Affiliate Conduit \1\ Affiliate Conduit \1\

    U.S. person) of, a U.S. Person of, by U.S. Person

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

    U.S. Person (including an affiliate Apply.................. Apply.................. Apply.

    of non-U.S. person).

    Non-U.S. Person Guaranteed by, or Apply.................. Substituted Do Not Apply.

    Affiliate Conduit \1\ of, a U.S. Compliance.\2\

    person.

    Non-U.S. Person Not Guaranteed by, or Apply.................. Do Not Apply........... Do Not Apply.

    Affiliate Conduit \1\ of, U.S.

    Person.

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

    * The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.

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

    ** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would generally

    expect the parties to the swap to comply with the conditions of the Inter-Affiliate Exemption, including the

    treatment of outward-facing swaps condition in Commission regulation 50.52(b)(4)(i).

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

    \1\ Factors that are relevant to the consideration of whether a non-U.S. person is an ``affiliate conduit''

    include whether: (i) the non-U.S. person is majority-owned, directly or indirectly, by a U.S. person; (ii) the

    non-U.S. person controls, is controlled by, or is under common control with the U.S. person; (iii) the non-

    U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the

    purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and

    enters into offsetting swaps or other arrangements with such U.S. affiliate(s) in order to transfer the risks

    and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results of the

    non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and

    circumstances also may be relevant.

    \2\ Substituted compliance does not apply to Large Trader Reporting, i.e., non-U.S. persons that are subject to

    part 20 would comply with it in the same way that U.S. persons comply. With respect to the SDR Reporting

    requirement, the Commission may permit substituted compliance only if direct access to swap data stored at a

    foreign trade repository is provided to the Commission.

    Issued in Washington, DC, on July 17, 2013, by the Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendices to Interpretive Guidance and Policy Statement Regarding

    Compliance with Certain Swap Regulations--Commission Voting Summary and

    Statements of Commissioners

    Note: The following appendices do not constitute a part of the

    Interpretive Guidance and Policy Statement itself.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and

    Wetjen voted in the affirmative; Commissioner O'Malia voted in the

    negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the Interpretive Guidance and Policy Statement

    Regarding Compliance with Certain Swap Regulations (Guidance) and

    the related phase-in exemptive order also being adopted today. With

    this Commission action another important step has been taken to make

    swaps market reform a reality.

    This Guidance is being adopted just shy of the third anniversary

    of President Obama signing the Dodd-Frank Act, and that law was

    historic. It was an historic answer to an historic problem: the near

    collapse of the American economy driven, in part, by the unregulated

    derivatives marketplace. Congress and the President were clear in

    their intention to bring transparency to this marketplace, to lower

    risk to the public, and to ensure the regulation of swap dealers and

    major swap participants.

    In 2008, when both the financial system and the financial

    regulatory system failed the public, Americans paid the price

    through the crisis with their jobs, their pensions, and their homes.

    We lost 8 million jobs in that crisis and thousands of businesses

    shuttered. The swaps market was central to the crisis and financial

    institutions operating complicated swaps businesses and offshore

    entities nearly toppled the economy. Congress responded. Americans

    are remarkably resilient--but the public really does expect us to

    learn from the lessons of the crisis, and to do everything possible

    to prevent this from happening to any of us again.

    It's pretty straightforward, I think. Even though we oversee,

    here at the CFTC, a complex and sometimes difficult to understand

    market (my mom consistently asks me, ``Gary, what are swaps?''), the

    questions the American people are looking for us to answer are

    simple: Have we lowered risk? Have we brought transparency to these

    markets? Have we promoted competition and openness in these markets

    so that end users can get the greatest benefit when they seek to

    lower their risk and focus on what they do well--which is employing

    people, innovating and moving our economy forward? That is why

    reform matters.

    Five years after the crisis and three years after Dodd-Frank

    passed, market participants are coming into compliance with the

    common sense reforms that Congress and the President laid out.

    Through Dodd-Frank and the rules that this agency has put in place,

    no longer will the markets be opaque and dark, and we will have

    transparency in the markets. In fact, throughout this year, for the

    first time, the public and regulators have benefitted from reporting

    to swap data repositories and reporting to the public. And later

    this year, starting actually in August, facilities called swap

    execution facilities will start so that the public can benefit from

    greater openness and competition before the transaction occurs. And

    by the end of this year, there are likely to be trade execution

    mandates for interest rate and credit derivative index products, as

    well.

    Central clearing became required for the broader market earlier

    this year, with key phase in dates to come this Fall and Winter, as

    well. We have 80 swap dealers, and, yes, two major swap

    participants, now provisionally registered. As part of the

    responsibilities accompanying registration, they're responsible for

    sales practice, record keeping and other business conduct

    requirements that help lower the risk to the public.

    Yesterday, we took another significant step when we and the

    European Commission announced a path forward regarding joint

    understandings regarding the regulation of cross border derivatives.

    I want to publicly thank Commissioner Michel Barnier, his Director

    General Jonathan Faull, and their staffs, the staffs at the European

    Securities Market Authority, and Steven Maijoor's leadership, for

    collaborating throughout the reform process. This was a significant

    step forward in harmonizing and giving clarity to the markets as to

    when there might be jurisdictional overlaps with regard to this

    reform.

    Today, we are considering two important actions, the Guidance,

    as well as a related

    [[Page 45371]]

    phase-in exemptive order. And as you probably have heard me say

    before, the nature of modern finance is that financial institutions

    commonly set up hundreds, even thousands of legal entities around

    the globe. In fact, the U.S.'s largest banks each have somewhere

    between 2,000 and 3,000 legal entities around the globe. Some of

    them have hundreds of legal entities just in the Cayman Islands

    alone. We have to remind ourselves that the largest banks and

    institutions are global in nature, and when a run starts on any part

    of an overseas affiliate or branch of a modern financial

    institution, risk comes crashing right back to our shores.

    Similarly, if it's an EU financial institution and it has some

    guaranteed affiliate in the U.S. or overseas that gets into trouble,

    that risk can flow back to their shores. That's why, together both

    we and Europe recognize the importance of covering guaranteed

    affiliates, whether they're guaranteed affiliates of a U.S. person

    or of an EU person.

    There's no question to me, at least, that the words of Dodd-

    Frank addressed this (i.e., risk importation) when they said that a

    direct and significant connection with activities and/or effect on

    commerce in the United States covers these risks that may come back

    to us.

    I want to publicly thank Chairman Barney Frank along with

    Spencer Bachus, Frank Lucas, and Collin Peterson, and their staffs

    for reaching out to the CFTC and the public to ask how to best

    address offshore risks that could wash back to our economy in Dodd-

    Frank.

    In addition, we should not forget the actual events over the

    past several years that remind us of the risks to the U.S. that can

    be posed by offshore entities:

    AIG nearly brought down the U.S. economy. Lehman Brothers had

    3,300 legal entities, including a London affiliate that was

    guaranteed here in the U.S., and it had 130,000 outstanding swap

    transactions. Citigroup had structured investment vehicles that were

    set up in the Cayman Islands, run out of London, and yet were

    central to not one, but two bailouts of that institution. Bear

    Stearns, in 2007 had two sinking hedge funds that had to be bailed

    out by Bear Stearns--and, yes, those hedge funds were organized in

    the jurisdiction of the Cayman Islands.

    More than a decade earlier, I was working in my position as

    Assistant Secretary of the United States Department of the Treasury.

    I found myself making a call from Connecticut to then Treasury

    Secretary Robert Rubin to report that Long Term Capital Management's

    $1.2 trillion swaps book was not only going to go down within a day

    or two, but that the business--that we thought was in Connecticut--

    was actually incorporated in the Cayman Islands as a PO Box

    facility.

    Even last year, we had yet another reminder that branches of big

    U.S. banks can bring risk back to the US. Even though they were not

    the risks as large as I've just related, JPMorgan Chase's Chief

    Investment Office's credit default swaps were executed primarily in

    the U.K. branch.

    Each of these examples demonstrated a direct and significant

    connection with activities and/or an effect on commerce in the

    United States. Congress knew this painful history when it provided

    the cross border provisions of swaps market reform. And as market

    participants asked the CFTC to provide interpretive guidance on

    Congress's word, I believe that we have had to keep this painful

    history in mind. Two and a half years ago, the CFTC started working

    on guidance, which was published for notice and comment in June

    2012, and for which we sought further input on in December 2012. We

    have greatly benefitted from this public input. The Guidance the

    Commission will adopt today incorporates the public's input and, I

    think, appropriately interprets the cross border provisions of Dodd-

    Frank.

    There are four areas that I think really are important:

    First, the CFTC interprets the cross-border provisions to cover

    swaps between non U.S. swap dealers and guaranteed affiliates of

    U.S. Persons, as well as swaps between two guaranteed affiliates

    that are not swap dealers. The guidance does, as was proposed,

    recognize and embrace the concept of substituted compliance where

    there are comparable and comprehensive rules abroad. But the history

    of AIG, Lehman Brothers, Citigroup and the others, and of guaranteed

    affiliates, is a strong lesson that Congress knew when we were

    approaching these issues.

    Second, the definition of U.S. person in this guidance captures

    offshore hedge funds and collective investment vehicles that have

    their principal place of business here in the U.S., or that are

    majority owned by U.S. persons. Addressing ourselves to guidance,

    and yet forgetting the lessons of Long Term Capital Management or

    Bear Stearns, is not in my opinion what Congress wanted.

    Third, under the guidance, foreign branches, like the JPMorgan's

    U.K. branch, of U.S. swap dealers may also comply with Dodd-Frank

    through substituted compliance if they are appropriately ring-

    fenced--that is, they are truly branches where employees and the

    booking and the taxes are actually offshore in the foreign branch.

    The Guidance allows, if there are comparable and comprehensive

    regimes overseas and supervisory authorities overseas looking at

    those branches, that those branches can avail themselves to

    substituted compliance in the manner offshore guaranteed affiliates

    would.

    Lastly, the guidance provides that swap dealers, foreign or

    U.S., transacting with U.S. persons (whether they be in New Jersey,

    Maryland, Michigan, Arkansas, Iowa--I have to get all the right

    states, recognizing where my fellow Commissioners come from)

    anywhere in the United States, must comply with Dodd-Frank's swap

    market reform. The guidance does provide, though, that U.S. Persons

    can meet international people anonymously, and not only on our

    exchanges called designated contract markets, but also on the new

    swap execution facilities, as well as foreign boards of trade.

    International parties trading on those platforms do not have to

    worry about whether those swaps might make them a swap dealer, or

    whether they need to worry about certain transaction level

    requirements. And I think that was important to maintain and promote

    the liquidity of these three very important types of platforms--

    foreign boards of trade, swap execution facilities, and designated

    contract markets.

    In conclusion, I will be voting in support of the Guidance and

    the related phase-in exemptive order also being adopted today. I'll

    say more about the exemptive order in my statement of support for

    that document, but I think these are both critical steps for the

    Commission and swaps reform. They add to the approximately 56 final

    guidance and rules that this Commission has adopted. We're well over

    90 percent through the various rule and guidance writing. And the

    markets are probably well towards half way implementing these

    reforms. I have a deep respect for how much work market participants

    are doing to come into compliance.

    So now, 3 years after the passage of financial reform, and a

    full year after the Commission proposed guidance with regard to the

    cross border application of reform, it is time for reforms to

    properly apply to and cover those activities that, as identified by

    Congress in section 722(d) of the Dodd-Frank Act, have ``a direct

    and significant connection with activities in, or effect on,

    commerce of the United States.'' With the additional transitional

    phase-in period provided by this Order, it is now time for the

    public to get the full benefit of the transparency and the measures

    to reduce risk included in Dodd Frank reforms.

    Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia

    I respectfully dissent from the Commodity Futures Trading

    Commission's (the ``Commission'' or ``CFTC'') approval of its

    interpretive guidance and policy statement (``Guidance'') regarding

    the cross-border application of the swaps provisions of the

    Commodity Exchange Act (``CEA''), as well as from the Commission's

    approval of a related exemptive order (``Exemptive Order'').

    When I voted in July 2012 to issue for public comment the

    proposed interpretive guidance and policy statement (``Proposed

    Guidance''),\1\ I made clear that if I had been asked to vote on the

    Proposed Guidance as final, my vote would have been no. I then laid

    out my concerns with the Proposed Guidance, all relating to the

    Commission's unsound interpretation of section 2(i) of the CEA,\2\

    which governs the extraterritorial application of the CEA's swaps

    provisions. Regrettably, the Guidance fails to address these

    concerns and constitutes a regulatory overreach based on a weak

    foundation of thin statutory and legal authority.

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

    \1\ Cross-Border Application of Certain Swaps Provisions of the

    Commodity Exchange Act, 77 FR 41214 (July 12, 2012).

    \2\ 7 U.S.C. 1 et seq.

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

    Like the Proposed Guidance, the Guidance: (1) Fails to

    articulate a valid statutory foundation for its overbroad scope and

    inconsistently applies the statute to different activities; (2)

    crosses the line between interpretive guidance and rulemaking; and

    (3) gives insufficient consideration to international law and

    comity. These shortcomings are compounded by serious procedural

    flaws in the Commission's treatment of international harmonization

    and substituted compliance, as well as in its issuance of the

    Exemptive Order.

    [[Page 45372]]

    Lack of Statutory Foundation

    Section 2(i) of the CEA \3\ as amended by the Dodd-Frank Wall

    Street Reform and Consumer Protection Act of 2010 (the ``Dodd-Frank

    Act'') \4\ provides, in part, that the Commission's swap authority

    ``shall not apply'' to activities outside the United States unless

    those activities ``have a direct and significant connection with

    activities in, or effect on, commerce of the United States . . . .''

    \5\ This provision is clearly a limitation on the Commission's

    authority.\6\ It follows that the Commission must properly

    articulate how and when the ``direct and significant'' standard is

    met in order to apply Commission rules to swap activities that take

    place outside of the United States.

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

    \3\ Sec. 2(i).

    \4\ Dodd-Frank Wall Street Reform and Consumer Protection Act,

    Public Law 111-203, 124 Stat. 1376 (2010).

    \5\ Sec. 2(i)(1).

    \6\ Stated another way, section 2(i)(1) may be read as the

    following: ``[The CEA's swaps provisions enacted by the Dodd-Frank

    Act] may apply to activities outside the United States only if those

    activities have a direct and significant connection with activities

    in, or effect on, commerce of the United States.''

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

    The Guidance, however, fails to do so. Instead, it treats

    section 2(i) as a ready tool to expand authority rather than as a

    limitation. The statutory analysis section of the Guidance is

    insufficient to support the broad sweep of extraterritorial

    activities that the Guidance contemplates would fall under the

    Commission's jurisdiction, relying heavily on a comparison to

    somewhat similar statutory language whose wholly different context

    renders the comparison unpersuasive. The Guidance makes no mention

    of statutes that may be more analogous to the CEA, such as the

    securities or banking laws.\7\ Because the ``direct and

    significant'' standard is never defined, the Guidance's attempts to

    link certain requirements imposed on market participants to the

    ``direct and significant'' standard do not establish the requisite

    jurisdictional nexus.\8\

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

    \7\ For a recent statutory analysis of the extraterritorial

    application of the Securities and Exchange Act of 1934, see Morrison

    v. Nat'l Australia Bank, 561 U.S. ---- (2010).

    \8\ See Appalachian Power Co. v. Envtl. Prot. Agency, 208 F.3d

    1015, 1027 (D.C. Cir. 2000) (vacating agency guidance interpreting

    statutory language with practical binding effect because it did not

    define subparts of the interpreted term and should have been

    promulgated as a legislative rule under the APA).

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

    I would also like to point out that CEA section 2(i) contains a

    second clause, which allows for the limited application of the

    Commission's swap rules to activities outside the United States when

    they violate the Commission's anti-evasion rules.\9\ Pursuant to

    this clause, the Commission promulgated section 1.6 under Part 1 of

    its regulations.\10\ Rather than relying on section 1.6 to address

    its concerns about evasion, the Commission chose simply to reference

    the same concerns in justifying its overbroad reach in the Guidance.

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

    \9\ 7 U.S.C. 2(i)(2) ([The CEA's swaps provisions enacted by the

    Dodd-Frank Act] ``shall not apply to activities outside the United

    States unless those activities . . . 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

    [the CEA enacted by the Dodd-Frank Act]'').

    \10\ 17 CFR 1.6.

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

    With such an unsound foundation for the Commission's

    extraterritorial authority under the ``direct and significant''

    standard, I am not surprised that the Guidance often applies section

    2(i) of the CEA inconsistently and arbitrarily. Examples of

    inconsistency abound.

    For instance, just as with the Proposed Guidance, the Guidance

    does not provide a basis for its reasoning that all Transaction-

    Level Requirements described in the Guidance satisfy the ``direct

    and significant'' standard under section 2(i). As I stated in my

    concurrence to the Proposed Guidance, trade execution and real-time

    public reporting requirements, although important for transparency

    purposes, do not raise the same systemic risk concerns that clearing

    and margining for uncleared swaps do. The Guidance acknowledges this

    point, but does not go on to sufficiently explain why they should

    be, and are, treated equally. The Guidance also acknowledges that

    clearing and margining, because of their implications for systemic

    risk, could be classified as Entity-Level Requirements, but it does

    not explain why are they are not. The Guidance's failure to give

    meaning to the ``direct and significant'' standard in its discussion

    of these requirements is glaring.

    Inconsistent application can also be seen within a specific

    Transaction-Level Requirement, for example reporting to swap data

    repositories (``SDRs''). The Guidance allows non-U.S. swap dealers

    (``SDs'') and major swap participants (``MSPs'') to utilize

    substituted compliance for SDR reporting of their swaps with non-

    U.S. counterparties, but it does not allow for substituted

    compliance for non-U.S. SD and MSPs' trades with U.S.

    counterparties. Again, the Commission fails here to give real

    meaning to ``direct and significant'' in order to adequately explain

    its reasoning for this distinction. The rationale is even weaker

    given the fact that substituted compliance is available for swaps

    with non-U.S. counterparties only under the condition that the

    Commission has direct access to the relevant data at the foreign

    trade repository. In either case, the Commission will have direct

    access to the relevant data, whether substituted compliance is

    available or not. This raises the question: if the outcome is the

    same, why is the distinction made? If it is different, the Guidance

    does not explain how or why--despite requiring data at foreign trade

    repositories to be essentially the same as data at domestic SDRs,

    before the Commission even contemplates substituted compliance for

    SDR reporting.

    Yet another example of inconsistent application of section 2(i)

    involves the requirement of physical commodity large swaps trader

    reporting (``Large Trader Reporting''). In contrast to SDR

    reporting, the Guidance does not allow substituted compliance for

    Large Trader Reporting, even for swaps between a non-U.S. registrant

    and a non-U.S. counterparty. The Commission's flimsy rationale is

    that Large Trader Reporting involves data conversion to ``futures

    equivalent'' units, and that it would cost too much time and

    resources for the Commission to conduct this conversion on data that

    it could access in a foreign trade repository. Here again, the

    ``direct and significant'' standard is nowhere to be found.

    Moreover, the Commission overstates the burden of the ``futures

    equivalent'' conversion and, more generally, the significance of

    Large Trader Reporting in its oversight duties, while understating

    the availability of data collected through SDR reporting, with its

    eligibility for substituted compliance, to achieve the same

    regulatory objectives.

    Interpretive Guidance Versus Rulemaking

    The imposition of requirements on market participants raises

    another of my major concerns with the Guidance. I strongly disagree

    with the Commission's decision to issue its position on the cross-

    border application of its swaps regulations in the form of

    ``interpretive guidance'' instead of promulgating a legislative rule

    under the Administrative Procedure Act (``APA'').\11\

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

    \11\ 5 U.S.C. 551 et seq.

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

    Simply putting the guise of ``guidance'' on this document does

    not change its content or consequences. Where agency action has the

    practical effect of binding parties within its scope, it has the

    force and effect of law, regardless of the name it is given.\12\

    Legally binding regulations that impose new obligations on affected

    parties--``legislative rules''--must conform to the APA.\13\ On its

    face, the Guidance sets out standards that it contemplates will be

    regularly applied by staff to cross-border activities in the swaps

    markets. Market participants cannot afford to ignore detailed

    regulations imposed upon their activities that may result in

    enforcement or other penalizing action.\14\ This point is underlined

    by the fact that, as I discuss below, Commission staff no-action

    letters have been issued in connection with compliance obligations

    that have essentially been imposed by the Guidance.\15\ All of this

    leads to the logical conclusion that the Guidance has a practical

    binding effect and

    [[Page 45373]]

    should have been promulgated as a legislative rule under the APA.

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

    \12\ See Gen. Elec. Co. v. Envtl. Prot. Agency, 290 F.3d 377,

    380 (D.C. Cir. 2002) (finding that a guidance document is final

    agency action); Appalachian Power, 208 F.3d at 1020-21.

    \13\ See Chrysler Corp. v. Brown, 441 U.S. 281, 302-03 (1979)

    (agency rulemaking with the force and effect of law must be

    promulgated pursuant to the procedural requirements of the APA).

    \14\ ``A document will have practical binding effect before it

    is actually applied if the affected private parties are reasonably

    led to believe that failure to conform will bring adverse

    consequences . . . .'' Gen. Elec., 290 F.3d at 383 (quoting Anthony,

    Robert A., Interpretive Rules, Policy Statements, Guidances,

    Manuals, and the Like--Should Federal Agencies Use Them to Bind the

    Public?, 41 Duke L.J. 1311 (1992)) (vacating an agency's guidance

    document that the court found to have practical binding effect and

    where procedures under the APA were not followed).

    \15\ A no-action letter is issued by a division of the

    Commission and states that, for the reasons and under the conditions

    described therein, it will not recommend that the Commission

    commence an enforcement action against an entity or group of

    entities for failure to comply with obligations imposed by the

    Commission.

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

    There are important policy and legal considerations that weigh

    strongly in support of rulemaking in accordance with the APA. Not

    only do the safeguards enacted by Congress in the APA ensure fair

    notice and public participation, they help to ensure reasoned

    decision-making and accountability. In addition, the APA requires

    that courts take a ``hard look'' at agency action.\16\

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

    \16\ The ``arbitrary and capricious'' standard of review of

    agency action under the APA is a rationality analysis also known as

    the hard-look doctrine:

    Under the leading formulation of this doctrine, ``the agency

    must examine the relevant data and articulate a satisfactory

    explanation for its action including a `rational connection between

    the facts found and the choices made.' '' The court ``consider[s]

    whether the decision was based on a consideration of the relevant

    factors and whether there has been a clear error of judgment.'' In

    addition, the agency may not ``entirely fail[ ] to consider an

    important aspect of the problem,'' may not ``offer[ ] an explanation

    for its decision that runs counter to the evidence before the

    agency,'' nor offer an explanation that is ``so implausible that it

    could not be ascribed to a difference in view or the product of

    agency expertise.'' The agency must also relate the factual findings

    and expected effects of the regulation to the purposes or goals the

    agency must consider under the statute as well as respond to salient

    criticisms of the agency's reasoning.

    Stack, Kevin M., Interpreting Regulations, 111 Mich. L. Rev.

    355, 378-79 (2012) (internal citations omitted).

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

    By issuing ``interpretive guidance'' instead of rulemaking, the

    Commission has also avoided analyzing the costs and benefits of its

    actions pursuant to section 15(a) of the CEA,\17\ because the CEA

    requires the Commission to consider costs and benefits only in

    connection with its promulgation of regulations and orders.

    Compliance with the Commission's swaps regulations entails

    significant costs for market participants. Avoiding cost-benefit

    analysis by labeling the document as guidance is unacceptable.

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

    \17\ 7 U.S.C. 19(a).

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

    In my concurrence to the Proposed Guidance, I suggested that the

    Commission should at least prepare a report analyzing the costs

    attributable to the breadth of the Commission's new authority under

    CEA section 2(i). I am disappointed, but not surprised, that the

    Commission has not taken up my suggestion.

    Insufficient Consideration of Principles of International Comity

    Also in my concurrence to the Proposed Guidance, I pointed out

    that the Commission's approach gave insufficient consideration to

    principles of international comity. The Guidance suffers from the

    same shortcoming.

    The Commission does describe principles of international comity

    in the Guidance, as it did in the Proposed Guidance. However, mere

    citation is meaningless if unaccompanied by adherence. With an

    interpretation of section 2(i) that essentially views the

    Commission's jurisdiction as boundless, roping in all transactions

    with U.S. persons regardless of the location or the regulations that

    foreign regulators may have in place, the reality is that the

    Commission's approach is unilateral and does not give adequate

    consideration to comity principles.

    These principles are crucial given the global, interconnected

    nature of today's swaps markets. Properly considering these

    principles--in addition to indicating respect for the international

    system and the legitimate interests of other jurisdictions--

    strengthens, not weakens, the Commission's ability to effectively

    regulate swaps markets.

    On the Path Forward to Harmonization, But a Flawed Process

    In order to implement principles of international comity and

    develop a harmonized global regulatory system that is both effective

    and efficient, I have consistently called for meaningful cooperation

    with foreign regulators. I initially did so in my concurrence to the

    Proposed Guidance, and the necessity of greater collaboration was

    subsequently driven home by the number and tone of comment letters

    on the Proposed Guidance submitted by foreign regulators.\18\ Then,

    when the Commission finalized a cross-border exemptive order last

    December with an expiration date of July 12,\19\ in my concurring

    statement I again urged the Commission and foreign regulators to

    engage in meaningful, substantive discussions.

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

    \18\ The Commission received comment letters from, among others:

    Jonathan Faull, European Commission; Steven Maijoor, European

    Securities and Markets Authority; David Lawton and Stephen Bland, UK

    Financial Services Authority; Pierre Moscovici, France Ministry of

    Economy and Finance, Christian Noyer, Autorite de controle

    prudential, and Jacques Delmas-Marsalet, Autorite des marches

    financiers; Patrick Raaflaub and Mark Branson, Swiss Financial

    Market Supervisory Authority; Masamichi Kono, Japan Financial

    Services Agency, and Hideo Hayakawa, Bank of Japan; K.C. Chan,

    Financial Services and Treasury Bureau of the Hong Kong Special

    Administrative Region; Belinda Gibson, Australian Securities and

    Investments Commission, Malcolm Edey, Reserve Bank of Australia,

    Arthur Yuen, Hong Kong Monetary Authority, Keith Lui, Hong Kong

    Securities and Futures Commission, and Teo Swee Lian, Monetary

    Authority of Singapore. These and all public comment letters on the

    Proposed Guidance are available at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234&ctl00--ctl00--

    cphContentMain--MainContent--gvCommentList.

    \19\ Final Exemptive Order Regarding Compliance With Certain

    Swap Regulations, 78 FR 858 (January 7, 2013). The document was

    adopted by the Commission in December 2012 and published in the

    Federal Register in January 2013.

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

    I am pleased that over the past several months, this engagement

    has taken place and progress has been made toward harmonization.

    However, we are not where we need to be: many outstanding issues and

    questions remain, from data privacy concerns, to the implications of

    other jurisdictions still finalizing their regulations, to a lack of

    a clear, consistent and transparent framework for substituted

    compliance. It would have made sense for these issues to be

    addressed in the Guidance--but they are not. The looming July 12

    expiration of the December exemptive order and the resulting time

    crunch cannot reasonably be cited as the reason for this failure,

    because July 12 is an artificial date; it could have been pushed

    back in order to reach the right outcome with the right process.

    Instead, while we are moving toward a workable outcome on

    harmonization, the process by which we are getting there is patently

    unacceptable. The most glaring example of this flawed process is

    this week's publication of a Commission staff no-action letter

    allowing substituted compliance for certain of the Transaction-Level

    Requirements.\20\ It boggles the mind to think that a staff letter

    issued by a single division, with no input from the Commission,

    would be used as the vehicle for addressing such a major issue.\21\

    Making matters worse, this no-action letter is outside the scope of

    a forthcoming Commission decision regarding the comparability of

    European rules. And the relief is not time-limited, thereby creating

    an effect similar to a rulemaking. Consequently, this indefinite

    exclusion not only preemptively overrides a Commission decision, but

    it also seems to provide relief beyond that contemplated by the

    Guidance, which calls for a re-evaluation of all substituted

    compliance determinations within four years of the initial

    determination.

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

    \20\ No-Action Relief for Registered Swap Dealers and Major Swap

    Participants from Certain Requirements under Subpart I of Part 23 of

    Commission Regulations in Connection with Uncleared Swaps Subject to

    Risk Mitigation Techniques under EMIR, CFTC Letter No. 13-45 (July

    11, 2013).

    \21\ I have set forth in note 18 some of the comment letters

    that the Commission has received from foreign supervisors and

    regulators. By allowing substituted compliance to be addressed

    through a no-action letter, is the Commission implying that, e.g.,

    the Bank of Japan should accede to, e.g., decisions of the CFTC

    Division of Swap Dealer and Intermediary Oversight? If so, I find

    such implication inappropriate.

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

    Unfortunately, this is not the first instance in recent times of

    staff no-action letters being used to issue Commission policy. Not

    only are they an improper tool to get around formal Commission

    action, their prolific use is a reflection of the ad-hoc, last-

    minute approach that has been far too prevalent lately at the

    Commission. I cannot emphasize this enough: the Commission must stop

    this approach and get back to issuing policy in a more formal, open

    and transparent manner.

    Substituted Compliance

    In my discussions with fellow regulators abroad and

    international regulatory bodies, it is clear that there are varying

    degrees of reforms being developed and implemented in respective

    jurisdictions: some are comparable to U.S. regulations and some are

    less stringent, but there are some that exceed the Commission's own

    requirements. I would have preferred the Commission to take the past

    year following the release of the Proposed Guidance to engage our

    international colleagues and to involve the International

    Organization of Securities Commissions (``IOSCO'') in order to

    resolve the issue of harmonizing our rules. Under this approach, we

    could finalize our guidance upon completion of the international

    harmonization process, allowing us to take into account any

    shortcomings in that process. Instead, we

    [[Page 45374]]

    have chosen the reverse order: to impose statutorily weak guidance,

    with all its no-action riders and exemptions, with only the promise

    of further negotiations with our foreign counterparts.

    Given the way the Commission has proceeded up to this point, it

    is my hope that the harmonization work lying ahead will be

    undertaken in a more transparent manner and not done through the

    abused no-action process that lacks any formal Commission process or

    oversight. Further, I hope that the process of substituted

    compliance will offer the opportunity for other regulatory bodies to

    engage directly with the full Commission, so that we can better

    understand how our rules and theirs will work and can minimize the

    likelihood of regulatory retaliation and inconsistent, duplicative,

    or conflicting rules. I believe the Commission has worked too hard

    to develop principles and standards that will encourage greater

    transparency, open access to clearing and trading and improved

    market data to let them go to waste due to a lack of global

    regulatory harmonization.

    I want to work with other home country regulators to ensure

    there is not an opportunity for entities to exploit regulatory

    loopholes. The stark reality is that this Commission is not the

    global regulatory authority and does not have the resources to

    support such a mission. Therefore, our best and most effective

    solution is to engage in a fully transparent discussion on

    substituted compliance and to do so immediately.

    Exemptive Order

    In an effort to mitigate the broad reach of the Guidance and

    accommodate its last-minute finalization, and in a moment of

    humility, the Commission has agreed to delay the application of

    certain elements of the Commission's swaps regulations with its

    approval of the Exemptive Order. The Exemptive Order provides relief

    ranging from 75 days (for application of the expanded U.S. person

    definition, for example) to December 21, 2013 (for Entity-Level and

    Transaction-Level Requirements for non-U.S. SDs and MSPs in certain

    jurisdictions). The Commission is issuing the Exemptive Order

    pursuant to section 4(c) of the CEA.\22\

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

    \22\ Section 4(c) of the CEA grants the Commission the authority

    to ``exempt any agreement, contract, or transaction (or class

    thereof) that is otherwise subject to subsection (a) (including any

    person or class of persons offering, entering into, rendering advice

    or rendering other services with respect to, the agreement,

    contract, or transaction). . . .'' 7 U.S.C. 6(c). Section 4(a)

    applies to ``any person to offer to enter into, to enter into, to

    execute, to confirm the execution of, or to conduct any office or

    business anywhere in the United States, its territories or

    possessions, for the purpose of soliciting, or accepting any order

    for, or otherwise dealing in, any transaction in, or in connection

    with, a contract for the purchase or sale of a commodity for future

    delivery (other than a contract which is made on or subject to the

    rules of a board of trade, exchange, or market located outside the

    United States, its territories or possessions). . . .'' 7 U.S.C.

    6(a).

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

    Even though the Exemptive Order goes into effect immediately,

    the Commission has included a post hoc 30-day comment period. I

    support the additional time that the Exemptive Order provides for

    market participants to comply with the Commission's last-minute

    Guidance, but I cannot support a final order that blatantly ignores

    the APA-mandated comment periods for Commission action, especially

    when I advocated for a relief package that would have provided for

    public comment over a month ago.\23\

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

    \23\ The Exemptive Order claims, unconvincingly, that it falls

    under a good-cause exception to notice-and-comment requirements

    provided for by the APA under section 553(b)(B): ``Except when

    notice and hearing is required by statute, this subsection does not

    apply . . . (B) when the agency for good cause finds (and

    incorporates the finding and a brief statement of reasons therefore

    in the rules issued) that notice and public procedure thereon are

    impracticable, unnecessary, or contrary to the public interest.'' 5

    U.S.C. 553(b)(B) (emphasis added). However, section 4(c) of the CEA

    clearly provides that the Commission may grant exemptive relief only

    by ``rule, regulation, or order after notice and opportunity for

    hearing'' (emphasis added). 7 U.S.C. 6(c). The APA further provides

    under section 559 that it does not ``limit or repeal additional

    requirements imposed by statute or otherwise recognized by law.'' 5

    U.S.C. 559. The CEA also grants emergency powers to the Commission

    under exigent circumstances. See, e.g., 7 U.S.C. 12a(9). In

    addition, courts have narrowly construed the good-cause exception

    and placed the burden of proof on the agency. See Tenn. Gas Pipeline

    Co. v. Fed. Energy Regulatory Comm'n, 969 F.2d 1141 (D.C. Cir.

    1992); Guardian Fed. Sav. & Loan Ass'n v. Fed. Sav. & Loan Ins.

    Corp., 589 F.2d 658, 663 (D.C. Cir. 1978).

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

    Additional Concerns

    In addition to the above, the Guidance leaves me concerned in a

    number of other areas. I am concerned about whether the definition

    of U.S. person contained herein provides the necessary clarity for

    market participants, particularly as its enumerated prongs are

    explicitly deemed to form a non-exhaustive list. I question whether

    the Commission has done enough to harmonize its cross-border

    approach with that of the Securities and Exchange Commission (which

    is being issued through notice-and-comment rulemaking instead of

    interpretive guidance, I should note), in particular with regard to

    the definitions of U.S. person and foreign branches. I also am

    concerned about whether the Guidance creates an uneven playing field

    for U.S. firms, which would be a plainly unacceptable outcome to me.

    I am concerned that the Guidance is overlapping, duplicative, and

    perhaps even contradictory with other provisions in the Dodd-Frank

    Act that mitigate systemic risk and allocate responsibility for

    administering its complex and comprehensive regulatory regime to

    multiple agencies under Title I, Title II, and even within Title

    VII.\24\ In addition, I am concerned that the Guidance practically

    ignores the hugely important matter of protecting customer funds,

    specifically in connection with bankruptcies, which has critical

    cross-border implications as vividly demonstrated by the recent

    collapse of MF Global.\25\ Finally, I am concerned about whether in

    overreaching to rope in entities into U.S. jurisdiction that would

    more appropriately be regulated elsewhere pursuant to an effective

    system of substituted compliance, the Guidance will have the

    perverse effect of creating more risk to the U.S. system and more

    risk to U.S. taxpayers.

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

    \24\ See, e.g., 7 U.S.C. 6s(d)(2) (``The Commission may not

    prescribe rules imposing prudential requirements on swap dealers or

    major swap participants for which there is a prudential

    regulator.''); 7 U.S.C. 6b-1(b) (``The prudential regulators shall

    have exclusive authority to enforce the provisions of section 4s(e)

    with respect to swap dealers or major swap participants for which

    they are the prudential regulator.'')

    \25\ In a recent op-ed article James Giddens, the bankruptcy

    trustee for MF Global's U.S.-registered entities, points out that

    serious concerns regarding the harmonization, or lack thereof, of

    bankruptcy regimes were identified during the resolution of Lehman

    Brothers in 2008 (he was then the liquidation trustee for Lehman

    Brothers's U.S. broker-dealer), only for similar failings to appear

    with MF Global. He urges clearer and more consistent cross-border

    rules regarding the protection of customer money in advance of any

    future multinational financial company meltdown. Giddens, James, How

    to Avoid the Next MF Global Surprise: Change Cross-Border Rules to

    Stop Raids on U.S. Customer Accounts, Wall St. J., July 9, 2013.

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

    Conclusion

    For an administrative agency, good government combines good

    substance--based on a faithful, appropriate reading of the guiding

    statute--and good process. The Guidance falls woefully short on both

    counts. Therefore, I respectfully dissent from the decision of the

    Commission to approve the Guidance and Exemptive Order for

    publication in the Federal Register.

    [FR Doc. 2013-17958 Filed 7-25-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: July 26, 2013



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