2016-24905

Federal Register, Volume 81 Issue 201 (Tuesday, October 18, 2016)

[Federal Register Volume 81, Number 201 (Tuesday, October 18, 2016)]

[Proposed Rules]

[Pages 71946-71975]

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

[FR Doc No: 2016-24905]

[[Page 71945]]

Vol. 81

Tuesday,

No. 201

October 18, 2016

Part VI

Commodity Futures Trading Commission

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17 CFR Parts 1 and 23

Cross-Border Application of the Registration Thresholds and External

Business Conduct Standards Applicable to Swap Dealers and Major Swap

Participants; Proposed Rule

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

Proposed Rules

[[Page 71946]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 23

RIN 3038-AE54

Cross-Border Application of the Registration Thresholds and

External Business Conduct Standards Applicable to Swap Dealers and

Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule; interpretations.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

``CFTC'') is publishing for public comment proposed rules and

interpretations (``Proposed Rule'') addressing the cross-border

application of certain swap provisions of the Commodity Exchange Act

(``CEA''). Specifically, the proposed rule defines key terms for

purposes of applying the CEA's swap provisions to cross-border

transactions and addresses the cross-border application of the

registration thresholds and external business conduct standards for

swap dealers and major swap participants, including the extent to which

they would apply to swap transactions that are arranged, negotiated, or

executed using personnel located in the United States.

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

ADDRESSES: You may submit comments, identified by RIN number 3038-AE54,

by any of the following methods:

CFTC Web site: http://comments.cftc.gov. Follow the

instructions for submitting comments through the Comments Online

process on the Web site.

Mail: Christopher Kirkpatrick, Secretary of the

Commission, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street NW., Washington, DC 20581.

Hand Delivery/Courier: Same as Mail, above.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

Please submit your comments using only one method.

All comments must be submitted in English, or if not, accompanied

by an English translation. Comments will be posted as received to

http://www.cftc.gov. You should submit only information that you wish

to make available publicly. If you wish the Commission to consider

information that you believe is exempt from disclosure under the

Freedom of Information Act (``FOIA''), a petition for confidential

treatment of the exempt information may be submitted according to the

procedures established in Sec. 145.9 of the CFTC's regulations, 17 CFR

145.9.

The Commission reserves the right, but shall have no obligation, to

review, pre-screen, filter, redact, refuse or remove any or all of a

submission from http://www.cftc.gov that it may deem to be

inappropriate for publication, such as obscene language. All

submissions that have been redacted or removed that contain comments on

the merits of the notice will be retained in the public comment file

and will be considered as required under all applicable laws, and may

be accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT: Paul Schlichting, Assistant General

Counsel, (202) 418-5884, [email protected]; Laura B. Badian,

Assistant General Counsel, (202) 418-5969, [email protected]; or Elise

Bruntel, Counsel, (202) 418-5577, [email protected]; Office of the

General Counsel, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Scope of Rulemaking

B. Current Market Structure

II. Definitions

A. U.S. Person

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

III. ANE Transactions

A. Background

B. Commission's Views Regarding ANE Transactions

C. Proposed Interpretation Regarding the Scope of ANE

Transactions

IV. Cross-Border Application of the Swap Dealer Registration

Threshold

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

B. Foreign Consolidated Subsidiaries

C. Other Non-U.S. Persons

1. U.S. Counterparties That Are U.S. Persons or U.S. Guaranteed

Entities

2. Counterparties That Are FCSs

3. Other Non-U.S. Counterparties

4. Swaps Executed Anonymously on a SEF, DCM, or FBOT and Cleared

D. Aggregation Requirement

E. Summary

V. Cross-Border Application of the Major Swap Participant

Registration Thresholds

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

Consolidated Subsidiaries

B. Other Non-U.S. Persons

C. Attribution Requirement

D. Summary

VI. Cross-Border Application of the External Business Conduct

Standards for Swap Dealers and Major Swap Participants

VII. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost-Benefit Considerations

1. Assessment Costs

2. Cross-Border Application of the Swap Dealer Registration

Threshold

a. U.S. Persons and U.S. Guaranteed Entities

b. Foreign Consolidated Subsidiaries

c. Other Non-U.S. Persons

3. Cross-Border Application of the Major Swap Participant

Registration Thresholds

4. Monitoring Costs

5. Registration Costs

6. Programmatic Costs

7. Cross-Border Application of External Business Conduct

Requirements

8. Section 15(a) Factors

a. Protection of Market Participants and the Public

b. Efficiency, Competitiveness, and Financial Integrity of the

Markets

c. Price Discovery

d. Sound Risk Management Practices

e. Other Public Interest Considerations

9. Appendix to Cost-Benefit Considerations

VIII. Preamble Summary Tables

Table A--Cross-Border Application of the Swap Dealer De Minimis

Threshold

Table B--Cross-Border Application of the Major Swap Participant

Registration Thresholds

Table C--Cross Border Application of the External Business

Conduct Standards

I. Background

A. Scope of Rulemaking

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection

Act (``Dodd-Frank Act'' or ``Dodd-Frank'') \1\ amended the Commodity

Exchange Act (``CEA'') \2\ to establish a new regulatory framework for

swaps. Added in the wake of the 2008 financial crisis, which

highlighted the potential for cross-border swap activities to have a

substantial impact on the U.S. financial system, the new swap

provisions expressly apply to activities that have a direct and

significant connection with activities in, or effect on, U.S. commerce

or that contravene Commission rules or regulations necessary or

appropriate to prevent evasion.\3\

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\1\ Public Law 111-203, 124 Stat. 1376 (2010).

\2\ 7 U.S.C. 1 et seq.

\3\ See 7 U.S.C. 2(i). Section 2(i) of the CEA states that the

provisions of that chapter relating to swaps that were enacted by

the Wall Street Transparency and Accountability Act of 2010

(including any rule prescribed or regulation promulgated under that

Act) shall not apply to activities outside the United States unless

those activities (1) have a direct and significant connection with

activities in, or effect on, commerce of the United States; or (2)

contravene such rules or regulations as the Commission may prescribe

or promulgate as are necessary or appropriate to prevent the evasion

of any provision of that chapter that was enacted by the Wall Street

Transparency and Accountability Act of 2010.

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In response to requests from market participants, the Commission

published

[[Page 71947]]

a policy statement and interpretive guidance regarding the cross-border

application of the swap provisions of the CEA.\4\ The Guidance offered

an interpretation of the term ``U.S. person'' and a general, non-

binding framework for the cross-border application of many substantive

Dodd-Frank requirements, including requirements for swap dealers

(``SDs'') and major swap participants (``MSPs'') (collectively, ``SD/

MSPs''). Given the complex and dynamic nature of the global swap

market, the Guidance was intended as a flexible and efficient way to

provide the Commission's views on cross-border issues raised by

commenters, allowing the Commission to adapt in response to changes in

the global regulatory and market landscape.\5\ The Commission

accordingly stated that it would review and modify its cross-border

policies as the global swaps market continues to evolve and consider

codifying the cross-border application of Dodd-Frank swap provisions in

future rulemakings, as appropriate.\6\

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\4\ See Interpretive Guidance and Policy Statement Regarding

Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26,

2013) (``Guidance'').

\5\ Id. at 45297, n.39.

\6\ See id. The Commission notes that at the time that the

Guidance was adopted, it was tasked with regulating a market that

grew to a global scale without any meaningful regulation. Developing

a regulatory framework to fit that market is necessarily an

iterative process, one that requires adapting and responding to

rapid and continual changes in the market. Therefore, the Commission

expects that this proposed rulemaking will be followed by additional

rulemakings affecting the cross-border application of the

Commission's swap regulations.

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In this release, the Commission is proposing to codify a central

element of the Dodd-Frank regulatory framework for SDs and MSPs,

incorporating various aspects of the Commission's recent cross-border

rulemaking regarding the margin requirement,\7\ including the

definitions of ``U.S. person'' and ``guarantee'' and the concept of a

Foreign Consolidated Subsidiary (``FCS''). Specifically, the Proposed

Rule addresses when U.S. and non-U.S. persons, including FCSs and those

whose swap obligations are guaranteed by a U.S. person, would be

required to include their cross-border swap dealing transactions or

swap positions in their SD or MSP registration threshold calculations,

respectively,\8\ and the extent to which SD/MSPs would be required to

comply with the Commission's business conduct standards governing their

conduct with swap counterparties (``external business conduct

standards'') in cross-border transactions.\9\

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\7\ See Margin Requirements for Uncleared Swaps for Swap Dealers

and Major Swap Participants--Cross-Border Application of the Margin

Requirements, 81 FR 34818 (May 31, 2016) (``Cross-Border Margin

Rule'').

\8\ See proposed rule Sec. 1.3(ggg)(7) and 1.3(nnn). The SD and

MSP registration thresholds are codified at 17 CFR 1.3(ggg)(4) and

1.3(hhh) through (mmm), respectively.

\9\ See proposed rule Sec. 23.452. The Commission's external

business conduct standards are codified in 17 CFR part 23, subpart H

(17 CFR 23.400 through 23.451).

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The Proposed Rule also addresses issues related to a Commission

request for comment on a 2013 staff advisory, which discussed the

staff's view of the application of certain Dodd-Frank swap provisions

to non-U.S. SDs if they use personnel located in the United States.\10\

Specifically, the Proposed Rule addresses situations in which swap

transactions are arranged, negotiated, or executed using personnel

located in the United States (``ANE transactions''), including the

types of activities that would fall within the scope of ANE

transactions and the extent to which the SD registration threshold and

external business conduct standards apply to ANE transactions.

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\10\ See Request for Comment on Application of Commission

Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S.

Counterparties Involving Personnel or Agents of the Non-U.S. Swap

Dealers Located in the United States, 79 FR 1347 (Jan. 8, 2014)

(``Request for Comment''); CFTC Staff Advisory No. 13-69,

Applicability of Transaction-Level Requirements to Activity in the

United States (Nov. 14, 2013) (``Staff Advisory''), available at

http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf. As stated therein, the Staff Advisory represented

the views of the Division of Swap Dealer and Intermediary Oversight

(``DSIO'') only, and not necessarily those of the Commission or any

other office or division thereof. Id. at 2.

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As part of the proposed rule, the Commission is also proposing to

define the key terms of ``U.S. person'' and ``Foreign Consolidated

Subsidiary'' for broad cross-border application in a manner consistent

with how the terms were defined in the Cross-Border Margin Rule.\11\ If

adopted, the Commission intends that these definitions would be

relevant not only within the context of the proposed rule, but for

purposes of any subsequent rulemakings specifically addressing the

cross-border application of other substantive Dodd-Frank requirements,

unless the context or a specific rule or regulation otherwise requires.

The Commission believes that applying a single definition for these

terms throughout the Commission's cross-border framework going forward

would benefit market participants by eliminating complexity associated

with the use of different definitions for different Dodd-Frank rules.

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\11\ See proposed rule Sec. 1.3(aaaaa); Cross-Border Margin

Rule, 81 FR 34818; 17 CFR 23.160(a).

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The Proposed Rule does not address the cross-border application of

any substantive Dodd-Frank requirements beyond the SD/MSP registration

thresholds and external business conduct standards. The Commission

expects to address the cross-border application of other Dodd-Frank

requirements, including the availability of substituted compliance, in

subsequent rulemakings.

B. Current Market Structure

In determining how the Commission's SD/MSP registration thresholds

should apply to market participants in cross-border transactions and

the extent to which the Dodd-Frank swap requirements should apply to

ANE transactions, the Commission was informed by its understanding of

the current market practices of global financial institutions.

Financial groups that are active in the swap market typically operate

in multiple market centers \12\ and carry out swap activity with

counterparties around the world using a number of different operational

structures. A financial group's business model, including its booking

practices and how it carries out market-facing activities, reflects a

range of business and regulatory considerations, which are weighed

differently by, and have different effects on, each group.

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\12\ Data from swap data repositories (``SDR data'') indicate

that the global swap market has several market centers, including

New York, London, and Tokyo.

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Despite its geographic expanse, a global financial group

effectively operates as a single business, with a highly integrated

network of business lines and services conducted through various

branches or affiliated legal entities that are under the control of the

parent entity. While each branch or affiliate may serve a unique

purpose, they are highly interdependent and inextricably linked, with

affiliated entities within the corporate group providing financial or

credit support for each other, such as in the form of a guarantee or

the ability to transfer risk through inter-affiliate trades.\13\

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\13\ Even in the absence of an explicit arrangement or

guarantee, the parent entity may, for reputational or other reasons,

choose or be compelled to assume the risk incurred by its

affiliates, branches, or offices located overseas.

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A financial group may reflect all of its swaps in the financial

statements of one entity (the ``booking entity''), realizing netting

and operational benefits, a practice referred to as ``central

booking.'' In this case, the booking entity retains all the risk

associated with

[[Page 71948]]

each swap, creating one swap portfolio. Alternatively, a financial

group may book swaps in several different affiliates depending on the

jurisdiction where the counterparty is located or, alternatively, where

the financial group manages a particular type of risk or product. In

the latter case, the swaps will be reflected in the financial

statements of different affiliates. The risks related to the swaps,

however, may not remain in the entity in which the swap is booked.

Using arrangements such as inter-affiliate transactions or assignments,

the risks related to a swap may be transferred to different entities

within an affiliated group while the entity at which the swap is booked

remains unchanged.\14\

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\14\ The extent to which swap risk may be transferred without

changing the booking entity may depend on relevant accounting rules,

legal requirements, and other factors. Swap activities may also be

carried out through branches located in separate jurisdictions

rather than, or in addition to, affiliates that are domiciled in

separate jurisdictions.

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Regardless of a financial group's booking practices, it typically

engages in sales or trading functions in one or more market centers.

Performing sales and trading functions in global market centers

provides the financial group with access to counterparties in that

jurisdiction. The financial group's presence in a particular market

center also enables the group to more effectively engage in swaps in

that locale on behalf of affiliates in other jurisdictions that are

servicing counterparties in those jurisdictions.\15\

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\15\ From discussions with market participants, the Commission

understands that financial groups typically prefer to operate their

swap businesses and manage swap portfolios in the jurisdiction where

the swap and the underlying asset have the deepest and most liquid

markets. In operating their swap dealing businesses in these market

centers, financial groups seek to take advantage of expertise in

products traded in those centers and obtain access to greater

liquidity, permitting them to more efficiently price such products

or otherwise compete more effectively in the global swap market,

including in jurisdictions different from the market center in which

the swap is traded.

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In this highly-integrated corporate structure, where financial

groups engage in swap dealing activity with counterparties located in

multiple jurisdictions, it is not uncommon for a swap to be traded

through an affiliate in one jurisdiction (the ``market-facing

affiliate'') and booked and risk-managed in another (the ``booking

affiliate''). In such cases, a particular affiliate may become the

market-facing affiliate because its trading desk has expertise in

relevant products or because it has an established client network in

the relevant jurisdiction or market hub.\16\ However, although each

affiliate carries out a distinct function in a given swap transaction,

together they operate as an integrated dealing business.

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\16\ The market-facing affiliate may in turn employ either its

own personnel or the personnel of another affiliate or unaffiliated

agent. Market-facing entities may use unaffiliated agents in order

to conduct swap dealing activity anonymously or to provide clients

with access to market hubs where they do not have their own

operations.

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Large U.S. financial services firms emphasize the importance of

operating globally through a unified structure. For example, Goldman

Sachs explains that one of its core businesses ``serves our clients who

come to the firm to buy and sell financial products, raise funding and

manage risk. We do this by acting as a market maker and offering market

expertise on a global basis . . . . Through our global sales force, we

maintain relationships with our clients, receiving orders and

distributing investment research, trading ideas, market information and

analysis. As a market maker, we provide prices to clients globally

across thousands of products in all major asset classes and markets . .

. . Much of this connectivity between the firm and its clients is

maintained on technology platforms and operates globally wherever and

whenever markets are open for trading.'' \17\ Morgan Stanley explains

that it provides financial services to clients globally, primarily

through subsidiaries incorporated in the U.S., Europe and Asia, and it

``trades, invests and makes markets globally in listed swaps and

futures and OTC cleared and uncleared swaps, forwards, options and

other derivatives . . . .'' \18\ Citigroup, one of the largest U.S.

bank holding companies, describes its global presence as ``trading

desks in over 30 countries and market access in 70 countries.'' \19\

Citigroup also states that it manages its risk exposures from its

activities across all these countries via its ``Centralized Risk

Desk.'' \20\

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\17\ See The Goldman Sachs Group, Inc. 2013 Annual Report on

Form 10-K at 3 (describing Institutional Client Services business,

which includes swaps and other derivatives trading), available at

http://www.goldmansachs.com/investor-relations/financials/archived/10k/docs/2013-10-k.pdf.

\18\ See Morgan Stanley 2013 Annual Report on Form 10-K at 3,

available at https://www.morganstanley.com/about-us-ir/shareholder/10k2013/10k2013.pdf.

\19\ See Global Equities, Citigroup, discussion of equities

product line (accessed Sept. 29, 2016), available at http://www.citibank.com/icg/global_markets/product_solutions/global_equities/index.jsp. While this description is in the context

of equities trading and not necessarily swaps, it illustrates the

integrated nature of the global operations of these firms and their

affiliates and subsidiaries in different countries.

\20\ See id.

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In sum, the current swap market is global in scale and

characterized by a high level of interconnectedness among market

participants, with transactions negotiated, executed, and arranged

between counterparties in different jurisdictions, (and booked and

managed in still other jurisdictions). These market realities suggest

that a cross-border framework that focuses only on the domicile of the

market participant or location of counterparty risk would fail to

effectively advance the policy objectives of the Dodd-Frank swap

reforms, which were aimed at increasing market transparency and

counterparty protections and mitigating the risk of financial contagion

in the swap market.\21\ At the same time, the Commission is also

mindful that its policy choices should aim to enhance market efficiency

and competition and the overall functioning of the global swap market.

Accordingly, as described in detail below, in developing the Proposed

Rule the Commission has strived to implement a cross-border framework

that would achieve the important goals of the Dodd-Frank Act while

mitigating any unnecessary burdens and avoiding disruption to market

practices to the extent possible.

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\21\ Nor would such a framework be consistent with CEA section

2(i), which provides that Dodd-Frank's swap provisions and the

Commission's regulations thereunder apply to cross-border

transactions under certain circumstances. See Secs. Indus. & Fin.

Mkts. Ass'n v. CFTC, 67 F. Supp. 3d 373, 425-26 & n.35 (D.D.C.

2014).

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II. Definitions

The Commission is proposing to define the key terms of ``U.S.

person'' and ``Foreign Consolidated Subsidiary'' for purposes of

applying the Dodd-Frank swaps provisions to cross-border transactions.

Whether a market participant is a U.S. person or a Foreign Consolidated

Subsidiary would, for instance, affect how the SD/MSP registration

thresholds apply under the proposed rule.\22\ If adopted, these

definitions would also be relevant for purposes of any subsequent

rulemakings specifically addressing the cross-border application of

other substantive Dodd-Frank requirements, unless the context or a

specific rule or regulation otherwise requires.

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\22\ Consistent with the reliance standard articulated in the

Commission's external business conduct rules, see 17 CFR 23.402(d),

market participants would be allowed to reasonably rely on

counterparty representations with respect to each of these

definitions unless they have information that would cause a

reasonable person to question the accuracy of the representation.

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A. U.S. Person

Under the Proposed Rule, a ``U.S. person'' would be defined as

follows:

Any natural person who is a resident of the United States

(proposed Sec. 1.3(aaaaa)(5)(i));

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Any estate of a decedent who was a resident of the United

States at the time of death (proposed Sec. 1.3(aaaaa)(5)(ii));

Any corporation, partnership, limited liability company,

business or other trust, association, joint-stock company, fund or any

form of entity similar to any of the foregoing (other than an entity

described in proposed paragraph (aaaaa)(5)(iv) or (v) of Sec. 1.3)

(``legal entity''), in each case that is organized or incorporated

under the laws of the United States or that has its principal place of

business in the United States, including any branch of the legal entity

\23\ (proposed Sec. 1.3(aaaaa)(5)(iii));

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\23\ The Commission notes that the reference in proposed Sec.

1.3(aaaaa)(5)(iii) and (vi) (indicating that legal entities would

include any branch of the legal entity) is intended to make clear

that the definition includes both foreign and U.S. branches of an

entity. The Commission further notes that a branch does not have a

legal identity apart from its principal entity. The proposed

language is not intended to introduce any additional criteria for

determining an entity's U.S. person status.

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Any pension plan for the employees, officers or principals

of a legal entity described in proposed paragraph (aaaaa)(5)(iii) of

Sec. 1.3, unless the pension plan is primarily for foreign employees

of such entity (proposed Sec. 1.3(aaaaa)(5)(iv));

Any trust governed by the laws of a state or other

jurisdiction in the United States, if a court within the United States

is able to exercise primary supervision over the administration of the

trust (proposed Sec. 1.3(aaaaa)(5)(v));

Any legal entity (other than a limited liability company,

limited liability partnership or similar entity where all of the owners

of the entity have limited liability) that is owned by one or more

persons described in proposed paragraphs (aaaaa)(5)(i) through (v) of

Sec. 1.3 who bear(s) unlimited responsibility for the obligations and

liabilities of the legal entity, including any branch of the legal

entity (proposed Sec. 1.3(aaaaa)(5)(vi)); and

Any individual account or joint account (discretionary or

not) where the beneficial owner (or one of the beneficial owners in the

case of a joint account) is a person described in proposed paragraphs

(aaaaa)(5)(i) through (vi) of Sec. 1.3 (proposed Sec.

1.3(aaaaa)(5)(vii)).\24\

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\24\ See proposed rule Sec. 1.3(aaaaa)(5). See also proposed

rule Sec. 1.3(aaaaa)(2) (defining ``non-U.S. person'' as any person

that is not a U.S. person); 17 CFR 23.160(a)(10) (defining U.S.

person for purposes of the Cross-Border Margin Rule). The Commission

notes that an affiliate or a subsidiary of a U.S. person that is

organized or incorporated in a non-U.S. jurisdiction would not be

deemed a U.S. person solely by virtue of its affiliation with a U.S.

person. As used herein, the term ``U.S. counterparty'' refers to a

swap counterparty that is a ``U.S. person'' under the Proposed Rule.

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In line with commenter requests, this definition mirrors the

definition of ``U.S. person'' recently adopted in the context of the

Cross-Border Margin Rule.\25\ As stated therein, the Commission

believes that this definition offers a clear, objective basis for

determining which individuals or entities should be identified as U.S.

persons and that harmonizing with the definition in the Cross-Border

Margin Rule is not only appropriate, but will reduce compliance costs

for market participants in the long run.

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\25\ See 17 CFR 23.160(a)(10). See also Cross-Border Margin

Rule, 81 FR at 34823-24. Unless expressly stated otherwise herein,

the description of the U.S. person definition in the Cross-Border

Margin Rule, including the Commission's interpretation of the

principal place of business test regarding funds, would also apply

in the context of the Proposed Rule.

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The proposed U.S. person definition is generally consistent with

the U.S. person interpretation set forth in the Guidance, with certain

exceptions.\26\ Notably, the proposed definition does not include a

commodity pool, pooled account, investment fund, or other collective

investment vehicle that is majority-owned by one or more U.S. persons

(``U.S. majority-owned fund prong'').\27\ The Commission understands

that identifying and tracking a fund's beneficial ownership may pose a

significant challenge in certain circumstances. Although the U.S.

owners of such funds may be adversely impacted in the event of a

counterparty default, the Commission believes that, on balance, the

majority-ownership test should not be included in the definition of

U.S. person.\28\ In the interest of providing legal certainty, the

proposed definition also does not include a catchall provision, thereby

limiting the definition of ``U.S. person'' to persons enumerated in the

rule.\29\

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\26\ See Guidance, 78 FR at 45308-17 (setting forth the

interpretation of ``U.S. person'' for purposes of the Guidance).

\27\ See id. at 45313-14 (discussing the U.S. majority-ownership

prong for purposes of the Guidance). The Guidance interpreted

``majority-owned'' in this context to mean the beneficial ownership

of more than 50 percent of the equity or voting interests in the

collective investment vehicle. See id. at 45314.

\28\ Note that a fund fitting within the majority U.S. ownership

prong may also be a U.S. person within the scope of paragraph (iii)

of the Proposed Rule (entities organized or having a principal place

of business in the United States). As the Commission clarified in

the Cross-Border Margin Rule, whether a pool, fund or other

collective investment vehicle is publicly offered only to non-U.S.

persons and not offered to U.S. persons would not be relevant in

determining whether it falls within the scope of the proposed U.S.

person definition. See Cross-Border Margin Rule, 81 FR at 34824

n.62.

\29\ See Guidance, 78 FR at 45316 (discussing the inclusion of

the prefatory phrase ``include, but not be limited to'' in the

interpretation of ``U.S. person'' in the Guidance).

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Finally, consistent with the Cross-Border Margin Rule, paragraph

(vi) of the proposed U.S. person definition includes legal entities

where one or more U.S. person owner(s) bear unlimited responsibility

for the obligations and liabilities of the legal entity (``unlimited

U.S. responsibility prong''). This paragraph represents a modified

version of a similar concept from the Guidance, which interpreted

``U.S. person'' to include a legal entity ``directly or indirectly

majority-owned'' by one or more U.S. person(s) that bear unlimited

responsibility for the legal entity's liabilities and obligations.\30\

Upon further consideration, the Commission believes that the amount of

equity the U.S. owner(s) have in this legal entity would not be

relevant because the U.S. person owner(s), by definition, serve as a

financial backstop for all of the legal entity's obligations and

liabilities regardless of whether they are majority or minority

owners.\31\

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\30\ See id. at 45312-13 (discussing the unlimited U.S.

responsibility prong for purposes of the Guidance).

\31\ See Cross-Border Margin Rule, 81 FR at 34823-24.

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In consideration of principles of international comity, the

Commission proposes that the term ``U.S. person'' would not include

international financial institutions. Consistent with Commission

precedent,\32\ the Commission interprets ``international financial

institutions'' to include ``international financial institutions'' as

defined in 22 U.S.C. 262r(c)(2) and institutions defined as

``multilateral development banks'' in the Proposal for the Regulation

of the European Parliament and of the Council on OTC Derivative

Transactions, Central Counterparties and Trade Repositories, Council of

the European Union Final Compromise Text, Article 1(4a(a)) (March 19,

2012).\33\

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\32\ See Guidance, 78 FR at 45353 n.531 (incorporating the

interpretation of ``international financial institutions'' included

in Further Definition of ``Swap Dealer,'' ``Security-Based Swap

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

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

30692 n.1180 (May 23, 2012) (``Entities Rule'')).

\33\ The two definitions overlap but together include the

following: The International Monetary Fund, International Bank for

Reconstruction and Development, European Bank for Reconstruction and

Development, International Development Association, International

Finance Corporation, Multilateral Investment Guarantee Agency,

African Development Bank, African Development Fund, Asian

Development Bank, Inter-American Development Bank, Bank for Economic

Cooperation and Development in the Middle East and North Africa,

Inter-American Investment Corporation, Council of Europe Development

Bank, Nordic Investment Bank, Caribbean Development Bank, European

Investment Bank and European Investment Fund. Note that the

International Bank for Reconstruction and Development, the

International Finance Corporation and the Multilateral Investment

Guarantee Agency are parts of the World Bank Group. The Commission's

proposal is generally similar to the position adopted by the SEC,

which excluded from its U.S. person definition the International

Monetary Fund, the International Bank for Reconstruction and

Development, the Inter-American Development Bank, the Asian

Development Bank, the African Development Bank, the United Nations,

and their agencies and pension plans, and any other similar

international organizations, their agencies and pension plans. See

17 CFR 240.3a71-3(a)(4)(iii); Application of ``Security-Based Swap

Dealer'' and ``Major Security-Based Swap Participant'' Definitions

to Cross-Border Security-Based Swap Activities; Republication, 79 FR

47278, 47306 (Aug. 12, 2014) (``SEC Cross-Border Rule'').

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[[Page 71950]]

Request for Comment. The Commission invites comment on all aspects

of the Proposed Rule, including on whether and in what respects the

Commission should further harmonize the U.S. person definition in the

Proposed Rule to either the interpretation of U.S. person included in

the Guidance or the U.S. person definition adopted by the Securities

Exchange Commission (``SEC'') in rule 3a71-3(a)(4) under the Securities

Exchange Act of 1934 (``Exchange Act'').\34\

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\34\ Exchange Act rule 3a71-3(a)(4), 17 CFR 240.3a71-3(a)(4),

defines ``U.S. person'' to mean any natural person resident in the

United States; any partnership, corporation, trust, investment

vehicle, or other legal person organized, incorporated, or

established under the laws of the United States or having its

principal place of business in the United States; any account

(whether discretionary or non-discretionary) of a U.S. person; or

any estate of a decedent who was a resident of the United States at

the time of death.

Exchange Act rule 3a71-3(a)(4) defines ``principal place of

business'' to mean the location from which the officers, partners,

or managers of the legal person primarily direct, control, and

coordinate the activities of the legal person. It also provides

that, with respect to an externally managed investment vehicle, this

location is the office from which the manager of the vehicle

primarily directs, controls, and coordinates the investment

activities of the vehicle.

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

Under the Proposed Rule, the term ``Foreign Consolidated

Subsidiary'' identifies a non-U.S. person that is consolidated for

accounting purposes with an ultimate parent entity that is a U.S.

person (a ``U.S. ultimate parent entity''). Consistent with the Cross-

Border Margin Rule, the proposed rule would define ``Foreign

Consolidated Subsidiary'' to mean a non-U.S. person in which an

ultimate parent entity that is a U.S. person has a controlling

financial interest, in accordance with U.S. generally accepted

accounting principles (``U.S. GAAP''), such that the U.S. ultimate

parent entity includes the non-U.S. person's operating results,

financial position and statement of cash flows in the U.S. ultimate

parent entity's consolidated financial statements, in accordance with

U.S. GAAP.\35\ The proposed rule would define the term ``ultimate

parent entity'' to mean the parent entity in a consolidated group in

which none of the other entities in the consolidated group has a

controlling interest, in accordance with U.S. GAAP.\36\

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\35\ See proposed rule Sec. 1.3(aaaaa)(1). See also 17 CFR

23.160(a)(1) (defining ``Foreign Consolidated Subsidiary'' for

purposes of the Cross-Border Margin Rule). The Cross-Border Margin

Rule defined the term ``Foreign Consolidated Subsidiary'' as limited

to SDs and MSPs subject to the Commission's margin requirements

(``Covered Swap Entities'' or ``CSEs''), using the term to

distinguish non-U.S. CSEs with a U.S. ultimate parent entity from

other non-U.S. CSEs. 81 FR at 34826-27. The proposed FCS definition

similarly but more broadly distinguishes any non-U.S. person that is

consolidated with a U.S. ultimate parent entity from other non-U.S.

persons, regardless of whether it is a CSE.

\36\ See proposed rule Sec. 1.3(aaaaa)(3). See also 17 CFR

23.160(a)(6) (defining ``ultimate parent entity'' for purposes of

the Cross-Border Margin Rule).

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The proposed FCS definition offers a clear, bright-line test for

identifying non-U.S. persons whose swap activities present a greater

supervisory interest relative to other non-U.S. market participants,

due to the nature and extent of the FCS's relationship with its U.S.

ultimate parent. As described above, the nature of modern finance is

such that large financial institutions typically conduct their business

operations through a highly integrated network of business lines and

services conducted through multinational branches or subsidiaries that

are under the control of the ultimate parent entity. Under this

structure, U.S. and non-U.S. derivatives trading functions as a single

enterprise, using funds, risk management, information systems and

trading personnel across the entire consolidated entity in the most

efficient manner in effectuating coordinated trading strategies, with

the profits and losses from global trading operations aggregated in the

consolidated financial statements of the ultimate parent entity. The

Commission believes that the FCS definition appropriately encompasses

those entities within this consolidated group that are subject to the

financial control, and directly impact the financials, of the U.S.

ultimate parent entity.

First, consolidation under U.S. GAAP is predicated on the financial

control of the reporting entity.\37\ Therefore, an entity within a

financial group that is consolidated with its parent entity for

accounting purposes in accordance with U.S. GAAP is subject to the

financial control of that parent entity. Second, as the Commission

previously stated, by virtue of consolidation with its parent entity's

financial statement under U.S. GAAP, an FCS's swap activity creates

direct risk to the U.S. parent.\38\ That is, as a result of

consolidation, the financial position, operating results, and statement

of cash flows of an FCS are included in the financial statements of its

U.S. ultimate parent and therefore affect the financial condition, risk

profile, and market value of the parent. Because of that relationship,

risks taken by FCSs can have a direct effect on the U.S. ultimate

parent entity. Furthermore, the FCS's counterparties generally look to

both the FCS and its U.S. ultimate parent for fulfillment of the FCS's

obligations under the swap, even without any explicit guarantee.\39\ In

many cases, the Commission believes that the counterparty would not

enter into the transaction with the subsidiary (or would not do so on

the same terms), and the subsidiary would not be able to engage in a

swaps business, absent this close relationship with the parent entity.

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\37\ There are two consolidation models. First, entities are

subjected to the variable interest entity (`VIE') model. If the VIE

model is not applicable, then entities are subjected to the voting

interest model. Under the VIE model, a reporting entity has a

controlling financial interest in a VIE if it has: (a) The power to

direct the activities of the VIE that most significantly affect the

VIE's economic performance, and (b) the obligation to absorb losses

or the right to receive benefits that could be significant to the

VIE. Under the voting interest model, a controlling financial

interest generally exists if a reporting entity has a majority

voting interest in another entity. In certain circumstances, the

power to control may exist when one entity holds less than a

majority voting interest (e.g., because of contractual provisions or

agreements with other shareholders). See Financial Accounting

Standards Board, Accounting Standards Codification 810,

Consolidation.

\38\ Cross-Border Margin Rule, 88 FR at 34826-27.

\39\ As Moody's Ratings states in a description of its bank

assessment methodology, ``most [financial] groups can be expected to

support banking entities within their consolidation.'' See Moody's

Investors Service, Cross-Border Application of the Swap Dealer De

Minimis Exception (Sept. 9, 2014) at 66, available at https://www.moodys.com/microsites/gbrm2014/RFC.pdf.

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Under these circumstances, the Commission believes that it is

appropriate to require FCSs to include relevant swaps for the SD/MSP

registration calculation like a U.S. person (and U.S. Guaranteed

Entity).\40\

[[Page 71951]]

A failure to treat these entities the same in this context could

provide a U.S. financial group with an opportunity to avoid SD or MSP

registration by conducting relevant swap activities through

unregistered entities. However, as in the Cross-Border Margin Rule, the

Commission would not necessarily treat FCSs the same as a U.S. person

(or U.S. Guaranteed Entity) in the context of other Dodd-Frank swap

provisions.\41\ The Commission also recognizes that other affiliates,

even though they are not consolidated with the U.S. ultimate parent

entity for accounting purposes, could likewise be distinguished from

other non-U.S. persons given the nature of their relationship with the

U.S. person and the U.S. market.\42\ The Commission believes that the

consolidation test provides a workable definition that is tailored to

focus on those affiliates that present greater supervisory concerns

(relative to other non-U.S. persons).

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\40\ The Commission notes that there are some important

differences between a U.S. Guaranteed Entity and an FCS. See Cross-

Border Margin Rule, 81 FR at 34827 (noting that, in contrast to U.S.

Guaranteed CSEs, in the event of an FCS's default, the U.S. ultimate

parent entity does not have a legal obligation to fulfill the

obligations of the FCS. Rather that decision would depend on the

business judgment of its parent). See also supra note 35 (describing

the definition of FCS in the context of the Cross-Border Margin

Rule).

\41\ Although the proposed rule is focused on the cross-border

application of the registration thresholds and external business

conduct standards for SD/MSPs, the Commission expects to address how

other substantive Dodd-Frank swap requirements (including the

trading and clearing mandates and reporting requirements) would

apply to FCSs in cross-border transactions in subsequent

rulemakings. In doing so, the Commission will give due consideration

to whether, and the extent to which, substituted compliance should

be made available to FCSs' swap transactions.

\42\ In particular, the Commission recognizes that, even absent

consolidated financial statements, a U.S. parent entity may, for

reputational reasons, determine that they must support their non-

U.S. affiliates at times of crisis, with direct risk implications

for the U.S. parent and U.S. market.

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Request for Comment. The Commission seeks comment on all aspects of

the Proposed Rule's definition of ``Foreign Consolidated Subsidiary''

including on whether the proposed FCS definition appropriately captures

persons that raise greater supervisory concerns relative to other non-

U.S. persons whose swap obligations are not guaranteed by a U.S.

person. If not, please explain and provide an alternative(s).

III. ANE Transactions

A. Background

In November 2013, DSIO issued a staff advisory providing that a

non-U.S. swap dealer that regularly uses personnel or agents located in

the United States to arrange, negotiate, or execute a swap with a non-

U.S. person (``Covered Transactions'') would generally be required to

comply with the ``Transaction-Level Requirements,'' as the term was

used in the Guidance.\43\ In January 2014, the Commission published a

request for comment on all aspects of the Staff Advisory, including (1)

the scope and meaning of the phrase ``regularly arranging, negotiating,

or executing'' and what characteristics or factors distinguish ``core,

front-office'' activity from other activities; (2) whether the

Commission should adopt the Staff Advisory as Commission policy, in

whole or in part; and (3) whether substituted compliance should be

available for non-U.S. swap dealers with respect to Covered

Transactions.\44\

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\43\ See supra note 10. See also Guidance, 78 FR at 45333

(providing that the Transaction-Level Requirements include (i)

Required clearing and swap processing; (ii) margining (and

segregation) for uncleared swaps; (iii) mandatory trade execution;

(iv) swap trading relationship documentation; (v) portfolio

reconciliation and compression; (vi) real-time public reporting;

(vii) trade confirmation; (viii) daily trading records; and (ix)

external business conduct standards).

\44\ See Request for Comment, 79 FR at 1348-49.

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The Commission received seventeen comment letters in response to

the Request for Comment.\45\ Most commenters challenged the Staff

Advisory as inconsistent with CEA section 2(i) \46\ or international

comity.\47\ They emphasized that the risk associated with Covered

Transactions lies outside the United States \48\ and that non-U.S. swap

dealers involve U.S. personnel primarily for the convenience of their

global customers.\49\ They also characterized the Staff Advisory as

impractical or unworkable, describing its key language (``regularly

arranging, negotiating, or executing swaps'' and ``performing core,

front-office activities'') as vague, open to broad interpretation, and

potentially capturing activities that are merely ``incidental'' to the

swap transaction.\50\ They further argued that if the Staff Advisory

were adopted as Commission policy, non-U.S. swap dealers would close

U.S. branches and relocate personnel to other countries (or otherwise

terminate agency contracts with U.S.-based agents) in order to avoid

Dodd-Frank swap regulation or having to interpret and apply the Staff

Advisory, thereby increasing market fragmentation.\51\

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\45\ See American Bankers Association Securities Association

(``ABASA'') (Mar. 10, 2014); Americans for Financial Reform

(``AFR'') (Mar. 10, 2014); Barclays Bank PLC (``Barclays'') (Mar.

10, 2014); Chris R. Barnard (``Barnard'') (Mar. 8, 2014); Better

Markets Inc. (``Better Markets'') (Mar. 10, 2014); Coalition for

Derivatives End-Users (``Coalition'') (Mar. 10, 2014); Commercial

Energy Working Group (``CEWG'') (Mar. 10, 2014); European Commission

(Mar. 10, 2014); European Securities and Markets Authority

(``ESMA'') (Mar. 13, 2014); Institute for Agriculture and Trade

Policy (``IATP'') (Mar. 10, 2014); Institute of International

Bankers (``IIB'') (Mar. 10, 2014); International Swaps and

Derivatives Association, Inc. (``ISDA'') (Mar. 7, 2014); Investment

Adviser Association (``IAA'') (Mar. 10, 2014); Japanese Bankers

Association (``JBA'') (Mar. 7, 2014); Japan Financial Markets

Council (``JFMC'') (Mar. 4, 2014); Securities Industry and Financial

Markets Association, Futures Industry Association, and Financial

Services Roundtable (``SIFMA/FIA/FSR'') (Mar. 10, 2014);

Soci[eacute]t[eacute] G[eacute]n[eacute]rale (``SG'') (Mar. 10,

2014). The associated comment file is available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1452&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_50. Although the comment file includes records

of 22 comments, five were either duplicate submissions or not

responsive to the Request for Comment.

\46\ See, e.g., IAA at 2 n.4; IIB at 4-5 (transactions between

two non-U.S. persons present no risk to the U.S. financial system

and therefore do not have a ``direct and significant'' nexus to U.S.

commerce); ISDA at 3-4, 10-13 (challenging the Commission's

interpretation of ``direct and significant''); JFMC at 3; SIFMA/FIA/

FSR at A-2-A-3 (section 2(i) should be interpreted in light of the

Dodd-Frank goal of mitigating risk); SG at 8. Accord European

Commission (the Staff Advisory does not clearly articulate how the

standard it sets out is consistent with section 2(i)).

\47\ See, e.g., European Commission at 2 (the unavailability of

substituted compliance would seem to depart from the G20 commitment

to defer to foreign regulators when appropriate); IIB at 5-6; ISDA

at 8-9; IAA at 4 (failure to grant substituted compliance reflects a

lack of coordination with foreign regulators, leading to a less

efficient use of regulatory resources and the potential for

duplicative or conflicting regulations); JFMC at 3; SIFMA/FIA/FSR at

A-13.

\48\ See, e.g., Barclays at 3 n.11; IIB at 4-5; ISDA at 6-7;

SIFMA/FIA/FSR at 2, A-9-A-10; SG at 2 (adopting the Staff Advisory

would extend the Commission's regulations ``to swaps whose risk lies

totally offshore'' and that do not pose a high risk to the U.S.

financial system).

\49\ See, e.g., Coalition at 2 (non-U.S. SDs use U.S. personnel

to arrange, negotiate, or execute swaps because they have particular

subject matter expertise for or due to the location of their clients

across time zone); European Commission at 1; IIB at 7-8 n.18; IAA at

2; ISDA at 4; JFMC at 2-3; SIFMA/FIA/FSR at A-4; SG at 3 (a non-U.S.

SD may use salespersons in the United States if the Covered

Transaction is linked to a USD instrument).

\50\ See, e.g., Barclays at 4-5; European Commission at 3

(whether negotiation of a Master Agreement by U.S. middle office

staff would trigger application of the Staff Advisory is unclear);

IAA at 5 (``[T]he terms `arranging' and `negotiating' are overly

broad and may encompass activities that are incidental to a swap

transaction,'' such as providing market or pricing information);

SIFMA/FIA/FSR at A-12 (arranging and negotiating trading

relationships and legal documentation are ``middle- and back-office

operations'' and should not be included); SG at 7-8 (``regularly''

is an arbitrary concept that cannot be made workable, and

programming trading systems to interpret ``arranging, negotiating,

or executing'' on a trade-by-trade basis would not be feasible).

\51\ See, e.g., ABASA at 2 (adopting the Staff Advisory would

``impose unnecessary compliance burdens on swap market participants,

encourage them to re-locate jobs and activities outside the United

States to accommodate non-U.S. client demands, and fragment market

liquidity''); Coalition at 3 (emphasizing the impact on non-U.S.

affiliates of U.S. end users, such as increased hedging costs and

reduced access to registered counterparties); IIB at 7-8; ISDA at 4;

JFMC at 3; SG at 8-9. See also IAA at 3 (expressing concern that

non-U.S. clients may avoid hiring U.S. asset managers to avoid

application of the Staff Advisory).

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A few commenters, however, supported the Staff Advisory.\52\ They

argued that the Commission has jurisdiction over swap activities

[[Page 71952]]

occurring inside the United States \53\ and expressed concern that the

Commission's failure to assert such jurisdiction would create a

substantial loophole, allowing U.S. financial firms to operate in the

United States without Dodd-Frank oversight by merely routing swaps

through a non-U.S. affiliate.\54\ They further argued that arranging,

negotiating, or executing swaps are functions normally performed by

brokers, traders, and salesperson and are ``economically central to the

business of swap dealing.'' \55\ They added the focus on the

``regular'' use of personnel located in the United States to perform

such core dealing activities would exclude ``entirely incidental''

interactions with U.S. personnel from triggering Dodd-Frank

oversight.\56\

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\52\ See AFR; Better Markets; IATP.

\53\ See AFR at 2 (CEA section 2(i) clearly sets the statutory

jurisdiction of CFTC rules to include all activities conducted

inside the United States); Better Markets at 3 (the Staff Advisory

``represents the only reasonable interpretation of Congress's

mandate to regulate swaps transactions with a `direct and

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

the United States'''); IATP at 1 (``It should be self-evident that

the swaps activities in the United States of non-U.S. persons fall

under the Commission's jurisdiction.'').

\54\ See AFR at 3 (failure to adopt the Staff Advisory ``could

mean that U.S. firms operating in the U.S. would face different

rules for the same transactions as compared to competitor firms also

operating in the very same market and location, perhaps literally

next door, who had arranged to route transactions through a

nominally foreign subsidiary''); Better Markets at 3 (allowing

registered swap dealers to book transactions overseas but otherwise

handle the swap inside the United States would ``create a gaping

loophole,'' resulting in ``keystroke off-shoring of the bookings,

but otherwise the on-shoring of the core activities associated with

the transaction'').

\55\ See AFR at 2-3, 5; Better Markets at 5 (brokers,

structurers, traders, and salesmen ``collectively comprise the

general understanding of the core front office'').

\56\ See AFR at 2-3, 5 (terms ```arranging, negotiating, or

executing' would appear to exclude purely clerical and incidental

functions such as notating or recording the sale of a swap for

consolidated risk management or bookkeeping purposes''). See also

id. at 5 (definition of ``regularly'' should be tied to an

expectation that U.S. personnel are available on request to arrange,

negotiate, and execute swaps).

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Commenters that disagreed with the Staff Advisory nevertheless

offered a few suggestions for its modification, should the Commission

determine to adopt it, including offering substituted compliance for

Covered Transactions \57\ or otherwise limiting the scope of applicable

requirements.\58\ Certain commenters, for instance, recommended that

the applicable requirements be limited to pre-trade disclosure

requirements (e.g., disclosure of material information), arguing that

applying relationship-wide external business conduct rules would

require wholesale amendments to relationship documentations even where

the specific communication is not material to the overall trading

relationship.\59\

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\57\ See, e.g., Coalition at 5; ESMA at 1; IAA at 3-4; ISDA at

9-10; SIFMA/FIA/FSR at A-13, SG at 6-7.

\58\ See, e.g., Barclays at 3 n.11 (transaction-level

requirements focused on risk mitigation, market integrity, or

transparency should not apply to Covered Transactions); Barnard at 2

(transaction-level requirements should not apply to Covered

Transactions with non-U.S. counterparties that are not guaranteed or

conduit affiliates); IIB at 9-10.

\59\ See, e.g., Barclays at 3 (``Applying the pre-trade

disclosure requirements promotes the Commission's interests in

regulating activities of U.S. based personnel or agents of

Commission registered entities and in protecting counterparties.

Such concerns may be raised by the activities of such individuals

even if the risk arising from those swaps transactions is borne by

entities outside the United States.''); IIB at 10-12 (``Non-U.S.

counterparties may reasonably expect the protection of the sales

practice rules applicable in the jurisdiction of the personnel

responsible for committing the non-U.S. swap dealer to the swap.'');

SIFMA/FIA/FSR at A-10-A-12 (``[O]nly direct communications by

personnel located in the United States with counterparties that

commit the SD to the execution of the transaction should trigger

application of the requirements under the Staff Advisory.''

(Emphasis omitted)).

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B. Commission's Views Regarding ANE Transactions

After considering the views of commenters on the Staff Advisory in

response to the Commission's Request for Comment, the Commission is

setting forth its views on whether persons engaged in ANE transactions

or transactions arising from this activity fall within the scope of the

Dodd-Frank Act. The Commission's analysis is guided by the definition

of ``swap dealer'' under the CEA and Commission regulations.

Under both the CEA and Commission regulations, whether a person is

a ``swap dealer'' is a functional test that focuses on whether the

person engages in particular types of activities involving swaps.\60\

In general, the swap dealer definition encompasses persons that engage

in any of the following types of activity: (1) Holding oneself out as a

dealer in swaps; (2) making a market in swaps; (3) regularly entering

into swaps with counterparties as an ordinary course of business for

one's own account; or (4) engaging in any activity causing oneself to

be commonly known in the trade as a dealer or market maker in

swaps.\61\ Commission regulations further define the term to include

specific activities indicative of acting as a swap dealer, such as (1)

providing liquidity by accommodating demand for or facilitating

interest in the swap, holding oneself out as willing to enter into

swaps, or being known in the industry as being available to accommodate

demand for swaps; (2) advising a counterparty as to how to use swaps to

meet the counterparty's hedging goals, or structuring swaps on behalf

of a counterparty; (3) having a regular clientele and actively

advertising or soliciting clients in connection with swaps; (4) acting

in a market maker capacity on an organized exchange or trading system

for swaps, and (5) helping to set the prices offered in the market

rather than taking those prices, although the fact that a person

regularly takes the market price for its swaps does not foreclose the

possibility that the person may be a swap dealer.\62\ Neither the

statutory definition of ``swap dealer'' nor the Commission's further

definition of that term turns solely on risk to the U.S. financial

system. Consistent with the focus of the ``swap dealer'' definition on

a person's activity, the Commission does not believe that the location

of counterparty credit risk associated with a dealing swap--which, as

discussed above, is easily and often frequently moved across the

globe--should be determinative of whether a person's dealing activity

falls within the scope of the Dodd-Frank Act or whether the Commission

has a regulatory interest in the dealing activity. The appropriate

inquiry also considers whether a non-U.S. person is engaged in the

United States in any of the indicia of dealing activity set forth in

the definition of ``swap dealer.''

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\60\ See 7 U.S.C. 1a(49); 17 CFR 1.3(ggg); Entities Rule, 77 FR

at 30598.

\61\ See Entities Rule, 77 FR at 30597; 7 U.S.C. 1a(49)(A); 17

CFR 1.3(ggg)(1).

\62\ See Entities Rule, 77 FR at 30608.

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In the Commission's view, and as further explained below,

arranging, negotiating, or executing swaps are functions that fall

within the scope of the ``swap dealer'' definition. That the

counterparty risks may reside primarily outside the United States is

not determinative. To the extent that a person uses personnel located

in the United States (whether its own personnel or personnel of an

agent) to arrange, negotiate, or execute its swap dealing transactions,

the Commission believes that such person is conducting a substantial

aspect of its swap dealing activity within the United States and

therefore, falls within the scope of the Dodd-Frank Act.

The Commission further believes that to the extent that ANE

transactions raise regulatory concerns of the type that the Dodd-Frank

Act is intended to address, applying specific Dodd-Frank swap

requirements to ANE transactions may be appropriate. In establishing a

comprehensive regulatory regime for swaps under the Dodd-Frank Act,

Congress intended to advance several

[[Page 71953]]

fundamental policy objectives, including reducing risk, increasing

market transparency and promoting market integrity within the financial

system. A person that, in connection with its dealing activity, engages

in market-facing activity using personnel located in the United States

is conducting a substantial aspect of its dealing business in the

United States.\63\ Even if the financial risks are borne by entities

residing outside the United States, this activity indicates a level of

involvement, and intention to participate, in the U.S. swap market that

may raise concerns regarding customer protection, market transparency

and financial contagion intended to be addressed by the Dodd-Frank Act.

Accordingly, it would undermine the policy objectives of the Dodd-Frank

Act to deem persons that, in connection with their dealing activity,

engage in ANE transactions or transactions arising from this activity

to fall entirely outside the scope of the Dodd-Frank Act solely because

the transactions involve two non-U.S. counterparties.

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\63\ As discussed above, the financial group affiliate may use

the trading desk of an affiliate that possesses expertise in

relevant products or personnel of an affiliate with an established

client network in relevant market hubs. The financial group

affiliate may also use the personnel of an unaffiliated agent to

conduct its swap dealing activity, typically where it is seeking to

trade anonymously or to provide clients with access to market hubs

where it does not have its own operation.

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In making a determination as to whether a particular Dodd-Frank

swap requirement (including those specifically applicable to swap

dealers) should apply to an ANE transaction, the Commission would

consider the extent to which the underlying regulatory objectives would

be advanced in light of other policy considerations, including the

potential for undue market distortions and international comity. As

indicated above, the Proposed Rule addresses the application of the SD

registration threshold and external business conduct standards to ANE

transactions. The Commission intends to address application of other

Dodd-Frank swap requirements to ANE transactions in subsequent cross-

border rulemakings as necessary and appropriate.

C. Proposed Interpretation Regarding the Scope of ANE Transactions

For purposes of the proposed rule, the Commission uses the terms

``arrange'' and ``negotiate'' to refer to market-facing activity

normally associated with sales and trading, as opposed to internal,

back-office activities, such as ministerial or clerical tasks,

performed by personnel not involved in the actual sale or trading of

the relevant swap.\64\ Accordingly, the terms would not encompass

activities such as swap processing, preparation of the underlying swap

documentation (including negotiation of a master agreement and related

documentation), or the mere provision of research information to sales

and trading personnel located outside the United States. In line with

Commission precedent, ``executed'' would refer to the market-facing act

of becoming legally and irrevocably bound to the terms of the

transaction under applicable law.\65\

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\64\ A swap transaction may be ``arranged'' by personnel located

in the United States regardless of whether the counterparty

initiated the transaction or whether the counterparty's business was

solicited.

\65\ Cf. 17 CFR 23.200(e) (defining ``execution'' to mean an

agreement by the parties (whether orally, in writing,

electronically, or otherwise) to the terms of a swap that legally

binds the parties to such swap terms under applicable law);

23.200(d) (further defining ``executed'' to mean the completion of

the execution process).

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In applying the proposed rule, the Commission would look to the

activities of personnel assigned to (on an ongoing or temporary basis)

or regularly working in a U.S. location.\66\ Such personnel may be

working directly for the dealing entity itself or a third-party that is

acting for or on behalf of (i.e., as an agent of) the dealing entity,

including a U.S. affiliate of the dealing entity. The proposed

definition would also include the market-facing activity of personnel

normally associated with sales and trading even if the personnel are

not formally designated as sales persons or traders. As an anti-

evasionary measure, a transaction would be viewed as falling within the

scope of the Dodd-Frank Act if personnel located in the United States

direct other personnel to arrange, negotiate, or execute the

transaction for or on behalf of a dealing entity.

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\66\ The Proposed Rule would accordingly not capture the

activities of personnel assigned to a non-U.S. location if such

personnel are only incidentally present in the United States when

they arrange, negotiate, or execute a transaction (e.g., an employee

of a non-U.S. person happens to be traveling within the United

States to attend a conference). Nor would the Proposed Rule include

a transaction solely on the basis that a U.S.-based attorney is

involved in negotiations regarding the terms of the transaction.

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Swap transactions arranged, negotiated, or executed by personnel

located in the United States implicate the Commission's supervisory

interests regardless of the reason such U.S. personnel were involved.

For example, a swap would not fall outside the scope of the Dodd-Frank

Act because a counterparty sought to enter into the swap outside of its

jurisdiction's regular trading hours. Additionally, the Commission

believes permitting such an exception would only incentivize dealing

entities to wait until after hours to enter into a swap, creating the

potential for a substantial loophole.

Finally, as the SEC noted in its cross-border rulemaking addressing

ANE transactions, the Commission would not view a swap as falling

outside the scope of the ANE transactions solely as a result of

algorithmic trading.\67\ That is, a swap transaction involving

algorithmic trading could be viewed as having been arranged,

negotiated, or executed using personnel located in the United States if

such personnel specify the trading strategy or techniques carried out

through algorithmic trading or automated electronic execution of

swaps.\68\ Therefore, performance of such activity by personnel located

in the United States may fall within the scope of the Dodd-Frank Act

and trigger the application of certain swap requirements thereunder.

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\67\ See Security-Based Swap Transactions Connected With a Non-

U.S. Person's Dealing Activity That Are Arranged, Negotiated, or

Executed by Personnel Located in a U.S. Branch or Office or in a

U.S. Branch or Office of an Agent; Security-Based Swap Dealer De

Minimis Exception, 81 FR 8598, 8623 (Feb. 19, 2016) (``SEC ANE

Rule''). The Commission would also not view a swap as falling

outside the scope of ANE transactions because it resulted from

automated electronic execution.

\68\ The activities or location of personnel responsible solely

for coding the algorithm, however, as opposed to specifying the

trading strategy or techniques that the algorithm is to follow,

would not be relevant.

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The Commission's proposed approach to the determination of when a

swap is an ANE transaction reflects its consideration of the comments

received in response to the Request for Comment and is generally

aligned with the SEC's approach to this determination in the context of

security-based swaps.\69\ In response to commenters and in the interest

of aligning with the SEC, to the extent that the proposed rule applies

to ANE transactions, application of the proposed rule would not be

limited to swaps ``regularly'' arranged, negotiated, or executed using

U.S. personnel. Accordingly, a dealing entity may need to establish

operational structures to identify swaps for which relevant personnel

performing market-facing activity in connection with the transaction

are located in the United States. The Commission believes, however,

that the proposed rule's focus on personnel assigned to or regularly

working in a U.S. location would exclude incidental activity and

mitigate the burden of such an analysis, as the Commission expects that

market

[[Page 71954]]

participants have means of identifying personnel involved in market-

facing activity, either for regulatory compliance purposes or to

facilitate compensation.\70\ The Commission further expects that, to

the extent that the Proposed Rule applies to ANE transactions,

additional burdens on potential SDs could be reduced given that the

Commission's proposed approach to determining whether a swap falls

within the scope of ANE transactions is substantively identical to the

SEC's approach to ANE transactions.\71\

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\69\ See supra note 67.

\70\ Dealing entities may also facilitate their compliance by

establishing appropriate policies and procedures, including by

requiring dealing activity to be arranged, negotiated, and executed

by personnel located outside the United States.

\71\ One commenter on the SEC's proposed approach, which closely

tracked its final rule, observed that it created ``a definable

standard that will bring clarity to the application of security-

based swap requirements to security-based swap dealers, and is

appropriate and consistent with the expectations of the parties as

to when U.S. security-based swap requirements will apply.'' SIFMA/

FSR (SEC July 13, 2015) at 2 (stating also that the commenters

``strongly believe that the Commission has taken the correct

approach in focusing on market-facing activity of sales and trading

personnel in defining the `arrange, negotiate, or execute' nexus

that subjects security-based swap activity to the Commission's

regulations based on location of conduct'').

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The Commission's treatment of ANE transactions is intended to

capture activity that raises a substantial regulatory interest while

still promoting a framework that is clear and workable for market

participants. By focusing on market-facing activity carried out by

personnel located in the United States, the Commission believes its

interpretation adequately captures the Commission's inherently strong

regulatory interest in dealing activity occurring within its

jurisdiction while enabling market participants to apply the definition

in a relatively efficient manner.

Request for Comment. The Commission invites comment on all aspects

of the Proposed Rule, including the following:

1. The Commission invites comment on whether its interpretation of

ANE transactions is appropriately tailored to capture activity that

raises a substantial regulatory interest and sufficiently clear and

workable for market participants. Is the Commission's focus on and

discussion of market-facing activity understandable and effective in

excluding activities that are merely incidental to the swap

transaction? Will the Commission's interpretation pose any operational

challenges? Please explain and provide specific recommendations for

modifications or clarifications.

2. Under what other circumstances, if any, should the Commission

determine that U.S. personnel are directing a system for the

algorithmic trading within the scope of its interpretation of ANE

transactions?

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

In accordance with CEA section 1a(49)(D), the Commission has

exempted from designation as an SD any entity that engages in a de

minimis quantity of swap dealing with or on behalf of its

customers.\72\ Specifically, Commission regulation 1.3(ggg)(4) provides

that a person shall not be deemed to be an SD as a result of its swap

dealing activity involving counterparties unless, during the preceding

12 months, the aggregate gross notional amount of the swap positions

connected with those dealing activities exceeds the de minimis

threshold.\73\ Commission regulation 1.3(ggg)(4) further requires that,

in determining whether its swap dealing activity exceeds the de minimis

threshold, a person must include the aggregate notional value of the

swap positions connected with the dealing activities of its affiliates

under common control (``aggregation requirement'').\74\

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\72\ See 7 U.S.C. 1a(49)(D) (directing the Commission to

establish a de minimis exception from the SD definition). See also

17 CFR 1.3(ggg)(4); Entities Rule, 77 FR 30596.

\73\ See 17 CFR 1.3(ggg)(4)(i)(A). The de minimis threshold is

currently set at a phase-in level of $8 billion, with an ultimate

threshold of $3 billion. Pursuant to Commission regulation

1.3(ggg)(4)(ii), following publication of a staff report on the de

minimis exception, the Commission may either terminate the phase-in

level, and thereby institute the $3 billion threshold, or propose an

alternative threshold through rulemaking. See 17 CFR

1.3(ggg)(4)(ii). Commission staff published for public comment a

preliminary report on the de minimis exception in November 2015,

with comments due by January 19, 2016. See Swap Dealer De Minimis

Exception Preliminary Report (Nov. 18, 2015), available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf. The comment file is available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1634. Note

that Commission regulation 1.3(ggg)(4) also contains separate de

minimis exceptions related to transactions in which the counterparty

is a ``special entity'' or ``utility special entity.'' See 17 CFR

1.3(ggg)(4)(i)(A)-(B). See also 17 CFR 1.3(ggg)(6) (identifying

swaps that are not considered in determining whether a person is a

swap dealer).

\74\ See 17 CFR 1.3(ggg)(4)(i)(A). For purposes of the Proposed

Rule, the Commission construes ``affiliates under common control''

by reference to the Entities Rule, which defined control as the

possession, direct or indirect, of the power to direct or cause the

direction of the management and policies of a person, whether

through the ownership of voting securities, by contract or

otherwise. See 77 FR at 30631 n.437. Accordingly, any reference in

the Proposed Rule to ``affiliates under common control'' with a

person would include affiliates that are controlling, controlled by,

or under common control with such person.

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The Commission is now proposing rules to address how the de minimis

threshold should apply to the cross-border swap dealing transactions of

U.S. and non-U.S. persons.\75\ Specifically, the proposed rule

identifies when a potential SD's cross-border dealing activities should

be included in its de minimis calculation and when they may properly be

excluded. As discussed in the sections below, whether a potential SD

would include a particular swap in its de minimis calculation would

depend on whether the potential SD is classified as either a U.S.

person or a non-U.S. person whose obligations under the relevant swap

are guaranteed by a U.S. person (``U.S. Guaranteed Entity'') \76\

(section A); a Foreign Consolidated Subsidiary (section B); or a non-

U.S. person that is neither an FCS nor a U.S. Guaranteed Entity

(``Other Non-U.S. Person'') (section C). Section D addresses the cross-

border application of the aggregation requirement. Section E provides

an overall summary of the Commission's proposed approach. If adopted,

the Proposed Rule would supersede the Guidance with respect to the

cross-border application of the SD de minimis threshold.

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\75\ See proposed rule Sec. 1.3(ggg)(7).

\76\ The preamble of this release uses the term ``U.S.

Guaranteed Entity'' for convenience only. Whether a non-U.S. person

would be considered a U.S. Guaranteed Entity would vary on a swap-

by-swap basis, such that a non-U.S. person may be considered a U.S.

Guaranteed Entity for one swap and not another, depending on whether

the non-U.S. person's obligations under the swap are guaranteed by a

U.S. person.

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In developing the proposed cross-border approach to applying the SD

and MSP registration thresholds,\77\ the Commission attempted to target

those entities that--due to the nature of their relationship with a

U.S. person or U.S. financial market--most directly implicate the

purposes of the Dodd-Frank registration scheme. The proposed rule is

also designed to apply the registration thresholds in a consistent

manner to differing organizational structures that serve similar

economic functions so as to avoid creating substantial regulatory

loopholes. At the same time, the Commission is mindful of the impact of

its choices on market efficiency and competition, as well as the

importance of international comity when exercising the Commission's

authority. The Commission believes that the proposed rule reflects a

measured approach that advances the goals underlying the SD and MSP

registration schemes, consistent with the Commission's

[[Page 71955]]

statutory authority, while mitigating market distortions and

inefficiencies.

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\77\ See section V, infra, for a discussion of the Commission's

proposed cross-border approach to applying the MSP registration

thresholds.

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

Under the Proposed Rule, a U.S. person would include all of its

swap dealing transactions in its de minimis threshold calculation

without exception. As discussed in section II.A above, the term ``U.S.

person'' encompasses a person who, by virtue of being domiciled or

organized in the United States (or in the case of the unlimited U.S.

responsibility prong, because U.S. person owner(s) serve as a financial

backstop for all of the legal entity's obligations and liabilities),

raises the concerns intended to be addressed by the Dodd-Frank Act,

regardless of the U.S. person status of its counterparty. Additionally,

a person's status as a U.S. person would be determined at the entity

level and thus a U.S. person would include the swap dealing activity of

foreign branches or operations that are part of the same legal person.

The Commission notes that the proposed rule's requirement that a U.S.

person include all of its swap dealing transactions in its de minimis

calculation is consistent with the Guidance.\78\

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\78\ See Guidance, 78 FR at 45326.

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The proposed rule would also require a non-U.S. person that is not

an FCS to include in its de minimis calculation swap dealing

transactions with respect to which it is a U.S. Guaranteed Entity. The

Commission believes that this result is appropriate because the swap of

a non-U.S. person whose swap obligations are guaranteed by a U.S.

person is identical, in relevant aspects, to a swap entered into

directly by a U.S. person.\79\ As a result of the guarantee, the U.S.

guarantor bears risk arising out of the swap as if it had entered into

the swap directly. The U.S. guarantor's financial resources in turn

enable the non-U.S. affiliate to engage in dealing activity, because

the affiliate's counterparties will look to both the U.S. Guaranteed

Entity and its U.S. guarantor to ensure performance of the swap. Absent

the guarantee from the U.S. person, a counterparty may choose not to

enter into the swap or may not do so on the same terms. In this way,

the U.S. Guaranteed Entity and the U.S. guarantor effectively act

together to engage in the dealing activity.

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\79\ For purposes of this proposed rulemaking, ``guarantee'' has

the same meaning as defined in Commission regulation 23.160(a)(2)

(cross-border application of the Commission's margin requirements

for uncleared swaps), except that application of the proposed

definition of ``guarantee'' would not be limited to uncleared swaps.

Under this definition, a ``guarantee'' would include arrangements,

pursuant to which one party to a swap has rights of recourse against

a guarantor, with respect to its counterparty's obligations under

the swap. For these purposes, a party to a swap has rights of

recourse against a guarantor if the party has a conditional or

unconditional legally enforceable right to receive or otherwise

collect, in whole or in part, payments from the guarantor with

respect to its counterparty's obligations under the swap. This

``guarantee'' definition also encompasses any arrangement pursuant

to which the guarantor itself has a conditional or unconditional

legally enforceable right to receive or otherwise collect, in whole

or in part, payments from any other guarantor with respect to the

counterparty's obligations under the swap. See Cross-Border Margin

Rule, 81 FR 34818.

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Furthermore, treating U.S. Guaranteed Entities differently from

U.S. persons could create a substantial regulatory loophole,

incentivizing U.S. persons to conduct their dealing business with non-

U.S. counterparties through non-U.S. affiliates, with a U.S. guarantee,

to avoid application of the Dodd-Frank swap dealer requirements.

Allowing transactions that have a similar economic reality with respect

to U.S. commerce to be treated differently depending on how the parties

structure their transactions could undermine the effectiveness of the

Dodd-Frank swap provisions and related Commission regulations. Applying

the same standard to similar transactions instead helps to limit those

incentives and regulatory implications.

B. Foreign Consolidated Subsidiaries

Under the proposed rule, a Foreign Consolidated Subsidiary would

include all of its swap dealing transactions in its de minimis

threshold calculation, without exception.\80\ The Commission believes

that the swap dealing transactions of an FCS should be treated in the

same manner as swap dealing transactions of a U.S. person (and U.S.

Guaranteed Entity) for purposes of the de minimis threshold

calculation, given the nature of the relationship between the FCS and

its U.S. ultimate parent entity. As discussed in section II.B. above,

an FCS is under the financial control of its U.S. ultimate parent

entity. Further, by virtue of consolidated reporting under U.S. GAAP,

the swap activity of an FCS creates a direct risk for the U.S. ultimate

parent entity. The Commission is also concerned that offering FCSs

disparate treatment compared to U.S. persons could incentivize U.S.

entities to conduct swap activities with non-U.S. counterparties

through consolidated non-U.S. subsidiaries in order to avoid

application of the Dodd-Frank Act SD requirements, creating the

potential for a substantial regulatory loophole.

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\80\ To the extent that a non-U.S. person is both an FCS and a

U.S. Guaranteed Entity with respect to a particular swap, the non-

U.S. person would only be required to include the swap in its SD de

minimis calculation once. See proposed rule Sec. 1.3(ggg)(7).

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C. Other Non-U.S. Persons

Under the proposed rule, whether an Other Non-U.S. Person would

include a particular swap in its de minimis calculation would depend on

the status of the counterparty. Specifically, as further explained

below, an Other Non-U.S. Person would be required to include in its de

minims threshold calculation its dealing activities with U.S. Persons,

U.S. Guaranteed Entities, and FCSs, but not with Other Non-U.S. Persons

(``Other Non-U.S. counterparties''). Additionally, Other Non-U.S.

Persons would not be required to include in their de minimis threshold

calculation any transaction that is executed anonymously on a swap

execution facility (``SEF''), designated contract market (``DCM''), or

foreign board of trade (``FBOT'') and cleared through a registered or

exempt derivatives clearing organization (``DCO'').

1. U.S. Counterparties that are U.S. Persons or U.S. Guaranteed

Entities

Under the proposed rule, an Other Non-U.S. Person would generally

include in its de minimis calculation all swap dealing transactions

with U.S. counterparties, subject to the exception for transactions

executed anonymously on a SEF, DCM, or FBOT and cleared (discussed in

section 4 below). As a general rule, the Commission believes that all

potential SDs should include in their de minimis calculations any swap

with a U.S. counterparty.\81\ As discussed in section II.A. above, the

term ``U.S. person'' encompasses persons that inherently raise the

concerns intended to be addressed by the Dodd-Frank Act regardless of

the U.S. person status of their counterparty. In the event of a default

or insolvency of an Other Non-U.S. SD with more than a de minimis level

of swap dealing, the SD's U.S. counterparties could be adversely

affected. A credit event, including funding and liquidity problems,

downgrades, default or insolvency at an Other Non-U.S. Person SD could

therefore have a direct adverse impact on its U.S. counterparties,

which could in turn create the risk of disruptions to the U.S.

financial system.

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\81\ As discussed above, the definition of ``U.S. person''

includes any foreign branch. See proposed rule Sec.

1.3(aaaaa)(5)(iii), (vi) (defining ``U.S. person'' to include ``any

branch of the legal entity'').

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The Commission notes that the proposed rule's requirement that an

Other Non-U.S. Person include in its de minimis calculation all swap

dealing

[[Page 71956]]

transactions with U.S. person counterparties (subject to the exception

for swaps executed anonymously on a SEF, DCM, or FBOT and cleared,

discussed in section 4 below) is largely consistent with the Guidance,

except with respect to the treatment of swaps with foreign branches of

U.S. SDs. Under the Guidance, a non-U.S. person that is not a

``guaranteed affiliate'' or a ``conduit affiliate'' (as those terms are

interpreted in the Guidance) \82\ would generally include in its de

minimis threshold calculations all swap transactions with

counterparties that are U.S. persons, except transactions with foreign

branches of U.S. SDs.\83\ This exception was primarily driven by

concerns that, absent such an exception, non-U.S. counterparties would

avoid transacting with U.S. SDs.\84\

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\82\ See Guidance, 78 FR at 45318, n.257-58. The Guidance uses

the terms ``conduit affiliate'' and ``affiliate conduit''

interchangeably.

\83\ See id. at 45318-19.

\84\ See id. at 45324.

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Upon further consideration, however, the Commission believes that

incorporating a similar exception into the proposed rule could create a

substantial regulatory loophole. As discussed above, a foreign branch

is an integral part of a U.S. person, such that a transaction involving

a foreign branch of a U.S. SD poses risk to the U.S. SD itself and,

consequently, the U.S. financial system. Allowing Other Non-U.S.

Persons to engage in potentially unlimited swap dealing with foreign

branches of U.S. SDs without having to register as SDs could therefore

result in a substantial amount of dealing activity with U.S.

counterparties occurring outside the comprehensive Dodd-Frank swap

regime, undermining the effectiveness of the proposed rule.

Under the proposed rule, an Other Non-U.S. Person would also

include in its de minimis threshold calculation swap dealing

transactions with a non-U.S. person that is a U.S. Guaranteed Entity,

subject to an exception for transactions executed anonymously on a SEF,

DCM, or FBOT and cleared.\85\ The Commission notes that the guarantee

of a swap is an integral part of the swap and that, as discussed above,

counterparties may not be willing to enter into a swap with a U.S.

Guaranteed Entity in the absence of the guarantee. The Commission also

recognizes that, given the highly-integrated corporate structures of

global financial groups described above, financial groups may elect to

conduct their swap dealing activity in a number of different ways,

including through a U.S. person or through a non-U.S. affiliate that

benefits from a recourse guarantee from a U.S. person. Therefore, in

order to avoid creating a substantial regulatory loophole, the

Commission believes that swaps of an Other Non-U.S. Person with a U.S.

Guaranteed Entity should receive the same treatment as swaps with a

U.S. person and should therefore be included in the Other Non-U.S.

Person's SD de minimis calculation. If Other Non-U.S. Persons were not

required to include such transactions in their SD de minimis threshold

calculations, they could engage in a significant level of swap dealing

activity with U.S. Guaranteed Entities without being required to

register as SDs. Treating swaps of Other Non-U.S. Persons with U.S.

Guaranteed Entities differently than their swaps with U.S. persons

could thereby undermine the effectiveness of the Dodd-Frank swap

provisions and related Commission regulations.

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\85\ To the extent that the swap is with a non-U.S. counterparty

that is both an FCS and a U.S. Guaranteed Entity with respect to a

particular swap, the Other Non-U.S. Person would only be required to

include the swap in its SD de minimis calculation once. See proposed

rule Sec. 1.3(ggg)(7).

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2. Counterparties That Are FCSs

Under the proposed rule, an Other Non-U.S. Person would include in

its de minimis threshold calculation swap dealing transactions with a

non-U.S. person that is an FCS, subject to an exception for

transactions executed anonymously on a SEF, DCM, or FBOT and cleared.

As discussed above, the default or insolvency of an Other Non-U.S

Person could have a direct adverse effect on an FCS, which through the

interconnection to its U.S. ultimate parent, could have knock-on

effects, potentially leading to disruptions to the U.S. financial

system. The Commission believes that such risk would be significant to

the extent that the Other Non-U.S. Person's dealing activities with

FCSs, U.S. persons and U.S. Guaranteed Entities \86\ exceed the de

minimis threshold.

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\86\ Id.

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3. Other Non-U.S. Counterparties

Under the proposed rule, an Other Non-U.S. Person would not include

in its de minimis calculation its swap dealing transactions with an

Other Non-U.S. Person. This approach reflects the Commission's

recognition of foreign jurisdictions' strong supervisory interest in

the swap transactions between Other Non-U.S. Persons, both of which are

domiciled and operate abroad. Consistent with comity principles, the

Commission believes that it would be appropriate to except this class

of swap transactions from counting against the de minimis threshold.

Further, the proposed rule would not require an Other Non-U.S.

Person to include a swap transaction with an Other Non-U.S. Person

counterparty in its de minimis threshold calculation even if the swap

is arranged, negotiated, or executed by personnel located in the United

States. Although, as stated above, a non-U.S. person that engages in

ANE transactions is performing dealing activity in the United States,

the Commission preliminarily does not believe that requiring Other Non-

U.S. Persons to include ANE transactions in their de minimis threshold

calculations would be necessary to advance the policy objectives of the

Dodd-Frank swap regime when taking the proposed rule in context. In

particular, the Commission preliminarily believes that the proposal to

require FCSs to include all of their swap dealing transactions in their

de minimis threshold calculations would capture a substantial portion

of dealing activity engaged in by non-U.S. persons in which the

Commission has a strong regulatory interest, such that the level of ANE

transactions engaged in by Other Non-U.S. Persons may be comparatively

insignificant. Additionally, Other Non-U.S. Persons that engage in ANE

transactions could either be registered already by virtue of their swap

transactions with U.S. persons or, if the proposed rule is adopted, be

required to register as SDs by virtue of their swap transactions with

U.S. persons, U.S. Guaranteed Entities or FCSs.

4. Swaps Executed Anonymously on a SEF, DCM, or FBOT and Cleared

The Commission believes that when an Other Non-U.S. Person enters

into a swap that is executed anonymously on a registered SEF, DCM, or

FBOT and the swap is cleared through a registered or exempt DCO, the

Other Non-U.S. Person may exclude the swap from its de minimis

threshold calculation.\87\ The Commission recognizes that, under these

circumstances, the Other Non-U.S. Person would not have the necessary

information about its counterparty to determine whether the swap should

be included in its de minimis threshold calculation. The Commission

therefore believes that in this case the practical

[[Page 71957]]

difficulties make it reasonable for the swap to be excluded

altogether.\88\

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\87\ The Commission clarifies that an Other Non-U.S. Person

would also be able exclude from its de minimis threshold calculation

any swap that is executed anonymously on a foreign trading platform

that is subject to relief from the requirement to register as a SEF

or DCM, provided the swap is cleared through a registered or exempt

DCO.

\88\ The Commission also believes that when an Other Non-U.S.

Person clears a swap through a registered or exempt DCO, such Other

Non-U.S. Person would not have to include the resulting swap (i.e.,

the novated swap) in its de minimis threshold calculation. A swap

that is submitted for clearing is extinguished upon novation and

replaced by new swap(s) that result from novation. See Commission

regulation 39.12(b)(6). See also Derivatives Clearing Organization

General Provisions and Core Principles, 76 FR 69334, 69361 (Nov. 8,

2011). Where a swap is created by virtue of novation, such swap does

not implicate swap dealing, and therefore it would not be

appropriate to include such swaps in determining whether a non-U.S.

person should register as an SD.

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D. Aggregation Requirement

As stated above, Commission regulation 1.3(ggg)(4) requires that,

in determining whether its swap dealing transactions exceed the de

minimis threshold, a person must include the aggregate notional value

of any swap dealing transactions entered into by its affiliates under

common control. Consistent with CEA section 2(i), the Commission

interprets the aggregation requirement in Commission regulation

1.3(ggg)(4) in a manner that applies the same aggregation principles to

all affiliates in a corporate group, whether they are U.S. or non-U.S.

persons. Accordingly, under the proposed rule, a potential SD, whether

a U.S. or non-U.S. person, would aggregate all swaps connected with its

dealing activity with those of persons controlling, controlled by, or

under common control with \89\ the potential SD to the extent that

these affiliated persons are themselves required to include those swaps

in their own de minimis thresholds, unless the affiliated person is

itself a registered SD. The Commission notes that this interpretation,

which mirrors the approach taken in the Guidance,\90\ ensures that the

aggregate notional value of applicable swap dealing transactions of all

such unregistered U.S. and non-U.S. affiliates does not exceed the de

minimis level.

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\89\ The Commission clarifies that for this purpose, the term

``affiliates under common control'' would include parent companies

and subsidiaries.

\90\ See 78 FR at 45323.

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Stated in general terms, the Commission interprets the aggregation

requirement to allow both U.S. persons and non-U.S. persons in an

affiliated group to engage in swap dealing activity up to the de

minimis threshold. When the affiliated group meets the de minimis

threshold in the aggregate, one or more affiliate(s) (a U.S. affiliate

or a non-U.S. affiliate) would have to register as an SD so that the

relevant swap dealing activity of the unregistered affiliates remains

below the threshold. The Commission recognizes the borderless nature of

swap dealing activities, in which a dealer may conduct swap dealing

business through its various affiliates in different jurisdictions, and

believes that this interpretation would address the concern that an

affiliated group of U.S. and non-U.S. persons engaged in swap dealing

transactions with a significant connection to the United States may not

be required to register solely because such swap dealing activities are

divided among affiliates that all individually fall below the de

minimis threshold.

E. Summary

In summary, under the proposed rule, in making its de minimis

calculation:

A U.S. person would include all of its swap dealing

transactions.

A non-U.S. person would include all swap dealing

transactions with respect to which it is a U.S. Guaranteed Entity.

A Foreign Consolidated Subsidiary would include all of its

swap dealing transactions.

An Other Non-U.S. Person would include all of its swap

dealing transactions with counterparties that are U.S. persons, U.S.

Guaranteed Entities, or FCSs, unless the swap is executed anonymously

on a registered SEF, DCM, or FBOT and cleared. It would not, however,

include any of its swap dealing transactions with Other Non-U.S.

Persons, even if they constitute ANE transactions.

All potential SDs, whether U.S. or non-U.S. persons, would

aggregate their swap dealing transactions with those of persons

controlling, controlled by, or under common control with the potential

SD to the extent that those affiliates are themselves required to

include those swaps in their own de minimis thresholds, unless the

affiliated person is a registered SD.

Request for Comment. The Commission invites comment on all aspects

of Proposed Rule, including the following:

1. The Commission invites comment on the appropriateness,

necessity, and potential impact of requiring Other Non-U.S. Persons to

include ANE transactions in their de minimis threshold calculations.

Should the Commission further harmonize with the SEC by requiring Other

Non-U.S. Persons to include ANE transactions in their de minimis

threshold calculations? \91\ What effect would a determination not to

impose such a requirement have on market liquidity and competitiveness?

To what degree would U.S. swap dealers be adversely affected? Would a

determination not to impose such a requirement create a substantial

loophole or otherwise expose the U.S. financial system to unregulated

risk? Do ANE transactions conducted by Other Non-U.S. Persons,

particularly those not currently registered as SDs by virtue of their

transactions with U.S. persons, form a significant segment of the U.S.

swap market? The Commission is particularly interested in data or

estimates regarding the current level of ANE transactions entered into

by Other Non-U.S. Persons, including whether and how many Other Non-

U.S. Persons that are not currently registered as SDs would exceed the

current de minimis threshold as a result of being required to include

ANE transactions in their de minimis threshold calculations.

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

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2. The Commission invites comment on whether and to what extent the

Proposed Rule should incorporate certain exceptions for non-U.S.

persons that were included in the Guidance.\92\ Specifically, should

the proposed rule permit Other Non-U.S. Persons to exclude from their

de minimis threshold calculations:

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\92\ See 78 FR at 45324 (providing that non-U.S. persons that

are not guaranteed or conduit affiliates would generally not count

toward their de minimis threshold calculations their swap dealing

transactions with (i) a foreign branch of a U.S. swap dealer, (ii) a

guaranteed affiliate of a U.S. person that is a swap dealer, and

(iii) a guaranteed or conduit affiliate that is not a swap dealer

and itself engages in de minimis swap dealing activity and which is

affiliated with a swap dealer).

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a. Swap transactions with foreign branches of U.S. SDs? If so, why

and how should the Commission interpret the term ``foreign branch of a

U.S. swap dealer'' (e.g., consistent with the Guidance,\93\ consistent

with the SEC's definitions of ``foreign branch'' and ``transaction

conducted through a foreign branch'' in Exchange Act rules,\94\ or an

alternative approach)?

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\93\ See id. at 45328-31 (discussing the scope of the term

``foreign branch'' and Commission's consideration of whether a swap

is with a foreign branch of a U.S. bank).

\94\ The SEC defined the term ``foreign branch'' in Exchange Act

rule 3a71-3(a)(2), 17 CFR 240.3a71-3(a)(2), to mean any branch of a

U.S. bank if (i) the branch is located outside the United States;

(ii) the branch operates for valid business reasons; and (iii) the

branch is engaged in the business of banking and is subject to

substantive banking regulation in the jurisdiction where located.

The SEC defined the term ``transaction conducted through a foreign

branch'' in Exchange Act rule 3a71-3(a)(3), 17 CFR 240.3a71-3(a)(3),

to mean a security-based swap transaction that is arranged,

negotiated, and executed by a U.S. person through a foreign branch

of such U.S. person if (A) the foreign branch is the counterparty to

such security-based swap transaction; and (B) the security-based

swap transaction is arranged, negotiated, and executed on behalf of

the foreign branch solely by persons located outside the United

States. See also SEC Cross-Border Rule, 79 FR 47278.

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[[Page 71958]]

b. Any swap transactions with U.S. Guaranteed Entities? If so, why

and under what circumstances?

3. The Commission is concerned that a non-U.S. person that is

affiliated with a U.S. SD could act as a conduit or an extension of the

affiliated U.S. SD by entering into market-facing swaps in a foreign

jurisdiction and then transferring some or all of the risk of such

swaps to its affiliated U.S. SD through one or more inter-affiliate

swaps. Furthermore, under the Proposed Rule, an Other Non-U.S. Person

would not be required to include its market-facing swaps with Other

Non-U.S. counterparties in its SD de minimis threshold. The Commission

invites comment as to whether Other Non-U.S. Persons should be required

to include market-facing swaps with non-U.S. persons in their de

minimis threshold calculations if any of the risk of such swaps is

transferred to an affiliated U.S. SD through one or more inter-

affiliate swaps and as to whether it would be too complex or costly to

monitor and implement.\95\ If so:

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\95\ The Commission notes that the Commission's final margin

rule requires CSEs to collect initial margin from certain affiliates

that are not subject to comparable initial margin collection

requirements on their own outward-facing swaps with financial end-

users, which addresses some of the credit risks associated with the

outward-facing swaps. See Margin Requirements for Uncleared Swaps

for Swap Dealers and Major Swap Participants, 81 FR 636, 703 (Jan.

6, 2016) (``Final Margin Rule'').

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a. Should an Other Non-U.S. Person that is consolidated with an

affiliated U.S. SD for financial reporting purposes and that transfers

some or all of the risk of a swap with an Other Non-U.S. counterparty,

directly or indirectly, to its affiliated U.S. SD (an ``SD conduit'')

be required to count outward-facing swap as to which it acts as a

conduit toward its SD or MSP registration threshold?

b. Should an Other Non-U.S. Person be considered an SD Conduit only

when it ``regularly'' acts as an SD Conduit, and if so, how would the

Commission determine whether it ``regularly'' acts as an SD Conduit?

c. Would it be appropriate to require an SD Conduit to include a

market-facing swap in its de minimis threshold calculation in its

entirety, for ease of calculation, even if not all of the risk arising

out of that swap is transferred to an affiliated U.S. SD through inter-

affiliate swaps? Is the Commission's assumption that a formula to

calculate the percentage of risk would be too costly and burdensome to

implement correct? If not, please propose such a workable formula.

Alternatively, should an SD Conduit be required to include all of its

swap dealing transactions (and not just those as to which it acts as an

SD conduit) in its SD or MSP registration threshold?

d. The Commission understands that a non-U.S. person may aggregate

all or a group of its market-facing swaps and then transfer all or a

portion of the risk of such swaps as one position to the affiliated

U.S. SD. In that case, the Commission understands that it would not be

burdensome for the non-U.S. person to disaggregate the netted swap, as

the non-U.S. person's trading system would aggregate these trades

initially, and therefore should be able to perform a disaggregation

function. Is the Commission's understanding correct?

e. Should the proposed rule be modified to require that Other Non-

U.S. Persons include swaps in their SD or MSP registration thresholds

if their counterparty is acting as an SD Conduit?

f. Should swaps where either one of the counterparties is acting as

an SD conduit be subject to other Dodd-Frank requirements (in addition

to SD and MSP registration thresholds) in future rulemakings?

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

Thresholds

CEA section 1a(33) defines ``major swap participant'' to include

persons that are not SDs but that nevertheless pose a high degree of

risk to the U.S. financial system by virtue of the ``substantial''

nature of their swap positions.\96\ In accordance with the Dodd-Frank

Act and CEA section 1a(33)(B), the Commission adopted rules further

defining ``major swap participant'' and providing that a person would

not be deemed an MSP unless its swap positions exceed one of several

thresholds.\97\ The thresholds were designed to take into account

default-related credit risk, the risk of multiple market participants

failing close in time, and the risk posed by a market participant's

swap positions on an aggregate level.\98\ The Commission also adopted

interpretive guidance that, for purposes of the MSP analysis, an

entity's swap positions would be attributable to a parent, other

affiliate, or guarantor to the extent that the counterparty has

recourse to the parent, other affiliate, or guarantor and the parent or

guarantor is not subject to capital regulation by the Commission, SEC,

or a prudential regulator (``attribution requirement'').\99\

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\96\ See 7 U.S.C. 1a(33)(A) (defining ``major swap participant''

to mean any person who is not an SD and either (i) maintains a

substantial position in swaps for any of the major swap categories,

subject to certain exclusions; (ii) whose outstanding swaps create

substantial counterparty exposure that could have serious effects on

the U.S. financial system; or (iii) is a highly leveraged financial

entity that is not subject to prudential capital requirements and

that maintains a substantial position in swaps for any of the major

swap categories. See also 17 CFR 1.3(hhh)(1); 156 Cong. Rec. S5907

(daily ed. July 15, 2010) (colloquy between Senators Hagen and

Lincoln, discussing how the goal of the major participant

definitions was to ``focus on risk factors that contributed to the

recent financial crisis, such as excessive leverage, under-

collateralization of swap positions, and a lack of information about

the aggregate size of positions'').

\97\ See 17 CFR 1.3(hhh)-(mmm). See also Dodd Frank Act section

712(d)(1) (directing the Commission and the SEC, in consultation

with the Board of Governors of the Federal Reserve System, to

jointly further define, among other things, the term ``major swap

participant''); 7 U.S.C. 1a(33)(B) (directing the Commission to

further define ``substantial position'' at the threshold the

Commission deems prudent for the effective monitoring, management,

and oversight of entities that are systemically important or can

significantly impact the U.S. financial system); Entities Rule, 77

FR 30596.

\98\ See 77 FR at 30666 (discussing the guiding principles

behind the Commission's definition of ``substantial position'' in 17

CFR 1.3(jjj)); id. at 30683 (noting that the Commission's definition

of ``substantial counterparty exposure'' in 17 CFR 1.3(lll) is

founded on similar principles as its definition of ``substantial

position'').

\99\ Id. at 30689.

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The Commission is now proposing rules to address the cross-border

application of the MSP thresholds to the swap positions of U.S. and

non-U.S. persons.\100\ Applying CEA section 2(i) and principles of

international comity, the proposed rule identifies when a potential

MSP's cross-border swap positions should apply toward the MSP

thresholds and when they may be properly excluded. As discussed in the

sections below, whether a potential registrant would include a

particular swap in its MSP calculations would depend on whether the

potential registrant is a U.S. person, a U.S. Guaranteed Entity,\101\

or a Foreign Consolidated Subsidiary (section A) or an Other Non-U.S.

Person \102\ (section B). Section C addresses the cross-border

application of the attribution requirement. Section D provides an

overall summary of the rule. If adopted, the Proposed Rule would

supersede the Commission's Cross-Border Guidance with respect to the

cross-border application of the MSP thresholds.

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\100\ See proposed rule Sec. 1.3(nnn).

\101\ See notes 76 and 79, supra.

\102\ As indicated above, for purposes of the Proposed Rule, an

``Other Non-U.S. Person'' refers to a non-U.S. person that is

neither an FCS nor a U.S. Guaranteed Entity. See section IV, supra.

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

Subsidiaries

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

would apply

[[Page 71959]]

toward the MSP thresholds without exception. As discussed in the

context of the Proposed Rule's approach to applying the SD de minimis

registration threshold, by virtue of it being domiciled or organized in

the United States, or the inherent nature of its connection to the

United States, all of a U.S. person's activities have a significant

nexus to U.S. markets, giving the Commission a particularly strong

regulatory interest in their swap activities. Accordingly, the

Commission believes that all of a U.S. person's swap positions,

regardless of where they occur or the U.S. person status of the

counterparty, present risk to the stability of the U.S. financial

system and U.S. entities, including those that may be systemically

important, and thus should apply toward the MSP thresholds.

For related reasons, the proposed rule would also require a non-

U.S. person that is not an FCS to include in its MSP calculations each

swap position with respect to which it is a U.S. Guaranteed Entity. As

explained in context of the SD de minimis threshold calculation, the

Commission believes that the swap positions of a non-U.S. person whose

swap obligations are guaranteed by a U.S. person are identical, in

relevant aspects, to those entered into directly by a U.S. person and

thus present risks to the stability of the U.S. financial system or of

U.S. entities. Treating U.S. Guaranteed Entities differently from U.S.

persons could also create a substantial regulatory loophole, allowing

transactions that have a similar connection to or impact on U.S.

commerce to be treated differently depending on how the parties are

structured and thereby undermining the effectiveness of the Dodd-Frank

swap provisions and related Commission regulations.

The proposed rule would also require an FCS to include all of its

swap positions in its MSP calculations.\103\ As discussed in the

context of applying the SD de minimis threshold, by virtue of its

relationship to its U.S. ultimate parent, the risk associated with an

FCS's swap positions have a direct impact on the financial position and

risk profile of its U.S. parent. Accordingly, should the FCS or its

counterparty default on a swap, the financial stability of the U.S.

ultimate parent entity would be directly impacted, raising the types of

regulatory concerns that MSP registration is intended to address. The

Commission is also concerned that offering disparate treatment to FCSs

compared to U.S. persons could create a substantial regulatory

loophole, incentivizing U.S. financial groups to conduct their swap

activities with non-U.S. counterparties through non-U.S. subsidiaries

and thereby undermining the effectiveness of the Dodd-Frank swap

provisions and related Commission regulations.

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\103\ To the extent that a non-U.S. person is both an FCS and a

U.S. Guaranteed Entity with respect to a particular swap, the non-

U.S. person would only be required to include the swap position in

its MSP calculations once. See proposed rule Sec. 1.3(nnn).

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B. Other Non-U.S. Persons

Under the proposed rule, an Other Non-U.S. Person would include all

of its swaps with U.S. persons, U.S. Guaranteed Entities, and Foreign

Consolidated Subsidiaries in its MSP calculations, with a limited

exception for transactions executed anonymously on a SEF, DCM, or FBOT

and cleared.\104\ As discussed above, the default or insolvency of the

Other Non-U.S. Person would have a direct adverse effect on a U.S.

counterparty and, by virtue of the U.S. person's significant nexus to

the U.S. financial system, potentially could result in adverse effects

or disruption to the U.S. financial system as a whole, particularly if

the Other Non-U.S. Person's swap positions are substantial enough to

exceed an MSP registration threshold.

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\104\ To the extent that the Other Non-U.S. Person's swap

position is with a non-U.S. counterparty that is both an FCS and a

U.S. Guaranteed Entity with respect to a particular swap, the Other

Non-U.S. Person would only be required to include the swap position

in its MSP calculations once. See proposed rule Sec. 1.3(nnn).

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The default or insolvency of the Other Non-U.S. Person would also

present a financial impact to the U.S. financial system where the

counterparty is an FCS because its U.S. ultimate parent would be

directly impacted. The Other Non-U.S. Person's default could also

impact the United States through a U.S. Guaranteed Entity. Although the

default on that swap may not directly affect the U.S. guarantor on that

swap, the default could affect the U.S. Guaranteed Entity's ability to

meet its other obligations, for which the U.S. guarantor may also be

liable. The Commission is also concerned that offering Other Non-U.S.

Persons disparate treatment with respect to their swap positions with

U.S. Guaranteed Entities compared to their swap positions with FCSs

could incentivize Other Non-U.S. Persons to favor transacting with U.S.

Guaranteed Entities solely in order to avoid application of the Dodd-

Frank swap provisions.

The Commission therefore has a strong regulatory interest in

ensuring that Other Non-U.S. Persons are subject to the Dodd-Frank MSP

requirements to the extent that their swap positions with U.S.

Guaranteed Entities and FCSs exceed a registration threshold.

Accordingly, the Commission believes that requiring Other Non-U.S.

Persons to include their swap positions with FCSs and U.S. Guaranteed

Entities as well as U.S. persons appropriately captures swap positions

that present a risk to the U.S. financial system, ensuring that MSP

regulation applies once that risk exceeds the relevant thresholds.

However, as discussed in the context of the SD de minimis threshold,

where the swap is executed anonymously on a SEF, DCM, or FBOT and

cleared, the Commission believes that the practical difficulties

involved in determining the status of the potential MSP's counterparty

would make it reasonable for the swap position to be excluded

altogether.\105\

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

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Where the counterparty is an Other Non-U.S. Person, however, the

proposed rule would not require an Other Non-U.S. Person to include the

swap position in its MSP calculations, as the Commission does not

believe the swap would present the type of risk to the U.S. financial

system that MSP registration is intended to address.\106\ Further, the

Commission clarifies that under the Proposed Rule, an Other Non-

[[Page 71960]]

U.S. Person would not be required to include its swap position with an

Other Non-U.S. Person counterparty in its MSP calculations solely by

reason of such swap being arranged, negotiated, or executed by

personnel located in the United States. As stated above, arranging,

negotiating, or executing swaps are functions that fall within the

scope of the ``swap dealer'' definition. In contrast, the definition of

MSP focuses primarily on credit risk and thus, the Commission does not

believe that including ANE transactions in this context would address

the regulatory concerns underlying the MSP registration requirement.

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\106\ The Commission notes that the Guidance provided that non-

U.S. persons that are not guaranteed affiliates generally could

exclude from their MSP threshold calculations swap positions with

either a foreign branch of a U.S. SD or a guaranteed affiliate that

is an SD if either (i) the potential non-U.S. MSP is a non-financial

entity or (ii) the potential non-U.S. MSP is a financial entity and

the swap is either cleared or the swap documentation requires the

foreign branch or guaranteed affiliate to collect daily variation

margin with no threshold. See Guidance, 78 FR at 45324-25. The

Commission has determined that a similar exception in the Proposed

Rule with regard to the swap positions of Other Non-U.S. Persons

would be unnecessary and inappropriate because (1) two of the three

prongs of the statutory MSP definition apply regardless of whether

the potential MSP is a financial entity, see 7 U.S.C. 1a(33)(A)(i)-

(ii), and (2) although subjecting a swap to the clearing or margin

requirements may mitigate some of the risk of the swap, the risk is

not entirely eliminated, and the mitigation effect of the clearing

and margin requirements is taken into account in calculating the

relevant MSP thresholds. See 17 CFR 1.3(jjj)(3)(iii) (defining

``substantial position'' such that the potential future exposure

associated with positions that are subject to central clearing by a

registered or exempt DCO is equal to 0.1 times the potential future

exposure that would otherwise be calculated). Accordingly, the

Commission believes that such swaps create the potential for

systemic risk within the meaning of the MSP definition and that

allowing such exclusion would allow market participants to

inappropriately avoid the Dodd-Frank registration and other

associated requirements that are designed to mitigate that risk. The

Commission further believes that the Proposed Rule has the added

benefit of aligning more closely with the SEC in this regard, which

should serve to reduce compliance costs associated with MSP

registration.

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C. Attribution Requirement

In the Entities Rule, the Commission and the SEC (collectively,

``Commissions'') provided a joint interpretation that an entity's swap

positions in general would be attributed to a parent, other affiliate,

or guarantor for purposes of the MSP analysis to the extent that the

counterparties to those positions have recourse to the parent, other

affiliate, or guarantor in connection with the position, such that no

attribution would be required in the absence of recourse.\107\ Even in

the presence of recourse, however, the Commissions stated that

attribution of a person's swap positions to a parent, other affiliate,

or guarantor would not be necessary if the person is already subject to

capital regulation by the Commission or the SEC or is a U.S. entity

regulated as a bank in the United States (and is therefore subject to

capital regulation by a prudential regulator).\108\

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\107\ See 77 FR at 30689.

\108\ Id. (positions of U.S. entities regulated as banks in the

United States would be subject to capital and other requirements,

making it unnecessary to separately address the risks associated

with guarantees of those positions via MSP regulation). See also id.

at n.1134 (``As a result of this interpretation, holding companies

will not be deemed to be major participants as a result of

guarantees to certain U.S. entities that already are subject to

capital regulation. The Commissions intend to address guarantees

provided to non-U.S. entities, and guarantees by non-U.S. holding

companies, in separate releases.'').

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The Commission is also proposing to address the cross-border

application of the attribution requirement in a manner consistent with

the Entities Rule and CEA section 2(i) and generally comparable to the

approach adopted by the SEC.\109\ Specifically, the Commission believes

that the swap positions of an entity, whether a U.S. or non-U.S.

person, should not be attributed to a parent, other affiliate, or

guarantor for purposes of the MSP analysis in the absence of recourse.

Even in the presence of recourse, attribution would not be required if

the entity that entered into the swap directly is subject to capital

regulation by the Commission or the SEC or is regulated as a bank in

the United States.\110\

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\109\ See SEC Cross-Border Rule, 79 FR at 47346-48.

\110\ The Commission further clarifies that the swap positions

of an entity that is required to register as an MSP, or whose MSP

registration is pending, would not be subject to the attribution

requirement.

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If recourse is present, however, and the entity subject to a

recourse guarantee (``guaranteed entity'') is not subject to capital

regulation (as described above), whether the attribution requirement

would apply would depend on the U.S. person status of the person to

whom there is recourse (i.e., the U.S. person status of the guarantor).

Specifically, a U.S. person guarantor would attribute to itself any

swap position of a guaranteed entity, whether a U.S. person or a non-

U.S. person, for which the counterparty to the swap has recourse

against that U.S. person guarantor. The Commission believes that when a

U.S. person acts as a guarantor of a swap position, the recourse

guarantee creates risk within the United States of the type that MSP

regulation is intended to address, regardless of the U.S. person status

of the guaranteed entity or its counterparty.\111\

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\111\ See Entities Rule, 77 FR at 30689 (attribution is intended

to reflect the risk posed to the U.S. financial system when a

counterparty to a position has recourse against a U.S. person).

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A non-U.S. person would attribute to itself any swap position of an

entity for which the counterparty to the swap has recourse against the

non-U.S. person unless all relevant persons (i.e., the non-U.S. person

guarantor, the entity subject to the recourse guarantee, and its

counterparty) are Other Non-U.S. Persons. In this regard, the

Commission believes that when a non-U.S. person provides recourse with

respect to the swap position of a particular entity, the economic

reality of the swap position is substantially identical, in relevant

respects, to a position entered into directly by the non-U.S. person.

Additionally, the Commission believes that guaranteed entities would be

able to enter into significantly more swap positions (and take on

significantly more risk) as a result of the guarantee than they would

otherwise, amplifying the risk of the non-U.S. person guarantor's

inability to carry out its obligations under the guarantee. Given that,

as discussed above, the Commission believes that the swap positions of

U.S. persons, FCSs, and U.S. Guaranteed Entities present the types of

risk that MSP regulation is intended to address, the Commission has a

strong regulatory interest in ensuring that the attribution requirement

applies to non-U.S. persons that provide recourse guarantees to U.S.

persons, FCSs, and U.S. Guaranteed Entities. Accordingly, the

Commission believes that a non-U.S. person should be required to

attribute to itself the swap positions of any entity for which it

provides a recourse guarantee unless it, the guaranteed entity, and its

counterparty are Other-Non-U.S. Persons.

D. Summary

In summary, under the proposed rule, in making its MSP threshold

calculations:

A U.S. person would include all of its swap positions.

A non-U.S. person would include all swap positions with

respect to which it is a U.S. Guaranteed Entity.

A Foreign Consolidated Subsidiary would include all of its

swap positions.

An Other Non-U.S. Person would include all of its swap

positions with counterparties that are U.S. persons, U.S. Guaranteed

Entities, or FCSs, unless the swap is executed anonymously on a

registered SEF, DCM, or FBOT and cleared. It would not, however,

include any of its swap positions with Other Non-U.S. counterparties.

All swap positions that are subject to recourse should

also be attributed to a guarantor, whether it is a U.S. person or a

non-U.S. person, unless the guarantor, the guaranteed entity, and its

counterparty are Other Non-U.S. Persons.

Request for Comment. The Commission invites comment on all aspects

of the proposed rule, including the following:

1. The Commission invites comment on whether it should provide an

exception for Other Non-U.S. Persons similar to that included in the

Guidance for non-U.S. persons that are not guaranteed affiliates

trading with either a foreign branch of a U.S. SD or a guaranteed

affiliate that is an SD.\112\ Would such an exception be appropriate or

otherwise consistent with the proposed rule? Why or why not?

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\112\ See note 106, supra.

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2. In its rulemaking addressing the cross-border application of the

MSP thresholds, the SEC determined not to require a non-U.S. person to

include in its major security-based swap participant threshold

calculations any security-based swap positions for which they (as

opposed to their counterparty)

[[Page 71961]]

benefit from a guarantee creating a right of recourse against a U.S.

person.\113\ The SEC argued that if the non-U.S. person were to

default, it would not pose a direct risk to its counterparty's U.S.

guarantor, as the non-U.S. person's failure under the swap would not

trigger any obligations under the guarantee of the swap. The Commission

invites comment on whether it should adopt a similar approach and

whether such an approach would be consistent with the Proposed Rule.

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

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3. Should the Commission modify its interpretation with regard to

the attribution requirement to further harmonize with the approach

presented in the Guidance \114\ and adopted by the SEC \115\ and

provide that attribution of a person's swap positions to a parent,

other affiliate, or guarantor would not be required if the person is

subject to capital standards that are comparable to and as

comprehensive as the capital regulations and oversight by a home

country supervisor or regulator? If so, should the home country capital

standards be deemed comparable and comprehensive if they are consistent

in all respects with the Capital Accord of the Basel Committee on

Banking Supervision (``Basel Accord'')?

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\114\ See 78 FR at 45326.

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

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VI. Cross-Border Application of the External Business Conduct Standards

for Swap Dealers and Major Swap Participants

Pursuant to CEA section 4s(h), the Commission has adopted rules

establishing business conduct standards governing the conduct of SD/

MSPs in transacting with swap counterparties.\116\ Broadly speaking,

the external business conduct standards are designed to enhance

counterparty protections by expanding the obligations of SD/MSPs with

respect to their counterparties.\117\ Among other things, SDs and/or

MSPs are required to conduct due diligence on their counterparties to

verify their eligibility to trade; provide disclosure of material

information about the swap to their counterparties; provide a daily

mid-market mark for uncleared swaps; and, when recommending a swap to a

counterparty, make a determination as to the suitability of the swap

for the counterparty based on reasonable diligence concerning the

counterparty.\118\

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\116\ See Business Conduct Standards for Swap Dealers and Major

Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012);

17 CFR 23.400-51.

\117\ The term ``counterparty'' is defined for purposes of the

external business conduct standards in 17 CFR 23.401 to include any

person who is a prospective counterparty to a swap, as appropriate

to subpart H.

\118\ Note that certain external business conduct standards

apply only to SDs and not MSPs. See, e.g., 17 CFR 23.434

(recommendations to counterparties--institutional suitability);

Sec. 23.440 (requirements for swap dealers acting as advisors to

Special Entities).

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The Commission is now proposing a rule to address the cross-border

application of the external business conduct standards, including the

extent to which they would apply to ANE transactions.\119\

Specifically, under the proposed rule, U.S. SD/MSPs, other than with

respect to transactions conducted through foreign branches of U.S. SD/

MSPs, would be required to comply with the Commission's applicable

external business conduct standards regardless of the status of the

counterparty as a U.S. person (or as a foreign branch of a U.S. SD/MSP)

\120\ without substituted compliance. This requirement reflects the

Commission's view that the Dodd-Frank's external business conduct

standards should apply fully to registered SD/MSPs domiciled and

operating in the United States because their swap activities are

particularly likely to affect the integrity of the swaps market in the

United States and give rise to concerns about the protection of

participants in those markets.\121\

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\119\ The rule text for the cross-border application of external

business conduct standards is proposed as Sec. 23.452.

\120\ As used in this preamble, the term ``U.S. SD/MSP'' refers

to a U.S. person that is an SD or MSP and the term ``Non-U.S. SD/

MSP'' refers to a non-U.S. person that is an SD or MSP.

\121\ The Commission observes that, where a swap between a non-

U.S. SD/MSP (or foreign branch of a U.S. SD/MSP) and a U.S. person

is executed anonymously on a registered DCM or SEF and cleared by a

registered or exempt DCO, the external business conduct standards

are not applicable. See, e.g., 17 CFR 23.402(b)-(c) (requiring swap

dealers and MSPs to obtain and retain certain information only about

each counterparty whose identity is known to the swap dealer or MSP

prior to the execution of the transaction); Sec. 23.430(e) (not

requiring SD/MSPs to verify counterparty eligibility when a

transaction is entered on a DCM or SEF and the swap dealer or MSP

does not know the identity of the counterparty prior to execution);

Sec. 23.431(c) (not requiring disclosure of material information

about a swap if initiated on a DCM or SEF and the swap dealer or MSP

does not know the identity of the counterparty prior to execution).

Because a registered FBOT is analogous to a DCM, the Commission is

of the view that the requirements likewise would not be applicable

where such a swap is executed anonymously on a registered FBOT and

cleared.

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Foreign branches of U.S. SD/MSPs as well as non-U.S. SD/MSPs

(including FCSs and U.S. Guaranteed Entities) would be required to

comply with all of the Commission's applicable external business

conduct standards, without substituted compliance, to the extent that

the counterparty is a U.S. person (other than a foreign branch of a

U.S. SD/MSP).\122\ Given the focus of the Dodd-Frank counterparty

protection mandate on U.S. persons, the Commission believes that the

external business conduct standards should apply fully to all swap

transactions with U.S. persons that are not foreign branches of a U.S.

SD/MSP.

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\122\ Although the Commission recognizes that foreign branches

of U.S. SD/MSPs are part of the same legal entity as their U.S.

principal, and that, from the standpoint of risk, there is no

difference between a swap with a U.S. SD/MSP and a swap with its

foreign branch, the Commission believes that for purposes of the

external business conduct standards, which are oriented toward

customer protection, a foreign branch of a U.S. SD/MSP should be

treated the same as a non-U.S. SD/MSP. The Commission proposes to

interpret the term ``foreign branch of a U.S. person'' that is a

swap dealer (or MSP) as used in proposed rule Sec. 23.452 in a

manner that is consistent with the Guidance. See Guidance, 78 FR at

45328-31 (discussing the scope of the term ``foreign branch'' and

the Commission's consideration of whether a swap is with a foreign

branch of a U.S. bank).

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With respect to transactions with counterparties that are foreign

branches of U.S. SD/MSPs or non-U.S. persons (including FCSs and U.S.

Guaranteed Entities), however, non-U.S. SD/MSPs and foreign branches of

U.S. SD/MSPs would generally not be required to comply with the

external business conduct rules, subject to one narrow exception:

foreign branches of U.S. SDs and non-U.S. SDs that use personnel

located in the United States to arrange, negotiate, or execute such

transactions would be required to comply with Commission regulations

23.410 (Prohibition on Fraud, Manipulation, and other Abusive

Practices) and 23.433 (Fair Dealing), without substituted

compliance.\123\ This position reflects the Commission's belief that,

in general, imposing its customer protection standards on transactions

between a foreign branch of a U.S. SD/MSP or a non-U.S. SD/MSP, on the

one hand, and a counterparty that is a non-U.S. person or the foreign

branch of a U.S. SD/MSP on the other, would generally not be necessary

to advance the goals of the Dodd-Frank customer protection regime.

However, to the extent that such SDs use personnel located in the

United States to arrange, negotiate, or execute the swap transaction,

the Commission believes that its interest in ensuring the

[[Page 71962]]

integrity of U.S. markets is implicated. By limiting application of the

external business conduct standards to ANE transactions to the

antifraud and fair dealing requirements, the proposed rule is tailored

to ensure a basic level of counterparty protections while, consistent

with the principles of international comity, recognizing the

supervisory interests of the relevant foreign jurisdictions in applying

their own sales practices requirements to transactions involving

counterparties that are non-U.S. persons or foreign branches of a U.S.

SD/MSP. This approach recognizes the supervisory interests of the local

jurisdiction with respect to swaps conducted within that jurisdiction

and that broadly imposing U.S. external business conduct standards with

respect to such transactions would not be necessary to advance the

goals of the Dodd-Frank customer protection regime.

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\123\ See section III for a discussion of the terms arrange,

negotiate, and execute. The Commission notes that the external

business conduct standards apply in connection with transactions in

swaps as well as in connection with swaps that are offered but not

entered into. See 17 CFR 23.400. Accordingly, Commission regulations

23.410 and 23.433 would apply where a non-U.S. SD uses personnel

located in the United States to offer a swap even if that swap is

not ultimately entered into.

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If adopted, the proposed rule would supersede the Guidance with

respect to the cross-border application of the external business

conduct standards.

Request for Comment. The Commission invites comment on all aspects

of the proposed rule, including the following:

1. The Commission invites comment regarding its determination to

distinguish transactions entered into by foreign branches of U.S.

persons that are SDs (or MSPs) for purposes of the cross-border

application of the external business conduct standards.\124\ Should

transactions involving foreign branches of U.S. SD/MSPs be treated in

the same manner as transactions involving U.S. persons with respect to

these requirements? Why or why not? Should the Commission, as proposed,

interpret the term ``foreign branch of a U.S. person'' that is an SD

(or MSP) in a manner consistent with the Guidance or incorporate an

alternative approach, such as the definition of ``foreign branch'' in

the SEC's Exchange Act rules? \125\

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\124\ See note 122, supra.

\125\ See note 94, supra.

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2. The Commission invites comment regarding the circumstances under

which a swap transaction should be considered as being ``with a foreign

branch of a U.S. person'' that is an SD (or MSP) as opposed to being

with the U.S. person itself. Specifically, should the Commission, as

proposed, adopt an interpretation consistent with the Guidance \126\ or

should it incorporate an alternative approach, such the how the SEC

defines ``transaction conducted through a foreign branch'' in the

context of its Exchange Act rules? \127\

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\126\ See note 122, supra.

\127\ See note 94, supra.

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3. The Commission invites comment on the proposed treatment of non-

U.S. SD/MSPs and foreign branches of U.S. SD/MSPs. Whether and to what

extent should their swap transactions with foreign branches of U.S. SD/

MSPs and non-U.S. persons be subject to the external business conduct

standards? Should they be required to comply with the external business

conduct standards with respect to their transactions with foreign

branches of U.S. SD/MSPs or non-U.S. persons? If so, should substituted

compliance be available? Relatedly, should transactions conducted

through foreign branches of U.S. SD/MSPs receive the same treatment as

other transactions conducted by U.S. SD/MSPs? Is limiting the scope of

applicable requirements for ANE transactions entered into by foreign

branches of U.S. SDs or non-U.S. SDs to the antifraud and fair dealing

requirements appropriate, or should other external business conduct

requirements in subpart H of part 23 of the Commission's regulations

also apply? Why or why not?

VII. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') requires that agencies

consider whether the regulations they propose will have a significant

economic impact on a substantial number of small entities.\128\ The

Commission previously established definitions of ``small entities'' to

be used in evaluating the impact of its regulations on small entities

in accordance with the RFA.\129\ The proposed regulation addresses when

U.S. persons and non-U.S. persons would be required to include their

cross-border swap dealing transactions or swap positions in their SD or

MSP registration threshold calculations, respectively, as specified in

the Proposed Rule,\130\ and the extent to which SDs or MSPs would be

required to comply with the Commission's external business conduct

standards in connection with their cross-border swap transactions or

swap positions.\131\

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\128\ See 5 U.S.C. 601 et seq.

\129\ See 47 FR 18618 (Apr. 30, 1982) (finding that designated

contract markets, future commission merchants, commodity pool

operators and large traders are not small entities for RFA

purposes).

\130\ See proposed rule Sec. 1.3(aaaaa), (ggg)(7), and (nnn).

\131\ See proposed rule Sec. 23.452.

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The Commission previously determined that SDs and MSPs are not

small entities for purposes of the RFA.\132\ The Commission believes,

based on its information about the swap market and its market

participants, that (1) the types of entities that may engage in more

than a de minimis amount of swap dealing activity such that they would

be required to register as an SD--which generally would be large

financial institutions or other large entities--would not be ``small

entities'' for purposes of the RFA; and (2) the types of entities that

may have swap positions such that they would be required to register as

an MSP would not be ``small entities'' for purposes of the RFA. Thus,

to the extent such entities are large financial institutions or other

large entities that would be required to register as SDs or MSPs with

the Commission by virtue of their cross-border swap dealing

transactions and swap positions, they would not be considered small

entities.\133\

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\132\ See Entities Rule, 77 FR at 30701; Registration of Swap

Dealers and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19,

2012) (noting that like future commission merchants, swap dealers

will be subject to minimum capital requirements, and are expected to

be comprised of large firms, and that major swap participants should

not be considered to be small entities for essentially the same

reasons that it previously had determined large traders not to be

small entities).

\132\ See 77 FR at 30701.

\133\ The SBA's Small Business Size Regulations, codified at 13

CFR 121.201, identifies (through North American Industry

Classification System codes) a small business size standard of $38.5

million or less in annual receipts for Sector 52, Subsector 523--

Securities, Commodity Contracts, and Other Financial Investments and

Related Activities. Entities affected by the Proposed Rule are

generally large financial institutions or other large entities that

would be required to include their cross border dealing transactions

or swap positions towards the SD and MSP registration thresholds,

respectively, as specified in the Proposed Rule.

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Under the proposed rule, to the extent that there are any affected

small entities under the proposed rule, they will need to assess how

they are classified under the proposed rule (i.e., U.S. person, FCS,

U.S. Guaranteed Entity, and Other Non-U.S. Person) and monitor their

swap activities in order to determine whether they are required to

register as an SD under the proposed rule. The Commission believes that

market participants would only incur incremental costs, which are

expected to be marginal, in modifying their existing systems and

policies and procedures resulting from changes to the status quo made

by the proposed rule.\134\

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\134\ The proposed regulation addresses the cross-border

application of the registration and external business conduct

regulations. The Proposed Rule does not change the current

registration requirements or external business conduct requirements.

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Accordingly, for the foregoing reasons, the Commission finds that

[[Page 71963]]

there will not be a substantial number of small entities impacted by

the proposed rule. Therefore, the Chairman, on behalf of the

Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the

proposed regulations will not have a significant economic impact on a

substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 \135\ (``PRA'') imposes certain

requirements on Federal agencies, including the Commission, in

connection with conducting or sponsoring any ``collection of

information,'' as defined by the PRA. Among its purposes, the PRA is

intended to minimize the paperwork burden to the private sector, to

ensure that any collection of information by a government agency is put

to the greatest possible uses, and to minimize duplicative information

collections across the government. The PRA applies to all information,

``regardless of form or format,'' whenever the government is

``obtaining, causing to be obtained, [or] soliciting'' information, and

includes required ``disclosure to third parties or the public, of facts

or opinions,'' when the information collection calls for ``answers to

identical questions posed to, or identical reporting or recordkeeping

requirements imposed on, ten or more persons.'' \136\ The PRA

requirements have been determined to include not only mandatory but

also voluntary information collections, and include both written and

oral communications.\137\

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\135\ 44 U.S.C. 3501 et seq.

\136\ See 44 U.S.C. 3502.

\137\ See 5 CFR 1320.3.

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The proposed rule would result in an amendment to existing

collections of information, ``Registration of Swap Dealers and Major

Swap Participants,'' Office of Management and Budget (``OMB'') Control

No. 3038-0072, as discussed below. The Commission, therefore, is

submitting this proposed rulemaking to OMB for its review and approval

in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If the proposed

rule is adopted, the responses to these collections of information

would be mandatory. An agency may not conduct or sponsor, and a person

is not required to respond to, a collection of information unless it

displays a currently valid control number issued by OMB.

The proposed rule provides for the cross-border application of the

SD/MSP registration thresholds and external business conduct standards.

The Commission estimates that if the proposed rule is adopted, 14

unregistered non-U.S. persons may be classified as FCSs and required to

register as new SDs because their swap dealing transactions would be in

excess of the SD de minimis threshold.\138\ The Commission would

increase the number of respondents under collection 3038-0072

accordingly. The proposed rule would not otherwise trigger any new

recordkeeping, disclosure, or reporting requirements or cause any

incremental burden under the PRA.

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\138\ See the Appendix to Cost-Benefit Considerations, infra,

for an explanation of the Commission's estimate.

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Information Collection Comments. The Commission invites the public

and other Federal agencies to comment on any aspect of the reporting

burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the

Commission solicits comments in order to: (1) Evaluate whether the

proposed collection of information is necessary for the proper

performance of the functions of the Commission, including whether the

information will have practical utility; (2) evaluate the accuracy of

the Commission's estimate of the burden of the proposed collection of

information; (3) determine whether there are ways to enhance the

quality, utility, and clarity of the information to be collected; and

(4) minimize the burden of the collection of information on those who

are to respond, including through the use of automated collection

techniques or other forms of information technology.

Comments may be submitted directly to the Office of Information and

Regulatory Affairs, by fax at (202) 395-6566 or by email at

[email protected] Please provide the Commission with a copy

of submitted comments so that all comments can be summarized and

addressed in the final rule preamble. Refer to the ADDRESSES section of

this notice of proposed rulemaking for comment submission instructions

to the Commission. A copy of the supporting statements for the

collections of information discussed above may be obtained by visiting

http://RegInfo.gov. OMB is required to make a decision concerning the

collections of information between 30 and 60 days after publication of

this document in the Federal Register. Therefore, a comment is best

assured of having its full effect if OMB receives it within 30 days of

publication.

C. Cost-Benefit Considerations

As detailed above, the Commission is proposing rules that would

define certain key terms for purposes of the Dodd-Frank swap provisions

and address the cross-border application of the SD and MSP registration

thresholds and the Commission's external business conduct standards,

including the extent to which such requirements would apply to ANE

transactions.

The baseline against which the costs and benefits of this proposed

rule are compared is the status quo, i.e., the swap market as it exists

today, with SD/MSP registration thresholds and external business

conduct rules applied to cross-border transactions in a manner

consistent with the Guidance and the Cross-Border Margin Rule.\139\ In

considering the costs and benefits of the proposed rule against this

baseline, the Commission notes that the Commission's existing swap

requirements, including the registration thresholds and external

business conduct standards, were adopted pursuant to the requirements

of the Dodd-Frank Act and have cross-border application by virtue of

CEA section 2(i). A significant portion of the costs and benefits

associated with the proposed rule are therefore inherent in the statute

itself and were addressed in the cost-benefit considerations of the

underlying registration rules and external business conduct standards

at the time they were adopted. This cost-benefit discussion accordingly

focuses on the central purpose and effect of the proposed rule,

determining whether and to what extent the underlying SD/MSP

registration thresholds and external business conduct standards should

apply in a cross-border context, consistent with CEA section 2(i), the

regulatory objectives of the Dodd-Frank Act, and principles of

international comity.

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\139\ Although the Guidance is non-binding, the Commission

understands that market participants have developed policies and

practices consistent with the views expressed therein.

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The costs associated with the key elements of the Commission's

proposed cross-border approach to the SD and MSP registration

thresholds--requiring market participants to classify themselves as

U.S. persons, U.S. Guaranteed Entities, Foreign Consolidated

Subsidiaries, or Other Non-U.S. Persons and to apply the rule

accordingly--fall into a few categories. Market participants would

incur costs determining which category of market participant (e.g., an

FCS or an Other Non-U.S. Person) they fall into (``assessment costs''),

tracking their swap activities or positions to determine whether they

should be included in their registration threshold calculations

(``monitoring costs''), and, to the degree

[[Page 71964]]

that their activities or positions exceed the relevant threshold,

registering with the Commission as an SD or MSP (``registration

costs'').

Entities required to register as SDs as a result of the proposed

rule would also incur costs associated with complying with the relevant

Dodd-Frank requirements applicable to registrants, such as the capital,

margin, and business conduct requirements (``programmatic

costs'').\140\ While only new registrants would be assuming these

programmatic costs for the first time, the obligations of entities that

are already registered as SDs may also change in the future as an

indirect consequence of the proposed rule. Although the Proposed Rule

does not address the cross-border application of any Dodd-Frank

requirements other than the registration thresholds and external

business conduct standards, the Commission expects that the proposed

rule's classification scheme for market participants (as U.S. Persons,

FCSs, etc.) and associated definitions (which closely track the

approach adopted in the Cross-Border Margin Rule) would apply for

purposes of future cross-border rulemakings. Accordingly, existing SDs

may find that their cross-border compliance obligations with respect to

other substantive Dodd-Frank requirements change in the future compared

to the status quo as a result of having to adjust their classification

(e.g., from non-U.S. person to FCS). As a result, the full extent of

the programmatic costs associated with the proposed rule would be

influenced by the scope and effect of future rulemakings addressing the

cross-border application of substantive requirements under the Dodd-

Frank Act.

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\140\ The Commission's discussion of programmatic costs and

registration costs does not address MSPs. No entities are currently

registered as MSPs, and the Commission does not expect that this

status quo would change as a result of the Proposed Rule given the

general similarities between the Proposed Rule's approach to the MSP

registration threshold calculations and the Guidance. For an

estimate of the number of market participants that may be required

to register as SDs as a result of the Proposed Rule, see the

accompanying Appendix below.

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In developing the proposed rule, the Commission took into account

the potential for creating or accentuating competitive disparities

between market participants, which could contribute to market

inefficiencies, including market fragmentation or decreased liquidity,

as more fully discussed below. Significantly, competitive disparities

may arise between U.S.-based financial groups and non-U.S. based

financial groups as a result of differences in how the SD/MSP

registration thresholds apply to the various classifications of market

participants. For instance, dealing subsidiaries with a U.S. ultimate

parent entity (i.e., FCSs)--which would be required to include all of

their swap dealing transactions in their de minimis threshold

calculations and therefore be more likely to trigger the SD

registration threshold relative to Other Non-U.S. Persons--may be at a

competitive disadvantage compared to Other Non-U.S. Persons when

trading with non-U.S. counterparties, as non-U.S. counterparties may

prefer to trade with non-registrants in order to avoid application of

the Dodd-Frank swaps regime.\141\ Again, the full competitive impact of

the Proposed Rule will be influenced by future cross-border

rulemakings, as well as the scope and implementation timelines

associated with any related rules adopted by other jurisdictions.

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\141\ Dodd-Frank swap requirements may impose significant direct

costs on participants falling within the SD/MSP definitions that are

not borne by other market participants, including costs related to

capital and margin requirements, regulatory reporting requirements,

and business conduct requirements. To the extent that foreign

jurisdictions adopt comparable requirements, these costs would be

mitigated.

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Other factors also create inherent challenges associated with

attempting to assess costs and benefits of the Proposed Rule. To avoid

the prospect of being regulated as an SD or MSP, or otherwise falling

within the Dodd-Frank swap regime, some market participants may

restructure their businesses or take other steps (e.g., limiting their

counterparties to Other Non-U.S. Persons) to avoid exceeding the

relevant registration thresholds. The degree of comparability between

the approaches adopted by the Commission and foreign jurisdictions and

the potential availability of substituted compliance, whereby a market

participant may comply with a Dodd-Frank swap dealer requirement by

complying with a comparable requirement of a foreign financial

regulator, may also affect the competitive impact of the proposed rule.

The Commission nevertheless believes that the proposed rule's

approach is necessary and appropriately tailored, consistent with CEA

section 2(i) and principles of international comity, to ensure that the

regulatory objectives of the Dodd-Frank registration requirements and

external business conduct standards are preserved while still

establishing a workable approach that recognizes foreign regulatory

interests and minimizes competitive disparities and market

inefficiencies to the degree possible. Furthermore, as mentioned above,

the Commission expects to apply the definitions and classification

scheme for market participants resulting from the proposed rule in

future cross-border rulemakings; having a uniform set of definitions

should mitigate the costs of cross-border compliance with the Dodd-

Frank swap regime in the long run.

In the sections that follow, the Commission discusses the costs and

benefits associated with the proposed rule, as well as reasonable

alternatives. Section 1 begins by addressing the assessment costs

associated with the rule, which derive in part from the defined terms

used in the proposed rule (the proposed definitions of ``U.S. Person''

and ``Foreign Consolidated Subsidiary,'' as well as the definition of

``guarantee'' adopted in the Cross-Border Margin Rule) and which, as

mentioned above, are expected to be relevant outside the context of the

cross-border application of the registration thresholds. Sections 2 and

3 consider the costs and benefits associated with the proposed rule's

determinations regarding how each classification of market participants

(U.S. Persons, U.S. Guaranteed Entities, FCSs, and Other Non-U.S.

Persons) should apply to the SD and MSP registration thresholds,

respectively. Sections 4, 5, and 6 address the monitoring,

registration, and programmatic costs associated with the proposed

cross-border approach to the SD (and, as appropriate, MSP) registration

thresholds, respectively. Section 7 addresses the costs and benefits

associated with the proposed cross-border approach to the external

business conduct standards, while Section 8 discusses the factors

established in section 15(a) of the CEA. Discussion of the Commission's

cost-benefit considerations concludes with an Appendix providing an

estimate of the number of new SDs that are expected to register as a

result of the Proposed Rule as well as the number of currently

registered non-U.S. SDs that the Commission estimates would be

classified as FCSs.

The Commission invites comment regarding the nature and extent of

any costs and benefits that could result from adoption of the Proposed

Rule and, to the extent they can be quantified, monetary and other

estimates thereof.

1. Assessment Costs

As discussed above, in applying the proposed cross-border approach

to the SD and MSP registration thresholds, market participants would be

required to first classify themselves as either a U.S. person, an FCS,

a U.S. Guaranteed

[[Page 71965]]

Entity, or an Other Non-U.S. Person. This classification scheme is also

generally applicable in the context of the proposed approach to the

external business conduct standards,\142\ and the Commission further

expects to rely on a similar classification scheme in the context of

future rulemakings relating to the cross-border application of other

substantive Dodd-Frank requirements.

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\142\ The proposed rule's cross-border application of the

external business conduct standards would also require SD/MSPs to

determine whether a swap is a transaction through a foreign branch.

See section VI, supra.

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The Commission expects that the costs to affected market

participants of assessing which classification they and their

counterparties fall into would generally be marginal and incremental.

In most cases, the Commission believes an entity will have performed an

initial determination or assessment of its status under either the

Cross-Border Margin Rule (which uses substantially similar definitions

of ``U.S. person,'' ``Foreign Consolidated Subsidiary,'' and

``guarantee'') or the Guidance (which interprets ``U.S. person'' in a

manner that is similar but not identical to the proposed definition of

``U.S. person''). Additionally, the proposed rule would allow market

participants to rely on representations from their counterparties with

regard to their classifications.\143\

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\143\ The Commission believes that these assessment costs for

the most part have already been incurred by potential SD/MSPs as a

result of adopting policies and procedures consistent with the

Guidance and Cross-Border Margin Rule (which had similar

classifications), both of which permitted counterparty

representations.

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Even with respect to market participants that have not previously

determined their status under the Cross-Border Margin Rule or the

Guidance, or that may need to reevaluate their status, the Commission

believes that their assessment costs would be small as a result of the

Proposed Rule's reliance on relatively clear, objective definitions of

the terms ``U.S. person,'' ``Foreign Consolidated Subsidiary,'' and

``guarantee.'' Specifically, the Commission believes that the costs of

assessing whether a market participant is a ``U.S. person'' would be

small as a result of certain key differences between the Proposed

Rule's U.S. person definition and the ``U.S. person'' interpretation in

the Guidance.\144\ Similarly, with respect to the determination of

whether a market participant falls within the ``Foreign Consolidated

Subsidiary'' definition,\145\ the Commission believes that assessment

costs would be small as the definition relies on a familiar

consolidation test already used by affected market participants in

preparing their financial statements under U.S. GAAP.\146\

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\144\ As discussed further in section II.A, the proposed U.S.

person definition does not include the U.S. majority-owned funds

prong that was included in the U.S. person interpretation in the

Guidance, which should lower assessment costs. The proposed

definition also includes a modified version of the unlimited U.S.

responsibility prong in the Guidance, which applied only to legal

entities whose unlimited U.S. owners were majority owners. Removing

the majority ownership requirement from the unlimited U.S.

responsibility prong may lower assessment costs, as compared to the

Guidance. Additionally, the Proposed Rule also makes clear that the

``U.S. person'' definition does not capture international financial

institutions. Further, the proposed definition does not include the

catchall provision that was included in the Guidance, which should

further increase legal certainty and reduce assessment costs.

\145\ The ``Foreign Consolidated Subsidiary'' definition is

discussed further in section II.B.

\146\ The Commission also considered certain alternatives to the

proposed FCS definition--such as relying on International Financial

Reporting Standards in addition to or instead of U.S. GAAP or

including a non-U.S. person whose U.S. parent meets standards for

consolidation, but does not prepare consolidated financial

statements under U.S. GAAP--but believes these alternatives add

complexity, without any substantial benefits.

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Additionally, the proposed rule relies on the definition of

``guarantee'' provided in the Cross-Border Margin Rule, which is

limited to arrangements in which one party to a swap has rights of

recourse against a guarantor with respect to its counterparty's

obligations under the swap.\147\ Although non-U.S. persons that are not

FCSs will need to know whether they are U.S. Guaranteed Entities with

respect to the relevant swap on a swap-by-swap basis for purposes of

the SD and MSP registration calculations, the Commission believes that

this information will already be known by non-U.S. persons.\148\

Accordingly, the Commission believes that the costs associated with

assessing whether an entity or its counterparty is a U.S. Guaranteed

Entity (for the purpose of the registration calculations or any

subsequent rulemakings) would be small.

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\147\ See note 79, supra.

\148\ Because a guarantee has a significant effect on pricing

terms and on recourse in the event of a counterparty default, the

Commission believes that the guarantee would already be in existence

and that a non-U.S. person therefore would have knowledge of its

existence before entering into a swap.

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Finally, the Commission believes that proposing consistent U.S.

person and Foreign Consolidated Subsidiary definitions, which would

apply across all of the Commission's future cross-border rulemakings

(unless the specific rule or regulation otherwise provides or the

context otherwise requires), would also further reduce costs (including

assessment costs) over time by applying a consistent definition across

all of the Commission's cross-border swaps rules.\149\

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\149\ The Commission recognizes that this benefit would not be

fully realized until such future rulemakings are adopted.

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

a. U.S. Persons and U.S. Guaranteed Entities

Under the proposed rule, a U.S. person would include all of its

swap dealing transactions in its de minimis calculation, without

exception. As discussed above, that would include any swap dealing

transactions conducted through a U.S. person's foreign branch, as such

swaps are directly attributed to, and therefore impact, the U.S.

person. Given that this requirement mirrors the Guidance in this

respect, the Commission believes that the proposed rule would have a

minimal impact on the status quo with regard to the number of

registered or potential U.S. SDs.\150\

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\150\ As discussed in the Appendix, the Commission is not

estimating the number of new U.S. SDs, as the methodology for

including swaps in a U.S. person's SD registration calculation does

not diverge from the approach included in the Guidance (i.e., a U.S.

person must include all of its swap dealing transactions in its de

minimis threshold calculation). As further explained in the

Appendix, the Commission does not expect an increase in the number

of SDs resulting from the Proposed Rule's definition of U.S. person

and therefore assumes that no new U.S. SDs would register as U.S.

SDs as a result of the Proposed Rule.

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The proposed rule would also require U.S. Guaranteed Entities (that

are not FCSs) \151\ to include all of their dealing transactions in

their de minimis threshold calculation without exception. This

approach, which recognizes that a U.S. Guaranteed Entity's swap dealing

transactions may have the same potential to impact the U.S. financial

system as a U.S. person's dealing transactions, closely parallels the

approach taken in the Guidance with respect to ``guaranteed

affiliates.'' \152\ However, as explained in

[[Page 71966]]

the accompanying Appendix, the Commission believes that there are few

U.S. Guaranteed Entities at this time.\153\ Accordingly, the Commission

believes that, in this respect, any increase in costs associated with

the Proposed Rule would be small.

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\151\ In order to avoid double counting, in the event that the

swap of an FCS is guaranteed by a U.S. person, the swap would only

be counted under the provision of the Proposed Rule that applies to

FCSs. See proposed rule Sec. 1.3(ggg)(7)(i)(B) and (C).

\152\ Under the Guidance, a ``guaranteed affiliate'' would

generally include all swap dealing activities in its de minimis

threshold calculation without exception. The Guidance interpreted

``guarantee'' to generally include ``not only traditional guarantees

of payment or performance of the related swaps, but also other

formal arrangements that, in view of all the facts and

circumstances, support the non-U.S. person's ability to pay or

perform its swap obligations with respect to its swaps.'' See the

Guidance at 45320. In contrast, the term ``guarantee'' in this

proposed rulemaking has the same meaning as defined in Commission

regulation 23.160(a)(2) (cross-border application of the

Commission's margin requirements for uncleared swaps), except that

application of the proposed definition of ``guarantee'' would not be

limited to uncleared swaps. See note 79, supra.

\153\ The proposed rule would require U.S. Guaranteed Entities

that are not FCSs to include all of their dealing transactions in

their de minimis calculation. However, the Commission believes that

there are few U.S. Guaranteed Entities (that are not FCSs). The

Commission notes that the Proposed Rule uses a narrower definition

of guarantee (compared to the Guidance), which would result in

relatively fewer U.S. Guaranteed Entities than if a broader

definition were used. In addition, the Commission believes that, as

a practical matter, few non-U.S. persons that are not FCSs obtain

guarantees of their obligations under swaps (which would generally

need to be obtained from an unaffiliated U.S. person). Although the

Commission believes that there are few U.S. Guaranteed Entities at

this time, the Commission has covered this infrequent situation in

the Proposed Rule as a prophylactic measure.

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b. Foreign Consolidated Subsidiaries

Under the proposed rule, a Foreign Consolidated Subsidiary would

include all of its swap dealing transactions in its de minimis

threshold calculation without exception. The Guidance did not

differentiate FCSs from Other Non-U.S. Persons, and therefore FCSs

would generally only include in their de minimis threshold calculations

their swap dealing transactions with U.S. persons (excluding foreign

branches of U.S. SDs) and with certain guaranteed affiliates.\154\

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\154\ The Commission believes that some FCSs would have been

``guaranteed affiliates'' as described in the Guidance at the time

that it was initially issued, but the Commission understands that

many financial groups ceased providing guarantees with regard to

their affiliated entities' swap activities subsequent to the

issuance of the Guidance, such that FCSs would have adopted policies

and practices consistent with the Guidance's treatment of non-U.S.

persons (that are not guaranteed or conduit affiliates).

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However, as noted in section II.B, the Commission believes that it

would be appropriate to distinguish FCSs from Other Non-U.S. Persons in

determining the cross-border application of the SD de minimis threshold

to such entities, as well as with respect to the Dodd-Frank swap

provisions more generally. As discussed above, by virtue of the close

integration between the FCS and its U.S. ultimate parent,

counterparties look to both the FCS and its U.S. parent for fulfillment

of the FCS's obligations under the swap, even without any explicit

guarantee. Therefore, the Commission believes that it is appropriate to

require FCSs to include all of their swap dealing transactions in their

SD de minimis calculation. In addition, allowing an FCS to exclude non-

U.S. swap dealing transactions from its calculation could incentivize

U.S. financial groups to book their non-U.S. dealing transactions into

an FCS, avoiding swap regulation.

Under the Proposed Rule, the FCS definition is used to distinguish

non-U.S. persons with a U.S. ultimate parent entity from Other Non-U.S.

Persons for purposes of determining how Dodd-Frank swap provisions

should apply. The full market impact of the Proposed Rule's shift of

some non-U.S. persons to FCSs cannot be determined at this time in the

absence of further rulemakings addressing the cross-border application

of substantive requirements under the Dodd-Frank Act. However, to the

extent that future cross-border rulemakings apply more stringent

requirements to swap transactions with FCSs, non-U.S. counterparties

may seek to avoid transacting with such dealers, fragmenting swaps

market liquidity into two pools--one for U.S. persons and FCSs and the

other for non-U.S. persons (that are not FCSs). Nevertheless, as

discussed above, the Commission believes that the proposal to require

FCSs to include all of their swap dealing activity in their de minimis

threshold calculations is necessary and appropriate to ensure the

policy objectives of the Dodd-Frank Act are preserved and not

undermined by a substantial regulatory loophole.

c. Other Non-U.S. Persons

Under the proposed rule, Other Non-U.S. Persons would be required

to include in their de minimis threshold calculations swap dealing

activities with U.S. persons (including foreign branches of U.S. SDs),

U.S. Guaranteed Entities, and FCSs. The proposed rule would not,

however, require Other Non-U.S. Persons to include swap dealing

transactions with Other Non-U.S. Persons. Additionally, Other Non-U.S.

Persons would not be required to include in their de minimis

calculation any transaction that is executed anonymously on a SEF, DCM,

or FBOT and cleared.

The Commission believes that requiring Other Non-U.S. Persons to

include their swap dealing transactions with U.S. persons in their de

minimis calculations is necessary to advance the goals of the Dodd-

Frank SD registration regime, which focuses on U.S. market participants

and the market. As discussed above, the Commission considered

incorporating an exception from the Guidance allowing non-U.S. persons

to exclude from their de minimis thresholds transactions with foreign

branches of U.S. SDs but determined that, given the integral nature of

the foreign branch to a U.S. person, such an exception would create a

potentially significant regulatory loophole, allowing a substantial

amount of dealing activity with U.S. counterparties to occur outside

the comprehensive Dodd-Frank swap regime.

Under the proposed rule, Other Non-U.S. Persons would not be

required to include any swap dealing transactions with Other Non-U.S.

Persons in their SD de minimis threshold calculations, including ANE

transactions. Although a non-U.S. person that engages in ANE

transactions is performing dealing activity in the United States, the

Commission does not believe that requiring non-U.S. persons to include

ANE transactions in their de minimis threshold calculations would be

necessary to advance the policy objectives of the Dodd-Frank swap

regime when taking the Proposed Rule in context, particularly the

proposal to require FCSs to include all of their swap dealing

transactions in their de minimis threshold calculations.

The Commission recognizes that the proposed rule's cross-border

approach to the de minimis threshold calculation could contribute to

competitive disparities arising between U.S.-based financial groups and

non-U.S. based financial groups. Potential SDs that are U.S. persons or

that have a U.S. ultimate parent entity (FCSs) would be required to

include all of their swap transactions. In contrast, potential non-U.S.

SDs with a non-U.S. ultimate parent entity whose obligations under the

relevant swap are not subject to a U.S. guarantee (Other Non-U.S.

Persons) would be permitted to exclude swaps with Other Non-U.S.

Persons, including ANE transactions. As a result, potential SDs with a

U.S. ultimate parent entity may be at a competitive disadvantage, as

more of their swap activity would apply toward the de minimis threshold

and trigger the SD registration threshold relative to Other Non-U.S.

Persons. To the extent that a currently unregistered non-U.S. person

would be required to register as an SD under the proposed rule, its

non-U.S. counterparties (clients and dealers) may possibly cease

transacting with it in order to operate outside the Dodd-Frank swap

regime.\155\ Additionally, unregistered non-U.S. dealers may be able to

offer swaps on more favorable terms to non-U.S. counterparties than

U.S. competitors (i.e., U.S. SDs, FCSs,

[[Page 71967]]

and U.S. Guaranteed Entities) because they are not required to register

(and therefore would not be subject to the Dodd-Frank swap dealer

regime).\156\ As noted above, however, the Commission believes that

these competitive disparities would be mitigated to the extent that

foreign jurisdictions impose comparable requirements. Furthermore, the

Commission reiterates its belief that the cross-border approach to the

SD registration threshold taken in the Proposed Rule is appropriately

tailored to further the policy objectives of the Dodd-Frank Act while

mitigating unnecessary burdens and disruption to market practices to

the extent possible.

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\155\ Additionally, some unregistered dealers may opt to

withdraw from the market, thereby contracting the number of dealers

competing in the swaps market, which may have an effect on

competition and liquidity.

\156\ These non-U.S. dealers also may be able to offer swaps on

more favorable terms to U.S. persons, giving them a competitive

advantage over U.S. competitors with respect to U.S. counterparties.

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3. Cross-Border Application of the Major Swap Participant Registration

Thresholds

As described in section V, the Proposed Rule would approach the

cross-border application of the MSP registration thresholds in a

similar manner as the SD de minimis registration threshold.

Specifically, the proposed rule would require U.S. persons, U.S.

Guaranteed Entities, and FCSs to include all of their swap positions in

their MSP calculations without exception. As further explained in

section V, in the Commission's view this result is appropriate because

the Commission believes that swap positions with U.S. persons, U.S.

Guaranteed Entities, and FCSs can in each case have a significant

effect on the U.S. financial system and therefore should be treated in

a similar manner for purposes of the MSP registration calculation.

For related reasons discussed in section V.B, the proposed rule

would also require Other Non-U.S. Persons to include in their MSP

calculations all of their swap positions with U.S. persons, U.S.

Guaranteed Entities, and FCSs, with a limited exception for

transactions executed anonymously on a SEF, DCM, or FBOT and cleared.

The Commission believes that swap positions with U.S. persons, U.S.

Guaranteed Entities, and FCSs can in each case have a significant

effect on the U.S. financial system and therefore should be treated in

a similar manner.\157\ Other Non-U.S. Persons would not, however, be

required to include swap positions with Other Non-U.S. Persons in their

MSP calculations, as the Commission does not believe these swaps would

present the type of risk to the U.S. financial system that the MSP

definition and registration requirements are intended to address.

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\157\ In addition, the Commission considered whether to include

an exclusion similar to that discussed in the Guidance (which

provides that non-U.S. persons that are not ``guaranteed

affiliates'' generally could exclude from their MSP threshold

calculations swap positions with either a foreign branch of a U.S.

SD or a guaranteed affiliate that is an SD if either (i) the

potential non-U.S. MSP is a non-financial entity or (ii) the

potential non-U.S. MSP is a financial entity and the swap is either

cleared or the swap documentation requires the foreign branch or

guaranteed affiliate to collect daily variation margin with no

threshold). Although including corollary exclusions in the Proposed

Rule might result in reduced compliance costs, the Commission

preliminarily believes that such exclusions are unnecessary and

inappropriate for the reasons discussed above. See note 106, supra.

The Commission further does not believe that the decision not to

include such an exception would result in any new MSPs. The

Commission is also seeking comment in section V with regard to

whether to adopt the SEC approach of not requiring a non-U.S. person

to include in its MSP threshold calculations any swap positions for

which they (as opposed to the non-U.S. person's counterparty)

benefit from a guarantee creating a right of recourse against a U.S.

person. See note 113, supra, and accompanying text.

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The Commission notes that no entities are currently registered as

MSPs. The Commission also does not believe that the proposed cross-

border approach to the MSP registration thresholds would result in

significant costs to market participants compared to the status quo

(i.e., would not cause any market participants to register as MSPs)

given the general similarities between the proposed rule's approach to

the MSP registration threshold calculations and the corollary approach

provided in the Guidance.\158\

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\158\ See also note 157, supra.

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4. Monitoring Costs

Under the proposed rule, market participants would need to continue

to monitor their swap activities in order to determine whether they

are, or continue to be, required to register as an SD or MSP. Given

that market participants are believed to have developed policies and

practices consistent with the cross-border approach to the SD/MSP

registration thresholds expressed in the Guidance, the Commission

believes that market participants would only incur incremental costs in

modifying their existing systems and policies and procedures in

response to the proposed rule (e.g., determining which swaps activities

or positions would be required to be included in the registration

threshold calculations).\159\

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\159\ Although the cross-border approach to the MSP registration

threshold calculation in the Proposed Rule is not identical to the

approach included in the Guidance, see note 106, supra, the

Commission believes that any resulting increase in monitoring costs

resulting from the Proposed Rule would be incremental and de

minimis.

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For example, the Commission notes that FCSs are likely to have

adopted policies and practices in line with the Guidance approach to

non-U.S. persons that are not guaranteed or conduit affiliates and

therefore may only be currently counting (or be provisionally

registered by virtue of) their swap dealing transactions with U.S.

persons, other than foreign branches of U.S. SDs.\160\ Although an FCS

would be required under the proposed rule to include all swaps

connected with its dealing activities in its de minimis calculation,

without exception, the Commission believes that any increase in

monitoring costs for FCSs would be de minimis, both initially and on an

ongoing basis, because they already have systems that track swap

dealing transactions with certain counterparties in place, which

includes an assessment of their counterparties' status.\161\

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\160\ Although the Guidance provided that non-U.S. persons (that

are not guaranteed or conduit affiliates) should generally include

all of their swap dealing transactions with U.S. persons (excluding

foreign branches of a U.S. SD) as well as swaps with certain

guaranteed affiliates in their de minimis threshold calculations,

the Commission understands that at the current time guaranteed

affiliates, as defined in the Guidance, likely no longer exist or

are few in number.

\161\ See section VII.C.1, supra, for a discussion of assessment

costs.

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5. Registration Costs

As a result of the proposed rule's classification scheme for market

participants (e.g., as U.S. persons, FCSs, U.S. Guaranteed Entities,

and Other Non-U.S. Persons, as described above) and the proposed

requirement that they apply the SD registration threshold accordingly,

the Commission recognizes that some market participants would be

required to register as SDs with the Commission who were previously not

required to register. In considering the costs and benefits of the

proposed rule, the Commission has estimated that approximately 14

unregistered non-U.S. persons may be required to register as SDs as a

result of the proposed rule. The basis for this estimated increase in

the number of SDs is discussed below in the accompanying Appendix. The

Commission previously estimated registration costs in its rulemaking on

registration of SDs; \162\ however, the costs that may be incurred

should be mitigated to the extent that these new SDs are affiliated

with an existing SD, as most of these costs have already been realized

by the consolidated group. The Commission has not included any

discussion of registration costs for MSPs because it believes that few

(if any) market participants will be required to

[[Page 71968]]

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

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\162\ See Registration of Swap Dealers and Major Swap

Participants, 77 FR 2613, 2623-25 (Jan. 19, 2012).

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6. Programmatic Costs

As noted above, if the proposed rule is adopted, certain market

participants would likely be required to register as SDs and would

become subject to various requirements imposed on swap dealers under

the Dodd-Frank Act and related Commission's regulations. To the extent

that the proposed rule acts as a ``gating'' rule by affecting which

entities engaged in cross-border swaps activities must comply with the

SD requirements, the Proposed Rule could result in increased costs for

particular entities that otherwise would not register as an SD and

comply with the swap provisions.\163\

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\163\ As noted above, the Commission believes that, if the

Proposed Rule is adopted, few (if any) market participants would be

required to register as an MSP under the Proposed Rule, and

therefore it has not included a separate discussion of programmatic

costs for registered MSPs in this section.

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Market participants that are already registered (or provisionally

registered) as SDs or MSPs prior to adoption of the proposed rule (if

it is adopted) could also be affected by the proposal. In particular,

the Commission is proposing rules that would define certain key terms

for purposes of the Dodd-Frank swaps provisions (including future

cross-border rulemakings). Therefore, the proposal could affect the

treatment of market participants that are already registered (or

provisionally registered) across the Commission's entire cross-border

framework and attendant costs and benefits in addition to those that

are registering for the first time. The proposal also addresses the

cross-border application of the Commission's external business conduct

standards, including the extent to which such requirements would apply

to swap transactions that are arranged, negotiated, or executed by

registered SDs or MSPs using personnel located in the United States.

Further, as a result of the proposed rule, certain other market

participants would be categorized differently under the proposal than

they were under the Guidance, which could affect how they are treated

across the Commission's entire cross-border framework and attendant

costs and benefits.\164\ Although the exact treatment of market

participants across the Commission's cross-border framework is not set

out in this proposal, the Commission will address specific costs that

market participants will incur in each specific future rulemaking.

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\164\ As discussed below in the accompanying Appendix, the

Commission has estimated that out of a total of 54 provisionally

registered non-U.S. SDs entities, 17 would be classified as an FCS

under the Proposed Rule.

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7. Cross-Border Application of External Business Conduct Requirements

As discussed in section VI above, the proposed rule addresses the

cross-border application of the Commission's external business conduct

standards to transactions in which at least one of the counterparties

is an SD/MSP, including the extent to which they would apply to ANE

transactions. Under the proposed rule, U.S. SD/MSPs (other than foreign

branches of U.S. SD/MSPs) would be required to comply with the

Commission's external business conduct standards without substituted

compliance. As discussed above, this requirement reflects the

Commission's view that the Dodd-Frank external business conduct

standards should apply fully to registered SDs and MSPs domiciled and

operating in the United States because their swap activities are

particularly likely to affect the integrity of the swaps market in the

United States and raise concerns about the protection of participants

in those markets. The Commission does not expect that this requirement

would impose any additional costs on market participants in comparison

to the status quo given that the Commission's external business conduct

standards already apply to U.S. SD/MSPs under the Commission's external

business conduct standards rulemaking.\165\

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\165\ See Business Conduct Standards for Swap Dealers and Major

Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012).

The Commission's discussion of cost-benefit considerations is at 77

FR at 9805-22.

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Non-U.S. SD/MSPs and foreign branches of U.S. SD/MSPs would only be

required to comply with the external business conduct standards if (1)

the counterparty is a U.S. person (other than a foreign branch of a

U.S. SD/MSP) or (2) a non-U.S. SD or foreign branch of a U.S. SD uses

personnel located in the United States to arrange, negotiate, or

execute the transaction (or a swap that is offered but not entered

into), in which case the antifraud \166\ and fair dealing \167\

requirements would apply. The proposal to require non-U.S. SD/MSPs and

foreign branches of U.S. SD/MSPs to comply with the external business

conduct standards where the counterparty is a U.S. person (other than a

foreign branch of a U.S. SD/MSP) reflects the Commission's recognition

that the Dodd Frank Act's counterparty protection mandate focuses on

protecting U.S. market participants, such that the external business

requirements should apply fully to U.S. persons without substituted

compliance regardless of the location from which the SD/MSP may be

operating. The exception for counterparties that are foreign branches

of U.S. SD/MSPs reflects the Commission's belief that, even though the

foreign branch is an integral part of the U.S. SD/MSP, a foreign

regulatory regime may have a heightened interest in enforcing its own

sales practice requirements to transactions occurring within its

jurisdiction. Furthermore, this limited exception should reduce

competitive disparities between such foreign branches and FCSs when

transacting with non-U.S. clients. Again, the Commission does not

expect that, in this regard, the proposed rule would impose any

additional costs on market participants in comparison to the status

quo, particularly given that the proposed rule does not significantly

deviate from the Commission's existing cross-border policy in this

respect, as described in the Guidance.\168\

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\166\ See 17 CFR 23.410.

\167\ See 17 CFR 23.433.

\168\ Under the approach described in the Guidance, non-U.S. SD/

MSPs and foreign branches of U.S. SD/MSPs generally would not comply

with the business conduct standards to the extent that their

counterparty is a foreign branch of a U.S. SD/MSP or a non-U.S.

person.

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The proposed rule goes beyond the scope of the Guidance, however,

by making clear that non-U.S. SDs and foreign branches of U.S. SDs

would be required to comply with the antifraud and fair dealing

external business conduct standards with respect to ANE transactions.

This requirement would therefore impose additional compliance costs

relative to the status quo not only on existing non-U.S. SDs and

foreign branches of U.S. SDs, which likely currently do not comply with

the external business conduct standards with respect to their

transactions with non-U.S. persons or foreign branches of U.S. SD/MSPs,

but any non-U.S. persons that are required to register by virtue of the

proposed rule's approach to the SD registration threshold. As discussed

above, where swaps are arranged, negotiated or executed in the United

States, the Commission has a strong supervisory interest both in

protecting involved counterparties against fraud, manipulation and

other abusive practices of an SD and in requiring that the SD

communicate in a fair and balanced manner with these counterparties

based on principles of fair dealing and good faith. Taking the proposed

rule as a whole, however, the Commission does not believe that

application of the remaining external business conduct standards would

be necessary to advance the goals of the

[[Page 71969]]

Dodd-Frank Act. Accordingly, by limiting application of the external

business conduct standards to ANE transactions to the antifraud and

fair dealing requirements, the Proposed Rule is appropriately tailored

to ensure a basic level of counterparty protections while, consistent

with the principles of international comity, recognizing the

supervisory interests of the relevant foreign jurisdictions in applying

their own sales practices requirements to transactions involving

counterparties that are non-U.S. persons (or foreign branches of U.S.

SD/MSPs) and avoiding potentially unnecessarily duplicative

requirements.

8. Section 15(a) Factors

Section 15(a) of the CEA requires the Commission to consider the

costs and benefits of its actions before promulgating a regulation

under the CEA or issuing certain orders. Section 15(a) further

specifies that the costs and benefits shall be evaluated in light of

five broad areas of market and public concern: (1) Protection of market

participants and the public; (2) efficiency, competitiveness, and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations. The Commission considers the costs and benefits

resulting from its discretionary determinations with respect to the

section 15(a) factors.

a. Protection of Market Participants and the Public

The Commission believes the proposed rule would support protection

of market participants and the public. By focusing on and capturing

swap dealing transactions and swap positions involving U.S. persons and

non-U.S. persons with a strong nexus to the United States (e.g., FCSs

and U.S. Guaranteed Entities), the Proposed Rule's approach to the

cross-border application of the SD and MSP registration threshold

calculations works to ensure that, consistent with CEA section 2(i) and

the policy objectives of the Dodd-Frank Act, significant participants

in the U.S. market are subject to the CEA's swap regime. The proposed

cross-border approach to the external business conduct standards,

including applying the antifraud and fair dealing requirements to ANE

transactions, similarly ensures that the Dodd-Frank market protections

apply to swap activities that are particularly likely to affect the

integrity of and raise concerns about the protection of participants in

the U.S. market while, consistent with principles of international

comity, recognizing the supervisory interests of the relevant foreign

jurisdictions in applying their own sales practices requirements to

transactions involving non-U.S. SD/MSPs and foreign branches of U.S.

SD/MSPs with non-U.S. persons and foreign branches of U.S. SD/MSPs.

b. Efficiency, Competitiveness, and Financial Integrity of the Markets

To the extent that the proposed rule leads additional entities to

register as SDs, the Commission believes that the proposed rule could

enhance the financial integrity of the markets by bringing significant

U.S. swaps market participants under Commission oversight, which may

reduce market disruptions and foster confidence and transparency in the

U.S. market. The Commission recognizes that the Proposed Rule's cross-

border approach to the SD and MSP registration thresholds may create

competitive disparities among market participants, based on the degree

of their connection to the United States, that could contribute to

market inefficiencies, including market fragmentation and decreased

liquidity, as certain market participants may reduce their exposure to

the U.S. market. As a result of reduced liquidity, counterparties may

pay higher prices, in terms of bid-ask spreads (or in the case of

swaps, the cost of the swap and the cost to hedge). Such competitive

effects and market inefficiencies may, however, be mitigated by global

efforts to harmonize approaches to swap regulation and by the large

inter-dealer market, which may link the fragmented markets and enhance

liquidity in the overall market. On balance, the Commission believes

that the proposed rule's approach is necessary and appropriately

tailored to ensure that the purposes of the Dodd-Frank swap regime and

its registration requirements are advanced while still establishing a

workable approach that recognizes foreign regulatory interests and

minimizes competitive disparities and market inefficiencies to the

degree possible. The Commission further believes that the proposed

rule's cross-border approach to the external business conduct standards

will promote the financial integrity of the markets by fostering

transparency and confidence in the major participants in the U.S. swap

markets.

c. Price Discovery

The Commission recognizes that the proposed rule's approach to the

cross-border application of the SD and MSP registration thresholds

could also have an effect on liquidity, which may in turn influence

price discovery. As liquidity in the swaps market is lessened and fewer

dealers compete against one another, bid-ask spreads (cost of swap and

cost to hedge) may widen and the ability to obtain the `true' price of

a swap may be hindered. However, as noted above, these negative effects

would be mitigated as jurisdictions harmonize their swaps initiative

and global financial institutions continue to manage their swaps books

(i.e., moving risk with little or no cost, across an institution to

market centers, where there is the greatest liquidity). The Commission

does not believe that the proposed rule's approach to the external

business conduct standards, however, will have a measurable impact on

price discovery.

d. Sound Risk Management Practices

The Commission believes that the proposed rule's approach could

promote the development of sound risk management practices by ensuring

that significant participants in the U.S. market are subject to

Commission oversight (via registration), including in particular

important counterparty disclosure and recordkeeping requirements that

will encourage policies and practices that promote fair dealing while

discouraging abusive practices in U.S. markets.

e. Other Public Interest Considerations

The Commission has not identified any public interest

considerations related to the costs and benefits of the proposed rule.

Request for Comment. The Commission invites comment on all aspects

of the costs and benefits associated with the proposed rule, including

the following:

1. Is the Commission's assumption that few, if any, market

participants will be required to register as MSPs as a result of the

proposed rule (as compared to the status quo) correct? If not, please

provide an estimate of the number of market participants that are

likely to have to register as MSPs as a result of the proposed rule,

including an explanation for the basis of the estimate, and associated

costs and benefits of the Proposed Rule's provisions for MSPs

(including potential MSPs).

2. The Commission preliminarily believes that a requirement that

Other Non-U.S. Persons include ANE transactions in their SD

registration threshold calculations would not be likely to increase the

scope of entities that would be covered under its swap requirements,

but may result in significant burdens. Is that belief correct? If not,

please provide an

[[Page 71970]]

estimate of the potential costs and benefits associated with including

such a requirement?

3. The Commission invites information regarding whether and the

extent to which specific foreign requirement(s) may affect the costs

and benefits of the proposed rule, including information identifying

the relevant foreign requirement(s) and any monetary or other

quantitative estimates of the potential magnitude of those costs and

benefits.

4. The Commission is estimating that 17 currently registered non-

U.S. SDs would be classified as FCSs and that 14 unregistered non-U.S.

persons may be classified as FCSs and required to register as new SDs

because their swap dealing transactions are in excess of the SD de

minimis threshold. The basis for these estimates is set forth below in

the accompanying Appendix. The Commission seeks comments regarding its

estimates of the scope and number of market participants potentially

affected by the proposed rule, including its methodology for arriving

at the estimates in the Appendix to Cost Benefit Considerations.

9. Appendix to Cost-Benefit Considerations

In this Appendix, the Commission explains its methodology for

estimating, as a result of the proposed rule, the number of new

entities that may be required to register with the Commission as SDs

and the number of currently registered non-U.S. SDs that would be

classified as an FCS. In arriving at this estimate, the Commission

relied on SDR data and other data sources.\169\ However, the Commission

faced a number of challenges in conducting a quantitative analysis. In

particular, the Commission does not have SDR data on trades between two

non-U.S. persons, and its estimate with regard to the number of non-

U.S. persons that may be required to register as SDs by virtue of being

FCSs is based on certain assumptions and adjustments, as explained

further below.

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

infra.

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

a. Estimates Regarding U.S. Persons and U.S. Guaranteed Entities

The Commission is estimating that overall there will not be an

increase in the number of persons that will be required to register as

U.S. SDs as a result of the proposed rule, as the proposed rule's

approach to the swaps of U.S. persons mirrors the approach in the

Guidance (i.e., all swap dealing transactions must be included).

Furthermore, the Commission does not expect any increase in the number

of SDs resulting from changes to the U.S. person definition.\170\

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\170\ There may be a decrease in the number of funds or other

entities that fall within the U.S. person definition as compared to

the Guidance because the proposed U.S. person definition does not

include the U.S. majority-owned funds provision or the catchall

provision that were included in the U.S. person interpretation in

the Guidance, and the Commission is clarifying that the proposed

definition does not capture international financial institutions. On

the other hand, because the unlimited U.S. responsibility prong does

not include a majority ownership requirement (in a modification from

the Guidance), this could increase the number of entities that fall

within the U.S. person definition resulting in a concomitant

increase in the number of SDs as compared to the Guidance. In

addition, the Commission is not providing a safe harbor for funds

that are only solicited to non-U.S. persons, which is a difference

from the policy discussed in the Guidance. Therefore, overall the

Commission does not expect any increase in the number of SDs

resulting from changes to the U.S. person definition.

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

The Commission is also estimating that there will be no increase in

the number of new SDs that are U.S. Guaranteed Entities, as the

proposed rule uses a narrower definition of a guarantee (compared to

the Guidance), which the Commission believes will result in few, if

any, U.S. Guaranteed Entities.\171\ Therefore, for purposes of this

cost-benefit analysis, the Commission estimates that currently there

are no U.S. Guaranteed Entities (that are not FCSs) with over $8

billion in swaps dealing transactions.

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

\171\ As explained in the preamble, the Commission believes that

there are few U.S. Guaranteed Entities at this time. See note 153,

supra. Accordingly, the Commission does not expect an increase in

the number of new SDs that would be required to register as a result

of the Proposed Rule's requirement that a U.S. Guaranteed Entity

include all of its swaps in its SD de minimis calculation.

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

b. Estimates Regarding Foreign Consolidated Subsidiaries

If the proposed rule is adopted, the Commission estimates that 17

currently registered non-U.S. SDs would be classified as FCSs and that

14 unregistered non-U.S. persons may be classified as FCSs and required

to register as new SDs because their swap dealing transactions are in

excess of the SD de minimis threshold. The basis for these estimates is

set forth below.

(1) Estimate of the Number of Non-U.S. Swap Dealers That Would Be

Classified as FCSs

In estimating the number of SDs that, as a result of the proposed

rule, would shift from a category of non-U.S. SDs to the new category,

FCS, the Commission reviewed its current list of registered SDs. As the

definition of an FCS is dependent on whether the SD is a non-U.S.

person that has an ultimate U.S. parent entity, the Commission was able

to isolate those entities from a list of non-U.S. SDs. From this list,

the Commission estimated that out of a total of 54 provisionally

registered non-U.S. SDs, 17 would be classified as an FCS under the

proposed rule.

(2) Estimate of Potential FCSs That May Be Required To Register as Swap

Dealers

The Commission estimates that approximately 14 unregistered non-

U.S. persons with a U.S. ultimate parent entity under U.S. GAAP

(``potential FCSs'') may be required to register as SDs as a result of

the proposed rule. The Commission does not currently collect data on

trades between non-U.S. persons (including those of potential FCSs with

non-U.S. persons). Therefore, in estimating the number of potential

FCSs that may be required to register as SDs, the Commission relied on

SDR data regarding inter-affiliate trades between potential FCSs and

their affiliated U.S. SDs (``inter-affiliate trades'').

The Commission believes that SDR data on inter-affiliate trades

provide a reasonable basis upon which to estimate the outward-dealing

trades of potential FCSs with non-U.S. persons, provided that the

estimate is scaled to the global swap market (as detailed below).\172\

As described in section I.B, global financial groups commonly carry out

swap dealing activities in multiple jurisdictions through branches or

affiliates that effectively operate as a single business under the

control of the ultimate parent entity. Under this model, where a non-

U.S. branch or affiliate in the global financial group enters into a

swap with a non-U.S. client in a local market, it will then offset the

risk associated with the outward-facing swap via an inter-affiliate

swap, which is likely to be with an affiliated dealer or market maker

in the particular swap in the group.\173\

[[Page 71971]]

Accordingly, the Commission believes that inter-affiliate trades

provide a reasonable means of estimating a substantial portion of a

potential FCS's outward-facing swap dealing with non-U.S.

counterparties.

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

\172\ The Commission is unable to quantify certain swaps that

may fall under the Proposed Rule. Specifically, there are dealing

transactions entered into by potential FCSs with non-U.S.

counterparties that would be included in the SD de minimis

calculation of potential FCSs in this rulemaking that are not

reported. Therefore, an estimate based solely on the SDR data for

inter-affiliate trades would be under-inclusive because it only

covers inter-affiliate trades between potential FCSs and their

affiliated U.S. SDs. Accordingly, as detailed below, the Commission

has scaled the inter-affiliate trade data to the global swaps

market.

\173\ The Commission understands that risk may move in either

direction in an inter-affiliate trade, and therefore, the

Commission's use of SDR data on inter-affiliate trades between a

potential FCS and an affiliated U.S. SD may also be over-inclusive

in estimating the number of SDs. However, for the reasons discussed

in this section, the Commission believes that SDR data on potential

FCSs' inter-affiliate swaps with affiliated U.S. SDs is much more

likely to be under-inclusive as a means of estimating the number of

potential FCSs that would be required to register as a result of the

Proposed Rule.

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

However, there is an important limitation on the use of this inter-

affiliate data which is likely to cause it to be under-inclusive as a

proxy for the outward-facing trades of these potential FCSs with non-

U.S. persons, as the Commission's SDR data only includes swaps that are

between a potential FCS and an affiliated U.S. SD. Potential FCSs may

also transfer the risk of some of their outward-facing dealing

activities to affiliated non-U.S. SDs located in market centers outside

the United States (e.g., London and Tokyo) or retain the risk in their

dealer portfolio (and an FCS must count all of its outward-facing

dealing transactions toward its SD de minimis threshold under the

proposed rule). Consequently, the Commission believes that using SDR

data on inter-affiliate trades (which only includes a potential FCS's

inter-affiliate swaps with an affiliated U.S. SD) as a proxy for swap

dealing between a potential FCS and non-U.S. persons is likely to be

under-inclusive. Therefore, the Commission has scaled the SDR data on

inter-affiliate trades between a potential FCS and an affiliated U.S.

SD to the global swaps market by applying a factor of 2 (which

represents the approximate ratio between total U.S. swaps market and

that of the global swaps market),\174\ in order to estimate the number

of potential FCSs that may be required to register as SDs as a result

of the proposed rule.

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

\174\ The factor of 2 that the Commission is using to scale the

data upon which it is basing its estimate to the global swaps market

is based on the inverse of the 57% scaling factor used in the cost-

benefit analysis for the Commission's Final Margin Rule, rounded up

to 2. In the Final Margin Rule, the Commission applied a 57% scale

factor to the global notional amount of margin estimated in ISDA and

BCBS-IOSCO surveys in order to better align its estimate of the

global impact of margin requirements for uncleared swaps with the

impact of the U.S. rules. The Commission utilized SDR data on

uncleared interest rate swaps, which represent the majority of the

notional value associated with uncleared swaps, to compute the 57%

scale factor. The 57% scale factor was designed to represent the

notional amount of uncleared interest rate swaps reported to the

SDRs as a fraction of the global notional amount of uncleared

interest rate swaps. See Final Margin Rule, 81 FR at 690-91

(Appendix A).

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

Based on the foregoing assumptions, the Commission obtained SDR

data on inter-affiliate swaps for each potential FCS with affiliated

U.S. SDs during the period between March 5, 2015 and March 4, 2016 (the

``Reference Period''). Because this inter-affiliate trade data only

includes open trades as of the end of the Reference Period (i.e.,

trades that were closed out during the Reference Period are not

accounted for in the data), the Commission used a $1 billion notional

amount as a screening threshold to identify those potential FCSs that

may be required to register as an SD under the proposed rule, rather

than the current $8 billion SD de minimis threshold. Seven of the non-

U.S. persons identified as potential FCSs had inter-affiliate trades

with U.S. SDs that exceeded this $1 billion screening threshold. The

Commission then multiplied its estimate of 7 by a scaling factor of 2

(as described above) to estimate that approximately 14 potential FCSs

may be required to register as SDs as a result of the proposed rule.

c. Other Non-U.S. Persons

The Commission is unable to estimate the number of new SDs that may

be required to register as a result of the proposed rule's requirement

that an Other Non-U.S. Person include swaps with an FCS for SD

registration threshold purposes due to the lack of SDR data regarding

transactions between non-U.S. persons. The Commission also is not

estimating the number of new SDs that may be required to register as a

result of the proposed rule's requirement that an Other Non-U.S. Person

include swaps with a U.S. Person or U.S. Guaranteed Entity in its SD de

minimis registration threshold. The Commission believes that few, if

any, additional Other Non-U.S. Persons would be required to register as

an SD as a result of changes made by the proposed rule (as compared to

the Guidance) with respect to either U.S. persons or U.S. Guaranteed

Entities.\175\

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

\175\ The Commission believes that any increase in the number of

Other Non-U.S. SDs that are required to register as an SD as a

result of the proposed rule's requirement that an Other Non-U.S.

Person include swaps with a U.S. Person in its SD de minimis

calculation would be de minimis because the Guidance expresses a

similar policy. Under the Guidance, non-U.S. persons that are not

guaranteed or conduit affiliates generally include swaps with U.S.

persons, excluding foreign branches of U.S. SDS, in their SD de

minimis calculation. To the extent this reflects current industry

practice, the Commission believes that few, if any, additional Other

Non-U.S. Persons would be required to register as SDs as a result of

deviation from the Guidance by the proposed rule with regard to

counting swaps with U.S. persons.

In addition, as explained in the preamble, the Commission

believes that there are few U.S. Guaranteed Entities at this time.

See note 153, supra. Accordingly, the Commission does not expect an

increase in the number of new SDs that would be required to register

as a result of the proposed rule's requirement that an Other Non-

U.S. Person include swaps with a U.S. Guaranteed Entity in its SD de

minimis calculation.

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

As noted above, the Commission requests comment regarding its

estimates of the scope and number of market participants potentially

affected by the proposed rule, including its methodology for arriving

at the estimates included in this Appendix.

VIII. Preamble Summary Tables

Table A--Cross-Border Application of the Swap Dealer De Minimis Threshold

[Table A should be read in conjunction with the text of the proposed rule]

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

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

Counterparty [rarr] Non-U.S. person

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

U.S. Person............ U.S. Guaranteed........ Other Non-U.S.

Potential SD [darr] entity \1\/FCS......... person

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

U.S. Person.......................... Include................ Include................ Include.

Non-U.S. Person:

U.S. Guaranteed Entity \1\/FCS... Include................ Include................ Include.

Other Non-U.S. Person............ Include \2\............ Include \2\............ Exclude.

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

\1\ A non-U.S. person that is a U.S. Guaranteed Entity with respect to a swap would include the swap in its de

minimis calculation if its swap counterparty has rights of recourse against a U.S. person with respect to its

obligations under the swap.

\2\ An Other Non-U.S. Person would include all swaps connected with its dealing activity with counterparties

that are U.S. persons, U.S. Guaranteed Entities, or FCSs unless the swap is executed anonymously on a

registered SEF, DCM, or FBOT and cleared.

[[Page 71972]]

Additionally, a potential SD, whether a U.S. or non-U.S. person, would aggregate all swaps connected with its

dealing activity with those of persons controlling, controlled by, or under common control with such potential

SD to the extent that these affiliated persons are themselves required to include those swaps in their own de

minimis thresholds, unless the affiliated person is a registered SD.

Table B--Cross-Border Application of the Major Swap Participant Registration Thresholds

[Table B should be read in conjunction with the text of the proposed rule]

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

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

Counterparty [rarr] Non-U.S. person

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

U.S. Person............ U.S. Guaranteed........ Other Non-U.S.

Potential MSP [darr] entity \1\/FCS......... person

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

U.S. Person.......................... Include................ Include................ Include.

Non-U.S. Person:

U.S. Guaranteed Entity \a\/FCS... Include................ Include................ Include.

Other Non-U.S. Person............ Include \b\............ Include \b\............ Exclude.

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

\a\ A non-U.S. person that is a U.S. Guaranteed Entity with respect to the relevant swap would include the swap

in its MSP threshold calculations if its swap counterparty has rights of recourse against a U.S. person with

respect to its obligations under the swap. Additionally, all swap positions that are subject to recourse

should be attributed to the guarantor, whether it is a U.S. person or a non-U.S. person, unless the guarantor,

the guaranteed entity, and its counterparty are Other Non-U.S. Persons.

\b\ An Other Non-U.S. Person would include all of its swap positions with counterparties that are U.S. persons,

U.S. Guaranteed Entities, or FCSs unless the swap is executed anonymously on a registered SEF, DCM, or FBOT

and cleared.

Table C--Cross-Border Application of the External Business Conduct Standards

[Table C should be read in conjunction with the text of the proposed rule]

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

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

Counterparty [rarr] U.S. Person

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

Not a foreign branch... Foreign branch of...... Non-U.S. person

Potential SD [darr] of an SD/MSP........... an SD/MSP..............

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

U.S. Person:

Not a Foreign Branch............. Apply.................. Apply.................. Apply.

Foreign Branch................... Apply.................. Do Not Apply *......... Do Not Apply.*

Non-U.S. Person...................... Apply.................. Do Not Apply *......... Do Not Apply.*

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

* An SD that uses personnel located in the United States to arrange, negotiate, or execute a swap transaction

(or a swap that is offered but not entered into) would nevertheless be subject to Commission regulations

23.410 (Prohibition on Fraud, Manipulation, and other Abusive Practices) and 23.433 (Fair Dealing).

List of Subjects

17 CFR Part 1

Counterparties, Cross-border, Major swap participants, Swap

dealers, Swaps.

17 CFR Part 23

Business conduct standards, Counterparties, Cross-border, Major

swap participants, Swap dealers, Swaps.

For the reasons discussed in the preamble, the Commodity Futures

Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0

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

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,

9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24

(2012).

0

2. Amend Sec. 1.3 as follows:

0

a. Add paragraphs (ggg)(7) and (nnn);

0

b. Reserve paragraphs (ooo)-(www) and (tttt)-(zzzz); and

0

c. Add paragraph (aaaaa).

The additions to read as follows:

Sec. 1.3 Definitions.

* * * * *

(ggg) * * *

(7) Cross-border application of de minimis registration threshold

calculation.

(i) For purposes of determining whether an entity engages in more

than a de minimis quantity of swap dealing activity under Sec.

1.3(ggg)(4)(i), a person shall include the following swaps (subject to

Sec. 1.3(ggg)(6)):

(A) If such person is a U.S. person, all swaps connected with the

dealing activity in which such person engages;

(B) If such person is a Foreign Consolidated Subsidiary, all swaps

connected with the dealing activity in which such person engages;

(C) If such person is a non-U.S. person that is not a Foreign

Consolidated Subsidiary, and its obligations under the relevant swap(s)

are guaranteed by a U.S. person, all swaps connected with the dealing

activity in which such person engages as to which its obligations under

the relevant swap(s) are guaranteed by a U.S. person (in addition to

any swaps that it is required to include pursuant to paragraph

(ggg)(7)(i)(D) of this section);

(D) If such person is a non-U.S. person that is not a Foreign

Consolidated Subsidiary, and its obligations under the relevant swap(s)

are not guaranteed by a U.S. person, all of the following swaps

connected with the dealing activity in which such person engages (in

addition to any swaps that it is required to include pursuant to

paragraph (ggg)(7)(i)(C) of this section) (unless the swap is entered

into anonymously on a registered designated contract market, registered

swap execution facility, or registered foreign board of trade and

cleared through a registered or exempt derivatives clearing

organization):

(1) Swaps with a counterparty that is a U.S. person;

(2) Swaps with a counterparty that is a Foreign Consolidated

Subsidiary; and

(3) Swaps with a counterparty that is a non-U.S. person that is not

a Foreign Consolidated Subsidiary and whose obligations under the

relevant swap(s) are guaranteed by a U.S. person.

(ii) [Reserved]

* * * * *

[[Page 71973]]

(nnn) Application of major swap participant tests in the cross-

border context.

(1) For purposes of determining a person's status as a major swap

participant as defined in section 1a(33) of the Act, 7 U.S.C. 1(a)(33)

and the rules and regulations thereunder, a person shall include the

following swap positions:

(i) If such person is a U.S. person, all swap positions that are

entered into by the person;

(ii) If such person is a Foreign Consolidated Subsidiary, all swap

positions that are entered into by the person; and

(iii) If such person is a non-U.S. person that is not a Foreign

Consolidated Subsidiary, and its obligations under the relevant swap(s)

are guaranteed by a U.S. person, all swap positions that are entered

into by the person as to which its obligations under the relevant

swap(s) are guaranteed by a U.S. person (in addition to any swap

positions that it is required to include pursuant to paragraph

(nnn)(1)(iv) of this section);

(iv) If such person is a non-U.S. person that is not a Foreign

Consolidated Subsidiary, and its obligations under the relevant swap(s)

are not guaranteed by a U.S. person, all of the following swap

positions that are entered into by the person (in addition to any swap

positions that it is required to include pursuant to paragraph

(nnn)(1)(iii) of this section) (unless the swap position is entered

into anonymously on a registered designated contract market, registered

swap execution facility, or registered foreign board of trade and

cleared through a registered or exempt derivatives clearing

organization):

(A) Swap positions with a counterparty that is a U.S. person;

(B) Swap positions with a counterparty that is a Foreign

Consolidated Subsidiary; and

(C) Swap positions with a counterparty that is a non-U.S. person

that is not a Foreign Consolidated Subsidiary and whose obligations

under the relevant swap are guaranteed by a U.S. person.

(2) [Reserved]

(ooo)-(www) [Reserved]

* * * * *

(tttt)-(zzzz) [Reserved]

(aaaaa) Cross-border definitions. The following terms, as used in

the rules and regulations in this chapter, with respect to the cross-

border application of the swap provisions of the Act (or of the rules

and regulations in this chapter prescribed or promulgated thereunder),

shall have the meanings hereby assigned to them, unless the specific

rule or regulation in this chapter otherwise provides or the context

otherwise requires:

(1) Foreign Consolidated Subsidiary means a non-U.S. person in

which an ultimate parent entity that is a U.S. person (``U.S. ultimate

parent entity'') has a controlling financial interest, in accordance

with U.S. generally accepted accounting principles, such that the U.S.

ultimate parent entity includes the non-U.S. person's operating

results, financial position and statement of cash flows in the U.S.

ultimate parent entity's consolidated financial statements, in

accordance with U.S. generally accepted accounting principles.

(2) Non-U.S. person means any person that is not a U.S. person.

(3) Ultimate parent entity means the parent entity in a

consolidated group in which none of the other entities in the

consolidated group has a controlling interest, in accordance with U.S.

generally accepted accounting principles.

(4) United States means the United States of America, its

territories and possessions, any State of the United States, and the

District of Columbia.

(5) U.S. person means:

(i) A natural person who is a resident of the United States;

(ii) An estate of a decedent who was a resident of the United

States at the time of death;

(iii) A corporation, partnership, limited liability company,

business or other trust, association, joint-stock company, fund or any

form of entity similar to any of the foregoing (other than an entity

described in paragraph (aaaaa)(5)(iv) or (v) of this section) (``legal

entity''), in each case that is organized or incorporated under the

laws of the United States or that has its principal place of business

in the United States, including any branch of the legal entity;

(iv) A pension plan for the employees, officers or principals of a

legal entity described in paragraph (aaaaa)(5)(iii) of this section,

unless the pension plan is primarily for foreign employees of such

entity;

(v) A trust governed by the laws of a state or other jurisdiction

in the United States, if a court within the United States is able to

exercise primary supervision over the administration of the trust;

(vi) A legal entity (other than a limited liability company,

limited liability partnership or similar entity where all of the owners

of the entity have limited liability) that is owned by one or more

persons described in paragraphs (aaaaa)(5)(i) through (v) of this

section and for which such person(s) bears unlimited responsibility for

the obligations and liabilities of the legal entity, including any

branch of the legal entity; or

(vii) An individual account or joint account (discretionary or not)

where the beneficial owner (or one of the beneficial owners in the case

of a joint account) is a person described in paragraphs (aaaaa)(5)(i)

through (vi) of this section.

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0

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

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,

9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),

Public Law 111-203, 124 Stat. 1641 (2010).

0

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

Sec. 23.452 Cross-border application.

(a) Except as provided in paragraph (b) of this section, anything

else to the contrary in this subpart notwithstanding, a swap dealer or

major swap participant that is a non-U.S. person or a foreign branch of

a U.S. person shall not be subject to the requirements of this subpart

with respect to any transaction in swaps (or any swap that is offered

but not entered into) where its counterparty is a foreign branch of a

U.S. person that is a swap dealer or major swap participant or is a

non-U.S. person.

(b) Notwithstanding paragraph (a) of this section, a swap dealer

that is a non-U.S. person or a foreign branch of a U.S. person shall be

subject to the requirements set forth in Sec. Sec. 23.410 and 23.433

if the swap dealer uses personnel located in the United States to

arrange, negotiate, or execute a transaction in swaps or a swap that is

offered but not entered into.

Issued in Washington, DC, on October 11, 2016, by the

Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

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

Federal Regulations.

[[Page 71974]]

Appendices to Cross-Border Application of the Registration Thresholds

and External Business Conduct Standards Applicable to Swap Dealers and

Major Swap Participants--Commission Voting Summary, Chairman's

Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

On this matter, Chairman Massad and Commissioners Bowen and

Giancarlo voted in the affirmative. No Commissioner voted in the

negative.

Appendix 2--Statement of Chairman Timothy G. Massad

I am pleased to support this proposal, which addresses several

important aspects of the cross-border application of our swaps

rules.

First, it seeks to enhance clarity and consistency in the

application of our rules by proposing to define certain key terms,

including the terms ``U.S. person'' and ``Foreign Consolidated

Subsidiary'' (FCS), consistent with how they are defined in the

Commission's cross-border margin rule.

Second, the proposal provides a clear standard for determining

whether a swap dealing transaction should be included in an entity's

calculation of whether it must register as a swap dealer. The

proposal states that for U.S. persons, as well as those non-U.S.

persons whose swaps are guaranteed by a U.S. person or that are a

financially consolidated subsidiary of a U.S. ultimate parent (FCS),

all swap dealing transactions must be included. All other persons

would include swap dealing transactions with counterparties that are

U.S. persons or FCSs, as well as swaps that have a U.S. guarantee,

unless the swap is executed anonymously on a registered platform and

cleared. The Proposed Rule provides a similar counting framework for

the major swap participant registration threshold.

We are also proposing the application of external business

conduct (EBC) standards for cross-border transactions, including

those transactions that are arranged, negotiated, or executed by

personnel in the U.S. Specifically, U.S. swap dealers would be

required to comply with applicable standards, with the exception of

their foreign branches. Non-U.S. swap dealers and foreign branches

of U.S. swap dealers would be required to comply with applicable EBC

standards for transactions with a U.S. counterparty--other than the

foreign branch of a U.S. entity. For all other transactions, these

dealers would not be subject to EBC standards, unless they use

personnel located in the United States to arrange, negotiate, or

execute such transactions. In that case, they would be required to

comply with those EBC standards prohibiting fraud and other abusive

conduct.

This aspect of our proposal follows up on a staff advisory and a

Commission request for comment relating to non-U.S. swap dealers

using personnel located in the United States to arrange, negotiate,

or execute swap transactions. We will address whether other

requirements should apply to such transactions at a later date.

This is just the latest in a number of steps we have taken to

address cross-border issues in swaps rules. We have harmonized

clearinghouse regulation through our accord with the European

Commission--as well as through our work to address recovery and

resolution internationally. We have given exemptions from

registration to several foreign clearinghouses, and granted

``foreign board of trade'' status to several exchanges. We are

actively working on harmonizing data reporting standards, and we are

looking at whether we can do the same regarding trading

requirements. And we harmonized requirements on margin for uncleared

swaps, adopted a cross-border approach to that rule, and recently

issued our first comparability determination for margin.

I wish to express my appreciation for the hard work of the CFTC

staff in putting together these important rules. I thank

Commissioner Bowen and Giancarlo for their support. And I encourage

market participants to give us their comments on this proposed rule.

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

The rule proposal we have before us is significant. It addresses

a number of important issues including: (i) The ``US Person''

definition; (ii) the treatment of foreign affiliates of US Persons

(``Foreign Consolidated Subsidiaries'' or ``FCS''); (iii) the

application of the de minimis threshold and business conduct

standards to non-US registered dealers; and (iv) the treatment of

swap trades that are ``arranged, negotiated, or executed'' in the US

by foreign-based dealers but booked elsewhere.

I intend to vote ``yes'' for this proposed rule. Although I do

not agree with every part of the proposal, I believe the proposal

and questions lay out the key issues to allow for meaningful

comments from the public. In that vein, I strongly urge market

participants and members of the general public to comment on this

rule proposal before the Commission makes a final decision. Its

importance to our overall effort to regulate the swaps market

requires us to take special care in considering how average

investors and interested citizens feel about this proposal before we

decide to finalize it.

I like many aspects of this rule. First, I am happy to see that

it largely adopts the US Person and FCS definitions from the cross

border margin rule. Whenever possible, we should try to make our

rules consistent with each other; so this is a move in the right

direction.

Second, it proposes that three important groups: US-based

dealers, non-US entities guaranteed by US persons, and FCS--each

count all of their swaps--those with US persons and non-US persons--

towards the de minimis threshold. It is important that we subject

non-US entities guaranteed by US persons, and FCS to this standard,

because their swap risks have a material effect on the related US

entity, and therefore, poses risks to our US financial system. Thus,

it makes sense that we count all of their dealing activity in

determining whether they engage in enough dealing to require

registration.

However, I especially invite robust comment on certain aspects

of the proposal:

Conduit Affiliates: I am concerned that the current proposal

does not capture the dealing activity of ``conduit affiliates.'' A

conduit affiliate is (i) a non-US affiliate that is consolidated

with a US entity (or where a non-US affiliate and a US entity are

consolidated) where there is no ultimate US parent and (ii) which

transfers, through back to back swaps, the risk of swaps it enters

into with non-US counterparties to that US person. They, in essence,

serve as conduits for US entities to engage in, and ultimately

assume the risk of, non-US swap activity. One would assume that

these conduit affiliates would be captured by our rules and

therefore would have to count this activity towards the de minimis

threshold. However, this is not the case. That US entity could

engage in billions of dollars of swap activity through its conduit

affiliate and avoid all of our swap requirements.\1\ This is a

market risk concern. This issue is clearly highlighted in the

questions, and I would be very interested in hearing comments about

whether we should close this loophole, and require that conduit

affiliates count all their trades, in which the risk is transferred

to a US dealer, towards the de minimis threshold.

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\1\ Also, if we find the jurisdiction where the transaction

occurs comparable, none of these swaps would have to be margined

either.

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Arranged, Negotiated, or Executed: While I am believe it is good

that the proposal requires that all US trading desk personnel of

non-US dealers are held to conduct standards, I am not certain that

we have gone far enough. Specifically, I encourage comment on

whether the dealing activity that occurs in the US with US personnel

from the trading desk of a non-US dealer should be counted towards

that non-US dealer's threshold, even though the transactions are

between two non-US counterparties and are booked outside the US. The

FCS definition rightly requires non-US consolidated subsidiaries

with a US parent to count all of their swap dealing activity towards

the threshold, regardless of where it is booked. Does it make sense

then that non-US dealers can use their US desks to engage in

billions of dollars of swap dealing and never have that counted

because the swaps are booked elsewhere? Are we, unnecessarily,

putting US dealers at a serious competitive disadvantage to other

dealers who are doing the very same thing sometimes just a few

offices away? \2\ Moreover, our fellow regulator, the Securities and

Exchange Commission has answered ``yes'' to that question: Under

their rules, non-US dealers must count security-based swap

transactions that are arranged, negotiated or executed by US

personnel toward their de minimis

[[Page 71975]]

threshold.\3\ Thus, if we choose not to do so, we would not be

harmonized with our fellow regulator, which governs an important

part of the swaps markets.

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\2\ ``Remarks of Chairman Gary Gensler at Swap Execution

Facility Conference: Bringing Transparency and Access to Markets''

(Nov. 18, 2013), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-152 (``[A] U.S. swap dealer on the 32nd

floor of a New York building and a foreign-based swap dealer on the

31st floor of the same building, have to follow the same rules when

arranging, negotiating or executing a swap. One elevator bank . . .

one set of rules.'').

\3\ 17 CFR 240.3a71-3(b)(1)(iii)(C). See also ``Security-Based

Swap Transactions Connected With a Non-U.S. Person's Dealing

Activity That Are Arranged, Negotiated, or Executed by Personnel

Located in a U.S. Branch or Office or in a U.S. Branch or Office of

an Agent; Security-Based Swap Dealer De Minimis Exception; Final

Rule,'' 81 FR 8598 (Feb. 19, 2016).

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For these reasons, and others, I would strongly encourage the

public and market participants, particularly our US dealers, to

comment on this proposal. Thank you.

Appendix 4--Statement of Commissioner J. Christopher Giancarlo

I support issuing today's proposed rule in order to hear

commenters' considered views, especially with respect to the

Commission's approach on the issue of U.S. personnel arranging,

negotiating or executing transactions for two non-U.S. persons.

I have been a critic of the Commission's 2013 over-expansive

cross-border interpretative guidance \4\ and its avoidance of the

rulemaking process to implement the sweeping policies contained

therein. I consider both of these failings as having been compounded

by the Division of Swap Dealer and Intermediary Oversight (DSIO)

Advisory No. 13-69 \5\ stating that CFTC transaction-level

requirements apply to swaps between a non-U.S. swap dealer and a

non-U.S. person if the swap is arranged, negotiated or executed by

personnel or agents of the non-U.S. swap dealer located in the U.S.

(ANE Transactions). Today the Commission is proposing a rulemaking

on the cross-border application of the registration thresholds and

external business conduct standards to swap dealers and major swap

participants and the ANE Transactions in DSIO Advisory No. 13-69. I

commend the Commission for at last putting the guidance and advisory

through the formal rulemaking process.

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\4\ Interpretive Guidance and Policy Statement Regarding

Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26,

2013), http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.

\5\ CFTC Staff Advisory No. 13-69 (Nov. 14, 2013), http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.

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The proposed rule provides that these ANE Transactions fall

within the scope of the Dodd-Frank Act and that it may be

appropriate to apply specific swap requirements to such transactions

to advance Dodd-Frank's regulatory objectives. Yet, it also

preliminarily determines that applying registration thresholds and

external business conduct standards to such ANE Transactions would

not further Dodd-Frank's regulatory objectives, except for certain

abusive practices and fair dealing rules with respect to external

business conduct standards. While this limited application seems

appropriate, I am interested to hear commenters' thoughts about the

Commission's approach and rationale before reaching a decision.

Since this proposal only addresses registration thresholds and

external business conduct standards, the Commission says it intends

to address the application of other Dodd-Frank swap requirements to

ANE Transactions in subsequent rulemakings as necessary and

appropriate. Until that happens, I urge the staff to commit to

extend no-action letter 16-64 \6\ in order to provide clarity that

those swap requirements do not apply to ANE Transactions. This will

provide the marketplace with certainty that all the swap

requirements not addressed in today's rulemaking will not apply to

ANE Transactions until the Commission takes further action.

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

[FR Doc. 2016-24905 Filed 10-17-16; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: October 18, 2016