```

[Federal Register Volume 78, Number 144 (Friday, July 26, 2013)]
[Rules and Regulations]
[Pages 45291-45374]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-17958]

[[Page 45291]]

Vol. 78

Friday,

No. 144

July 26, 2013

Part II

Commodity Futures Trading Commission

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17 CFR Chapter I

Interpretive Guidance and Policy Statement Regarding Compliance With 
Certain Swap Regulations; Rule

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

[[Page 45292]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN 3038-AD85

Interpretive Guidance and Policy Statement Regarding Compliance 
With Certain Swap Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Interpretive Guidance and Policy Statement.

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SUMMARY: On July 12, 2012, the Commodity Futures Trading Commission 
(``Commission'' or ``CFTC'') published for public comment its proposed 
interpretive guidance and policy statement (``Proposed Guidance'') 
regarding the cross-border application of the swaps provisions of the 
Commodity Exchange Act (``CEA''), as added by Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'' or ``Dodd-Frank''). On December 21, 2012, the Commission also 
proposed further guidance on certain aspects of the Proposed Guidance 
(``Further Proposed Guidance'').
    The Commission has determined to finalize the Proposed Guidance 
with certain modifications and clarifications to address public 
comments. The Commission's Interpretive Guidance and Policy Statement 
(``Guidance'') addresses the scope of the term ``U.S. person,'' the 
general framework for swap dealer and major swap participant 
registration determinations (including the aggregation requirement 
applicable to the de minimis calculation with respect to swap dealers), 
the treatment of swaps involving certain foreign branches of U.S. 
banks, the treatment of swaps involving a non-U.S. counterparty 
guaranteed by a U.S. person or ``affiliate conduit,'' and the 
categorization of the Dodd-Frank swaps provisions as ``Entity-Level 
Requirements'' or ``Transaction-Level Requirements.''

DATES: Effective Date: This Guidance will become effective July 26, 
2013.

FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, Division of 
Swap Dealer and Intermediary Oversight, (202) 418-5977, 
gbarnett@cftc.gov; Sarah E. Josephson, Director, Office of 
International Affairs, (202) 418-5684, sjosephson@cftc.gov; Mark 
Fajfar, Assistant General Counsel, Office of General Counsel, (202) 
418-6636, mfajfar@cftc.gov; Laura B. Badian, Counsel, Office of General 
Counsel, (202) 418-5969, lbadian@cftc.gov; Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. The Dodd-Frank Wall Street Reform and Consumer Protection Act
    B. The Proposed Guidance and Further Proposed Guidance
II. Scope of This Guidance
III. Interpretation of Section 2(i)
    A. Comments
    B. Statutory Analysis
    C. Principles of International Comity
IV. Guidance
    A. Interpretation of the Term ``U.S. Person''
    1. Proposed Interpretation
    2. Comments
    a. Phase-In Interpretation
    b. Comments on Particular Prongs of the Proposed Interpretation 
of the Term ``U.S. Person''
    c. Commenters' Proposed Alternatives
    d. Due Diligence
    e. Non-U.S. Person That Is Affiliated, Guaranteed, or Controlled 
by U.S. Person
    f. Foreign Branch of U.S. Person
    g. Regulation S
    h. Other Clarifications
    3. Commission Guidance
    a. Due Diligence
    b. Foreign Branch of U.S. Person
    c. Regulation S
    d. Other Clarifications
    4. Summary
    B. Registration
    1. Proposed Guidance
    2. Comments
    3. Commission Guidance
    a. Registration Thresholds for U.S. Persons and Non-U.S. 
Persons, Including Those Guaranteed by U.S. Persons
    b. Aggregation
    c. Exclusion of Certain Swaps by Non-U.S. Persons From the Swap 
Dealer De Minimis Threshold
    d. Exclusion of Certain Swaps by Non-U.S. Persons From the MSP 
Calculation
    e. Exclusion of Certain Swaps Executed Anonymously on a SEF, 
DCM, or Foreign Board of Trade (``FBOT'') and Cleared
    f. MSP-Parent Guarantees
    4. Summary
    C. Interpretation of the Term ``Foreign Branch;'' When a Swap 
Should Be Considered To Be With the Foreign Branch of a U.S. Person 
That Is a Swap Dealer or MSP
    1. Interpretation of the Term ``Foreign Branch'' and Treatment 
of Foreign Branches
    2. Comments
    3. Commission Guidance
    a. Scope of the Term ``Foreign Branch''
    b. Commission Consideration of Whether a Swap Is With a Foreign 
Branch of a U.S. Bank
    D. Description of the Entity-Level and Transaction-Level 
Requirements
    1. Description of the Entity-Level Requirements
    a. First Category of Entity-Level Requirements
    i. Capital Adequacy
    ii. Chief Compliance Officer
    iii. Risk Management
    iv. Swap Data Recordkeeping (Except Certain Aspects of Swap Data 
Recordkeeping Relating to Complaints and Sales Materials)
    b. Second Category of Entity-Level Requirements
    i. SDR Reporting
    ii. Swap Data Recordkeeping Relating to Complaints and Marketing 
and Sales Materials
    iii. Physical Commodity Large Swaps Trader Reporting (Large 
Trader Reporting)
    2. Description of the Transaction-Level Requirements
    a. Category A: Risk Mitigation and Transparency
    i. Required Clearing and Swap Processing
    ii. Margin and Segregation Requirements for Uncleared Swaps
    iii. Trade Execution
    iv. Swap Trading Relationship Documentation
    v. Portfolio Reconciliation and Compression
    vi. Real-Time Public Reporting
    vii. Trade Confirmation
    viii. Daily Trading Records
    b. Category B: External Business Conduct Standards
    E. Categorization of Entity-Level and Transaction-Level 
Requirements
    1. Categorization Under the Proposed Guidance
    2. Comments
    a. Reporting and Trade-Execution Requirements
    b. Swap Trading Relationship Documentation, Portfolio 
Reconciliation and Compression, Daily Trading Records and External 
Business Conduct Standards
    c. Internal Conflicts of Interest Requirement
    d. Position Limits and Anti-Manipulation Rules
    3. Commission Guidance
    a. Entity-Level Requirements
    i. The First Category--Capital Adequacy, Chief Compliance 
Officer, Risk Management, and Swap Data Recordkeeping (Except for 
Certain Recordkeeping Requirements)
    ii. The Second Category--SDR Reporting, Certain Swap Data 
Recordkeeping Requirements and Large Trader Reporting
    b. Transaction-Level Requirements
    i. The Category A Transaction-Level Requirements
    ii. The Category B Transaction-Level Requirements (External 
Business Conduct Standards)
    F. Substituted Compliance
    1. Proposed Guidance
    2. Comments
    3. Overview of the Substituted Compliance Regime
    4. Process for Comparability Determinations
    5. Conflicts Arising Under Privacy and Blocking Laws
    6. Clearing

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    a. Clearing Venues
    b. Foreign End-Users
    G. Application of the Entity-Level and Transaction-Level 
Requirements To Swap Dealers and MSPs
    1. Comments
    2. Commission Guidance
    3. Application of the Entity-Level Requirements To Swap Dealers 
and MSPs the Commission's policy on
    a. To U.S. Swap Dealers and MSPs
    b. To Non-U.S. Swap Dealers and MSPs
    4. Application of the ``Category A'' Transaction-Level 
Requirements To Swap Dealers and MSPs
    a. Swaps With U.S. Swap Dealers and MSPs
    b. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs
    c. Swaps With a Non-U.S. Person Guaranteed by a U.S. Person
    i. Proposed Guidance
    ii. Comments
    iii. Commission Guidance
    d. Swaps With a Non-U.S. Person That Is an Affiliate Conduit
    i. Proposed Guidance
    ii. Comments
    iii. Commission Guidance
    5. Application of the ``Category B'' Transaction-Level 
Requirements To Swap Dealers and MSPs
    a. Swaps With U.S. Swap Dealers and U.S. MSPs
    b. Swaps With Foreign Branches of a U.S. Bank That Is a Swap 
Dealer or MSP
    c. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs
    H. Application of the CEA's Swap Provisions and Commission 
Regulations to Market Participants That Are Not Registered as a Swap 
Dealer or MSP
    1. Swaps Between Non-Registrants Where One or More of the Non-
Registrants Is a U.S. Person
    2. Swaps between Non-Registrants That Are Both Non-U.S. Persons
    a. Large Trader Reporting
    b. Swaps Where Each of the Counterparties Is Either a Guaranteed 
or Conduit Affiliate
    c. Swaps Where Neither or Only One of the Parties Is a 
Guaranteed or Conduit Affiliate
V. Appendix A--The Entity-Level Requirements
    A. First Category of Entity-Level Requirements
    1. Capital Adequacy
    2. Chief Compliance Officer
    3. Risk Management
    i. Swap Data Recordkeeping (Except Certain Aspects of Swap Data 
Recordkeeping Relating to Complaints and Sales Materials)
    B. Second Category of Entity-Level Requirements
    1. SDR Reporting
    2. Swap Data Recordkeeping Relating to Complaints and Marketing 
and Sales Materials
    3. Physical Commodity Large Swaps Trader Reporting (Large Trader 
Reporting)
VI. Appendix B--The Transaction-Level Requirements
    A. Category A: Risk Mitigation and Transparency
    1. Required Clearing and Swap Processing
    2. Margin and Segregation Requirements for Uncleared Swaps
    3. Trade Execution
    4. Swap Trading Relationship Documentation
    5. Portfolio Reconciliation and Compression
    6. Real-Time Public Reporting
    7. Trade Confirmation
    8. Daily Trading Records
    B. Category B: External Business Conduct Standards
VII. Appendix C--Application of the Entity-Level Requirements to 
Swap Dealers and MSPs*
VIII. Appendix D--Application of the Category A Transaction-Level 
Requirements to Swap Dealers and MSPs*
IX. Appendix E--Application of the Category B Transaction-Level 
Requirements to Swap Dealers and MSPs*
X. Appendix F--Application of Certain Entity-Level and Transaction-
Level Requirements to Non-Swap Dealer/Non-MSP Market Participants*

I. Introduction

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

    On July 21, 2010, President Obama signed the Dodd-Frank Act,\1\ 
Title VII of which amended the CEA to establish a new regulatory 
framework for swaps. The legislation was enacted to reduce systemic 
risk (including risk to the U.S. financial system created by 
interconnections in the swaps market), increase transparency, and 
promote market integrity within the financial system by, among other 
things: (1) Providing for the registration and comprehensive regulation 
of swap dealers \2\ and major swap participants (each, an ``MSP''); (2) 
imposing clearing and trade execution requirements on standardized 
derivatives products; (3) creating rigorous recordkeeping and data 
reporting regimes with respect to swaps, including real-time public 
reporting; and (4) enhancing the Commission's rulemaking and 
enforcement authorities over all registered entities, intermediaries, 
and swap counterparties subject to the Commission's oversight.
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \2\ For purposes of this Guidance, the term ``swap dealer'' 
means any swap dealer registered with the Commission. Similarly, the 
term ``MSP'' means any MSP registered with the Commission.
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    Section 722(d) of the Dodd-Frank Act amended the CEA by adding 
section 2(i),\3\ which provides that the swaps provisions of the CEA 
(including any CEA rules or regulations) apply to cross-border 
activities when certain conditions are met, namely, when such 
activities have a ``direct and significant connection with activities 
in, or effect on, commerce of the United States'' or when they 
contravene Commission rules or regulations as are necessary or 
appropriate to prevent evasion of the swaps provisions of the CEA 
enacted under Title VII of the Dodd-Frank Act.\4\
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    \3\ 7 U.S.C. 2(i).
    \4\ Id. Section 2(i) of the CEA states that the provisions of 
the Act relating to swaps that were enacted by the Wall Street 
Transparency and Accountability Act of 2010 (including any rule 
prescribed or regulation promulgated under that Act), shall not 
apply to activities outside the United States unless those 
activities have a direct and significant connection with activities 
in, or effect on, commerce of the United States; or contravene such 
rules or regulations as the Commission may prescribe or promulgate 
as are necessary or appropriate to prevent the evasion of any 
provision of this Act that was enacted by the Wall Street 
Transparency and Accountability Act of 2010.
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    The potential for cross-border activities to have a substantial 
impact on the U.S. financial system was apparent in the fall of 2008, 
when a series of large financial institutional failures threatened to 
freeze foreign and domestic credit markets. In September 2008, for 
example, U.S.-regulated insurance company American International Group 
(``AIG'') nearly failed as a result of risk incurred by the London swap 
trading operations of its subsidiary AIG Financial Products 
(``AIGFP'').\5\ Enormous losses on credit default swaps entered into by 
AIGFP and guaranteed by AIG led to a credit downgrade for AIG, 
triggering massive collateral calls and an acute liquidity crisis for 
both entities. AIG only avoided default through more than $112.5

[[Page 45294]]

billion in support from the Federal Reserve Bank of New York and nearly 
$70 billion from the U.S. Department of the Treasury and the Federal 
Reserve.
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    \5\ See, e.g., Congressional Oversight Panel, June Oversight 
Report, The AIG Rescue, Its Impact on Markets, and the Government's 
Exit Strategy, (Jun. 10, 2010), available at http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT-111JPRT56698.pdf (``AIG 
Report''); Office of the Special Inspector General for the Troubled 
Asset Relief Program, Factors Affecting Efforts to Limit Payments to 
AIG Counterparties (Nov. 17, 2009), available at http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf. AIGFP was a Delaware 
corporation based in Connecticut that was an active participant in 
the credit default swap (``CDS'') market in the years leading up to 
the crisis. See id. at 23. AIGFP's CDS activities benefited from 
credit support provided by another Delaware corporation, American 
International Group, Inc., AIGFP's highly-rated parent company. 
Although both AIG and AIGFP were incorporated and headquartered in 
the U.S., much of AIGFP's CDS business was conducted through its 
London office and involved non-U.S. counterparties and credit 
exposures. Id. at 18. See also Office of the Special Inspector 
General for the Troubled Asset Relief Program, Factors Affecting 
Efforts to Limit Payments to AIG Counterparties, at 20 (Nov. 17, 
2009) (listing AIGFP's CDS counterparties, including a variety of 
U.S. and foreign financial institutions), available at: http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf.
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    A global, complex, and highly integrated business model also played 
a role in, and complicated, the bankruptcy of former U.S.-based 
multinational corporation Lehman Brothers Holding Inc. (``LBHI'') in 
September 2008. In addition to guaranteeing certain swaps for its 
subsidiary Lehman Brothers International Europe (``LBIE''), estimated 
at nearly 130,000 OTC derivatives contracts at the time LBIE was placed 
into administration on September 15, 2008, LBHI and its global 
affiliates relied on each other for many of their financial and 
operational services, including treasury and depository functions, 
custodial arrangements, trading facilitation, and information 
management.\6\ The complexity of the financial and operational 
relationships of LBHI and its domestic and international affiliates, 
including with respect to risk associated with swaps, provides an 
example of how risks can be transferred across multinational affiliated 
entities, in some cases in non-transparent ways that make it difficult 
for market participants and regulators to fully assess those risks.
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    \6\ ``The global nature of the Lehman business with highly 
integrated, trading and non-trading relationships across the group 
led to a complex series of inter-company positions being outstanding 
at the date of Administration. There are over 300 debtor and 
creditor balances between LBIE and its affiliates representing 
$10.5B of receivables and $11.0B of payables as of September 15 
2008.'' See Lehman Brothers International (Europe) in 
Administration, Joint Administrators' Progress Report for the Period 
15 September 2008 to 14 March 2009 (Apr. 14, 2009) (``Lehman 
Brothers Progress Report''), available at http://www.pwc.co.uk/en_uk/uk/assets/pdf/lbie-progress-report-140409.pdf.
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    Even in the absence of an explicit business arrangement or 
guarantee, U.S. companies may for reputational or other reasons choose, 
or feel compelled, to assume the cost of risks incurred by foreign 
affiliates. In 2007, U.S.-based global investment firm Bear Stearns 
decided to extend loans secured by assets of uncertain value to two 
Cayman Islands-based hedge funds it sponsored after they suffered 
substantial losses due to their investments in subprime mortgages, even 
though Bear Stearns was not legally obligated to support those 
funds.\7\ Shortly thereafter, the funds, filed for bankruptcy 
protection.\8\
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    \7\ See In re Bear Sterns High-Grade Structured Credit 
Strategies Master Funds, Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007), 
available at http://www.nysb.uscourts.gov/opinions/brl/158971_25_opinion.pdf.
    \8\ See id.
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    Although the Dodd-Frank Act was enacted in the wake of the 2008 
financial crisis, the impact of cross-border activities on the health 
and stability of U.S. companies and financial markets is not new. A 
decade before the AIG and Lehman collapses, a Cayman Islands hedge fund 
managed by Connecticut-based Long-Term Capital Management L.P. 
(``LTCM'') nearly failed.\9\ The hedge fund had a swap book of more 
than $1 trillion notional and only $4 billion in capital. The hedge 
fund avoided collapse only after the Federal Reserve Bank of New York 
intervened and supervised a financial rescue and reorganization by 
creditors of the fund.\10\ While the fund was a Cayman Island 
partnership, its default would have caused significant market 
disruption in the United States.\11\
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    \9\ See The President's Working Group on Financial Markets, 
Hedge Funds, Leverage, and the Lessons of Long-Term Capital 
Management (April 1999), available at http://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf.
    \10\ See id. at 13.
    \11\ See id. at 17.
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    More recently, J.P. Morgan Chase & Co. (``J.P. Morgan''), the 
largest U.S. bank, disclosed a multi-billion dollar trading loss 
stemming in part from positions in a credit-related swap portfolio 
managed through its London Chief Investment Office.\12\ The 
relationship between the New York and London offices of J.P. Morgan 
that were involved in the credit swaps that were the source of this 
loss demonstrates the close integration among the various branches, 
agencies, offices, subsidiaries and affiliates of U.S. financial 
institutions, which may be located both inside and outside the United 
States. Despite their geographic expanse, the branches, agencies, 
offices, subsidiaries and affiliates of large U.S. financial 
institutions in many cases effectively operate as a single 
business.\13\
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    \12\ See Sen. Permanent Subcomm. on Investigations, 113th Cong., 
Majority and Minority Staff Report, JPMorgan Chase Whale Trades: A 
Case History of Derivatives Risks and Abuses (March 15, 2013), 
available at http://www.levin.senate.gov/download/?id=bfb5cd04-41dc-4e2d-a5e1-ab2b81abfaa8-2560k. See also Dodd-Frank Statement (``[A]ny 
suggestion that U.S. financial entities learned enough from AIG's 
devastating misjudgments are [sic] undercut by the multi-billion 
dollar loss incurred by a bank generally considered to be among the 
most careful--J.P.Morgan Chase--in its London derivative 
trading.'').
    \13\ See Letter from Sen. Carl Levin, Chairman of the Permanent 
Subcommittee on Investigations at 4 (Apr. 23, 2013) (``Letter from 
Sen. Levin''), available at http://www.levin.senate.gov/download/levin_comment_letter_cftc_042313. See also Cross-Border 
Application of Certain Swaps Provisions of the Commodity Exchange 
Act, 77 FR 41214, 41216 (Jul. 12, 2012) (``Proposed Guidance'').
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    Efforts to regulate the swaps market in the wake of the 2008 
financial crisis are underway not only in the United States, but also 
abroad. In 2009, leaders of the Group of 20 (``G20'')--whose membership 
includes the European Union (``EU''), the United States, and 18 other 
countries--agreed that: (i) OTC derivatives contracts should be 
reported to trade repositories; (ii) all standardized OTC derivatives 
contracts should be cleared through central counterparties and traded 
on exchanges or electronic trading platforms, where appropriate, by the 
end of 2012; and (iii) non-centrally cleared contracts should be 
subject to higher capital requirements. In line with the G20 
commitment, much progress has been made to coordinate and harmonize 
international reform efforts, but the pace of reform varies among 
jurisdictions and disparities in regulations remain due to differences 
in cultures, legal and political traditions, and financial systems.\14\
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    \14\ Legislatures and regulators in a number of foreign 
jurisdictions are undertaking significant regulatory reforms over 
the swaps market and its participants. See CFTC and SEC, Joint 
Report on International Swap Regulation Required by Section 719(c) 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act at 
13 (Jan. 31, 2012), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/dfstudy_isr_013112.pdf.
    For example, the European Commission released a public 
consultation on revising the Markets in Financial Instruments 
Directive (``MiFID'') in December 2010. See ``European Commission 
Public Consultation: Review of the Markets in Financial Instruments 
Directive'' (Dec. 8, 2010), available at http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf.
    In October 2011, the European Commission released two public 
consultations, one to revise MiFID and the other for creating a new 
regulation entitled the Markets in Financial Instruments Regulation 
(``MiFIR''). See European Commission, Proposal for a Directive of 
the European Parliament and of the Council on markets in financial 
instruments repealing Directive 2004/39/EC of the European 
Parliament and of the Council, COM (2011) 656 final (Oct. 20, 2011), 
available at http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_656_en.pdf; European Commission, Proposal for 
a Regulation of the European Parliament and of the Council on 
markets in financial instruments and amending regulation [EMIR] on 
OTC derivatives, central counterparties and trade repositories, COM 
(2011) 652 final (Oct. 20, 2011), available at http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_652_en.pdf.
    As of March 15, 2013, the majority of the regulatory technical 
standards (i.e., rulemakings) of the European Market Infrastructure 
Regulation (``EMIR'') entered into force. The EMIR and the related 
regulatory technical standards generally regard requirements for 
clearinghouses, clearing, data repositories, regulatory reporting, 
and uncleared OTC transactions. Certain technical standards under 
EMIR have yet to be developed and completed. These standards regard 
margin and capital for uncleared transactions and contracts that 
have a ``direct, substantial and foreseeable effect within the 
[European] Union.'' See EMIR Article 11(14)(e).
    The Japanese legislature passed the Amendment to the Financial 
Instruments and Exchange Act (``FIEA'') in May 2010. See Japan 
Financial Services Agency, Outline of the bill for amendment of the 
Financial Instruments and Exchange Act (May 2010), available at 
http://www.fsa.go.jp/en/refer/diet/174/01.pdf.

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[[Page 45295]]

    The failures of Lehman Brothers and the Bear Stearns hedge funds, 
and the near failures of LTCM's hedge fund and AIG (which required 
intervention by the government and Federal Reserve), and their 
collateral effects on the broader economy and U.S. commerce,\15\ 
provide examples of how risks that a large financial institution takes 
abroad in swap transactions or otherwise can result in or contribute to 
substantial losses to U.S. persons and threaten the financial stability 
of the entire U.S. financial system. These failures and near failures 
revealed the vulnerability of the U.S. financial system and economy to 
systemic risk resulting from, among other things, poor risk management 
practices of certain financial firms, the lack of supervisory oversight 
for certain financial institutions as a whole, and the overall 
interconnectedness of the global swap business.\16\ These failures and 
near failures demonstrate the need for and potential implications of 
cross-border swaps regulation.
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    \15\ On October 3, 2008, President Bush signed the Emergency 
Economic Stabilization Act of 2008, which was principally designed 
to allow the U.S. Treasury and other government agencies to take 
action to restore liquidity and stability to the U.S. financial 
system (e.g., the Troubled Asset Relief Program--also known as 
TARP--under which the U.S. Treasury was authorized to purchase up to 
$700 billion of troubled assets that weighed down the balance sheets 
of U.S. financial institutions). See Public Law 110-343, 122 Stat. 
3765 (2008).
    \16\ See Financial Crisis Inquiry Commission, The Financial 
Crisis Inquiry Report: Final Report of the National Commission on 
the Causes of the Financial and Economic Crisis in the United States 
at xvi-xxvii (Jan. 21, 2011), available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
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B. The Proposed Guidance and Further Proposed Guidance

    To address the scope of the cross-border application of the Dodd-
Frank Act, the Commission published the Proposed Guidance on July 12, 
2012, setting forth its proposed interpretation of the manner in which 
it intends that section 2(i) of the CEA would apply Title VII's swaps 
provisions to cross-border activities.\17\ In view of the complex legal 
and policy issues involved, the Commission published the Proposed 
Guidance to solicit comments from all interested persons and to further 
inform the Commission's deliberations. Specifically, the Proposed 
Guidance addressed the general manner in which the Commission proposed 
to consider: (1) When a non-U.S. person's swap dealing activities would 
justify registration as a ``swap dealer,'' \18\ as further defined in a 
joint release adopted by the Commission and the Securities and Exchange 
Commission (``SEC''); \19\ (2) when a non-U.S. person's swaps positions 
would justify registration as a ``major swap participant,'' \20\ as 
further defined in the Final Entities Rules; and (3) how foreign 
branches, agencies, affiliates, and subsidiaries of U.S. swap dealers 
generally should be treated. The Proposed Guidance also generally 
described the policy and procedural framework under which the 
Commission would consider compliance with a comparable and 
comprehensive regulatory requirement of a foreign jurisdiction as a 
reasonable substitute for compliance with the attendant requirements of 
the CEA. Last, the Proposed Guidance set forth the manner in which the 
Commission proposed to interpret section 2(i) of the CEA as it would 
generally apply to clearing, trading, and certain reporting 
requirements under the Dodd-Frank Act with respect to swaps between 
counterparties that are not swap dealers or MSPs.
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    \17\ See Proposed Guidance, 77 FR 41214. Simultaneously with 
publication of the Proposed Guidance, the Commission published a 
proposed exemptive order providing time-limited relief from certain 
cross-border applications of the swaps provisions of Title VII and 
the Commission's regulations. See Proposed Exemptive Order Regarding 
Compliance with Certain Swap Regulations, 77 FR 41110 (July 12, 
2012) (``Proposed Order''). The Commission approved a final 
exemptive order on December 21, 2012, which reflected certain 
modifications and clarifications to the Proposed Order to address 
public comments. See Final Exemptive Order Regarding Compliance with 
Certain Swap Regulations, 78 FR 858 (Jan. 7, 2013) (``January 
Order'').
    \18\ See 7 U.S.C. 1a(49) (defining the term ``swap dealer'').
    \19\ See Further Definition of `Swap Dealer,' `Security-Based 
Swap Dealer,' `Major Swap Participant,' `Major Security-Based Swap 
Participant' and `Eligible Contract Participant,' 77 FR 30596 (May 
23, 2012) (``Final Entities Rules'').
    \20\ See 7 U.S.C. 1a(33) (defining the term ``major swap 
participant'').
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    The public comment period on the Proposed Guidance ended on August 
27, 2012. The Commission received approximately 290 comment letters on 
the Proposed Guidance from a variety of interested parties, including 
major U.S. and non-U.S. banks and financial institutions that conduct 
global swap business, trade associations, clearing organizations, law 
firms (representing international banks and dealers), public interest 
organizations, and foreign regulators.\21\
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    \21\ The Commission also received approximately 26 comment 
letters on the Proposed Order. Because the Proposed Guidance and 
Proposed Order were substantially interrelated, many commenters 
submitted a single comment letter addressing both proposals. The 
comment letters submitted in response to the Proposed Order and 
Proposed Guidance may be found on the Commission's Web site at 
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234.
    Approximately 200 individuals submitted substantially identical 
letters to the effect that oversight of the $700 trillion global 
derivatives market is the key to meaningful reform. The letters 
state that because the market is inherently global, risks can be 
transferred around the world with the touch of a button. Further, 
according to these letters, loopholes in the Proposed Guidance could 
allow foreign affiliates of Wall Street banks to escape regulation. 
Lastly, the letters request that the Proposed Guidance be 
strengthened to ensure that the Dodd-Frank derivatives protections 
will directly apply to the full global activities of all important 
participants in the U.S. derivatives markets.
---------------------------------------------------------------------------

    The Further Proposed Guidance, issued on December 21, 2012,\22\ 
reflected the Commission's determination that further consideration of 
public comments regarding the Commission's proposed interpretation of 
the term ``U.S. person,'' and its proposed guidance regarding 
aggregation for purposes of swap dealer registration, would be helpful 
to the Commission in issuing final interpretive guidance. In order to 
facilitate the Commission's further consideration of these issues, in 
the Further Proposed Guidance the Commission sought public comment on: 
(1) An alternative interpretation of the aggregation requirement for 
swap dealer registration in Commission regulation 1.3(ggg)(4); \23\ (2) 
an alternative ``prong'' of the proposed interpretation of the term 
``U.S. person'' in the Proposed Guidance which relates to U.S. owners 
that are responsible for the liabilities of a non-U.S. entity; and (3) 
a separate alternative prong of the proposed interpretation of the term 
``U.S. person'' which relates to commodity pools and funds with 
majority-U.S. ownership.
---------------------------------------------------------------------------

    \22\ See Further Proposed Guidance Regarding Compliance With 
Certain Swap Regulations, 78 FR 909, 913 (Jan. 7, 2013) (``Further 
Proposed Guidance'').
    \23\ 17 CFR 1.3(ggg)(4). The Commission's regulations are 
codified at 17 CFR Ch. I.
---------------------------------------------------------------------------

    The public comment period on the Further Proposed Guidance ended on 
February 6, 2013. The Commission received approximately 24 comment 
letters on the Further Proposed Guidance from interested parties 
including major U.S. and non-U.S. banks and financial institutions, 
trade associations, law firms (representing international banks and 
dealers), public interest organizations, and foreign regulators.\24\ 
With respect to both the Proposed Guidance and the Further Proposed 
Guidance and throughout the process of considering this Guidance,

[[Page 45296]]

the Commission (and Commission's staff) held numerous meetings and 
discussions with various market participants, domestic bank regulators, 
and other interested parties.\25\
---------------------------------------------------------------------------

    \24\ The comment letters submitted in response to the Further 
Proposed Guidance are available on the Commission's Web site at 
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1315.
    \25\ The records of these meetings and communications are 
available on the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/Cross-BorderApplicationofSwapsProvisions/index.htm.
---------------------------------------------------------------------------

    Further, the Commission's staff closely consulted with the staff of 
the SEC in an effort to increase understanding of each other's 
regulatory approaches and to harmonize the cross-border approaches of 
the two agencies to the greatest extent possible, consistent with their 
respective statutory mandates.\26\ The Commission is cognizant of the 
value of harmonization by the Commission and the SEC of their cross-
border policies to the fullest extent possible. The staffs of the 
Commission and the SEC have participated in numerous meetings to work 
jointly toward this objective. The Commission expects that this 
consultative process will continue as each agency works towards 
implementing its respective cross-border policy.
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    \26\ Sections 722 and 772 of the Dodd-Frank Act establish the 
scope of the Commission's and SEC's jurisdiction over cross-border 
swaps and security-based swaps, respectively. CEA section 2(i), 
which was added by section 722 of the Dodd-Frank Act, is discussed 
above. Section 30(c) of the Securities Exchange Act of 1934 
(``Exchange Act''), which was added by section 772 of the Dodd-Frank 
Act, provides that the swaps provisions of the Exchange Act added by 
Title VII do not apply ``to any person insofar as such person 
transacts a business in security-based swaps without the 
jurisdiction of the United States, unless such person transacts such 
business in contravention of such rules and regulations as the [SEC] 
may prescribe as necessary or appropriate to prevent the evasion of 
any provision [added by Title VII of the Dodd-Frank Act] . . . '' 
See 15 U.S.C. 78dd(c).
---------------------------------------------------------------------------

    The SEC recently published for public comment proposed rules and 
interpretive guidance to address the application of the provisions of 
the Exchange Act, added by Subtitle B of Title VII of the Dodd-Frank 
Act, that relate to cross-border security-based swap activities.\27\ 
The Commission has considered the SEC's cross-border proposal and has 
taken it into account in the process of considering this Guidance. The 
SEC's proposal acknowledges the statutory provisions and regulatory 
precedents that are relevant to security-based swaps by virtue of the 
fact that security-based swaps are securities.\28\ For example, the 
SEC's proposed rules regarding registration of security-based swap 
dealers build from the SEC's traditional approach to the registration 
of brokers and dealers under the Exchange Act.\29\ The SEC's proposal 
also notes the SEC's belief that Congress intended the territorial 
application of Title VII to entities and transactions in the security-
based swaps market to follow similar principles to those applicable to 
the securities market under the Exchange Act.\30\ The Commission 
believes that one factor in harmonization of the two agencies' 
approaches is that Congress did not express a similar intent that the 
application of Title VII to entities and transactions in the swaps 
market should follow principles that preceded the Dodd-Frank Act, but 
rather mandated a new regulatory regime for swaps.\31\
---------------------------------------------------------------------------

    \27\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to 
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, 78 FR 30968 (May 23, 2013) (``SEC Cross-
Border Proposal'').
    \28\ The SEC Cross-Border Proposal notes that the definition of 
``security'' in the Exchange Act includes security-based swaps, 
which raises issues related to the statutory definitions of 
``broker'' and ``dealer,'' the statutory exchange registration 
requirement, and other statutory requirements related to securities. 
Id. at 30972.
    \29\ Id. at 30990.
    \30\ Id. at 30983-84.
    \31\ One commenter expressed the view that the SEC's proposed 
rule is entirely inapplicable to the CFTC's statutory mandate to 
regulate the risks from cross border derivatives trading and related 
activities. This commenter stated that the SEC was given very 
limited statutory authority in the Dodd-Frank Act related solely to 
anti-evasion, in contrast to the Commission, which was given the 
same anti-evasion authority plus an affirmative statutory mandate to 
regulate cross-border derivative activities that ``have a direct an 
significant connection with activities in, or effect on, commerce of 
the United States.'' This commenter further stated that a broader 
statutory mandate makes sense because the Commission ``has decades 
of expertise and jurisdiction for virtually the entire derivatives 
markets,'' whereas the SEC has ``jurisdiction for no more than 3.5 
percent of those markets.'' See Better Markets Inc. (``Better 
Markets'') (Jun. 24, 2013) at 2.
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    The Commission also recognizes the critical role of international 
cooperation and coordination in the regulation of derivatives in the 
highly interconnected global market, where risks are transmitted across 
national borders and market participants operate in multiple 
jurisdictions. Close cooperative relationships and coordination with 
other jurisdictions take on even greater importance given that, prior 
to the recent reforms, the swaps market has largely operated without 
regulatory oversight, and given that many jurisdictions are in 
differing stages of implementing their regulatory reform. To this end, 
the Commission's staff has actively engaged in discussions with their 
foreign counterparts in an effort to better understand and develop a 
more harmonized cross-border regulatory framework. The Commission 
expects that these discussions will continue as it implements the 
cross-border interpretive guidance and as other jurisdictions develop 
their own regulatory approaches to derivatives.\32\
---------------------------------------------------------------------------

    \32\ This is one aspect of the Commission's on-going bilateral 
and multilateral efforts to promote international coordination of 
regulatory reform. The Commission's staff is engaged in 
consultations with Europe, Japan, Hong Kong, Singapore, Switzerland, 
Canada, Australia, Brazil, and Mexico on derivatives reform. In 
addition, the Commission's staff is participating in several 
standard-setting initiatives, co-chairs the IOSCO Task Force on OTC 
Derivatives, and has created an informal working group of 
derivatives regulators to discuss implementation of derivatives 
reform. See also Joint Press Statement of Leaders on Operating 
Principles and Areas of Exploration in the Regulation of the Cross-
border OTC Derivatives Market, published as CFTC Press Release 6439-
12, Dec. 4, 2012, available at http://www.cftc.gov/PressRoom/PressReleases/pr6439-12; OTC Derivatives Regulators Group Report to 
the G-20 Meeting of Finance Ministers and Central Bank Governors of 
18-19 April 2013, linked to CFTC Press Release ODRG Report to G-20, 
Apr. 16, 2013, available at http://www.cftc.gov/PressRoom/PressReleases/odrg_reporttog20release.
---------------------------------------------------------------------------

    In general, many of the financial institutions and law firms 
(representing financial institutions) that commented on the Proposed 
Guidance and Further Proposed Guidance stated that the Commission's 
proposed interpretation of the extraterritorial application of Title 
VII of the Dodd-Frank Act was overly broad and unnecessarily complex 
and unclear.\33\ Among the issues they raised were concerns relating to 
the interpretation of the term ``U.S. person,'' aggregation for 
purposes of swap dealer registration, lack of parity in the treatment 
of foreign branches and affiliates of U.S. persons, the approach to 
guaranteed non-U.S. affiliates and non-U.S. affiliate ``conduits,'' and 
the ``comparability'' assessment for purposes of substituted 
compliance. The commenters also urged the Commission to allow 
sufficient time after the publication of the final interpretive 
guidance for market participants to understand and implement any new 
policies of the Commission, before the Commission begins to apply such 
policies.
---------------------------------------------------------------------------

    \33\ See, e.g., Securities Industry and Financial Markets 
Association (``SIFMA'') (Aug. 27, 2012); Institute of International 
Bankers (``IIB'') (Aug. 27, 2012); Sullivan & Cromwell, on behalf of 
Bank of America Corp., Citi, and J.P. Morgan (``Sullivan & 
Cromwell'') (Aug. 13, 2012); Bank of America Merrill Lynch, Barclays 
Capital, and PNB Paribas et al., submitted by Cleary Gottlieb Steen 
& Hamilton LLP (``Cleary'') (Aug. 16, 2012).
---------------------------------------------------------------------------

    Other commenters disagreed that the Commission's proposed 
interpretation of its extraterritorial authority was overly broad, 
instead arguing that the Commission had not gone far enough.\34\

[[Page 45297]]

For example, AFR stated that the Proposed Guidance ``takes some real 
positive steps in affirming CFTC jurisdiction over a variety of cross-
border transactions,'' but ``falls well short of closing potential 
cross-border loopholes.'' \35\ Senator Levin wrote that although 
``members of the financial industry have filed comment letters urging 
the CFTC to weaken its proposals . . . American families and businesses 
deserve strong protections against the risks posed by derivatives 
trading, including from cross-border swaps, and . . . the Proposed 
Guidance should be strengthened rather than weakened.'' \36\
---------------------------------------------------------------------------

    \34\ See, e.g., Americans for Financial Reform, submitted by 
Marcus Stanley (``AFR'') (Aug. 27, 2012); Better Markets (Aug. 16, 
2012); Michael Greenberger, Francis King Cary School of Law, 
University of Maryland (``Greenberger'') (Aug. 13, 2012).
    \35\ AFR (Aug. 27, 2012) at 2.
    \36\ Letter from Sen. Levin at 3.
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II. Scope of This Guidance

    After carefully reviewing and considering the comments on the 
Proposed Guidance and the Further Proposed Guidance, the Commission has 
determined to finalize the Proposed Guidance. This Guidance sets forth 
the general policy of the Commission in interpreting how section 2(i) 
of the CEA provides for the application of the swaps provisions of the 
CEA and Commission regulations to cross-border activities when such 
activities have a ``direct and significant connection with activities 
in, or effect on, commerce of the United States'' or when they 
contravene Commission rulemaking.\37\ Unlike a binding rule adopted by 
the Commission, which would state with precision when particular 
requirements do and do not apply to particular situations, this 
Guidance is a statement of the Commission's general policy regarding 
cross-border swap activities \38\ and allows for flexibility in 
application to various situations, including consideration of all 
relevant facts and circumstances that are not explicitly discussed in 
the guidance. The Commission believes that the statement of its policy 
in this Guidance will assist market participants in understanding how 
the Commission intends that the registration and certain other 
substantive requirements of the Dodd-Frank Act generally would apply to 
their cross-border activities.\39\
---------------------------------------------------------------------------

    \37\ See 7 U.S.C. 2(i).
    \38\ The Commission notes that part 23 of its regulations 
defines ``swaps activities'' to mean, ``with respect to a 
[registered swap dealer or MSP], such registrant's activities 
related to swaps and any product used to hedge such swaps, 
including, but not limited to, futures, options, other swaps or 
security-based swaps, debt or equity securities, foreign currency, 
physical commodities, and other derivatives.'' See 17 CFR 23.200(j); 
23.600(a)(7).
    \39\ In this regard, the Commission notes that it would consider 
codifying certain aspects of the Guidance in future rulemakings, as 
appropriate; but at this time, this guidance is intended to provide 
an efficient and flexible vehicle to communicate the agency's 
current views on how the Dodd-Frank swap requirements would apply on 
a cross-border basis.
---------------------------------------------------------------------------

    This release is intended to inform the public of the Commission's 
views on how it ordinarily expects to apply existing law and 
regulations in the cross-border context. In determining the application 
of the CEA and Commission regulations to particular entities and 
transactions in cross-border contexts, the Commission will apply the 
relevant statutory provisions, including CEA section 2(i), and 
regulations to the particular facts and circumstances. Accordingly, the 
public has the ability to present facts and circumstances that would 
inform the application of the substantive policy positions set forth in 
this release.
    The Commission understands the complex and dynamic nature of the 
global swap market and the need to take an adaptable approach to cross-
border issues, particularly as it continues to work closely with 
foreign regulators to address potential conflicts with respect to each 
country's respective regulatory regime. Although the Commission is 
issuing the Guidance at this time, the Commission will continue to 
follow developments as foreign regulatory regimes and the global swaps 
market continue to evolve. In this regard, the Commission will 
periodically review this Guidance in light of future developments.
    This release is organized into four main sections. Section III sets 
forth the Commission's interpretation of CEA section 2(i) and the 
general manner in which it intends to apply the swaps provisions of the 
Dodd-Frank Act to activities outside the United States. Section IV 
addresses the public comments and Commission Guidance on: (A) The 
Commission's interpretation of the term ``U.S. person''; (B) swap 
dealer and MSP registration; (C) the scope of the term ``foreign 
branch'' of a U.S. bank and consideration of when a swap should be 
considered to be with the foreign branch of a U.S. bank; (D) a 
description of the entity-level requirements and transaction-level 
requirements under Title VII and the Commission's related regulations 
(``Entity-Level Requirements'' and ``Transaction-Level Requirements,'' 
respectively); (E) the categorization of Title VII swaps provisions 
(and Commission regulations) as either Entity-Level or Transaction-
Level Requirements; (F) substituted compliance, including an overview 
of the principles guiding substituted compliance determinations for 
Entity-Level and Transaction-Level Requirements, a general description 
of the process for comparability determinations, and a discussion of 
conflicts arising under foreign privacy and blocking laws; (G) 
application of the Entity-Level Requirements and ``Category A'' and 
``Category B'' Transaction-Level Requirements to swap dealers and MSPs; 
and (H) application of the CEA's swaps provisions and Commission 
regulations where both parties to a swap are neither swap dealers nor 
MSPs.\40\
---------------------------------------------------------------------------

    \40\ Certain provisions of Title VII apply regardless of whether 
a swap dealer or MSP is a counterparty to the swap. These provisions 
include the clearing requirement (7 U.S.C. 2(h)(1)), the trade 
execution requirement (2(h)(8)), reporting to SDRs (2(a)(13)(G)), 
and real-time public reporting (2(a)(13)).
---------------------------------------------------------------------------

    In addition, this Guidance includes the following Appendices, which 
should be read in conjunction with (and are qualified by) the remainder 
of the Guidance: (1) Appendix A--The Entity-Level Requirements; (2) 
Appendix B--The Transaction-Level Requirements: (3) Appendix C--
Application of the Entity-Level Requirements; (4) Appendix D--
Application of the Category A Transaction-Level Requirements to Swap 
Dealers and MSPs; (5) Appendix E--Application of the Category B 
Transaction-Level Requirements to Swap Dealers and MSPs; and (6) 
Appendix F--Application of Certain Entity-Level and Transaction-Level 
Requirements to Non-Swap Dealer/Non-MSP Market Participants.

III. Interpretation of Section 2(i)

    CEA section 2(i) provides that the swaps provisions of Title VII 
shall not apply to activities outside the United States unless those 
activities--
     Have a direct and significant connection with activities 
in, or effect on, commerce of the United States; or
     contravene such rules or regulations as the Commission may 
prescribe or promulgate as are necessary or appropriate to prevent the 
evasion of any provision of [the CEA] that was enacted by the [Dodd-
Frank Act].
    In the Proposed Guidance, the Commission noted that section 2(i) 
provides the Commission express authority over swap activities outside 
the United States when certain conditions are met, but it does not 
require the Commission to extend its reach to the outer bounds of that 
authorization. Rather, in exercising its authority with respect to swap 
activities outside the United States, the Commission will be guided by 
international comity principles.

[[Page 45298]]

A. Comments

    Some commenters addressing the interpretation of section 2(i) in 
the Proposed Guidance stated that the activities of the non-U.S. 
branches and subsidiaries of U.S. persons outside the United States 
with respect to swaps with non-U.S. persons should not be subject to 
Dodd-Frank requirements. Sullivan & Cromwell asserted that the non-U.S. 
branches and subsidiaries generally do not enter into swaps with U.S. 
persons and therefore the jurisdictional nexus with the United States 
that would justify application of the Dodd-Frank Act is absent.\41\ 
Sullivan & Cromwell stated that there are legitimate business reasons 
for U.S. persons to establish non-U.S. branches and subsidiaries, so 
doing so should not be interpreted to mean that the U.S. person is 
using the branch to evade application of the Dodd-Frank Act.\42\ 
Sullivan & Cromwell argued that the Dodd-Frank Act's application 
outside the United States should be narrowly construed because it 
includes only specific exceptions to the judicial precedent that U.S. 
laws should be interpreted to apply outside the United States only when 
such application is clearly expressed in the law.\43\ Similarly, SIFMA 
argued that the Commission's proposal asserted a broad jurisdictional 
scope that is inconsistent with the congressional intent expressed in 
section 2(i) of the CEA.\44\
---------------------------------------------------------------------------

    \41\ Sullivan & Cromwell (Aug. 13, 2012) at 6-7.
    \42\ Id. at 8.
    \43\ Id. at 9.
    \44\ SIFMA (Aug. 27, 2012) at 2.
---------------------------------------------------------------------------

    Sullivan & Cromwell cited past instances where the Commission has 
not applied its regulations to firms that deal solely with foreign 
customers and do not conduct business in or from the United States or 
to the non-U.S. subsidiaries of entities registered with the 
Commission.\45\ Sullivan & Cromwell and SIFMA stated that the 
application of Dodd-Frank requirements to non-U.S. swap activities 
would be contrary to principles of international comity and cooperation 
with foreign regulators, would lead to less efficient use of regulatory 
resources, and would subject the affected entities to potentially 
conflicting regulations and increased costs of compliance.\46\ SIFMA 
asserted that the jurisdictional scope in the Commission's proposal is 
not necessary to prevent evasive activity, because the Commission 
already has broad authority to address evasion.\47\ Sullivan & Cromwell 
and SIFMA also argued that imposing the Dodd-Frank requirements on non-
U.S. branches and subsidiaries of U.S. persons would put those entities 
at a disadvantage compared to competitors in foreign jurisdictions, 
while other federal laws and banking regulations (such as the Edge Act 
\48\) indicate that Congress wishes to promote such entities' ability 
to compete in foreign jurisdictions.\49\
---------------------------------------------------------------------------

    \45\ Sullivan & Cromwell (Aug. 13, 2012) at 10.
    \46\ Id. at 11; SIFMA (Aug. 27, 2012) at 3 and A55.
    \47\ SIFMA (Aug. 27, 2012) at 3.
    \48\ 12 U.S.C. 611-31.
    \49\ Id.; Sullivan & Cromwell (Aug. 13, 2012) at 12-14.
---------------------------------------------------------------------------

    By contrast, Senator Levin stated that the J.P. Morgan ``whale 
trades'' provide an example of how major U.S. financial institutions 
have integrated their U.S. and non-U.S. swap activities, and therefore 
supports the application of the swaps provisions of Title VII and 
Commission regulations to the non-U.S. offices of U.S. financial 
institutions.\50\ He explained that a Senate investigation found that 
J.P. Morgan personnel in London executed the ``whale trades'' using 
money from the U.S. bank's excess deposits, and while traders in London 
conducted the trades, the trades were attributed to a U.S. affiliate of 
J.P. Morgan through back-to-back arrangements between the London branch 
and New York branch.\51\ He also stated the whale trades were entered 
into with counterparties including major U.S. banks and J.P. Morgan's 
own investment bank.\52\ Senator Levin concluded that because of the 
integration of U.S. and non-U.S. offices and affiliates of U.S. 
financial institutions, it is critical that the non-U.S. offices and 
affiliates of U.S. financial institutions follow the same Dodd-Frank 
requirements as are applicable to the U.S. financial institutions.\53\
---------------------------------------------------------------------------

    \50\ Letter from Sen. Levin at 4.
    \51\ Id.
    \52\ Id.
    \53\ Id. at 7. See also Dodd-Frank Statement (``An exemption for 
foreign derivatives activity by the [ ] affiliates of American 
institutions is a free pass no matter where that activity is 
located.'').
---------------------------------------------------------------------------

B. Statutory Analysis

    In interpreting the phrase ``direct and significant,'' the 
Commission has examined the plain language of the statutory provision, 
similar language in other statutes with cross-border application, and 
the legislative history of section 2(i).
    The statutory language in new CEA section 2(i) is structured 
similarly to the statutory language in the Foreign Trade Antitrust 
Improvements Act of 1982 (the ``FTAIA''),\54\ which provides the 
standard for the cross-border application of the Sherman Antitrust 
Act.\55\ The FTAIA, like CEA section 2(i), excludes certain non-U.S. 
commercial transactions from the reach of U.S. law. It provides that 
the antitrust provisions of the Sherman Act ``shall not apply to [anti-
competitive] conduct involving trade or commerce . . . with foreign 
nations.'' \56\ However, like paragraph (1) of CEA section 2(i), the 
FTAIA also creates exceptions to the general exclusionary rule and thus 
brings back within antitrust coverage any conduct that: (1) has a 
``direct, substantial, and reasonably foreseeable effect'' on U.S. 
commerce; \57\ and (2) ``such effect gives rise to a [Sherman Act] 
claim.'' \58\ In F. Hoffman-LaRoche, Ltd. v. Empagran S.A., the Supreme 
Court stated that ``this technical language initially lays down a 
general rule placing all (nonimport) activity involving foreign 
commerce outside the Sherman Act's reach. It then brings such conduct 
back within the Sherman Act's reach provided that the conduct both (1) 
sufficiently affects American commerce, i.e., it has a `direct, 
substantial, and reasonably foreseeable effect' on American domestic, 
import, or (certain) export commerce, and (2) has an effect of a kind 
that antitrust law considers harmful, i.e., the `effect' must `giv[e] 
rise to a [Sherman Act] claim.' '' \59\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 6a.
    \55\ 15 U.S.C. 1-7.
    \56\ 15 U.S.C. 6a.
    \57\ 6a(1).
    \58\ 6a(2).
    \59\ 542 U.S. 155, 162 (2004) (emphasis in original).
---------------------------------------------------------------------------

    It is appropriate, therefore, to read section 2(i) of the CEA as a 
clear expression of congressional intent that the swaps provisions of 
Title VII of the Dodd-Frank Act apply to activities beyond the borders 
of the United States when certain circumstances are present. These 
circumstances include, pursuant to paragraph (1) of section 2(i), when 
activities outside the United States meet the statutory test of having 
a ``direct and significant connection with activities in, or effect 
on,'' U.S. commerce.
    An examination of the language in the FTAIA, however, does not 
provide an unambiguous roadmap for the Commission in interpreting 
section 2(i) of the CEA. There are both similarities, and a number of 
significant differences, between the language in CEA section 2(i) and 
the language in the FTAIA. Further, the Supreme Court has not provided 
definitive guidance as to the meaning of the ``direct, substantial, and 
reasonably foreseeable'' test in the FTAIA, and the lower courts have 
interpreted the individual terms in the FTAIA differently.
    Although a number of courts have interpreted the various terms in 
the

[[Page 45299]]

FTAIA, only the term ``direct'' appears in both CEA section 2(i) and 
the FTAIA. Relying upon the Supreme Court's definition of the term 
``direct'' in the Foreign Sovereign Immunities Act (``FSIA''),\60\ the 
U.S. Court of Appeals for the Ninth Circuit construed the term 
``direct'' in the FTAIA as requiring a ``relationship of logical 
causation,'' \61\ such that ``an effect is `direct' if it follows as an 
immediate consequence of the defendant's activity.'' \62\ However, in 
an en banc decision, the U.S. Court of Appeals for the Seventh Circuit 
held that ``the Ninth Circuit jumped too quickly on the assumption that 
the FSIA and the FTAIA use the word `direct' in the same way.'' \63\ 
After examining the text of the FTAIA as well as its history and 
purpose, the Seventh Circuit found persuasive the ``other school of 
thought [that] has been articulated by the Department of Justice's 
Antitrust Division, which takes the position that, for FTAIA purposes, 
the term `direct' means only `a reasonably proximate causal nexus.' '' 
\64\ The Seventh Circuit rejected interpretations of the term 
``direct'' that included any requirement that the consequences be 
foreseeable, substantial, or immediate.\65\
---------------------------------------------------------------------------

    \60\ See 28 U.S.C. 1605(a)(2).
    \61\ United States v. LSL Biotechnologies, 379 F.3d 672, 693 
(9th Cir. 2004). ``As a threshold matter, many courts have debated 
whether the FTAIA established a new jurisdictional standard or 
merely codified the standard applied in [United States v. Aluminum 
Co. of Am., 148 F.2d 416 (2d Cir. 1945)] and its progeny. Several 
courts have raised this question without answering it. The Supreme 
Court did as much in [Harford Fire Ins. Co. v. California, 509 U.S. 
764 (1993)].'' Id. at 678.
    \62\ Id. at 692-3, quoting Republic of Argentina v. Weltover, 
Inc., 504 U.S. 607, 618 (1992) (providing that, pursuant to the 
FSIA, 28 U.S.C. 1605(a)(2), immunity does not extend to commercial 
conduct outside the United States that ``causes a direct effect in 
the United States'').
    \63\ Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 857 (7th 
Cir. 2012) (en banc).
    \64\ Id.
    \65\ Id. at 856-57.
---------------------------------------------------------------------------

    Other terms in the FTAIA differ from the terms used in section 2(i) 
of the CEA. First, the FTAIA test explicitly requires that the effect 
on U.S. commerce be a ``reasonably foreseeable'' result of the 
conduct.\66\ Section 2(i) of the CEA, by contrast, does not provide 
that the effect on U.S. commerce must be foreseeable. Second, whereas 
the FTAIA solely relies on the ``effects'' on U.S. commerce to 
determine cross-border application of the Sherman Act, section 2(i) of 
the CEA refers to both ``effect'' and ``connection.'' ``The FTAIA says 
that the Sherman Act applies to foreign `conduct' with a certain kind 
of harmful domestic effect.'' \67\ Section 2(i), by contrast, applies 
more broadly--not only to particular instances of conduct that have an 
effect on U.S. commerce, but also to activities that have a direct and 
significant ``connection with activities in'' U.S. commerce. Unlike the 
FTAIA, section 2(i) applies the swaps provisions of the CEA to 
activities outside the United States that have the requisite connection 
with activities in U.S. commerce, regardless of whether a ``harmful 
domestic effect'' has occurred.
---------------------------------------------------------------------------

    \66\ See, e.g., Animal Sciences Products. v. China Minmetals 
Corp., 654 F.3d 462, 471 (3d Cir. 2011) (``[T]he FTAIA's `reasonably 
foreseeable' language imposes an objective standard: the requisite 
`direct' and `substantial' effect must have been `foreseeable' to an 
objectively reasonable person.'').
    \67\ Hoffman-LaRoche, 452 U.S. at 173.
---------------------------------------------------------------------------

    As the foregoing textual analysis indicates, Congress crafted 
section 2(i) differently from its analogue in the antitrust laws. 
Congress delineated the cross-border scope of the Sherman Act in 
section 6a of the FTAIA as applying to conduct that has a ``direct'' 
and ``substantial'' and ``reasonably foreseeable'' ``effect'' on U.S. 
commerce. In section 2(i), on the other hand, Congress did not include 
a requirement that the effects or connections of the activities outside 
the United States be ``reasonably foreseeable'' for the Dodd-Frank 
swaps provisions to apply. Further, Congress included language in 
section 2(i) to apply the Dodd-Frank swaps provisions in circumstances 
in which there is a direct and significant connection with activities 
in U.S. commerce, regardless of whether there is an effect on U.S. 
commerce. The different words that Congress used in paragraph (1) of 
section 2(i), as compared to its closest statutory analogue in section 
6a of the FTAIA, inform the Commission in construing the boundaries of 
its cross-border authority over swap activities under the CEA.\68\ 
Accordingly, the Commission believes it is appropriate to interpret 
section 2(i) such that it applies to activities outside the United 
States in circumstances in addition to those that would be reached 
under the FTAIA standard.
---------------------------------------------------------------------------

    \68\ The provision that ultimately became section 722(d) of the 
Dodd-Frank Act was added during consideration of the legislation in 
the House of Representatives. See 155 Cong. Rec. H14685 (Dec. 10, 
2009). The version of what became Title VII that was reported by the 
House Agriculture Committee and the House Financial Services 
Committee did not include any provision addressing cross-border 
application. See 155 Cong. Rec. H14549 (Dec. 10, 2009). The 
Commission finds it significant that, in adding the cross-border 
provision before final passage, the House did so in terms that, as 
discussed in text, were different from, and broader than, the terms 
used in the analogous provision of the FTAIA.
---------------------------------------------------------------------------

    As further described in the Proposed Guidance, one of the principal 
rationales for the enactment of the Dodd-Frank derivatives reforms was 
the need for a comprehensive scheme of regulation to prevent systemic 
risk in the U.S. financial system.\69\ More particularly, a primary 
purpose of Title VII of the Dodd-Frank Act is to address risk to the 
U.S. financial system created by interconnections in the swaps 
market.\70\ Title VII of the Dodd-Frank Act gave the Commission new and 
broad authority to regulate the swaps market to address and mitigate 
risks arising from swap activities that in the future could cause a 
financial crisis.
---------------------------------------------------------------------------

    \69\ See Proposed Guidance, 77 FR at 41215-41216.
    \70\ Cf. 156 Cong. Rec. S5818 (July 14, 2010) (statement of Sen. 
Lincoln) (``In 2008, our Nation's economy was on the brink of 
collapse. America was being held captive by a financial system that 
was so interconnected, so large, and so irresponsible that our 
economy and our way of life were about to be destroyed.''), 
available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/pdf/CREC-2010-07-14.pdf; 156 Cong. Rec. S5888 (July 15, 2010) (statement of 
Sen. Shaheen) (``We need to put in place reforms to stop Wall Street 
firms from growing so big and so interconnected that they can 
threaten our entire economy.''), available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf; 156 Cong. 
Rec. S5905 (July 15, 2010) (statement of Sen. Stabenow) (``For too 
long the over-the-counter derivatives market has been unregulated, 
transferring risk between firms and creating a web of fragility in a 
system where entities became too interconnected to fail.''), 
available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf.
---------------------------------------------------------------------------

    In global markets, the source of such risk is not confined to 
activities within U.S. borders. Due to the interconnectedness between 
firms, traders, and markets in the U.S. and abroad, a firm's failure, 
or trading losses overseas, can quickly spill over to the United States 
and affect activities in U.S. commerce and the stability of the U.S. 
financial system. Accordingly, Congress did not limit the application 
of the Dodd-Frank Act to activities within the United States. Rather, 
in recognition of the global nature of the swaps market, and the fact 
that risks to the U.S. financial system may arise from activities 
outside the United States, as well as from activities within the United 
States, Congress explicitly provided for cross-border application of 
Title VII to activities outside the United States that pose risks to 
the U.S. financial system.\71\

[[Page 45300]]

Therefore, upon consideration of the statutory language, as well as the 
prophylactic purpose of the CEA and the amendments made to it by Title 
VII, the Commission construes section 2(i) to apply the swaps 
provisions of the CEA to activities outside the United States that have 
either: (1) A direct and significant effect on U.S. commerce; or, in 
the alternative, (2) a direct and significant connection with 
activities in U.S. commerce, and through such connection present the 
type of risks to the U.S. financial system and markets that Title VII 
directed the Commission to address. The Commission interprets section 
2(i) in a manner consistent with the overall goals of the Dodd-Frank 
Act to reduce risks to the U.S. financial system and avoid future 
financial crises.\72\
---------------------------------------------------------------------------

    \71\ The legislative history of the Dodd-Frank Act shows that in 
the fall of 2009, neither the Over-the-Counter Derivatives Markets 
Act of 2009, H.R. 3795, 111th Cong. (1st Sess. 2009), reported by 
the Financial Services Committee chaired by Rep. Barney Frank, nor 
the Derivatives Markets Transparency and Accountability Act of 2009, 
H.R. 977, 111th Cong. (1st Sess. 2009), reported by the Agriculture 
Committee chaired by Rep. Collin Peterson, included a general 
territoriality limitation that would have restricted Commission 
regulation of transactions between two foreign persons located 
outside of the United States. During the House Financial Services 
Committee markup on October 14, 2009, Rep. Spencer Bachus offered an 
amendment that would have restricted the jurisdiction of the 
Commission over swaps between non-U.S. resident persons transacted 
without the use of the mails or any other means or instrumentality 
of interstate commerce. Chairman Frank opposed the amendment, noting 
that there may well be cases where non-U.S. residents are engaging 
in transactions that have an effect on the United States and that 
are insufficiently regulated internationally and that he would not 
want to prevent U.S. regulators from stepping in. Chairman Frank 
expressed his commitment to work with Rep. Bachus going forward, and 
Rep. Bachus withdrew the amendment. See H. Fin. Serv. Comm. Mark Up 
on Discussion Draft of the Over-the-Counter Derivatives Markets Act 
of 2009, 111th Cong., 1st Sess. (Oct. 14, 2009) (statements of Rep. 
Bachus and Rep. Frank), available at http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=231922.
    \72\ The Commission also notes that the Supreme Court has 
indicated that the FTAIA may be interpreted more broadly when the 
government is seeking to protect the public from anticompetitive 
conduct than when a private plaintiff brings suit. See Hoffman-
LaRoche, 452 U.S. at 170 (``A Government plaintiff, unlike a private 
plaintiff, must seek to obtain the relief necessary to protect the 
public from further anticompetitive conduct and to redress 
anticompetitive harm. And a Government plaintiff has legal authority 
broad enough to allow it to carry out its mission.'').
---------------------------------------------------------------------------

    Consistent with this overall interpretation, the Commission 
believes that the term ``direct'' in CEA section 2(i) should be 
interpreted in a manner consistent with the position of the Department 
of Justice Antitrust Division with respect to the meaning of the same 
term in the FTAIA, and as recently adopted by the Seventh Circuit.\73\ 
The Commission therefore interprets the term ``direct'' in section 2(i) 
so as to require ``a reasonably proximate causal nexus'' and not to 
require foreseeability, substantiality, or immediacy.\74\
---------------------------------------------------------------------------

    \73\ See note 63 and accompanying text, supra.
    \74\ The Seventh Circuit's rationale for rejecting the Ninth 
Circuit's interpretation applies with at least equal, if not 
greater, force to the interpretation of the word ``direct'' in 
section 2(i) of the CEA. As discussed in note 68 and the 
accompanying text, supra, Congress expressly declined to import the 
FTAIA standards of substantiality, immediacy, or foreseeability into 
section 2(i). The Commission believes that the terms included in 
section 2(i) that are the same as the terms in the FTAIA should be 
interpreted in a manner consistent with Congress's determination to 
not import other, different standards from the FTAIA into section 
2(i). Where Congress has included in a new statute one term but not 
another from an existing statute, it is reasonable to conclude that 
Congress did not want the other existing standards included in the 
new statute.
---------------------------------------------------------------------------

    Consistent with the purpose of Title VII to protect the U.S. 
financial system against the build-up of systemic risks, the Commission 
does not read section 2(i) so as to require a transaction-by-
transaction determination that a specific swap outside the United 
States has a ``direct and significant connection with activities in, or 
effect on, commerce of the United States'' in order to apply the swaps 
provisions of the CEA to such transactions. Rather, it is the 
connection of swap activities, viewed as a class or in the aggregate, 
to activities in commerce of the United States that must be assessed to 
determine whether application of the CEA swaps provisions is 
warranted.\75\
---------------------------------------------------------------------------

    \75\ The Commission believes this interpretation is supported by 
Congress's use of the plural term ``activities'' in CEA section 
2(i), rather than the singular term ``activity.'' The Commission 
believes it is reasonable to interpret the use of the plural term 
``activities'' in section 2(i) to require not that each particular 
activity have the requisite connection with U.S. commerce, but 
rather that such activities in the aggregate, or a class of 
activity, have the requisite nexus with U.S. commerce. This 
interpretation is consistent with the overall objectives of Title 
VII, as described above. Further, the Commission believes that a 
swap-by-swap approach to jurisdiction would be ``too complex to 
prove workable.'' See Hoffman-LaRoche, 542 U.S. at 168.
---------------------------------------------------------------------------

    This conclusion is bolstered by similar interpretations of other 
federal statutes regulating interstate commerce. Recently, the Supreme 
Court reaffirmed a similar ``aggregate effects'' approach in Nat'l 
Fed'n of Indep. Bus. v. Sebelius.\76\ In that case, the Court phrased 
the holding in the seminal ``aggregate effects'' decision, Wickard v. 
Filburn,\77\ in this way: ``[The farmer's] decision, when considered in 
the aggregate along with similar decisions of others, would have had a 
substantial effect on the interstate market for wheat.'' \78\ In 
another recent case, Gonzales v Raich,\79\ the Court adopted similar 
reasoning to uphold the application of the Controlled Substance Act 
\80\ to prohibit the intrastate use of medical marijuana for medicinal 
purposes. In Raich, the Court held that Congress could regulate purely 
intrastate activity if the failure to do so would ``leave a gaping 
hole'' in the federal regulatory structure. These cases support the 
Commission's cross-border authority over swap activities that as a 
class, or in the aggregate, have a direct and significant connection 
with activities in, or effect on, U.S. commerce--whether or not an 
individual swap may satisfy the statutory standard.\81\
---------------------------------------------------------------------------

    \76\ 132 S. Ct. 2566 (2012).
    \77\ 317 U.S. 111 (1942).
    \78\ 132 S. Ct. 2566, 2588 (2012). At issue in Wickard was the 
regulation of a farmer's production and use of wheat even though the 
wheat was ``not intended in any part for commerce but wholly for 
consumption on the farm.'' 317 U.S. at 118. The Supreme Court upheld 
the application of the regulation, stating that although the 
farmer's ``own contribution to the demand for wheat may be trivial 
by itself,'' the federal regulation could be applied when his 
contribution ``taken together with that of many others similarly 
situated, is far from trivial.'' Id. at 128-29. The Court also 
stated it had ``no doubt that Congress may properly have considered 
that wheat consumed on the farm where grown, if wholly outside the 
scheme of regulation, would have a substantial effect in defeating 
and obstructing its purpose . . . .'' Id.
    \79\ 545 U.S. 1 (2005).
    \80\ 21 U.S.C. 801 et seq.
    \81\ In Sebelius, the Court stated, ``Where the class of 
activities is regulated, and that class is within the reach of 
federal power, the courts have no power to excise, as trivial, 
individual instances of the class.'' 132 S. Ct. at 2587 (quoting 
Perez v. United States, 402 U.S. 146, 154 (1971).
---------------------------------------------------------------------------

C. Principles of International Comity

    The case law in the antitrust area also teaches the importance of 
recognizing the laws and interests of other countries in applying an 
ambiguous federal statute across borders; in such circumstances, 
principles of international comity counsel courts and agencies to act 
reasonably in exercising jurisdiction with respect to activity that 
takes place elsewhere. In Hoffman-LaRoche, an antitrust class action 
lawsuit alleging an international price-fixing conspiracy by foreign 
and domestic vitamin manufacturers and distributors, the Supreme Court 
held that ambiguous statutes should be construed to ``avoid 
unreasonable interference with the sovereign authority of other 
nations.'' \82\ The Court explained that this rule of construction 
``reflects customary principles of international law'' and ``helps the 
potentially conflicting laws of different nations work together in 
harmony--a harmony particularly needed in today's highly interdependent 
commercial world.'' \83\
---------------------------------------------------------------------------

    \82\ 542 U.S. at 164.
    \83\ Id. at 165.
---------------------------------------------------------------------------

    In determining whether the exercise of jurisdiction by one nation 
over activities in another nation would be reasonable, the courts and 
agencies are guided by the Restatement (Third) of Foreign Relations Law 
of the United States (the ``Restatement''). Drawing upon traditional 
principles of international law, the Restatement provides bases of 
jurisdiction to prescribe law, as well as limitations on the exercise 
of jurisdiction. In addition

[[Page 45301]]

to recognizing territoriality and nationality as bases for 
jurisdiction, the Restatement expressly provides that a country has 
jurisdiction to prescribe law with respect to ``conduct outside its 
territory that has or is intended to have substantial effect within its 
territory.'' \84\
---------------------------------------------------------------------------

    \84\ See Restatement sec. 402(1)(c). A comment to the 
Restatement also identifies jurisdiction with respect to activity 
outside the country, but having or intended to have substantial 
effect within the country's territory, as an aspect of jurisdiction 
based on territoriality. See Restatement sec. 402 cmt. d.
---------------------------------------------------------------------------

    The Restatement also provides that even where a country has a basis 
for jurisdiction, it should not prescribe law with respect to a person 
or activity in another country when the exercise of such jurisdiction 
is unreasonable.\85\ The reasonableness of such an exercise of 
jurisdiction, in turn, is to be determined by evaluating all relevant 
factors, including certain specifically enumerated factors where 
appropriate:
---------------------------------------------------------------------------

    \85\ Restatement sec. 403(1).

    (a) the link of the activity to the territory of the regulating 
state, i.e., the extent to which the activity takes place within the 
territory, or has substantial, direct, and foreseeable effect upon 
or in the territory;
    (b) the connections, such as nationality, residence, or economic 
activity, between the regulating state and the persons principally 
responsible for the activity to be regulated, or between that state 
and those whom the regulation is designed to protect;
    (c) the character of the activity to be regulated, the 
importance of regulation to the regulating state, the extent to 
which other states regulate such activities, and the degree to which 
the desirability of such regulation is generally accepted;
    (d) the existence of justified expectations that might be 
protected or hurt by the regulation;
    (e) the importance of the regulation to the international 
political, legal, or economic system;
    (f) the extent to which the regulation is consistent with the 
traditions of the international system;
    (g) the extent to which another state may have an interest in 
regulating the activity; and
    (h) the likelihood of conflict with regulation by another 
state.\86\
---------------------------------------------------------------------------

    \86\ Restatement sec. 403(2).

    Notably, the Restatement does not preclude concurrent regulation by 
multiple jurisdictions. However, where concurrent jurisdiction by two 
or more jurisdictions creates conflict, the Restatement recommends that 
each country evaluate both its interests in exercising jurisdiction and 
those of the other jurisdiction, and where possible, to consult with 
each other.\87\
---------------------------------------------------------------------------

    \87\ With regard to conflicting exercises of jurisdiction, 
section 403(3) of the Restatement states:
    (3) When it would not be unreasonable for each of the two states 
to exercise jurisdiction over a person or activity, but the 
prescriptions by the two states are in conflict, each state has an 
obligation to evaluate its own as well as the other state's interest 
in exercising jurisdiction, in light of all the relevant factors, 
including those set out in Subsection (2), a state should defer to 
the other state if that state's interest is clearly greater.
    Comment e. to section 403 of the Restatement states:
    Conflicting exercises of jurisdiction. Subsection (3) applies 
when an exercise of jurisdiction by each of two states is not 
unreasonable, but their regulations conflict. In that case, each 
state is required to evaluate both its interests in exercising 
jurisdiction and those of the other state. When possible, the two 
states should consult with each other. If one state has a clearly 
greater interest, the other should defer, by abandoning its 
regulation or interpreting or modifying it so as to eliminate the 
conflict. When neither state has a clearly stronger interest, states 
often attempt to eliminate the conflict so as to reduce 
international friction and avoid putting those who are the object of 
the regulations in a difficult situation. Subsection (3) is 
addressed primarily to the political departments of government, but 
it may be relevant also in judicial proceedings.
    Subsection (3) applies only when one state requires what another 
prohibits, or where compliance with the regulations of two states 
exercising jurisdiction consistently with this section is otherwise 
impossible. It does not apply where a person subject to regulation 
by two states can comply with the laws of both; for example, where 
one state requires keeping accounts on a cash basis, the other on an 
accrual basis. It does not apply merely because one state has a 
strong policy to permit or encourage an activity which another state 
prohibits, or one state exempts from regulation an activity which 
another regulates. Those situations are governed by Subsection (2), 
but do not constitute conflict within Subsection (3).
---------------------------------------------------------------------------

    Consistent with the Restatement, in determining the extent to which 
the Dodd-Frank swaps provisions apply to activities abroad, the 
Commission has strived to protect U.S. interests as determined by 
Congress in Title VII, and minimize conflicts with the laws of other 
jurisdictions. The Commission has carefully considered, among other 
things, the level of the home jurisdiction's supervisory interests over 
the subject activity and the extent to which the activity takes place 
within the foreign territory.\88\ At the same time, the Commission has 
also considered the potential for cross-border activities to have 
substantial connection to or impact on the U.S. financial system and 
the global, highly integrated nature of today's swap business; to 
fulfill the purposes of the Dodd-Frank swaps reform, the Commission's 
supervisory oversight cannot be confined to activities strictly within 
the territory of the United States.
---------------------------------------------------------------------------

    \88\ For purposes of this Guidance, the terms ``home 
jurisdiction'' or ``home country'' are used interchangeably and 
refer to the jurisdiction in which the person or entity is 
established, including the European Union.
---------------------------------------------------------------------------

    The Commission believes that the Guidance strikes the proper 
balance between these competing factors to ensure that the Commission 
can discharge its responsibilities to protect the U.S. markets, market 
participants, and financial system, consistent with the traditions of 
the international system and comity principles, as set forth in the 
Restatement. Of particular relevance is the Commission's approach to 
substituted compliance, which would be expected to mitigate any burden 
associated with potentially conflicting foreign regulations and would 
generally be appropriate in light of the supervisory interests of 
foreign regulators in entities domiciled and operating in its 
jurisdiction.\89\
---------------------------------------------------------------------------

    \89\ As discussed in section IV.F, infra, the Commission's 
recognition of substituted compliance would be based on an 
evaluation of whether the requirements of the foreign jurisdiction 
are comparable and comprehensive compared to the applicable 
requirement(s) under the CEA and Commission regulations, based on a 
consideration of all relevant factors, including among other things: 
(i) the comprehensiveness of the foreign regulator's supervisory 
compliance program, and (ii) the authority of such foreign regulator 
to support and enforce its oversight of the registrant's branch or 
agency with regard to such activities to which substituted 
compliance applies.
---------------------------------------------------------------------------

    In addition, recognizing that close cooperation and coordination 
with other jurisdictions is vital to the regulation of derivatives in 
the highly interconnected global market, the Commission's staff expects 
to remain actively engaged in discussions with foreign regulators as 
the Commission implements the cross-border interpretive guidance and as 
other jurisdictions develop their own regulatory requirements for 
derivatives. The Commission recognizes that conflicts of law may exist 
and is ready to address those issues as they may arise. In that regard, 
where a real conflict of laws exists, the Commission strongly 
encourages regulators and registrants to consult directly with its 
staff.

IV. Guidance

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

1. Proposed Interpretation
    Under the Proposed Guidance, the term ``U.S. person'' identifies 
those persons who, under the Commission's interpretation, could be 
expected to satisfy the jurisdictional nexus under section 2(i) of the 
CEA based on their swap activities either individually or in the 
aggregate.\90\ As proposed, the Commission's interpretation of the term 
``U.S. person'' would generally encompass: (1) persons (or classes of 
persons) located within the United

[[Page 45302]]

States; and (2) persons that may be domiciled or operate outside the 
United States but whose swap activities nonetheless have a ``direct and 
significant connection with activities in, or effect on, commerce of 
the United States'' within the meaning of CEA section 2(i).
---------------------------------------------------------------------------

    \90\ See Proposed Guidance, 77 FR at 41218. The discussion of 
the term ``U.S. person'' in this Guidance is limited to the 
relevance of this term for purposes of the Commission regulations 
promulgated under Title VII. The Commission does not intend that 
this discussion would apply to other uses of the term ``person'' in 
the CEA.
---------------------------------------------------------------------------

    Specifically, as set forth in the Proposed Guidance, the 
Commission's interpretation of the term ``U.S. person'' would generally 
include, but not be limited to:

    (i) any natural person who is a resident of the United States;
    (ii) any corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or 
any form of enterprise similar to any of the foregoing, in each case 
that is either (A) organized or incorporated under the laws of the 
United States or having its principal place of business in the 
United States (legal entity) or (B) in which the direct or indirect 
owners thereof are responsible for the liabilities of such entity 
and one or more of such owners is a U.S. person;
    (iii) any individual account (discretionary or not) where the 
beneficial owner is a U.S. person;
    (iv) any commodity pool, pooled account, or collective 
investment vehicle (whether or not it is organized or incorporated 
in the United States) of which a majority ownership is held, 
directly or indirectly, by a U.S. person(s);
    (v) any commodity pool, pooled account, or collective investment 
vehicle the operator of which would be required to register as a 
commodity pool operator under the CEA;
    (vi) a pension plan for the employees, officers or principals of 
a legal entity with its principal place of business inside the 
United States; and
    (vii) an estate or trust, the income of which is subject to U.S. 
income tax regardless of source.

    Under the proposed interpretation, a ``U.S. person'' would include 
a foreign branch of a U.S. person; on the other hand, a non-U.S. 
affiliate guaranteed by a U.S. person would not be within the 
Commission's interpretation of the term ``U.S. person.''
    The Further Proposed Guidance included alternatives for two 
``prongs'' of the proposed interpretation of the term ``U.S. person'' 
in the Proposed Guidance: prong (ii)(B), which relates to U.S. owners 
that are responsible for the liabilities of a non-U.S. entity; and 
prong (iv), which relates to commodity pools and funds with majority-
U.S. ownership.
    The alternative version of prong (ii)(B) in the Further Proposed 
Guidance would limit its scope to a non-U.S. legal entity that is 
directly or indirectly majority-owned by one or more natural persons or 
legal entities that meet prong (i) or (ii) of the interpretation, in 
which such U.S. person(s) bears unlimited responsibility for the 
obligations and liabilities of the legal entity. This alternative prong 
(ii)(B) would generally not include an entity that is a corporation, 
limited liability company or limited liability partnership where 
shareholders, members or partners have limited liability. Further, the 
Commission stated in the Further Proposed Guidance that the majority-
ownership criterion would be intended to avoid capturing those legal 
entities that have negligible U.S. ownership interests. Unlimited 
liability corporations where U.S. persons have majority ownership and 
where such U.S. persons have unlimited liability for the obligations 
and liabilities of the entity generally would be covered under this 
alternative to prong (ii)(B).
    The alternative prong (ii)(B) in the Further Proposed Guidance was 
as follows:

    (ii) A corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or 
any form of enterprise similar to any of the foregoing, in each case 
that is either (A) organized or incorporated under the laws of a 
state or other jurisdiction in the United States or having its 
principal place of business in the United States or (B) directly or 
indirectly majority-owned by one or more persons described in prong 
(i) or (ii)(A) and in which such person(s) bears unlimited 
responsibility for the obligations and liabilities of the legal 
entity (other than a limited liability company or limited liability 
partnership where partners have limited liability);

    The Further Proposed Guidance explained that this alternative 
proposed prong would generally treat an entity as a U.S. person if one 
or more of its U.S. majority owners has unlimited responsibility for 
losses of, or nonperformance by, the entity. This prong would reflect 
that when the structure of an entity is such that the U.S. direct or 
indirect owners are ultimately liable for the entity's obligations and 
liabilities, the connection to activities in, or effect on, U.S. 
commerce would be expected to satisfy the requisite jurisdictional 
nexus. This ``look-through'' requirement also would serve to discourage 
persons from creating such indirect ownership structures for the 
purpose of engaging in activities outside of the Dodd-Frank regulatory 
regime. Under the Further Proposed Guidance, this alternative proposed 
prong generally would not render a legal entity organized or domiciled 
in a foreign jurisdiction a ``U.S. person'' simply because the entity's 
swaps obligations are guaranteed by a U.S. person.
    With respect to prong (iv) of the interpretation of the term ``U.S. 
person'' in the Proposed Guidance, the Further Proposed Guidance set 
forth an alternative under which any commodity pool, pooled account, 
investment fund or other collective investment vehicle generally would 
be within the interpretation of the term ``U.S. person'' if it is 
(directly or indirectly) majority-owned by one or more natural persons 
or legal entities that meet prong (i) or (ii) of the interpretation of 
the term ``U.S. person.'' The Further Proposed Guidance explained that 
for purposes of this alternative prong (iv), the Commission would 
interpret ``majority-owned'' to mean the beneficial ownership of 50 
percent or more of the equity or voting interests in the collective 
investment vehicle. Similar to the alternative prong (ii)(B) discussed 
above, the Commission generally would not interpret the collective 
investment vehicle's place of organization or incorporation to be 
determinative of its status as a U.S. person. The Further Proposed 
Guidance clarified that under alternative prong (iv), the Commission 
would interpret the term ``U.S. person'' to include a pool, fund, or 
other collective investment vehicle that is publicly traded only if it 
is offered, directly or indirectly, to U.S. persons.
    The alternative prong (iv) in the Further Proposed Guidance was as 
follows:

    (iv) A commodity pool, pooled account, investment fund, or other 
collective investment vehicle that is not described in prong (ii) 
and that is directly or indirectly majority-owned by one or more 
persons described in prong (i) or (ii), except any commodity pool, 
pooled account, investment fund, or other collective investment 
vehicle that is publicly-traded but not offered, directly or 
indirectly, to U.S. persons;

    The Further Proposed Guidance explained that this alternative 
proposed prong (iv) is intended to capture collective investment 
vehicles that are created for the purpose of pooling assets from U.S. 
investors and channeling these assets to trade or invest in line with 
the objectives of the U.S. investors, regardless of the place of the 
vehicle's organization or incorporation. These collective investment 
vehicles may serve as a means to achieve the investment objectives of 
their beneficial owners, rather than being separate, active operating 
businesses. As such, the beneficial owners would be directly exposed to 
the risks created by the swaps that their collective investment 
vehicles enter into.

[[Page 45303]]

2. Comments
    In general, commenters stated that the proposed ``U.S. person'' 
interpretation presented significant interpretive issues and 
implementation challenges.\91\ The commenters contended that it would 
be difficult to determine U.S. person status because of the breadth of 
the proposed interpretation, potential ambiguities it contains, and the 
collection of information its application may require. The commenters, 
therefore, urged the Commission to consider how the proposed 
interpretation could be stated in a simpler and more easily applied 
manner.\92\ While a number of commenters stated that the Commission's 
construction of the term ``U.S. person'' in the Proposed Guidance was 
overbroad,\93\ several commenters on the Further Proposed Guidance 
advocated for a broader reading of the term than any of those proposed 
by the Commission.\94\
---------------------------------------------------------------------------

    \91\ See SIFMA (Aug. 27, 2012) at 5; Societe Generale 
(``SocGen'') (Aug. 8, 2012) at 4; IIB (Aug. 27, 2012) at 4-14; 
Deutsche Bank AG (``Deutsche Bank'') (Aug. 27, 2012) at 1-4; Goldman 
Sachs ``(Goldman'') (Aug. 27, 2012) at 3; The Hong Kong Association 
of Banks (``Hong Kong Banks'') (Aug. 27, 2012) at 3-4; Australian 
Bankers' Association Inc. (``Australian Bankers'') (Aug. 27, 2012) 
at 4.
    \92\ SIFMA (August 27, 2012) at A10.
    \93\ See, e.g., European Commission (Aug. 24, 2012) at 1-2; Hong 
Kong Banks (Aug. 27, 2012) at 4; J.P. Morgan (Aug. 13, 2012) at 9.
    \94\ See Better Markets (Feb. 15, 2013) at 4-8; Michael 
Greenberger and Brandy Bruyere, University of Maryland, and AFR 
(``Greenberger/AFR'') (Feb. 6, 2013) at 3 (stating that none of the 
definitions of U.S. person proposed by the CFTC are sufficient to 
protect U.S. taxpayers from the risks of foreign subsidiaries and 
affiliates of U.S. financial institutions). See also Letter from 
Sen. Levin at 7-8.
---------------------------------------------------------------------------

a. Phase-in Interpretation
    A number of commenters requested that the Commission adopt an 
interim interpretation of ``U.S. person'' that would allow firms to 
rely on their existing systems and classifications and avoid the need 
to develop systems to follow a temporary interpretation of the term 
``U.S. person'' that may change in the near future.\95\ IIB explained 
that applying any interpretation of ``U.S. person'' that departs from 
status based on residence or jurisdiction of organization, and in some 
cases principal place of business, will require sufficient time to 
implement relevant documentation conventions and diligence 
procedures.\96\ IIB, therefore, requested that the Commission implement 
a phased-in approach to the ``U.S. person'' interpretation that would 
encompass, in general, (1) a natural person who is a U.S. resident and 
(2) a corporate entity that is organized or incorporated under the laws 
of the United States or has its place of business in the United 
States.\97\
---------------------------------------------------------------------------

    \95\ See, e.g., Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27, 
2012) at A8-9; IIB (Aug. 9, 2012) at 4; Deutsche Bank (Aug. 13, 
2012) at 2; State Street Corporation (``State Street'') (Aug. 27, 
2012) at 2; Goldman (Aug. 27, 2012) at 3.
    \96\ See IIB (Aug. 9, 2012) at 4.
    \97\ For purposes of IIB's definition, a foreign branch of a 
U.S. swap dealer would be considered a non-U.S. person. IIB added 
that it believes that the Commission should adopt a final definition 
of ``U.S. person'' that is consistent with its proposed interim 
definition. Id.
---------------------------------------------------------------------------

    SIFMA also urged the Commission to phase in the ``U.S. person'' 
interpretation, citing the implementation difficulties identified by 
IIB. Specifically, SIFMA recommended that the Commission allow market 
participants to apply an interim interpretation of ``U.S. person'' 
until 90 days after the final interpretation of ``U.S. person'' is 
published.\98\ SIFMA stated that the interim interpretation--which was 
identical to IIB's interim interpretation--should identify ``core'' 
U.S. persons and would allow its members to phase in compliance with 
the Dodd-Frank requirements without building new systems that might 
have to be changed when the Commission states a final interpretation of 
the term.\99\
---------------------------------------------------------------------------

    \98\ See SIFMA (Aug. 25, 2012) at A8.
    \99\ Id. at A8.
---------------------------------------------------------------------------

b. Comments on Particular Prongs of the Proposed Interpretation of the 
Term ``U.S. Person''
    Commenters' concerns were primarily (though not exclusively) 
directed to three prongs of the proposed ``U.S. person'' 
interpretation: prong (ii)(B) relating to U.S. owners that are 
responsible for the liabilities of a non-U.S. company; prong (iv) 
relating to commodity pools and funds with majority-U.S. ownership; and 
prong (v) relating to registered commodity pool operators. Below, the 
Commission describes the main comments to all the prongs of the 
proposed interpretation of ``U.S. person'' in greater detail.
    Commenters generally did not comment on prong (i).
    With respect to prong (ii)(A), the Investment Industry Association 
of Canada (IIAC) stated that the Commission should look to the location 
of a legal entity's management (or the majority of its directors and 
executive officers), instead of the location of organization.\100\ Two 
commenters stated that the ``principal place of business'' element of 
the interpretation was ambiguous and difficult to administer and thus 
recommended that it be removed.\101\
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    \100\ See IIAC (Aug. 27, 2012) at 3-5.
    \101\ See Lloyds Banking Group (``Lloyds'') (Aug. 24, 2012) at 
3; Managed Fund Association and Alternative Investment Management 
Association (``MFA/AIMA'') (Aug. 28, 2012) at 6.
---------------------------------------------------------------------------

    On the other hand, Senator Levin supported an inclusive 
interpretation of the term ``U.S. person'' that would encompass foreign 
offices and affiliates of U.S. financial institutions and corporations, 
because requiring a case-by-case analysis of whether they should be 
subject to the Dodd-Frank Act would be complicated, burdensome, and 
susceptible to gamesmanship.\102\ He also suggested that, since it 
appears that typically foreign affiliates and subsidiaries operate not 
as independent actors but are closely integrated with their parent 
corporations, obtaining from them the financial backing needed for 
their derivative trades, the Commission's interpretation should presume 
that a foreign affiliate engaged in swap activity is an extension of 
the parent corporation, unless the parent can demonstrate that the 
foreign affiliate should be treated as independent.\103\ Senator Levin 
also stated that the Commission's interpretation should include as a 
U.S. person any foreign affiliate under common control with a U.S. 
person, based on factors such as common management, funding, systems, 
and financial reporting.\104\
---------------------------------------------------------------------------

    \102\ See Letter from Sen. Levin at 7-8.
    \103\ Id. (stating that it ``makes little economic sense, given 
the insubstantial reality of many foreign affiliates and 
subsidiaries in the financial industry'' to ``view a foreign 
affiliate or subsidiary as a non-U.S. person even if it were fully 
integrated with its U.S. parent, operated as a wholly owned shell 
operation with no offices or employees of its own, and functioned in 
the same way as a branch or agency office'').
    \104\ Id. at 8.
---------------------------------------------------------------------------

    With respect to prong (ii)(B) of the interpretation, which 
addresses situations where the direct or indirect owners of an entity 
are responsible for its liabilities, several commenters stated that the 
phrase ``responsible for the liabilities'' was vague. For example, the 
Committee on Capital Markets Regulation (``Capital Markets'') stated 
that the phrase ``responsible for the liabilities'' was open to 
interpretation and requested that the Commission provide more details 
regarding its interpretation of this phrase.\105\ SIFMA sought 
clarification on whether the Commission intended to capture 
partnerships where the partners have unlimited liability.\106\ The 
International Swaps and Derivatives Association Inc. (``ISDA'') stated 
that it was not clear whether the concept includes

[[Page 45304]]

guarantees, sureties, simple risk of loss of equity, or other type of 
exposure.\107\ Deutsche Bank further noted that the language in prong 
(ii)(B) could be read to include an entity guaranteed by a U.S. person, 
which appears at odds with possibly varying policies elsewhere in the 
Proposed Guidance for entities guaranteed by U.S. persons.\108\
---------------------------------------------------------------------------

    \105\ See Capital Markets (Aug. 24, 2012) at 5.
    \106\ See SIFMA (Aug. 27, 2012) at A13 and A19.
    \107\ See ISDA (Aug. 27, 2012) at 9; MFA/AIMA (Aug. 28, 2012) at 
6.
    \108\ See Deutsche Bank (Aug. 27, 2012) at 3. See also Peabody 
Energy Corporation (``Peabody'')(Aug. 28, 2012) at 2-3 (``By 
contrast, a foreign affiliate or subsidiary of a U.S. person would 
be considered a non-U.S. person, even where such an affiliate or 
subsidiary has certain or all of swap-related obligations guaranteed 
by the U.S. person.'') (citing Proposed Guidance, 77 FR at 41218); 
SIFMA (Aug. 27, 2012) at A2 (stating that the Commission should 
clarify that prong (ii)(B) of the interpretation is not meant to 
capture an entity merely because it is guaranteed by a U.S. person).
---------------------------------------------------------------------------

    Commenters also expressed concerns about the lack of a minimum 
U.S.-ownership threshold. For example, Sumitomo Mitsui Trust Bank Ltd. 
(``Sumitomo'') stated that there should be a minimum level of ownership 
of the entity in question by one or more U.S. persons for this prong to 
apply, and suggested that the majority ownership threshold used in 
prong (iv) apply here as well.\109\ ISDA emphasized a different point, 
stating that without clear thresholds, a non-U.S. business would be 
within the Commission's interpretation of the term ``U.S. person'' by 
virtue of even negligible ownership interests by U.S. persons.\110\ The 
Financial Services Roundtable (``FSR'') stated that prong (ii) is 
overbroad because it would cover even minority-U.S. owned institutions 
based only on a pro-rata (or less) parent liability guarantee.\111\
---------------------------------------------------------------------------

    \109\ See Sumitomo (Aug. 24, 2012) at 2.
    \110\ See ISDA (Aug. 10, 2012) at 8 (recommending that 
regardless of the nature of the ``responsibilities for the 
liabilities,'' only direct owners of apparent non-U.S. persons 
should be considered, and that the Commission adopt a presumptive 
control threshold of 25% direct ownership for distinguishing between 
control persons and owners that need not be considered in assessing 
the status of an entity as a U.S. person).
    \111\ See FSR (Aug. 27, 2012) at 3.
---------------------------------------------------------------------------

    Capital Markets raised a concern that whether a conclusion that the 
direct or indirect owners of a U.S. legal entity are ``responsible for 
the liabilities'' of such entity requires knowledge of each 
counterparty's legal and ownership structure.\112\ FSR stated that 
interpretation of prong (ii)(B) would depend on a reevaluation of most, 
if not all, counterparty relationships in order to determine what type 
of liability guarantees exist between an entity and its parent.\113\ 
Both Capital Markets and FSR stated that firms do not currently have 
any reasonable means to obtain information necessary to assess this 
element of the interpretation, particularly within the short time frame 
prior to the registration date.
---------------------------------------------------------------------------

    \112\ See Capital Markets (Aug. 24, 2012) at 5.
    \113\ See FSR (Aug. 27, 2012) at 3.
---------------------------------------------------------------------------

    One commenter supported finalization of the alternative prong 
(ii)(B) in the Further Proposed Guidance, with minor clarifying 
changes. The Commercial Energy Working Group (``CEWG'') stated that the 
words ``all of'' should be added to clarify that this prong would 
generally apply when U.S. persons that are majority owners bear 
``unlimited responsibility for all of the obligations and liabilities 
of the legal entity . . .'' \114\ The CEWG also stated that the 
Guidance should reaffirm that a guarantee of a non-U.S. person by a 
U.S. person, in and of itself, generally would not invoke U.S. person 
status.\115\ Other commenters that supported the principles of the 
alternative prong (ii)(B) thought that the interpretation of ``U.S. 
person'' in this regard should be restructured. The Investment Company 
Institute (``ICI'') stated that the Commission should clarify that 
collective investment vehicles would not fall within the alternative 
prong (ii)(B) because the investors' liabilities are limited to the 
amount of their investment.\116\ Thus, ICI stated that it believes the 
alternative prong (ii)(B) would be superfluous with respect to 
collective investment vehicles because the alternative prong (iv) in 
the Further Proposed Guidance would address these entities if they are 
majority-owned by U.S. persons.\117\ MFA/AIMA, on the other hand, 
supported the combination of majority ownership and unlimited liability 
elements in the alternative prong (ii)(B) and recommended that 
collective investment vehicles be considered under that prong.\118\
---------------------------------------------------------------------------

    \114\ See CEWG, submitted by Sutherland Asbill & Brennan LLP 
(Feb. 25, 2013) at 5.
    \115\ Id.
    \116\ See ICI (Feb. 6, 2013) at 3.
    \117\ See id. at 2. See also IIB (Feb 6, 2013) at 10-11 
(collective investment vehicles should be excluded from prong (ii) 
and addressed only in prong (iv)).
    \118\ See MFA/AIMA (Feb. 6, 2013) at 7-8. Thus under MFA/AIMA's 
approach, the status of collective investment vehicles would be 
determined by reference to only the tests in alternative prong 
(ii)(B).
---------------------------------------------------------------------------

    Other commenters stated that the Commission should clarify that the 
language at the end of the proposed alternative prong (ii)(B), which 
refers to limited liability companies and limited liability 
partnerships, would generally also apply to other types of entities 
where owners have limited liability but where the entities have 
different names in foreign legal jurisdictions.\119\ MFA/AIMA and SIFMA 
AMG stated that the Commission should clarify how frequently an entity 
should consider (e.g., annually) whether U.S. persons are its direct or 
indirect majority owners, and provide for a transition period after an 
entity falls within this prong of the interpretation for the first 
time.\120\
---------------------------------------------------------------------------

    \119\ Id. at 10-11; Asociaci[oacute]n Bancaria y de Entidades 
Financieras de Colombia (``Colombian Bankers'') (Feb. 6, 2013) at 1-
2; IIB (Feb. 6, 2013) at 10; ISDA (Feb. 6, 2013) at 5-6.
    \120\ See MFA/AIMA (Feb. 6, 2013) at 12; SIFMA/AMG (Feb. 14, 
2013) at 6. ISDA stated that the Commission should clarify how the 
prong would apply to an entity where some but not all of the owners 
have unlimited responsibility. In this case, the Commission should 
clarify whether the U.S. owners with majority ownership of the 
entity also each must bear unlimited responsibility for the entity's 
obligations and liabilities or, rather, whether it suffices that a 
single U.S. owner has unlimited responsibility once U.S. majority 
ownership is established. See ISDA (Feb. 6, 2013) at 5-7.
---------------------------------------------------------------------------

    Other commenters were critical of the alternative prong (ii)(B). 
Greenberger/AFR and Better Markets stated that this proposed prong is 
too narrow, because it appears to require that U.S. persons be both the 
majority owners of an entity and bear unlimited responsibility for the 
entity's obligations and liabilities, in order for the entity to be 
within the Commission's interpretation of the term ``U.S. person'' 
based solely on ownership by U.S. persons.\121\ Greenberger/AFR pointed 
out that a U.S. person could be the majority owner of an entity 
organized outside the United States, and be responsible for 99% of the 
entity's obligations, yet the entity would not fall within the 
Commission's interpretation under the proposed prong.\122\
---------------------------------------------------------------------------

    \121\ See Greenberger/AFR (Feb. 6, 2013) at 7; Better Markets 
(Feb. 15, 2013) at 7-8.
    \122\ See Greenberger/AFR (Feb. 6, 2013) at 7.
---------------------------------------------------------------------------

    Other commenters suggested that the alternative prong (ii)(B) is 
too broad, recommending that the ownership element be limited to when a 
majority of the direct owners of an entity are U.S. persons, because 
considering the indirect ownership of an entity will be unworkable for 
many entities.\123\ ISDA also stated that the concept of ``unlimited 
responsibility'' is too amorphous to be a basis for the Commission's 
interpretation, because it could turn on fact-sensitive and

[[Page 45305]]

uncertain legal judgments under doctrines such as ``veil-piercing'' or 
``alter ego'' entities.\124\ Moreover, ISDA asserted that the 
Commission has not justified the treatment of unlimited liability 
entities in the proposed alternative prong (ii)(B) by demonstrating how 
such entities are more susceptible to being used to evade Dodd-Frank 
regulations or otherwise raise the concerns addressed by the 
Commission's regulations.\125\
---------------------------------------------------------------------------

    \123\ See MFA/AIMA (Feb. 6, 2013) at 7; SIFMA, The Clearing 
House, Association LLC (``The Clearing House''), and FSR (``SIFMA/
CH/FSR'') (Feb. 6, 2013) at 2, A8-9; ISDA (Feb. 6, 2013) at 5. IIB 
and SIFMA/AMG made similar comments and questioned whether extending 
this prong to entities where a majority of indirect owners are U.S. 
persons would be consistent with the ``direct and significant 
connection'' language in CEA section 2(i). See IIB (Feb. 6, 2013) at 
10; SIFMA/AMG (Feb. 14, 2013) at 3-4.
    \124\ See ISDA (Feb. 6, 2013) at 6. ISDA also stated that the 
Commission should make clear that the reference to ``unlimited 
responsibility'' does not include responsibility arising out of 
separate contractual arrangements or extraordinary circumstances, 
such as conduct by owners that results in veil piercing or limited 
partner participation in management of a partnership. See id. SIFMA/
CH/FSR made similar points and stated that this prong is not 
necessary because market participants have not used unlimited 
liability entities to avoid Dodd-Frank regulations. See SIFMA/CH/FSR 
(Feb. 6, 2013) at A12.
    \125\ See ISDA (Feb. 6, 2013) at 6.
---------------------------------------------------------------------------

    Commenters were also critical of the element of the alternative 
prong (ii)(B) that would treat a collective investment vehicle as a 
U.S. person if its principal place of business is in the United States. 
They stated that application of this element would be very unclear and 
difficult on an operational level.\126\ Commenters also stated that a 
collective investment vehicle should be treated as a U.S. person if it 
is organized in the U.S., not if its manager or operator is in the 
U.S.\127\
---------------------------------------------------------------------------

    \126\ Id. at 6-7; SIFMA/CH/FSR (Feb. 6, 2013) at A1, A5-6, B5; 
IIB (Feb. 6, 2013) at 7-8, 10.
    \127\ See MFA/AIMA (Feb. 6, 2013) at 8-9; SIFMA/AMG (Feb. 6, 
2013) at A7-8. The Japanese Bankers Association made similar 
comments and stated that the Commission should clarify whether the 
location of the principal place of business of a subsidiary that is 
controlled by its parent is the location of the subsidiary's 
headquarters or the parent's headquarters. Japanese Bankers 
Association (Feb. 6, 2013) at 7.
---------------------------------------------------------------------------

    Peabody Energy Corporation (``Peabody'') and SIFMA/AMG stated the 
Commission should adopt the interpretation of U.S. person in the 
January Order, which does not include all the elements of the proposed 
alternative prong (ii)(B).\128\
---------------------------------------------------------------------------

    \128\ See Peabody (Feb. 5, 2013) at 1-2; SIFMA/AMG (Feb. 6, 
2013) at 1-3.
---------------------------------------------------------------------------

    Commenters generally did not comment on prong (iii) of the proposed 
interpretation of the term ``U.S. person.''
    With respect to prong (iv) relating to majority direct- or 
indirect-owned commodity pools, pooled accounts, or collective 
investment vehicles, several commenters stated that this prong was 
unworkable because the proposed interpretation would require 
potentially unascertainable information.\129\ According to SIFMA, 
reliance on representations would be the only practical way to consider 
the status of counterparties as U.S. persons under this prong since 
other types of information, such as the direct and indirect ownership 
of any commodity pool, pooled account or collective investment vehicle 
with which a market participant transacts, may be unavailable, non-
public or otherwise sensitive.\130\ Moreover, a fund would be required 
to monitor its level of U.S. ownership on an on-going basis, and this 
prong could result in frequent changes in the fund's U.S. person 
status.\131\ The Clearing House argued that the interpretation should 
not look through direct investors to indirect investors, unless there 
is evidence of evasion.\132\ Other commenters questioned whether the 
proposed interpretation of ``U.S. person'' for commodity pools, pooled 
accounts, and collective investment vehicles meets the ``direct and 
significant'' jurisdictional nexus applicable to the Commission's 
application of Title VII to transactions with such persons.\133\
---------------------------------------------------------------------------

    \129\ See, e.g., ISDA (Aug. 10, 2012) at 8; SIFMA (Aug. 27, 
2012) at A17; Credit Suisse (Aug. 27, 2012) at 3-4; The Clearing 
House Association LLC (``The Clearing House'') (Aug. 27, 2012) at 
12-13; Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012) at 6-7.
    \130\ See SIFMA (Aug. 27, 2012) at A17-18. See also IIB (Aug. 
27, 2012) at 7 (arguing that since pools cannot ascertain or control 
the status of their indirect investors, the reference to indirect 
ownership should be removed).
    \131\ SIFMA (Aug. 27, 2012) at A17.
    \132\ See The Clearing House (Aug. 13, 2012) at 15 n. 20.
    \133\ See, e.g., SIFMA/AMG (Aug. 27, 2012) at 2-3; MFA/AIMA 
(Aug. 28, 2012) at 4-5; ICI (Aug. 23, 2012) at 4.
---------------------------------------------------------------------------

    Cleary urged that the Commission not adopt an interpretation of 
``U.S. person'' based on the composition of fund ownership, at least 
prior to finalizing the interpretation.\134\ As it explained, even if 
the Commission's interpretation would allow for reasonable reliance on 
counterparty representations, fund counterparties would not be able to 
provide any representation except with respect to funds formed after 
the finalization of the interpretation for which the fund's 
subscription materials could have been modified to capture the relevant 
information.\135\ If the Commission nevertheless decided to adopt an 
interpretation based on investor composition, Cleary argued against 
including a fund in the interpretation on the basis of indirect 
ownership at any level less than a majority-ownership.\136\
---------------------------------------------------------------------------

    \134\ See Cleary (Aug. 16, 2012) at 6-7.
    \135\ Id.
    \136\ Id. IIB also noted that fund sponsors/operators verify 
investor status through subscription materials provided at the time 
of initial investment. Therefore, they request that any test based 
on fund ownership apply only to funds formed after the effective 
date of the final ``U.S. person'' interpretation. IIB also agreed 
that majority ownership is the minimum threshold under which a 
foreign fund should be included in the interpretation of the term 
``U.S. person.'' See IIB (Aug. 27, 2012) at 6-7.
---------------------------------------------------------------------------

    Consideration of majority-ownership is particularly problematic 
with respect to funds that are publicly traded, according to several 
commenters.\137\ For example, ICI explained that U.S. persons typically 
purchase shares in non-U.S. funds through intermediaries, and that such 
shares are registered and held in nominee/street name accounts.\138\ In 
such cases, the fund manager/operator would not have information 
regarding the underlying investors.\139\ SIFMA recommended that 
publicly offered and listed commodity pools organized in foreign 
jurisdictions be excluded from the interpretation.\140\ Credit Suisse 
stated that a fund should not be considered a U.S person to the extent 
that it is organized outside the United States and is subject to 
foreign regulation that is comparable to U.S. law. To the extent the 
fund is not so regulated, then the fund would be within the U.S. person 
interpretation only where it is organized under the laws of the United 
States or marketed to U.S. residents.\141\
---------------------------------------------------------------------------

    \137\ See, e.g., SIFMA (Aug. 27, 2012) at A20; ICI (Aug. 23, 
2012) at 3-7; MFA/AIMA (Aug. 28, 2012) at 4; Credit Suisse (Aug. 27, 
2012) at 3-4.
    \138\ See ICI (Aug. 23, 2012) at 3.
    \139\ ICI also noted that certain jurisdictions may prohibit 
disclosure by intermediaries of beneficial owner information. Id.
    \140\ See SIFMA (Aug. 27, 2012) at A19-20.
    \141\ See Credit Suisse (Aug, 27, 2012) at 3-4.
---------------------------------------------------------------------------

    One commenter strongly supported the alternative prong (iv) in the 
Further Proposed Guidance. Citadel stated that since the Dodd-Frank 
clearing and reporting requirements will mitigate systemic risk, 
increase transparency and promote competition, the U.S. person 
interpretation should encompass offshore collective investment vehicles 
that have a sufficient U.S. nexus.\142\ If it did not, then a core, 
active portion of the swaps market would fall outside the scope of the 
transaction level requirements, including clearing, which would 
undermine central objectives of Dodd-Frank, create opportunities for 
regulatory arbitrage, and risk fragmenting the swaps markets.\143\
---------------------------------------------------------------------------

    \142\ See Citadel (Feb. 6, 2013) at 1.
    \143\ See id.
---------------------------------------------------------------------------

    Other commenters argued that the entities that would be covered by 
the alternative prong (iv) should not be covered by the interpretation 
of ``U.S. person,'' which should cover only entities that are directly 
majority-owned by U.S. persons. For example, SIFMA/

[[Page 45306]]

CH/FSR stated that consideration of indirect ownership could require 
ongoing monitoring of ownership, which is burdensome or even 
impossible, and would not necessarily reflect a sufficient 
jurisdictional nexus to the United States.\144\ SIFMA/CH/FSR also 
stated that if consideration of majority ownership is included in the 
interpretation, it should reflect an objective statement of the 
ownership level that the Commission would consider relevant to U.S.-
person status, so as to exclude entities that are owned by U.S. persons 
only to a de minimis extent and allow an annual consideration of 
ownership.\145\ MFA/AIMA and the Investment Adviser Association 
(``IAA'') also provided reasons that there is not a sufficient 
jurisdictional nexus with the United States to include in the 
Commission's interpretation of the term ``U.S. person'' collective 
investment vehicles that are indirectly majority-owned by U.S. 
persons.\146\
---------------------------------------------------------------------------

    \144\ See SIFMA/CH/FSR (Feb. 6, 2013) at A8-9. See also IIB 
(Feb. 6, 2013) at 11 (systems to track indirect ownership would be 
difficult and expensive to implement).
    \145\ See SIFMA/CH/FSR (Feb. 6, 2013) at A8-9. ISDA stated that 
the lack of an objective policy regarding the interpretation of 
majority ownership would lead to arbitrary or indeterminate results 
for many collective investment vehicles due to their varied capital 
structures (citing, for example, structured finance vehicles, which 
merit further analysis due not only to their complex capital 
structures but also to practical difficulties in monitoring 
ownership of their securities), and the practical consequences of 
the alternative interpretations can be considered only following a 
more concrete proposal offered for public comment. See ISDA (Feb. 6, 
2013) at 6-7.
    \146\ MFA/AIMA stated that since interactions between collective 
investment vehicles and registered swap dealers are expected to be 
covered by Dodd-Frank requirements or comparable foreign 
regulations, the inclusion of collective investment vehicles as 
``U.S. persons'' is less important to achieve regulatory coverage. 
See MFA/AIMA (Feb. 6, 2013) at 7-8. MFA/AIMA also disputed whether 
the pooling of assets in a collective investment vehicle is a 
fundamental difference that denotes a greater U.S. nexus than the 
pooling of assets by corporations or other financial entities, and 
therefore it is problematic that alternative prong (iv) is more 
onerous (in MFA/AIMA's view) for non-U.S collective investment 
vehicles than alternative prong (ii) is for corporate or other 
financial entities. See id. IAA stated that it is inappropriate to 
define an entity as a U.S. person based on characteristics of 
investors in the entity rather than the characteristics of the 
entity itself. See IAA (Feb. 6, 2013) at 4.
---------------------------------------------------------------------------

    Some commenters stated that whether a collective investment vehicle 
would be included in the interpretation of U.S. person should depend on 
whether the fund or other collective investment vehicle is being 
offered to U.S. persons, arguing that the interpretation should cover 
collective investment vehicles that are targeted to the U.S. market or 
to U.S. investors by focusing on activities within the control of the 
vehicle's manager.\147\
---------------------------------------------------------------------------

    \147\ See Invesco Advisers Inc. (``Invesco'') (Feb. 6, 2013) at 
11 (manager of collective investment vehicle determines whether to 
make offering in the United States; subsequent purchases by non-U.S. 
persons who have relocated to the U.S. should not alone constitute 
offering in the U.S.); IIB (Feb. 6, 2013) at 11. Invesco, ICI and 
IAA each stated that the language at the end of alternative prong 
(iv) (if it is adopted) should be interpreted to cover collective 
investment vehicles that are ``publicly-offered'' only to non-U.S. 
persons, even if the vehicles are not publicly-traded. See Invesco 
(Feb. 6, 2013) at 2; ICI (Feb. 6, 2013) at 3; IAA (Feb. 6, 2013) at 
4. See also ICI (Jul. 5, 2013) at 3 n. 9 (``There is an important 
distinction between publicly-traded funds and publicly-offered 
funds: publicly-offered funds are those that are broadly available 
to retail investors; publicly-traded funds are simply a subset of 
publicly-offered funds that trade on exchanges or other secondary 
markets. Excluding from the U.S. person definition only publicly-
traded funds would capture only a subset of non-U.S. regulated 
funds. We note that, by contrast, hedge funds are neither publicly 
offered nor publicly traded and, unlike non-U.S. retail funds, are 
not subject to substantive government regulation and oversight 
similar in scope to that provided by the U.S. Investment Company 
Act.'').
    ICI and IAA stated that the Commission should interpret whether 
an offer is made to U.S. persons in accordance with precedents under 
the SEC's Regulation S. See ICI (Feb. 6, 2013) at 4-5 n. 14; IAA 
(Feb. 6, 2013) at 4. ISDA stated that the Commission's 
interpretation should specifically exclude any collective investment 
vehicle that offers its securities in accordance with local law and 
customary documentation practices in a local market, as well as 
offerings conducted in accordance with the Regulation S. See ISDA 
(Feb. 6, 2013) at 7.
---------------------------------------------------------------------------

    Commenters also stated that regardless of the policy adopted in 
this regard, in the consideration of whether an entity is a U.S. 
person, only information that is available to third parties or other 
parties should be considered relevant, and the Commission's policy 
should contemplate that market participants would rely on a 
representation of U.S. person status. Also, the Commission's policy 
should clarify how it would apply during the transition period 
immediately after expiration of the January Order.\148\
---------------------------------------------------------------------------

    \148\ See SIFMA/AMG (Feb. 14, 2013) at 4 n. 8; IIB (Feb. 6, 
2013) at 7; ISDA (Feb. 6, 2013) at 7; Japanese Bankers Association 
(Feb. 6, 2013) at 5.
---------------------------------------------------------------------------

    Addressing prong (v) relating to registered commodity pool 
operators, many commenters stated that the Commission should not adopt 
an interpretation that looks to the registration status of a fund's 
operator, because this interpretation could capture a non-U.S. fund 
that does not itself trigger registration as a commodity pool operator 
and has a minimal U.S. nexus.\149\ A number of commenters urged the 
Commission not to adopt an interpretation that looks to the nationality 
of the fund's manager/operator since this would place U.S.-based 
investment managers at a competitive disadvantage, without addressing 
the Commission's regulatory objectives.\150\ IIB generally agreed with 
these commenters and stated that the commodity pool operator 
registration prong would be over-inclusive because, under the 
Commission's current rules, an operator of a foreign pool may be 
required to register as a commodity pool operator with less than 50 
percent U.S. ownership; at the same time, the prong also would be 
under-inclusive because it would not cover funds whose operators are 
eligible for relief from commodity pool operator registration.
---------------------------------------------------------------------------

    \149\ See, e.g., SIFMA (Aug. 27, 2012) at A21; ICI (Aug. 23, 
2012) at 3-7; IIB (Aug. 9, 2012) at 3; MFA/AIMA (Aug. 28, 2012) at 
4-5; IIAC (Aug. 27, 2012) at 4, 5. As IIB explained, even a fund 
that lacks a sufficient U.S. connection can be considered a U.S. 
person where its commodity pool operator is required to register. 
IIB (Aug. 9, 2012) at 3. Under Commission regulation 3.10, the 
operator of a non-U.S. fund with even one U.S.-based owner is 
required to register as a commodity pool operator.
    \150\ See SIFMA (Aug. 27, 2012) at A13; ICI (Aug, 23, 2012) at 
4; Cleary (Aug. 16, 2012) at 7; The Clearing House (Aug. 27, 2012) 
at 13-14.
---------------------------------------------------------------------------

    ICI recommended that the Commission, instead, interpret the term 
``U.S. person'' to include a commodity pool, pooled account, or 
collective investment vehicle that is ``offered publicly, directly or 
indirectly'' by the manager/sponsor to U.S. persons.\151\ As ICI 
explained, this alternative approach would base a fund's U.S. person 
status on more workable considerations, and not on changes in investor 
status that are beyond the control of a fund or its manager/operator. 
In the consideration of whether a fund is making a public offering to 
U.S. persons, ICI recommended that the Commission look to SEC 
Regulation S.\152\
---------------------------------------------------------------------------

    \151\ See ICI (Aug. 23, 2012) at 5-6.
    \152\ Id. at 6-7. Regulation S is codified at 17 CFR 230.901 
through 230.905.
---------------------------------------------------------------------------

    IIAC recommended that prong (vi) relating to pension plans be 
modified so that pension plans designed exclusively for foreign 
employees of a U.S.-based entity are not within the interpretation of 
the term ``U.S. person.'' Further, IIAC urged the Commission to clarify 
that U.S. investment advisers or other fiduciaries not be considered to 
be within the interpretation of the term ``U.S. person'' when they are 
acting on behalf of non-U.S. accounts.\153\
---------------------------------------------------------------------------

    \153\ IIAC (Aug. 27, 2012) at 4.
---------------------------------------------------------------------------

    IIB stated that prong (vii) relating to an estate or trust should 
be replaced, explaining that market participants do not typically 
identify an estate's or trust's regulatory status on the basis of its 
tax status. Instead, it recommended that the Commission's 
interpretation look to the status of the executor, administrator, or 
trustee. Specifically,

[[Page 45307]]

IIB recommended that the Commission's interpretation of the term ``U.S. 
person'' include an estate or trust that is organized in the United 
States ``unless (A) an executor, administrator or trustee that is not a 
U.S. person has sole or shared investment discretion with respect to 
the assets of the trust or estate, (B) in the case of an estate, the 
estate is governed by foreign law and (C) in the case of a trust, no 
beneficiary of the trust (and no settlor if the trust is revocable) is 
a U.S. person . . . .'' \154\
---------------------------------------------------------------------------

    \154\ IIB (Aug. 27, 2012) at 14.
---------------------------------------------------------------------------

c. Commenters' Proposed Alternatives
    A number of commenters provided substantially different alternative 
interpretations of the term ``U.S. person.'' \155\ Most notably, the 
commenters' alternatives would not encompass persons by virtue of 
``indirect'' U.S. ownership. For example, SIFMA's proposed ``U.S. 
person'' interpretation would include only those commodity pools or 
collective investment vehicles that are organized or incorporated under 
U.S. law or are (1) directly majority owned by ``U.S. persons'' or, in 
the case of ownership by a pool, a pool that is organized in the United 
States and (2) not publicly offered.\156\ IIB submitted an alternative 
``U.S. person'' interpretation that generally tracked SIFMA's proposed 
interpretation.\157\
---------------------------------------------------------------------------

    \155\ See, e.g., SIFMA (Aug. 27, 2012); IIB (Aug. 27, 2012); The 
Clearing House (Aug. 27, 2012).
    \156\ See SIFMA (Aug. 27, 2012) at A10-11.
    \157\ See IIB (Aug. 27, 2012) at 13-14.
---------------------------------------------------------------------------

d. Due Diligence
    Many commenters stated that the Commission's policy in this regard 
should contemplate that a firm would reasonably rely on counterparty 
representations regarding their U.S. person status.\158\ For example, 
SIFMA stated that the Commission's policy should be consistent with a 
determination by the swap counterparty itself of its U.S.-person 
status, but in the alternative, SIFMA recommended that the Commission's 
policy contemplate reasonable reliance on counterparty 
representations.\159\ According to these commenters, counterparty 
representations are the only practical means of determining 
counterparty status as firms do not currently collect the information 
necessary to evaluate counterparty status under the proposed 
interpretation. The commenters also were concerned that certain prongs 
of the proposed interpretation (e.g., ``look-through'' obligations 
associated with the ``direct and indirect ownership'' criterion in 
prong (iv)) would render it difficult, if not impossible, for market 
participants to directly consider whether their counterparties would be 
within the Commission's interpretation of the term ``U.S. person.'' 
SIFMA and Cleary further pointed out that the Commission has accepted 
reasonable reliance on counterparty representations in the context of 
the external business conduct standards.\160\
---------------------------------------------------------------------------

    \158\ See, e.g., SIFMA (Aug. 27, 2012) at A16-17; Deutsche Bank 
(Aug. 27, 2012) at 4; Capital Markets (Aug. 24, 2012) at 5; SIFMA/
AMG (Aug. 27, 2012) at 4-5.
    \159\ SIFMA (Aug. 27, 2012) at A16-18.
    \160\ SIFMA/AMG (Aug. 27, 2012) at 4-5; Cleary (Aug. 16. 2012) 
at 6.
---------------------------------------------------------------------------

e. Non-U.S. Person That Is Affiliated, Guaranteed, or Controlled by 
U.S. Person
    Viewed as a whole, the proposed interpretation of the term ``U.S. 
person,'' would generally not include a non-U.S. affiliate of a U.S. 
person, even if all of such affiliate's swaps are guaranteed by the 
U.S. person.\161\ The Commission, nevertheless, raised a concern 
regarding risks associated with a U.S. person providing a guarantee to 
its non-U.S. affiliates and requested comments on whether the term 
``U.S. person'' should, in fact, be interpreted to generally include a 
non-U.S. affiliate guaranteed by a U.S. person.\162\ In addition, the 
Commission sought comments on whether the term ``U.S. person'' also 
should be interpreted to generally include any non-U.S. persons 
controlled by or under common control with a U.S. person.\163\
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    \161\ See Proposed Guidance, 77 FR at 41218. For purposes of 
this Guidance, the Commission generally interprets the term 
``affiliates'' to include an entity's parent entity and 
subsidiaries, if any, unless stated otherwise.
    \162\ Id.
    \163\ Id.
---------------------------------------------------------------------------

    Responding to the Commission's request for comments on this issue, 
many commenters stated that Title VII requires the Commission to 
interpret the term ``U.S. person'' to include foreign affiliates of 
U.S. persons, and U.S. affiliates of foreign persons, in order to 
protect U.S. taxpayers from the risks posed by the global swaps 
market.\164\ Senator Levin urged that ``[a]t a minimum, it is essential 
that [the Guidance] . . . include as a U.S. person any foreign 
affiliate or subsidiary under common control with a U.S. person.'' 
\165\ He also agreed with statements in the Proposed Guidance that non-
U.S. affiliates guaranteed by U.S. persons effectively transfer the 
risks of their swaps to the U.S. guarantor, and therefore the 
guaranteed non-U.S. affiliates should be subject to U.S. 
safeguards.\166\ Public Citizen stated that not interpreting the term 
``U.S. person'' to include a foreign affiliate of a U.S. person ``hides 
the rabbit in the hat'' for Title VII purposes.\167\ It argued that 
Congress intended financial entities that are controlled by U.S. 
financial institutions or that could adversely impact the U.S. economy 
to be regulated as U.S. persons under Title VII in order to fully 
protect American taxpayers from the threat of ``future financial 
bailouts.''
---------------------------------------------------------------------------

    \164\ See Public Citizen's Congress Watch (``Public Citizen'') 
(Aug. 14, 2012) at 9-10; IATP (Aug. 27, 2012) at 4; Better Markets 
(Aug. 27, 2012) at 6.
    \165\ See Letter from Sen. Levin at 8.
    \166\ See id. (citing Proposed Guidance, 77 FR at 41218).
    \167\ Public Citizen (Aug. 14, 2012) at 3.
---------------------------------------------------------------------------

    Greenberger also expressed support for including foreign swap 
entities controlled by U.S. parents in the interpretation of the term 
``U.S. person.'' In his view, the Commission's distinction between 
guaranteed and non-guaranteed foreign subsidiaries is arbitrary, as the 
absence of a U.S. guarantee does not insulate the U.S. parent from risk 
exposure.\168\ Other commenters argued that the Commission's 
interpretation of the term ``U.S. person'' should include foreign 
affiliates whose swaps are guaranteed by a U.S. person.\169\
---------------------------------------------------------------------------

    \168\ Greenberger (Aug. 27, 2012) at 6-7.
    \169\ See Better Markets (Aug. 27, 2012) at 6-7; Public Citizen 
(Aug. 14, 2012) at 3.
---------------------------------------------------------------------------

    Other commenters objected to including a non-U.S. entity in the 
interpretation of the term ``U.S. person'' solely on the basis of 
affiliation with a U.S. person or having its swaps guaranteed by a U.S. 
person. Sullivan & Cromwell argued that foreign operations of a U.S.-
based bank do not have a ``direct and significant connection with 
activities in, or effect on,'' U.S. commerce based solely on 
affiliation with or guarantee by a U.S. parent bank.\170\ It stated 
that overseas operations usually have a non-U.S. orientation (i.e., 
transactions with non-U.S. counterparties for non-U.S. business 
purposes), and thus the connection to U.S. commerce is indirect and, 
further, transactions with non-U.S. counterparties will not have a 
significant effect on U.S. commerce. Other commenters raised similar 
concerns about the lack of jurisdictional nexus. For example, The 
Clearing House stated that the Commission must conclude that the risk 
to the U.S. entity is ``significant'' before designating a non-U.S. 
guaranteed entity a ``U.S. person,'' and further stated that a non-U.S. 
entity that is subject to local capital

[[Page 45308]]

rules or swap dealer registration should be excluded from the 
interpretation of ``U.S. person.'' \171\ SIFMA, addressing the control 
issue, objected to including a non-U.S. person that is controlled by, 
or under common control with, such person in the interpretation of the 
term ``U.S. person'' since such control is insufficient to satisfy the 
jurisdictional nexus required by section 2(i).\172\
---------------------------------------------------------------------------

    \170\ See Sullivan & Cromwell (Aug. 13, 2012) at A2-3. See also 
Hong Kong Banks (Aug. 27, 2012) at 4.
    \171\ See The Clearing House (Aug. 27, 2012) at 17.
    \172\ See SIFMA (Aug. 27. 2012) at A20. See also Australian 
Bankers (Aug. 27, 2012) at 4 (stating that the control concept 
should not be relevant in the definition of ``U.S. person,'' and 
while common control may potentially indicate common risk, the 
Commission's focus on the ultimate location of the risk is a more 
relevant to the interpretation of the term ``U.S. person.'').
---------------------------------------------------------------------------

    Japanese Bankers Association did not agree that these situations 
effect a risk transfer to the U.S. person, arguing that the risk would 
ultimately be incurred by the non-U.S. person and not by the U.S. 
guarantor; thus, it believed that the term ``U.S. person'' should not 
be interpreted to include a non-U.S. person guaranteed by a U.S. 
person.\173\ The Coalition for Derivatives End-Users (``End-Users 
Coalition'') expressed concerns about competitive implications, stating 
that imputing U.S. status to a non-U.S. person guaranteed by a U.S. 
person may disadvantage the non-U.S. affiliates of U.S. end-users, 
since those non-U.S. affiliates may need to be guaranteed to enter into 
swaps with non-U.S. counterparties.\174\
---------------------------------------------------------------------------

    \173\ See Japanese Bankers Association (Aug. 27. 2012) at 8.
    \174\ See End-Users Coalition (Aug. 27, 2012) at 3 (urging the 
Commission to exclude a foreign affiliate of a U.S. end-user, 
guaranteed by that end-user, from its interpretation).
---------------------------------------------------------------------------

f. Foreign Branch of U.S. Person
    In the Proposed Guidance, the Commission stated that a foreign 
branch of a U.S. swap dealer should be included in the Commission's 
interpretation of the term ``U.S. person'' because it is a part, or an 
extension, of a U.S. person.\175\ Several commenters agreed with the 
Commission's interpretation.\176\ Senator Levin asserted that the ``JP 
Morgan whale trades provide strong factual support for an inclusive 
definition of U.S. person, in particular when it comes to the foreign 
branch or agency of a U.S. corporation.''\177\ Other commenters 
recommended that a foreign branch of a U.S. swap dealer be excluded 
from the interpretation. Sullivan & Cromwell argued that a foreign 
branch should not be included in the interpretation solely on the basis 
that it is a part of a U.S. bank.\178\ Citi recommended that the 
Commission's policy should be that a foreign branch of a U.S. swap 
dealer is generally considered a non-U.S. person, so long as the branch 
remains subject to Entity-Level Requirements and obtains substituted 
compliance for Transaction-Level Requirements for transactions with 
non-U.S. persons.\179\ In Citi's view, this would address comments by 
the foreign branch's non-U.S. clients that they would have to register 
as swap dealers or MSPs, while assuring that such non-U.S. clients' 
swaps with the foreign branch would generally be covered by the 
Transaction-Level Requirements or substituted compliance.
---------------------------------------------------------------------------

    \175\ See Proposed Guidance, 77 FR at 41218.
    \176\ See, e.g., Public Citizen (Aug. 27, 2012) at 5; 
Greenberger (Aug. 27, 2012) at 3; Better Markets (Aug. 27, 2012) at 
2, 6-7.
    \177\ See Letter from Sen. Levin at 7.
    \178\ See Sullivan & Cromwell (Aug. 13, 2012) at A6-7.
    \179\ See Citi (Aug. 27, 2012) at 2-4 (stating that foreign 
branches of U.S.-based swap dealers should not be considered ``U.S. 
persons,'' but should still be subject to the Commission's Entity-
Level and Transactional-Level Requirements). See also State Street 
(Aug. 27, 2012) at 3; IIB (Aug. 27, 2012) at 8.
---------------------------------------------------------------------------

g. Regulation S
    Some commenters believed that the Commission's policy should 
explicitly adopt the SEC's Regulation S definition of a ``U.S. 
person.'' MFA/AIMA stated that Regulation S eliminates problems and 
inconsistencies in the Commission's proposed interpretation.\180\ J.P. 
Morgan stated that Regulation S would facilitate compliance by non-U.S. 
market participants since they are familiar with the SEC's 
approach.\181\ On the other hand, the Institute for Agriculture and 
Trade Policy (``IATP'') argued against incorporating the Regulation S 
definition, stating that it predates the prominence of the swaps 
market.\182\
---------------------------------------------------------------------------

    \180\ See MFA/AIMA (Aug. 28, 2012) at 8-9.
    \181\ See J.P. Morgan (Aug. 13, 2012) at 9.
    \182\ See IATP (Aug. 27, 2012) at 4.
---------------------------------------------------------------------------

h. Other Clarifications
    A number of commenters voiced concerns regarding potential 
expansion of the Commission's interpretation of the term ``U.S. 
person,'' which they thought could result from the prefatory phrase 
``includes, but is not limited to,'' and requested that the Commission 
affirmatively state that non-U.S. persons are any persons that would 
not be covered by the interpretation of the term ``U.S. person.'' \183\ 
A non-exhaustive ``U.S. person'' interpretation, they contended, would 
create unnecessary uncertainty.
---------------------------------------------------------------------------

    \183\ See SIFMA (Aug. 27, 2012) at A15; IIB (Aug. 27, 2012) at 
11-12; EC (Aug. 24, 2012) at 1-2; Australian Bankers (Aug. 27, 2012) 
at 4.
---------------------------------------------------------------------------

    A number of commenters further stated that the interpretation of 
the term ``U.S. person'' should be applied only for purposes of the 
registration and regulation of swap dealers and MSPs.\184\ The Futures 
Industry Association (``FIA'') argued that the interpretation of the 
term ``U.S. person'' should not extend to those provisions of the CEA 
governing the activities of futures commission merchants (``FCMs'') 
with respect to either exchange-traded futures (whether executed on a 
designated contract market or a foreign board of trade) or cleared 
swaps.\185\ SIFMA similarly requested that the Commission clarify that 
the final interpretation of the term ``U.S. person'' does not override 
existing market practice as it relates to futures or FCMs, including 
with respect to clearing.\186\ SIFMA also requested that the Commission 
clarify that the final interpretation of the term ``U.S. person'' for 
cross-border swaps regulation is the single interpretation for all 
Dodd-Frank swaps regulation purposes.\187\ Finally, SIFMA requested 
that supranational organizations, such as the World Bank and 
International Monetary Fund (and their affiliates) be excluded from the 
interpretation.\188\
---------------------------------------------------------------------------

    \184\ See, e.g., The Futures and Options Association Ltd. 
(``FOA'') (Aug. 13, 2012) at 10-11; SIFMA (Aug. 27, 2012); IIB (Aug. 
27, 2012); EC (Aug. 24, 2012).
    \185\ See FIA (Aug. 27, 2012) at 2-3.
    \186\ See SIFMA (Aug. 27, 2012) at A14-15.
    \187\ Id.
    \188\ Id. at A21.
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3. Commission Guidance
    The Commission has carefully reviewed and considered the comments 
received and is finalizing a policy that will generally set forth an 
interpretation of the term ``U.S. person,'' as used in this Guidance, 
with certain modifications to the proposed definition as described 
below. As explained in the Proposed Guidance, the term ``U.S. person,'' 
as used in the context of CEA section 2(i), generally encompasses those 
persons whose activities--either individually or in the aggregate--have 
the requisite ``direct and significant'' connection with activities in, 
or effect on, U.S. commerce within the meaning of section 2(i).\189\ 
The various prongs of

[[Page 45309]]

the Commission's interpretation are intended to identify persons for 
which, in practice, the connection or effects required by section 2(i) 
are likely to exist and thereby inform the public of circumstances in 
which the Commission expects that the swaps provisions of the CEA and 
the Commission's regulations would apply pursuant to the statute. In 
this respect, the Commission will consider not only a person's legal 
form and its domicile (or location of operation), but also the economic 
reality of a particular structure or arrangement, along with all other 
relevant facts and circumstances, in order to identify those persons 
whose activities meet the ``direct and significant'' jurisdictional 
nexus. Below, the Commission discusses each prong of its proposed 
interpretation of the term ``U.S. person.''
---------------------------------------------------------------------------

    \189\ For purposes of this Guidance, the Commission interprets 
the term ``U.S. person'' by reference to the extent to which swap 
activities or transactions involving one or more such persons have 
the relevant jurisdictional nexus. For example, this interpretation 
would help determine whether non-U.S. persons engaging in swap 
dealing transactions with ``U.S. persons'' in excess of the de 
minimis level would be required to register and be regulated as a 
swap dealer. In addition, for the same reasons, the term ``U.S. 
person'' can be helpful in determining the level of U.S. interest 
for purposes of analyzing and applying principles of international 
comity when considering the extent to which U.S. transaction-level 
requirements should apply to swap transactions.
---------------------------------------------------------------------------

    First, the Commission will include in its consideration the 
elements in prongs (i) and (ii)(A), as proposed, renumbered as prongs 
(i) and (iii).\190\ These prongs of the ``U.S. person'' interpretation 
generally incorporate a ``territorial'' concept of a U.S. person.\191\ 
That is, these are natural persons and legal entities that are 
physically located or incorporated within U.S. territory and, 
consequently, the Commission would generally consider swap activities 
involving such persons to satisfy the ``direct and significant'' test 
under section 2(i).\192\ The Commission clarifies that it expects that 
prong (iii) would encompass legal entities that engage in non-profit 
activities, as well as U.S. state, county and local governments and 
their agencies and instrumentalities. Under prong (iii), the Commission 
would generally interpret the term ``U.S. person'' to include also a 
legal entity that is not incorporated in the United States if it has 
its ``principal place of business'' in the United States. The 
Commission intends that this interpretation would generally include 
those entities that are organized outside the United States but have 
the center of direction, control, and coordination of their business 
activities in the United States.
---------------------------------------------------------------------------

    \190\ For clarity, the Commission has reordered the prongs of 
its interpretation of the term ``U.S. person.''
    \191\ For purposes of this Guidance, the Commission would 
interpret the term ``United States'' to include the United States, 
its states, the District of Columbia, Puerto Rico, the U.S. Virgin 
Islands, and any other territories or possessions of the United 
States government, or enclave of the United States government, its 
agencies or instrumentalities.
    \192\ In this respect, the Commission declines to adopt a 
commenter's recommendation that IRS regulations should be relevant 
in considering whether a person is included in the interpretation of 
the term ``U.S. person.'' The Commission believes that adopting the 
IRS's approach in the Commission's policy would be inappropriate; 
rather, consistent with CEA section 2(i), the Commission's 
interpretation of the term ``U.S. person'' focuses on persons whose 
swap activities meet the ``direct and significant'' nexus.
---------------------------------------------------------------------------

    The concept of an operating company having a principal place of 
business has been addressed by the Supreme Court. In a recent case, the 
Supreme Court described a corporation's principal place of business as 
the ``place where the corporation's high level officers direct, 
control, and coordinate the corporation's activities.'' \193\ The 
Supreme Court explained that ```principal place of business' is best 
read as referring to the place where a corporation's officers direct, 
control, and coordinate the corporation's activities. It is the place 
that Courts of Appeals have called the corporation's `nerve center.' 
And in practice it should normally be the place where the corporation 
maintains its headquarters--provided that the headquarters is the 
actual center of direction, control and coordination, i.e., the `nerve 
center,' and not simply an office where the corporation holds its board 
meetings.'' \194\ The Commission notes that commenters on the Proposed 
Guidance and Further Proposed Guidance generally did not object to the 
inclusion in the interpretation of the term ``U.S. person'' of an 
entity that has its principal place of business in the United States.
---------------------------------------------------------------------------

    \193\ See Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010) 
(determining a corporation's principal place of business for 
purposes of diversity jurisdiction).
    \194\ Id. at 92-93.
---------------------------------------------------------------------------

    The Commission is of the view that the application of the principal 
place of business concept to a collective investment vehicle may 
require consideration of additional factors beyond those applicable to 
operating companies. A collective investment vehicle is an entity or 
group of related entities created for the purpose of pooling assets of 
one or more investors and channeling these assets to trade or invest to 
achieve the investment objectives of the investor(s), rather than being 
a separate, active operating business.\195\ In this context, the 
determination of where the collective investment vehicle's ``high level 
officers direct, control, and coordinate the [vehicle's] activities''--
to apply the Hertz decision noted above--can involve several different 
factors.\196\
---------------------------------------------------------------------------

    \195\ See Further Proposed Guidance, 78 FR at 913.
    \196\ As mentioned in the Introduction, Long-Term Capital 
Portfolio LP, a Cayman Islands hedge fund advised by LTCM, collapsed 
in 1998, leading a number of creditors to provide LTCM substantial 
financial assistance under the supervision of the Federal Reserve 
Bank of New York. High level officers at LTCM's offices in 
Greenwich, Connecticut, directed, controlled and coordinated the 
activities of Long-Term Capital Portfolio LP. This hedge fund, with 
approximately $4 billion in capital and a balance sheet of just over 
$100 billion had a swap book in excess of $1 trillion notional. 
Federal Reserve Chairman Alan Greenspan testified that ``[h]ad the 
failure of LTCM triggered the seizing up of markets, substantial 
damage could have been inflicted on many market participants, 
including some not directly involved with the firm, and could have 
potentially impaired the economies of many nations, including our 
own.'' Systemic Risks to the Global Economy and Banking System from 
Hedge Fund Operations: Hearing Before the House Banking and Fin. 
Services Comm., 105th Cong., 2nd sess. (Oct. 1, 1998) (statement of 
Alan Greenspan, Chairman, Federal Reserve), available at 1998 WL 
694498.
---------------------------------------------------------------------------

    The Commission is aware that the formation and structure of 
collective investment vehicles involve a great deal of variability, 
including with regard to the formation of the legal entities that will 
hold the relevant assets and enter into transactions (including swaps) 
in order to achieve the investors' objectives. Legal, regulatory, tax 
and accounting considerations may all play a role in determining how 
the collective investment vehicle is structured and the jurisdictions 
in which the legal entities will be incorporated.\197\ Many legal 
jurisdictions around the world have promulgated specialized regimes for 
the formation of collective investment vehicles, which offer various 
legal, regulatory, tax and accounting efficiencies.\198\
---------------------------------------------------------------------------

    \197\ This discussion regarding the location of a collective 
investment vehicle's principal place of business is solely for 
purposes of applying Commission swaps regulations promulgated under 
Title VII. The Commission does not intend to address here the 
interpretation of ``principal place of business'' for any other 
purpose.
    \198\ See Gerald T. Lins, et al., Hedge Funds and Other Private 
Funds: Regulation and Compliance Sec.  9:1 (Thomson Reuters 2012-
2013 ed. 2012).
---------------------------------------------------------------------------

    In view of these circumstances, the Commission believes that for a 
collective investment vehicle, the locations where the relevant legal 
entities have registered offices, hold board meetings or maintain books 
and records are generally not relevant in determining the principal 
place of business of the collective investment vehicle. Instead, as 
stated in the Hertz case cited above, the determination should 
generally depend on the location of the ``actual center of direction, 
control and coordination,'' i.e., the ``nerve center,'' of the 
collective investment vehicle.
    Hertz focuses on the place where the ``high level officers direct, 
control, and coordinate'' the entity's activities.\199\ In this regard, 
the Commission believes that the focus should not necessarily be

[[Page 45310]]

on the persons who are named as directors or officers of the legal 
entities that comprise the collective investment vehicle.\200\ As noted 
above, these legal entities are merely the legal structure through 
which the investment objectives of the collective investment vehicle 
are implemented. Rather, the analysis should focus on the persons who 
are the equivalent for the collective investment vehicle to the ``high 
level officers'' of an operating company because they direct, control 
and coordinate key functions of the vehicle, such as formation of the 
vehicle or its trading and investment.
---------------------------------------------------------------------------

    \199\ See note 193 and accompanying text, supra.
    \200\ In many cases, the entities that comprise the collective 
investment vehicle may not have ``high level officers'' as 
contemplated by Hertz, and the directors of the entities may be 
individuals who are affiliated with a firm that is the legal counsel 
or administrator of the collective investment vehicle and who may 
serve as directors for many different vehicles. See Lins, supra note 
198, at Sec.  9:4.
---------------------------------------------------------------------------

    The ``high level officers [who] direct, control and coordinate'' 
the collective investment vehicle may be those senior personnel who 
implement the investment and trading strategy of the collective 
investment vehicle and manage its risks, and the location where they 
conduct the activities necessary to implement the investment strategies 
of the vehicle may be its center of direction, control and 
coordination. In this regard, the Commission notes that the achievement 
of the investment objectives of a collective investment vehicle 
typically depends upon investment performance and risk management. 
Investors in a collective investment vehicle seek to maximize the 
return on their investment while remaining within their particular 
tolerance for risk. Thus, the key personnel relevant to this aspect of 
the analysis are those senior personnel responsible for implementing 
the vehicle's investment strategy and its risk management. Depending on 
the vehicle's investment strategy, these senior personnel could be 
those responsible for investment selections, risk management decisions, 
portfolio management, or trade execution.\201\
---------------------------------------------------------------------------

    \201\ The Commission understands that the collective investment 
vehicle may obtain the services of the relevant personnel through a 
variety of arrangements, including contracting with an asset manager 
that employs the personnel, contracting with other employers, or 
retaining the personnel as independent contractors. Thus, in this 
analysis, the Commission would generally expect to consider the 
location of the personnel who undertake the relevant activities, 
regardless of their particular employment arrangements.
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    The achievement of a collective investment vehicle's investment 
objectives may be closely linked to its formation. Decisions made in 
the structuring and formation of the collective investment vehicle may 
have a significant effect on the performance of the vehicle. Thus, for 
purposes of identifying the vehicle's principal place of business, the 
Commission may also consider the location of the senior personnel who 
direct, control and coordinate the formation of the vehicle (i.e., the 
promoters).\202\ The location of the promoters of the collective 
investment vehicle is relevant, particularly where the vehicle has a 
specialized structure or where the promoters of the vehicle continue to 
be integral to the ongoing success of the fund, including by retaining 
overall control of the vehicle. The location where the promoters of the 
collective investment vehicle act to form the vehicle and bring it to 
commercial life is relevant in determining the center of direction, 
control and coordination of the vehicle, and those promoters may be the 
``high level officers'' of the vehicle referred to in Hertz.\203\
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    \202\ The promoters who form a collective investment vehicle may 
be integral to the ongoing success of the collective investment 
vehicle. In fact, the importance of the role played by the promoters 
of a legal entity has long been recognized. See generally 1A 
Fletcher Cyc. Corp. Sec.  189. For example, in Old Dominion Copper 
Mining & Smelting Co. v. Bigelow, the court drew upon English law in 
describing the promoters as follows:
    In a comprehensive sense promoter includes those who undertake 
to form a corporation and to procure for it the rights, 
instrumentalities and capital by which it is to carry out the 
purposes set forth in its charter, and to establish it as fully able 
to do its business. Their work may begin long before the 
organization of the corporation, in seeking the opening for a 
venture and projecting a plan for its development, and it may 
continue after the incorporation by attracting the investment of 
capital in its securities and providing it with the commercial 
breath of life.
    203 Mass. 159, 177 (1909), aff'd, 225 U.S. 111 (1912).
    Modern law continues to refer to the responsibility of promoters 
of legal entities. See, e.g., SEC Form D, instructions to Item 3 
(requiring information regarding the ``promoters'' of a securities 
issuer). See also In Re Charles Schwab Corp. Sec. Litig., 2010 WL 
1261705 (N.D. Cal. Mar. 30, 2010) (discussing responsibility of 
``fund managers and promoters'' to operate a collective investment 
vehicle in accordance with its formation documents).
    The Commission generally does not intend that when the promoters 
of a collective investment vehicle serve an administrative, purely 
ministerial function of handling the flow of funds from investors 
into the vehicle, the location of these personnel would be relevant 
in this context.
    \203\ The Commission is aware that the boards of directors (or 
equivalent corporate bodies) of the legal entities that comprise a 
collective investment vehicle typically have the authority to 
appoint or remove the legal entity's investment manager, 
administrator, and auditor, and to approve major transactions 
involving the legal entity and the legal entity's audited financial 
statements. But since these functions are not key to the actual 
implementation of the investment objectives of the collective 
investment vehicle, and noting that Hertz focuses on the ``high 
level officers'' of the entity rather than its directors, the 
Commission would generally not view the boards of directors of the 
legal entities to be key personnel for the collective investment 
vehicle.
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    Accordingly, the Commission will generally consider the principal 
place of business of a collective investment vehicle to be in the 
United States if the senior personnel responsible for either (1) the 
formation and promotion of the collective investment vehicle or (2) the 
implementation of the vehicle's investment strategy are located in the 
United States, depending on the facts and circumstances that are 
relevant to determining the center of direction, control and 
coordination of the vehicle.
    Since the Commission recognizes that the structures of collective 
investment vehicles vary greatly, the Commission believes it is useful 
to provide examples to illustrate how the Commission's approach could 
apply to a consideration of whether the ``principal place of business'' 
of a collective investment vehicle is in the United States in 
particular hypothetical situations. However, because of variations in 
the structure of collective investment vehicles as well as the factors 
that are relevant to the consideration of whether a collective 
investment vehicle has its principal place of business in the United 
States under this Guidance, these examples are for illustrative 
purposes only. In addition, these examples are not intended to be 
exclusive or to preclude a determination that any particular collective 
investment vehicle has its principal place of business in the United 
States.

    Example 1. An asset management firm located in the United States 
establishes a collective investment vehicle outside the United 
States (``Fund A'').\204\ Typically, the formation of the collective 
investment vehicle by the personnel of the asset management firm 
involves the selection of firms to be the administrator, prime 
broker, custodian and placement agent for the

[[Page 45311]]

collective investment vehicle.\205\ The legal entities comprising 
the collective investment vehicle enter into agreements retaining 
the asset management firm as investment manager. Personnel of the 
asset management firm who are located in the United States will be 
responsible for implementing Fund A's investment and trading 
strategy and its risk management. Based on the above facts, the 
Commission would be inclined to view the principal place of business 
of Fund A as being in the United States,\206\ and therefore each of 
the legal entities that comprise Fund A would be within the 
interpretation of the term ``U.S. person.''
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    \204\ The collective investment vehicle could be a hedge fund, a 
private equity fund, or other type of investment fund. The 
Commission is aware that the asset management firm may use any of a 
variety of structures to form the collective investment vehicle, 
which may involve one or more legal entities. In a common hedge fund 
structure, the asset management firm forms a legal entity outside 
the United States which holds the collective investment vehicle's 
assets and is the legal counterparty in its investment transactions, 
including swaps (a ``master fund''). If this structure is used, then 
typically the equity of the master fund is held by several ``feeder 
funds,'' each of which is a separate legal entity formed by the 
asset management firm with characteristics that are important to a 
different type of investor. Each investor in the collective 
investment vehicle obtains an equity interest in one of the feeder 
funds and thereby holds an indirect interest in the master fund. The 
Commission intends that this Example 1 would encompass, but not be 
limited to, a collective investment vehicle using a master/feeder 
structure such as this.
    \205\ The collective investment vehicle's administrator 
generally handles day-to-day administrative activities, such as 
operating the vehicle's bank account, issuing payment instructions, 
providing net asset calculations, calculating fees, receiving and 
processing subscriptions, preparing accounts, maintaining the 
shareholder register, arranging payments of redemption proceeds, 
coordinating communications with shareholders, and overseeing anti-
money laundering compliance. See id. at Sec.  9:6. The prime broker 
facilitates the execution of the vehicle's investment transactions, 
including swaps. The custodian is responsible for holding the 
vehicle's assets. The placement agent markets and sells shares to 
investors.
    The Commission generally considers all of these functions, 
although important to the collective investment vehicle, to be 
ministerial functions that are generally not relevant to the 
determination of the location of a collective investment vehicle's 
principal place of business. Thus, even if all of these firms and 
all the personnel performing these functions were outside the United 
States, the Commission would nonetheless be inclined to view the 
principal place of business of Fund A as within the United States.
    Additional elements that could be relevant to the determination 
include the location of the collective investment vehicle's primary 
assets, and the location of the collective investment vehicle's 
counterparties. However, the Commission believes that the location 
of these additional elements outside the United States should 
generally not preclude an interpretation that the collective 
investment vehicle's principal place of business is in the United 
States.
    \206\ The Commission notes that elements of Example 1 are 
similar to the facts of a recent court case involving a similar 
issue--the location of a collective investment vehicle's ``center of 
main interest'' for purposes of bankruptcy law. See Bear Stearns, 
note 7 and accompanying text, supra. In Bear Stearns, the collective 
investment vehicle's ``center of main interest'' was found to be in 
the United States even though its registered office was in the 
Cayman Islands, because it had no employees or managers in the 
Cayman Islands, and its investment manager was located in New York. 
Id., 374 B.R. at 129-30. The court further observed that the 
administrator that ran the back-office operations was in the United 
States, the collective investment vehicle's books and records were 
in the United States before the foreign proceedings began, and all 
of its liquid assets were located in the United States. Id. at 130. 
In addition, investor registries were maintained in Ireland; 
accounts receivables were located throughout Europe and the United 
States; and counterparties to master repurchase and swap agreements 
were based both inside and outside the United States--but none were 
claimed to be in the Cayman Islands. Id.
    The Commission believes that Bear Stearns aligns with its view 
that the principal place of business of a collective investment 
vehicle should not be determined based on where it is organized or 
has its registered office, but rather should be based on an analysis 
of the relevant facts and circumstances. However, the Commission 
notes that under bankruptcy law various factors, particularly 
factors relating to the debtor's assets and creditors, may be 
relevant to the determination of where a debtor has its ``center of 
main interest'' for purposes of determining whether a U.S. 
bankruptcy court has jurisdiction over the matter. See, e.g., In re 
SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006) (including various 
factors in the determination of center of main interest, including 
the location of the debtor's primary assets and the location of the 
majority of the debtor's creditors). The Commission believes that 
the factors that are relevant in such bankruptcy jurisdictional 
cases differ from those that are relevant to the consideration of 
whether a collective investment vehicle has its principal place of 
business in the United States for purposes of this Guidance.
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    Example 2. An asset management firm located outside the United 
States establishes a collective investment vehicle located outside 
the United States (``Fund B''). Personnel of the asset management 
firm who are located outside the United States will be responsible 
for implementing Fund B's investment and trading strategy and its 
risk management. However, personnel in two offices of the asset 
management firm--one of which is located outside the United States 
and the other of which is located in the United States--will be 
involved in managing Fund B's investment portfolio. Although the 
personnel in the U.S. office may act autonomously on a day-to-day 
basis, they will be under the direction of senior personnel in the 
non-U.S. office regarding how they are implementing the investment 
objectives of Fund B. In terms of the asset management firm's 
internal organization, the personnel in the U.S. office report to 
the personnel in the non-U.S. office, who also generally hold higher 
positions within the firm. Because the personnel located inside the 
United States merely facilitate the implementation of the investment 
objectives of Fund B, for which senior personnel outside the United 
States are responsible, the Commission would be inclined to view the 
principal place of business of Fund B as not being in the United 
States.\207\ As a result, assuming that Fund B is not majority-owned 
by U.S. persons (as discussed further below), Fund B would not be 
within the interpretation of the term ``U.S. person,'' and none of 
the legal entities that comprise Fund B would be U.S. persons 
(unless the legal entity was actually incorporated or organized in 
the United States).
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    \207\ The Commission expects that in this example, this result 
would be the same if the asset management firm entered into a 
subadvisory agreement with an independent firm that employed the 
personnel in the U.S. office described in this example. That is, 
regardless of whether the U.S. personnel are employed by the asset 
management firm or a third party employer, the relevant issue is 
whether the personnel who fulfill the key functions relating to its 
formation or the achievement of its investment objectives are 
located in, or outside of, the United States.
---------------------------------------------------------------------------

    Example 3. A financial firm located in the United States 
establishes a collective investment vehicle outside the United 
States (``Fund C''). The collective investment vehicle includes a 
single legal entity organized outside the United States, the assets 
of which are segregated into several separate classes.\208\ The U.S. 
financial firm arranges with several unaffiliated investment 
management firms to manage the assets in the various classes; an 
investment management firm affiliated with the U.S. financial firm 
may also manage the assets in one or more of the classes. Some of 
these investment management firms are located in, and others 
outside, the United States. Under the terms of the contracts between 
Fund C, the U.S. financial firm and these investment management 
firms, Fund C has delegated responsibility for the overall control 
of its investment strategies to the U.S. financial firm that 
established Fund C, and the U.S. financial firm will have rights to 
reallocate Fund C's assets among the investment management firms for 
various reasons, including the U.S. financial firm's discretion 
regarding Fund C's investment strategies. Based on the above facts, 
the Commission would be inclined to view the principal place of 
business of Fund C as being in the United States, even though some 
of the investment managers involved in implementing Fund C's 
investment and trading strategy are located outside the United 
States. Therefore, Fund C (including each of the legal entities that 
comprise Fund C) would be within the interpretation of the term 
``U.S. person.'' \209\
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    \208\ Legal entities that may be formed with separate classes 
are known in various jurisdictions as segregated portfolio 
companies, protected cell companies or segregated accounts 
companies. A collective investment vehicle with a structure such as 
this is typically referred to as a ``hedge fund platform'' or an 
``umbrella'' or ``multi-series'' hedge fund.
    \209\ The Commission expects that the result would generally be 
the same where the assets of Fund C are not segregated into separate 
classes.

    The Commission recognizes that the structures of collective 
investment vehicles are complex and varied, and it does not intend to 
establish bright line tests for when the principal place of business of 
a collective investment vehicle would or would not be within the United 
States. Rather, the Commission's examples above are intended to 
illustrate the considerations that would be relevant to whether a 
collective investment vehicle's principal place of business is in the 
United States, within the framework of reviewing all the relevant facts 
and circumstances.\210\
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    \210\ The Commission believes that Commission regulation 140.99, 
which provides for persons to request that the staff of the 
Commission provide written advice or guidance, would be an 
appropriate mechanism for a collective investment vehicle to seek 
guidance as to whether the principal place of business of the 
vehicle is in the United States for purposes of applying the 
Commission swaps regulations promulgated under Title VII.
---------------------------------------------------------------------------

    The Commission also understands that non-U.S. individuals, 
institutions, pension plans or operating companies may retain asset 
management firms in the United States to provide a range of asset 
management and other investment-related services. Where the individual, 
institution, pension plan or operating company is not within any

[[Page 45312]]

prong of the interpretation of the term ``U.S. person'' described in 
this Guidance (including prongs (iii) and (vi) which relate to 
collective investment vehicles), then the Commission generally believes 
that the person would not come within the ``U.S. person'' 
interpretation solely because it retains an asset management firm 
located in the United States to manage its assets or provide other 
financial services.\211\
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    \211\ However, this policy (that non-U.S. persons generally do 
not become U.S. persons solely by retaining U.S. asset management 
firms) would not apply to the legal entities comprising a collective 
investment vehicle that is within the interpretation of the term 
``U.S. person.'' Rather, those legal entities would be within the 
interpretation of the term ``U.S. person'' for other reasons (e.g., 
because the vehicle has its principal place of business in the 
United States or a majority of its direct or indirect owners are 
U.S. persons)--not solely because they had retained a U.S. asset 
management firm.
---------------------------------------------------------------------------

    Second, the Commission will include in its consideration the 
elements in the alternative version of prong (ii)(B) that was described 
in the Further Proposed Guidance (and renumbered in the Guidance as 
prong (vii)). The relevant elements in the alternative version are 
whether a legal entity is directly or indirectly majority-owned by one 
or more U.S. persons,\212\ in which one or more of these U.S. person(s) 
bears unlimited responsibility for the obligations and liabilities of 
such legal entity, and the entity is not a corporation, limited 
liability company, limited liability partnership or similar entity 
where shareholders, members or partners have limited liability.
---------------------------------------------------------------------------

    \212\ In this context, the term ``U.S. person'' refers to those 
natural persons or legal entities that meet prong (i), (ii), (iii), 
(iv), or (v) of the interpretation of ``U.S. person.''
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    In response to comments on the Proposed Guidance, the Commission 
intends that this prong would cover entities that are directly or 
indirectly majority-owned by U.S. person(s), but not those legal 
entities that have negligible U.S. ownership interests. In the 
Commission's view, where the structure of an entity is such that the 
U.S. owners are ultimately liable for the entity's obligations and 
liabilities, the connection to activities in, or effect on, U.S. 
commerce would generally satisfy section 2(i), irrespective of the fact 
that the ownership is indirect. The Commission expects that this 
``look-through'' aspect of the interpretation also would serve to 
discourage persons from engaging in activities outside of the Dodd-
Frank regulatory regime by creating such indirect ownership structures.
    In the Commission's view, where one or more U.S. owners has 
unlimited responsibility for losses or nonperformance by its majority-
owned affiliate, there is generally a direct and significant connection 
with activities in, or effect on, commerce of the United States within 
the meaning of section 2(i). Therefore, for purposes of section 2(i), 
the majority-owned entity would appropriately be considered a ``U.S. 
person.'' \213\ Unlimited liability corporations where U.S. persons 
have direct or indirect majority ownership and any such U.S. persons 
have unlimited liability for the obligations and liabilities of the 
entity would generally be covered under this prong.\214\ By contrast, a 
limited liability corporation or limited liability partnership would 
generally not be covered under this prong; the Commission also 
clarifies, in response to comments on the Further Proposed Guidance, 
that it intends that entities in other jurisdictions that are similar 
to limited liability corporations or limited liability partnerships in 
that none of the owners of such entities bear unlimited liability for 
the entity's obligations and liabilities would generally be excluded 
from this prong.
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    \213\ When Lehman Brothers collapsed in 2008, it had a complex 
web of affiliates. This included LBIE, an unlimited liability 
company in London. At that time, it had more than 300 outstanding 
creditor and debtor balances with its affiliates amounting to more 
than $21 billion in total. What happened to LBIE is directly 
relevant to the current discussions about cross-border application 
of swaps reforms, as LBIE had more than 130,000 swaps contracts 
outstanding when it failed. Many of the Lehman Brothers entities 
were guaranteed by the parent, Lehman Brothers Holdings, in the 
United States. More than $28 billion in client assets and money were 
caught up in the bankruptcy of the UK entity. This uncertainty led, 
further, to a run on many other financial institutions when 
customers feared for their positions and collateral housed in 
overseas affiliates of other U.S. financial institutions. See Lehman 
Brothers Progress Report, note 6 and accompanying text, supra.
    \214\ Unlimited liability corporations include, solely by way of 
example, entities such as an unlimited company formed in the U.K., 
see Brian Stewart, Doing Business in the United Kingdom Sec.  
18.02[2][c], or an unlimited liability company formed under the law 
of Alberta, British Columbia, or Nova Scotia, see Richard E. 
Johnston, Doing Business in Canada Sec.  15.04[5].
---------------------------------------------------------------------------

    The Commission has considered the comments requesting that the 
interpretation include consideration of whether the U.S. person 
majority owners have unlimited responsibility for ``all of'' the 
obligations and liabilities of the entity in connection with this prong 
of the interpretation. The Commission believes that even if there are 
some potential obligations and liabilities of the entity that may not 
flow to the U.S. persons, the risk of unlimited responsibility for 
other obligations and liabilities would generally be a sufficient nexus 
to the United States for purposes of section 2(i). Similarly, it would 
generally not be necessary for all the U.S. persons who are majority 
owners to bear unlimited responsibility (as some commenters suggested). 
Rather, if any of the U.S. persons who are direct or indirect majority 
owners bears unlimited responsibility for the obligations and 
liabilities of the entity, it would generally be covered by this prong 
of the interpretation.
    In response to requests from commenters on the Proposed Guidance, 
the Commission clarifies that it does not intend that prong (vii) would 
cover legal entities organized or domiciled in a foreign jurisdiction 
but whose swaps obligations are guaranteed by a U.S. person.\215\ To be 
clear, the Commission remains concerned, as explained in the Proposed 
Guidance, about the risks to a U.S. guarantor that flow from its 
guarantee of the swaps obligations of an entity that is organized or 
domiciled abroad.\216\ Yet, a guarantee does not necessarily provide 
for ``unlimited responsibility for the obligations and liabilities of 
the guaranteed entity'' in the same sense that the owner of an 
unlimited liability corporation bears such unlimited liability.\217\ 
The Commission believes, therefore, that its concern regarding the 
risks associated with guarantee arrangements can, consistent with CEA 
section 2(i) and in the interests of international comity, 
appropriately be addressed in a more targeted fashion without broadly 
treating such guaranteed entities as U.S. persons at this time.
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    \215\ Also, the Commission does not interpret section 2(i) to 
require that it treat a non-U.S. person as a ``U.S. person'' solely 
because it is controlled by or under common control with a U.S. 
person.
    \216\ See, e.g., Letter from Sen. Levin at 10 (``If a U.S.-based 
parent company provides an implicit or explicit guarantee, 
regardless of the form of the guarantee, to a non-U.S. subsidiary or 
affiliate, the risk is effectively transferred to the U.S. person. 
In such circumstances, the exact form of the guarantee should not 
prevent the CFTC from demanding compliance with the CFTC's 
derivatives safeguards.'').
    \217\ Since a guarantee is treated in law as a contract, a 
guarantor may be protected by legal defenses to the enforcement of 
the contract. Also, in some circumstances, a guarantee may not be 
enforceable with respect to underlying obligations that are 
materially altered without the guarantor's consent. See, e.g., 
Debtor-Creditor Law Sec.  44.04 (Theodore Eisenberg ed., Matthew 
Bender 2005).
---------------------------------------------------------------------------

    Thus, for example, as set forth below, where a non-U.S. affiliate 
of a U.S. person has its swap dealing obligations with non-U.S. 
counterparties guaranteed by a U.S. person,\218\ the guaranteed 
affiliate generally would be required to count those swap dealing 
transactions with non-U.S. counterparties (in addition to its swap 
dealing transactions with U.S. persons) for purposes of

[[Page 45313]]

determining whether the affiliate exceeds a de minimis amount of swap 
dealing activity and must register as a swap dealer. The Commission 
notes that where a non-U.S. affiliate of a U.S. person has its swap 
dealing obligations with non-U.S. counterparties guaranteed by a U.S. 
person, the guarantee creates a significant risk transfer into the 
United States. In the absence of such guarantees, non-U.S. 
counterparties may be unwilling to enter into swaps with such non-U.S. 
affiliates. As for the substantive swaps requirements, as discussed 
below, Transaction-Level Requirements generally would apply to swaps 
between a non-U.S. swap dealer or non-U.S. MSP on the one hand, and a 
U.S.-guaranteed affiliate on the other hand, though such swaps may be 
subject to substituted compliance, as appropriate. The Commission 
generally expects that, in considering international comity and the 
factors set forth in the Restatement (e.g., the character of the 
activity to be regulated, the existence of justified expectations, the 
likelihood of conflicts with regulation by foreign jurisdictions), this 
approach would strike a reasonable balance in assuring that the swaps 
market is brought under the new regulatory regime as directed by 
Congress, consistent with section 2(i) of the CEA.
---------------------------------------------------------------------------

    \218\ See note 267 and accompanying text, supra, for guidance 
regarding the Commission's interpretation of the term ``guarantee.''
---------------------------------------------------------------------------

    Third, the Commission will include in its interpretation of the 
term ``U.S. person'' the elements in prong (iii), (renumbered as prong 
(viii)), substantially as proposed. Commenters did not comment on, nor 
object to, this prong. The Commission clarifies that it expects that 
this prong would encompass a joint account where any one of the 
beneficial owners is a U.S. person.
    Fourth, the Commission will include in its interpretation of the 
term ``U.S. person'' the elements in the alternative prong (iv) that 
was described in the Further Proposed Guidance (renumbered in the 
Guidance as prong (vi)), with some modifications. The Commission 
understands from commenters that the determination by some collective 
investment vehicles of whether they are majority-owned by U.S. persons 
may pose practical difficulties. In response to these practical 
difficulties, the Commission has eliminated the reference to 
``indirect'' majority ownership in this prong. As revised, this prong 
no longer refers to ``direct or indirect'' majority ownership by U.S. 
persons.
    Under alternative prong (vi), any commodity pool, pooled account, 
investment fund or other collective investment vehicle that is 
majority-owned by one or more U.S. person(s) \219\ would be deemed a 
U.S. person. For purposes of this prong, majority-owned means the 
beneficial ownership of more than 50 percent of the equity or voting 
interests in the collective investment vehicle. The Commission expects 
that the collective investment vehicle would: (1) Determine whether its 
direct beneficial owners are U.S. persons described in prong (i), (ii), 
(iii), (iv), or (v) of the term ``U.S. person,'' and (2) ``look-
through'' the beneficial ownership of any other legal entity invested 
in the collective investment vehicle that is controlled by or under 
common control with the collective investment vehicle in determining 
whether the collective vehicle is majority-owned by U.S. persons.
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    \219\ The term ``U.S. person,'' as used in this context, refers 
to those natural persons or legal entities that meet (i), (ii), 
(iii), (iv), or (v) of the interpretation of ``U.S. person.''
---------------------------------------------------------------------------

    For example, a limited company is formed under the laws of the 
Cayman Island as a collective investment vehicle that engages in swap 
transactions. It has a single investor, which is an investment company 
registered with the Securities and Exchange Commission under the 
Investment Company Act of 1940. Shares in the registered investment 
company are only owned by United States persons and both the Cayman 
Island limited company and the registered investment company are 
sponsored by the same investment adviser. The Cayman Island limited 
company would be viewed as a ``controlled foreign corporation'' of the 
registered investment company. Because the Cayman Island limited 
company is controlled by the same investment adviser as the investor 
registered investment company, the Cayman Island limited company would 
be required to ``look through'' the registered investment company and 
would be considered majority owned by U.S. persons. Therefore, under 
revised prong (vi), the Cayman Island limited company generally would 
be a U.S. person, subject to consideration of all the facts and 
circumstances.
    As another example, a limited company is formed under the laws of 
the Cayman Island by an investment manager as a collective investment 
vehicle that engages in swap transactions as part of its investment 
strategy (``Master Fund''). It has two investors, which are also 
collective investment vehicles that were formed by the same investment 
manager for the purpose of investing in the Master Fund. One investor 
collective investment vehicle is formed under the laws of the state of 
Delaware and the other investor collective investment vehicle is a 
limited company formed under the laws of the Cayman Island. Because 
Master Fund and the two investor collective investment vehicles are 
under common control by the investment manager, the Master Fund is 
required to ``look through'' the two investor vehicles to their 
beneficial owners to determine whether it is majority owned by U.S. 
persons. Whether the Master Fund is a U.S. person will require the 
assessment of whether the majority of its equity is held indirectly by 
U.S. persons through the two investor vehicles.
    However, where a collective investment vehicle is owned in part by 
an unrelated investor collective investment vehicle, the collective 
investment vehicle need not ``look through'' the unrelated investor 
entity, but may reasonably rely upon written, bona fide representations 
from the unrelated investor entity regarding whether it is a U.S. 
person,\220\ unless the investee collective investment vehicle has 
reason to believe that such unrelated investor entity was formed or is 
operated principally for the purpose of avoiding looking through to the 
ultimate beneficial owners of that entity.\221\ The Commission expects 
that the collective investment vehicle would take reasonable ``due 
diligence'' steps with respect to its investors in making this 
determination, along the lines of the verifications that the collective 
investment vehicle may conduct in connection with other regulatory 
requirements.\222\
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    \220\ The ability of the collective investment vehicle to rely 
on the bona fide representation of the unrelated investor entity 
does not affect the due diligence that the unrelated investor entity 
should conduct in order to make such representation to the 
collective investment vehicle.
    \221\ The Commission has applied similar anti-evasion standards 
in other contexts. See, e.g., 17 CFR 4.7(a)(1)(iv)(D) (providing 
that a passive investment vehicle will be considered a non-U.S. 
person for purposes of section 4.7 under certain circumstances 
provided that the entity was ``not formed principally for the 
purpose of facilitating investment by persons who do not qualify as 
Non-United States persons in a pool'' whose operator is claiming 
relief under that section).
    \222\ See the discussion of due diligence below, which the 
Commission believes is generally applicable to the ``due diligence'' 
required by the collective investment vehicle in this context.
---------------------------------------------------------------------------

    The Commission is also including a minor modification to clarify 
that it expects that the interpretation in prong (vi) would apply 
irrespective of whether the collective investment vehicle is organized 
or incorporated in the United States. Similar to the Commission's 
analysis with respect to prong (vii) discussed above, the Commission's

[[Page 45314]]

policy is that the place of a collective investment vehicle's 
organization or incorporation would not necessarily be determinative of 
its status as a ``U.S. person'' for purposes of CEA section 2(i). As 
noted above, collective investment vehicles are created for the purpose 
of pooling assets from investors and channeling these assets to trade 
or invest in line with the objectives of the investors. In the 
Commission's view, these are generally passive investment vehicles that 
serve as a means to achieve the investment objectives of their 
beneficial owners, rather than being separate, active operating 
businesses. As such, the beneficial owners would be directly exposed to 
the risks created by the swaps that their collective investment 
vehicles enter into.\223\ Therefore, the Commission's policy is that if 
U.S. persons beneficially own more than 50 percent of the equity or 
voting interests in a collective investment vehicle, then the 
collective investment vehicle would ordinarily satisfy the ``direct and 
significant'' standard of CEA section 2(i).
---------------------------------------------------------------------------

    \223\ A collective investment vehicle is an arrangement pursuant 
to which funds of one or more investors are pooled together and 
invested on behalf of such investors by a manager. Typically, 
investors do not have day-to-day control over the management or 
operation of the vehicle and are essentially passive, beneficial 
owners of the vehicle's assets. Prior to participating in a 
collective investment vehicle, an investor enters into an 
arrangement with the vehicle which governs the fees collected by the 
manager of the vehicle and the investor's payout from the vehicle, 
which may include periodic payments. Typically a limited liability 
entity such as a corporation, limited partnership or limited 
liability company is used as part of the arrangement so that 
investor liability is limited to the investor's beneficial interest 
in the vehicle's assets.
    With respect to a swap between a collective investment vehicle 
and a non-U.S. swap dealer, the Commission believes that losses 
borne by the vehicle upon a default by the non-U.S. swap dealer are 
better seen as losses incurred by the investors in the collective 
investment vehicle rather than by the vehicle itself. In contrast 
with a collective investment vehicle, when an operating company 
enters into a swap with a non-U.S. swap dealer, losses borne by the 
operating company upon a default by the non-U.S. swap dealer are 
better seen as losses incurred by the operating company and only 
indirectly by its shareholders. Therefore, prong (vi) only relates 
to collective investment vehicles and does not extend to operating 
companies.
---------------------------------------------------------------------------

    The Commission is also revising its interpretation in prong (vi) to 
exclude non-U.S. publicly-offered, as opposed to publicly-traded, 
collective investment vehicles. That is, a collective investment 
vehicle that is publicly offered to non-U.S. persons, but not offered 
to U.S. persons, would generally not be included within the 
interpretation of the term U.S. person. This revision is intended to 
address comments that publicly-traded funds are only a subset of non-
U.S. regulated collective investment vehicles and that ownership 
verification is expected to be particularly difficult for pools, funds, 
and other collective investment vehicles that are publicly 
offered.\224\
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    \224\ The publicly-offered collective investment vehicle could 
be a UCITS (Undertakings for Collective Investment in Transferable 
Securities). See Directive 2009/65/EC of the European Parliament and 
of the Council (Jul. 13, 2009), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:302:0032:0096:EN:PDF. Under the 
Commission's interpretation of section 2(i), a UCITS would not be 
included in the term ``U.S. person,'' provided it is not offered, 
directly or indirectly, to U.S. persons.
---------------------------------------------------------------------------

    In addition, a collective investment vehicle that is publicly 
offered only to non-U.S. persons and not offered to U.S. persons 
generally would not fall within any of the prongs of the interpretation 
of the term ``U.S. person.''
    Fifth, the Commission will not include in its interpretation of the 
term ``U.S. person'' the elements in proposed prong (v), which related 
to registered commodity pool operators. The Commission agrees with 
commenters that neither the location (nor the nationality), nor the 
registration status, of the pool operator would normally, without more, 
be determinative of whether the underlying pool(s) should be included 
in its interpretation of the term ``U.S. person.'' The Commission has 
further considered that, as discussed above, the relevant elements for 
a commodity pool or other collective investment vehicle would generally 
be whether or not its principal place of business is in the United 
States or it is majority owned by U.S. persons. The Commission believes 
that proposed prong (v) could be overly broad and have the effect of 
capturing commodity pools with minimal participation of U.S. persons 
and a minimal U.S. nexus.
    Sixth, the Commission will include in its interpretation of the 
term ``U.S. person'' the elements in prong (vi) (renumbered as prong 
(iv)) relating to pension plans. In response to comments, though, the 
Commission is clarifying that it does not intend that its 
interpretation encompass pension plans that are primarily for foreign 
employees of U.S.-based entities described in prong (iii) of the 
interpretation. Also, as noted above in the discussion of collective 
investment vehicles, the Commission does not generally expect that a 
pension plan which is not a U.S. person would become a U.S. person 
simply because some of the individuals or entities that manage the 
investments of the pension plan are located or organized in the United 
States.
    Finally, the Commission will include in its interpretation of the 
term ``U.S. person'' the elements in prong (vii) (renumbered as prongs 
(ii) and (v)) pertaining to an estate or trust, with certain 
modifications to take into account the views of commenters who 
addressed this issue, and the legal and practical considerations that 
are relevant to the treatment of estates and trusts for purposes of the 
Dodd-Frank Act. The Commission agrees with the commenters who stated 
that treatment of an estate or trust should generally not depend on 
whether the income of the estate or trust is subject to U.S. tax. The 
Commission understands that whether income is subject to U.S. tax can 
depend on a variety of factors, including the source of the income, 
which may not be relevant to whether the Dodd-Frank Act should apply to 
swaps entered into by the estate or trust.
    After further consideration, the Commission will include in its 
interpretation of the term ``U.S. person'' (a) an estate if the 
decedent was a U.S. person at the time of death and (b) a trust if it 
is governed by the law of a state or other jurisdiction in the United 
States and a court within the United States is able to exercise primary 
supervision over the administration of the trust. For what it expects 
to be the relatively few estates that would use swaps (most likely for 
purposes of investment hedging), the Commission believes that the 
treatment of such swaps should generally be the same as for swaps 
entered into by the decedent during life. If the decedent was a party 
to any swaps at the time of death, then those swaps should generally 
continue to be treated in the same way after the decedent's death, when 
the swaps would most likely pass to the decedent's estate. Also, the 
Commission expects that this element of the interpretation will be 
predictable and easy to apply for natural persons planning for how 
their swaps will be treated after death, for executors and 
administrators of estates, and for the swap counterparties to natural 
persons and estates.
    With respect to trusts, the Commission expects that its approach 
would be in line with how trusts are treated for other purposes under 
law. The Commission has considered that each trust is governed by the 
laws of a particular jurisdiction, which may depend on steps taken when 
the trust was created or other circumstances surrounding the trust. The 
Commission believes that if a trust is governed by U.S. law (i.e., the 
law of a state or other jurisdiction in the United States), then it 
would generally be reasonable to treat the trust as a U.S. person for 
purposes of the Dodd-Frank Act. Another relevant element in this regard 
would be whether a court within the United States is able

[[Page 45315]]

to exercise primary supervision over the administration of the 
trust.\225\ The Commission expects that including this element of the 
interpretation would generally align the treatment of the trust for 
purposes of the Dodd-Frank Act with how the trust is treated for other 
legal purposes. For example, the Commission expects that if a person 
could bring suit against the trustee for breach of fiduciary duty in a 
U.S. court (and, as noted above, the trust is governed by U.S. law), 
then treating the trust as a U.S. person would generally be in line 
with how it is treated for other purposes.
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    \225\ The Commission is aware that one element applied by the 
Internal Revenue Service to determine if a trust is a U.S. person 
for tax purposes depends on whether a court within the United States 
is able to exercise primary supervision over the administration of 
the trust. See 26 CFR 301.7701-7(a)(1)(i). The Commission believes 
that precedents developed under tax law could be relevant, as 
appropriate, in applying this aspect of its interpretation of the 
term ``U.S. person.'' However, the Commission does not intend to 
formally adopt the Internal Revenue Service test for this purpose.
---------------------------------------------------------------------------

    The Commission disagrees with commenters that the status of an 
estate or trust should be based solely on the status of the executor, 
administrator or trustee.\226\ For one thing, this would mean that the 
treatment of the estate or trust could change if, for example, the 
executor or trustee relocates its offices. The Commission also does not 
believe it would be appropriate that the treatment of a trust would 
depend solely on the identity of the beneficiaries to the trust 
because, among other reasons, the beneficiaries may be described as a 
class of persons, rather than particular persons. In the Commission's 
view, more important considerations in formulating its policy are 
whether the treatment of the estate or trust is predictable and whether 
it is in line with how the entity is treated for other purposes. The 
Commission would also consider other facts and circumstances related to 
the estate or trust that could be relevant to whether the entity should 
be within the interpretation of the term ``U.S. person'' in the context 
of section 2(i).
---------------------------------------------------------------------------

    \226\ The Commission does not intend to preclude considerations 
relating to the trustee in determining whether the trust is governed 
by U.S. law or subject to the jurisdiction of U.S. courts, if any 
such considerations are relevant. Rather, the Commission believes 
that the status of the trustee would generally not be directly 
relevant to determining if a trust should be treated as a U.S. 
person.
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a. Due Diligence
    As described above, many commenters indicated that the information 
necessary to accurately assess the status of their counterparties as 
U.S. persons may not be available, or may be available only through 
overly burdensome due diligence, particularly where the interpretation 
includes a ``look-through'' element that considers ``direct and 
indirect'' ownership. For this reason, these commenters requested that 
the Commission's policy contemplate reasonable reliance on counterparty 
representations as to the relevant elements of the interpretation of 
the term ``U.S. person.''
    The Commission agrees with the commenters that a party to a swap 
should generally be permitted to reasonably rely on its counterparty's 
written representation in determining whether the counterparty is 
within the Commission's interpretation of the term ``U.S. person.'' In 
this context, the Commission's policy is to interpret the 
``reasonable'' standard to be satisfied when a party to a swap conducts 
reasonable due diligence on its counterparties, with what is reasonable 
in a particular situation to depend on the relevant facts and 
circumstances. The Commission notes that under the External Business 
Conduct Rules, a swap dealer or MSP generally meets its due diligence 
obligations if it reasonably relies on counterparty representations, 
absent indications to the contrary.\227\ As in the case of the External 
Business Rules, the Commission believes that allowing for reasonable 
reliance on counterparty representations encourages objectivity and 
avoids subjective evaluations, which in turn facilitates a more 
consistent and foreseeable determination of whether a person is within 
the Commission's interpretation of the term ``U.S. person'' and the 
extent to which the Title VII requirements apply to certain cross-
border activities.\228\
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    \227\ See Business Conduct Standards for Swap Dealers and Major 
Swap Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012) 
(``External Business Conduct Rules''). Consistent with the 
``reasonable reliance'' standard in the External Business Conduct 
Rules, a swap dealer or MSP may rely on the written representations 
of a counterparty to satisfy its due diligence requirements. 
However, a swap dealer or MSP should not rely on a written 
representation if it has information that would cause a reasonable 
person to question the accuracy of the representation. In other 
words, a swap dealer or MSP should not ignore red flags when relying 
on written representations to satisfy its due diligence obligations. 
Further, if agreed to by the counterparty, the written 
representations may be included in counterparty relationship 
documentation. However, a swap dealer or MSP may only rely on such 
representations in the counterparty relationship documentation if 
the counterparty agrees to timely update any material changes to the 
representations. In addition, the Commission expects swap dealers 
and MSPs to review the written representations on a periodic basis 
to ensure that they remain appropriate for the intended purpose.
    \228\ This approach is generally consistent with suggestions 
provided by commenters. For example, SIFMA suggested that the 
determination of whether a counterparty is a U.S. person should be 
made at the inception of the swap transaction based on the most 
recent representation from the counterparty, which should be renewed 
by the counterparty once per calendar year. See SIFMA (Aug. 27, 
2012) at A17.
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b. Foreign Branch of U.S. Person
    The Commission is confirming its interpretation, as proposed, that 
a foreign branch of a U.S. person is itself a ``U.S. person.'' As the 
Commission explained in the Proposed Guidance, a branch does not have a 
legal identity separate from that of its principal entity. In this 
respect, the Commission notes that branches are neither separately 
incorporated nor separately capitalized and, more generally, the rights 
and obligations of a branch are the rights and obligations of its 
principal entity (and vice versa). Under these circumstances, the 
Commission views the activities of a foreign branch as the activities 
of the principal entity, and thus a foreign branch of a U.S. person is 
a U.S. person.
    Accordingly, the Commission declines to recognize foreign branches 
of U.S. persons separately from their U.S. principal for purposes of 
registration. That is, if the foreign branch were to be a swap dealer 
or MSP, as discussed further below, the U.S. person would be required 
to register, and the registration would encompass the foreign branch. 
Upon consideration of principles of international comity and the 
factors set forth in the Restatement, though, the Commission has 
calibrated the requirements otherwise applicable to such foreign 
branches in respects other than broadly excluding them from the U.S. 
person interpretation. For example, as discussed further below, foreign 
branches of U.S. persons may comply with Transaction-Level Requirements 
through substituted compliance, where appropriate, with respect to 
swaps with foreign counterparties, as well as with a foreign branch of 
another U.S. person. Further, non-U.S. persons may exclude swaps with 
foreign branches of registered swap dealers for purposes of determining 
whether they have exceeded the de minimis level of swap dealing 
activity under the swap dealer definition.
    The types of offices the Commission would consider to be a 
``foreign branch'' of a U.S. bank, and the circumstances in which a 
swap is with such foreign branch, are discussed further below in 
section C below.

[[Page 45316]]

c. Regulation S
    The Commission has considered the recommendation by several 
commenters that the Commission follow, entirely or to some extent, the 
definition of ``U.S. person'' in the SEC's Regulation S.\229\ With 
respect to the treatment of foreign branches in particular, Regulation 
S excludes from its definition of ``U.S. person'' any agency or branch 
of a U.S. person located outside the United States if (1) the agency or 
branch operates for valid business reasons; and (2) the agency or 
branch is engaged in the business of insurance or banking, and is 
subject to substantive insurance or banking regulation in the 
jurisdiction where it is located.\230\ As the Commission noted in the 
Proposed Guidance, however, Regulation S addresses the level of 
activities (i.e., offerings of securities) conducted within the United 
States, and related customer protection issues.\231\ As such, the 
regulation's territorial approach to determining U.S. person status is, 
in the Commission's view, unsuitable for purposes of interpreting 
section 2(i), which addresses the connection with activities in and the 
risks to U.S. commerce arising from activities outside the United 
States.
---------------------------------------------------------------------------

    \229\ See, e.g., MFA/AIMA (Aug. 28, 2012) at 4, 8-9; IIAC (Aug. 
27, 2012) at 3; J.P. Morgan (Aug. 27, 2012) at 3, 8-9; SocGen (Aug. 
8, 2012) at 5; ISDA (Aug. 10, 2012) at 9. See also IIB (Aug. 9, 
2012) at 3 (noting that the proposed interpretation is more 
expansive than other Commission and SEC definitions of ``U.S. 
person'' and makes it difficult to assess U.S. person status). 
Regulation S is codified at 17 CFR 230.901 through 230.905.
    \230\ See 17 CFR 230.902(k)(2)(v).
    \231\ See Offshore Offers and Sales, 55 FR 18306 (May 2, 1990).
---------------------------------------------------------------------------

    Similarly, Regulation S and the Dodd-Frank swaps provisions also 
serve fundamentally different regulatory objectives with respect to the 
treatment of collective investment vehicles. Under Regulation S, the 
SEC will consider certain investment funds and securities issuers that 
are organized in foreign jurisdictions, but owned by U.S. investors, to 
be U.S. persons unless the U.S. investors are accredited 
investors.\232\ The accredited investor condition provides a level of 
assurance that U.S. investors are entities that understand the 
consequences of investing through a foreign entity and, in effect, may 
be deemed to have waived the benefits of the U.S. securities laws. In 
contrast, the focus of Title VII is not limited to customer protection. 
Whether or not the investors in a collective investment vehicle are 
accredited investors, in the Commission's view, is irrelevant; rather, 
under section 2(i), the focus is whether the swap activities of a 
collective investment vehicle have a direct and significant connection 
with activities in, or effect on, U.S. commerce.
---------------------------------------------------------------------------

    \232\ See 17 CFR 230.902(k)(1)(viii). Also, the exception from 
the Regulation S definition of ``U.S. person'' is not available if 
any of such accredited investors are natural persons, estates or 
trusts. Id.
---------------------------------------------------------------------------

    The Commission understands that the Regulation S definition of 
``U.S. person'' is generally understood and applied by market 
participants. However, as the foregoing examples demonstrate, the 
Regulation S definition of ``U.S. person'' could fail to capture 
persons whose activities, the Commission believes, meet the ``direct 
and significant'' jurisdictional test of CEA section 2(i)--and whose 
activities present the type of risk that Congress addressed in Title 
VII. This potential for underinclusion, together with the fact that the 
Commission has addressed commenter concerns by providing further 
details and guidance about its interpretation of the term ``U.S. 
person,'' which the Commission expects will facilitate a more 
consistent understanding of that term among market participants, 
provides the basis for not importing the Regulation S definition into 
the Commission's interpretation of CEA section 2(i).
d. Other Clarifications
    The Commission continues to include the prefatory phrase ``include, 
but not be limited to'' in its interpretation of the term ``U.S. 
person,'' as it appeared in the Proposed Guidance. While the 
Commission's policy generally is to limit its interpretation of this 
term, for purposes of this Guidance, to persons encompassed within the 
several prongs discussed above, the Commission also expects that there 
may be circumstances that are not fully addressed by those prongs, or 
other situations where the interpretation discussed above does not 
appropriately resolve whether a person should be included in the 
interpretation of the term ``U.S. person.'' Thus, the Commission 
continues to include the prefatory phrase to indicate that there may be 
situations where a person not fully described in the interpretation 
above is appropriately treated as a ``U.S. person'' for purposes of 
this Guidance in view of the relevant facts and circumstances and a 
balancing of the various regulatory interests that may apply. In these 
situations, the Commission anticipates that the relevant facts and 
circumstances may generally include the strength of the connections 
between the person's swap-related activities and U.S. commerce; the 
extent to which such activities are conducted in the United States; the 
importance to the United States (as compared to other jurisdictions 
where the person may be active) of regulating the person's swap-related 
activities; the likelihood that including the person within the 
interpretation of ``U.S. person'' could lead to regulatory conflicts; 
and considerations of international comity.\233\ The Commission 
anticipates that it would also likely be helpful to consider how the 
person (and in particular its swap activities) is currently regulated, 
and whether such regulation encompasses the person's swap activities as 
they relate to U.S. commerce.
---------------------------------------------------------------------------

    \233\ These factors are among those relevant to whether a 
country has a basis to assert jurisdiction over an activity under 
the Restatement. See generally note 86 and accompanying text, supra.
---------------------------------------------------------------------------

    Finally, in response to commenters' requests for clarification 
regarding the scope of the applicability of the ``U.S. person'' 
interpretation,\234\ the Commission confirms that its policy is to 
apply its interpretation of the term ``U.S. person'' only to swaps 
regulations promulgated under Title VII, unless provided otherwise in 
any particular regulation. Therefore, for example, the Commission does 
not intend that this Guidance address how the term ``person'' or ``U.S. 
person'' should be interpreted in connection with any other CEA 
provisions or Commission regulations promulgated thereunder.
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    \234\ See, e.g., Goldman (Aug. 27, 2010) at 3, FOA (Aug. 13, 
2012) at 10-11; SIFMA (Aug. 27, 2012) at A14-15, FIA (Aug. 27, 2012) 
at 2-5.
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4. Summary
    In summary, for purposes of the application of CEA section 2(i), 
the Commission will interpret the term ``U.S. person'' generally to 
include, but not be limited to: \235\
---------------------------------------------------------------------------

    \235\ The Commission believes that Commission regulation 140.99, 
which provides for persons to request that the staff of the 
Commission provide written advice or guidance, would be an 
appropriate mechanism for a person to seek guidance as to whether it 
is a U.S. person for purposes of applying the Commission swaps 
regulations promulgated under Title VII.

    (i) Any natural person who is a resident of the United States;
    (ii) any estate of a decedent who was a resident of the United 
States at the time of death;
    (iii) any corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or 
any form of enterprise similar to any of the foregoing (other than 
an entity described in prongs (iv) or (v), below) (a ``legal 
entity''), in each case that is organized or incorporated under the 
laws of a state or other jurisdiction in the United States or having 
its principal place of business in the United States;
    (iv) any pension plan for the employees, officers or principals 
of a legal entity described in prong (iii), unless the pension

[[Page 45317]]

plan is primarily for foreign employees of such entity;
    (v) any trust governed by the laws of a state or other 
jurisdiction in the United States, if a court within the United 
States is able to exercise primary supervision over the 
administration of the trust;
    (vi) any commodity pool, pooled account, investment fund, or 
other collective investment vehicle that is not described in prong 
(iii) and that is majority-owned by one or more persons described in 
prong (i), (ii), (iii), (iv), or (v), except any commodity pool, 
pooled account, investment fund, or other collective investment 
vehicle that is publicly offered only to non-U.S. persons and not 
offered to U.S. persons;
    (vii) any legal entity (other than a limited liability company, 
limited liability partnership or similar entity where all of the 
owners of the entity have limited liability) that is directly or 
indirectly majority-owned by one or more persons described in prong 
(i), (ii), (iii), (iv), or (v) and in which such person(s) bears 
unlimited responsibility for the obligations and liabilities of the 
legal entity; and
    (viii) any individual account or joint account (discretionary or 
not) where the beneficial owner (or one of the beneficial owners in 
the case of a joint account) is a person described in prong (i), 
(ii), (iii), (iv), (v), (vi), or (vii).

    Under this interpretation, the term ``U.S. person'' generally means 
that a foreign branch of a U.S. person would be covered by virtue of 
the fact that it is a part, or an extension, of a U.S. person.
    For convenience of reference, this Guidance uses the terms ``U.S. 
swap dealer'' and ``U.S. MSP'' to refer to swap dealers and MSPs, 
respectively, that are within the Commission's interpretation of the 
term ``U.S. person'' under this Guidance. The terms ``non-U.S. swap 
dealer'' and ``non-U.S. MSP'' refer to swap dealers and MSPs, 
respectively, that are not within the Commission's interpretation of 
the term ``U.S. person'' under this Guidance; and the term ``non-U.S. 
person'' refers to a person that is not within the Commission's 
interpretation of the term ``U.S. person'' under this Guidance.

B. Registration

1. Proposed Guidance
    Under section 2(i) of the CEA, the Dodd-Frank swaps provisions, 
including the swap dealer and MSP registration provisions, do not apply 
to activities overseas unless such activities have a ``direct and 
significant connection with activities in, or effect on,'' U.S. 
commerce. In the Proposed Guidance, the Commission addressed the 
general manner in which a person's overseas swap dealing activities or 
positions may require registration as a swap dealer or MSP, 
respectively. Specifically, under the Proposed Guidance, the Commission 
would expect that a non-U.S. person whose swap dealing transactions 
with U.S. persons exceed the de minimis threshold would register as a 
swap dealer.\236\ Likewise, under the Proposed Guidance, the Commission 
would expect that a non-U.S. person who holds swaps positions where one 
or more U.S. persons are counterparties above the specified MSP 
thresholds would register as an MSP.\237\ As explained in the Proposed 
Guidance, the Commission believes that, consistent with section 2(i), 
the level of swap dealing or positions that is sufficient to require a 
person to register as a swap dealer or MSP when conducted by a person 
located in the United States would generally also meet the ``direct and 
significant'' nexus when such activities are conducted by a non-U.S. 
person with a U.S. person and in some other limited circumstances.
---------------------------------------------------------------------------

    \236\ See Proposed Guidance, 77 FR at 41218-41219.
    \237\ Id.
---------------------------------------------------------------------------

    In the consideration of whether a non-U.S. person is engaged in 
more than a de minimis level of swap dealing, the Proposed Guidance 
would generally include the notional value of any swaps between such 
non-U.S. person (or any of its non-U.S. affiliates under common 
control) and a U.S. person (other than a foreign branch of a registered 
swap dealer).\238\ Further, where the potential non-U.S. swap dealer's 
obligations are guaranteed by a U.S. person, the Commission would 
expect that the non-U.S. person would register with the Commission as a 
swap dealer when the aggregate notional value of its swap dealing 
activities (along with the swap dealing activities of its non-U.S. 
affiliates that are under common control and also guaranteed by a U.S. 
person) with U.S. persons and non-U.S. persons exceeds the de minimis 
threshold. Additionally, the Proposed Guidance clarified that the 
Commission would not expect a non-U.S. person without a guarantee from 
a U.S. person to register as a swap dealer if it does not engage in 
swap dealing with U.S. persons as part of ``a regular business'' with 
U.S. persons, even if the non-U.S. person engages in dealing with non-
U.S. persons.
---------------------------------------------------------------------------

    \238\ Id. at 41218-20.
---------------------------------------------------------------------------

    Following a similar rationale, under the Proposed Guidance if a 
non-U.S person holds swaps positions above the requisite threshold, the 
Commission would expect such non-U.S. person to register as an MSP. In 
considering whether a non-U.S. person that is a potential MSP meets the 
applicable threshold, under the Proposed Guidance, the non-U.S. person 
would have included the notional value of: (1) any swaps entered into 
between such non-U.S. person and a U.S. person (provided that if the 
non-U.S. person's swaps are guaranteed by a U.S. person, then such 
swaps will be attributed to the U.S. guarantor and not the potential 
non-U.S. MSP); and (2) any swaps between another non-U.S. person and a 
U.S. person if the potential non-U.S. MSP guarantees the obligations of 
the other non-U.S. person thereunder.\239\
---------------------------------------------------------------------------

    \239\ Id. at 41221.
---------------------------------------------------------------------------

2. Comments
    In general, commenters on the Proposed Guidance did not raise 
concerns or objections to the Commission's interpretation that non-U.S. 
persons who engage in more than a de minimis level of swap dealing with 
U.S. persons should be expected to register as swap dealers.\240\ A 
number of commenters argued, however, that a non-U.S. person should not 
be expected to register as a swap dealer solely by reason of being 
guaranteed by a U.S. person.\241\ SIFMA stated that the ``connection 
between a non-U.S. swap dealing entity and its U.S. guarantor creates 
too tenuous a nexus to justify registration on the basis of this 
relationship alone.'' \242\ As an alternative, SIFMA posited that only 
guarantees by a U.S. person for which there is a material likelihood of 
payment by the U.S. guarantor should be counted towards the de minimis 
calculation. To implement this recommendation, SIFMA suggested that the 
Commission establish how to determine whether the likelihood of payment 
is remote, such as a comparison of the aggregate contingent liability 
of the U.S. person

[[Page 45318]]

guarantor to the net equity of that guarantor.\243\
---------------------------------------------------------------------------

    \240\ One commenter, Japanese Bankers Association, stated that 
the cross-border application of Dodd-Frank is overbroad because it 
would capture even hedging transactions made by a non-U.S. swap 
dealer with a U.S. swap dealer that is making a market. The 
definition of ``dealing activity'' is ambiguous, this commenter 
asserted, and might require the non-U.S. swap dealer to register. 
See Japanese Bankers Association (Aug. 27, 2012) at 1.
    \241\ See, e.g., Goldman (Aug. 27, 2012) at 5; ISDA (Aug. 10, 
2012) at 12 (stating that, in the typical case, an intra-group 
guarantee allocates risks and activities within the corporate group 
and is not a dealing activity of the non-U.S. person); CEWG (Aug. 
27, 2012) at 6-7 (stating that the Proposed Guidance should not 
include swap guarantees for aggregation purposes because it is 
contrary to the Final Entities Rules; jurisdiction should not be 
extended to transactions between two non-U.S. persons if the swaps 
obligations of one party are guaranteed by a U.S. person because 
U.S. jurisdiction in these circumstances is not supported by law or 
existing conventions of international jurisdiction).
    \242\ SIFMA (Aug. 27, 2012) at A29.
    \243\ Id. at A29-30.
---------------------------------------------------------------------------

    Similarly, Goldman argued that it would be inconsistent with the 
Dodd-Frank Act to expect non-U.S. persons to register as swap dealers 
solely on the basis of guarantees by a U.S. parent, absent any showing 
of a ``direct and significant'' jurisdictional nexus. Goldman 
recommended that any concerns regarding potential evasion of the 
registration requirement be addressed through the Commission's exercise 
of its anti-evasion authority.\244\ ISDA agreed, suggesting that rather 
than protecting the U.S. guarantor by encouraging swap dealer 
registration of the guaranteed non-U.S. person, a better course is 
addressing the question of when (if ever) the U.S. guarantor must 
register as a swap dealer.\245\ Australian Bankers stated that the 
considerations relevant to whether a non-U.S. person (without a 
guarantee from a U.S. affiliate) is expected to register as a swap 
dealer should relate to the aggregate notional amount of swap dealing 
activities with U.S. persons within a particular asset class.\246\
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    \244\ Goldman (Aug 27, 2012) at 5. See also CEWG (Aug. 27, 2012) 
6-7 (stating that because there is no legal basis under section 2(i) 
for asserting jurisdiction based on a guaranty, the Commission 
should amend the Proposed Guidance to clarify that a non-U.S. person 
is not subject to Commission regulation, even where a U.S. person 
guarantees either counterparty; swap dealing activity outside the 
United States that does not involve a U.S. person should not be 
subject to the Commission's jurisdiction; guarantees do not alter 
the location of activity, nor should they alter a participant's 
residency); Hong Kong Banks (Aug. 27, 2012) at 8 (arguing that swaps 
between non-U.S. persons should be excluded from the de minimis 
determination regardless of whether a counterparty is guaranteed).
    \245\ ISDA (Aug. 10, 2012) at 12.
    \246\ Australian Bankers (Aug. 27, 2012) at 4.
---------------------------------------------------------------------------

    IIAC requested that the Commission confirm that a guarantee by a 
foreign holding company would not be deemed to be a guarantee by all of 
its subsidiaries, including U.S. entities, solely as a result of the 
indirect ownership.\247\ J.P. Morgan raised concerns regarding the 
scope of the interpretation of the term a ``guarantee.'' Specifically, 
it argued that the term ``guarantee'' should not be interpreted to 
include keepwells and liquidity puts because these agreements do not 
create the same types of third-party rights as traditional guarantees 
and may be unenforceable by third parties.\248\ CEWG objected to the 
broader interpretation of the term ``guarantee'' in the Proposed 
Guidance than under the Final Product Definitions Rules,\249\ stating 
that the Commission ``must undertake a more thorough regulatory 
analysis with respect to guarantees of swaps obligations.'' \250\
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    \247\ IIAC (Aug. 27, 2012) at 6, 8.
    \248\ J.P. Morgan (Aug. 27, 2012) at 10.
    \249\ See Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48208 
(Aug. 13, 2012) (``Final Swap Definition'').
    \250\ CEWG (Aug. 27, 2012) at 5.
---------------------------------------------------------------------------

    On the other hand, Senator Levin stated that guarantees are central 
to concerns regarding cross-border swaps, and that any guarantee, 
implicit or explicit, by a U.S. parent company to its non-U.S. 
affiliates effectively transfers risk to the U.S. parent.\251\ 
Therefore, Senator Levin stated that the exact form of the guarantee 
should not limit compliance with Dodd-Frank requirements, and the list 
of relevant guarantee arrangements should be expanded to include 
arrangements involving total return swaps, credit default swaps or 
customized options that result in the foreign affiliate's activities 
creating off balance sheet liabilities for a U.S. person.\252\ Eight 
Senators commented that focusing on whether affiliates are explicitly 
``guaranteed'' by a U.S. affiliate does not go far enough. They 
expressed concern that market pressures cause U.S. parent firms to 
stand behind their foreign affiliates even if explicit guarantees are 
not in place. The Senators suggested that other factors be considered 
to determine whether risk is effectively guaranteed such as: 
limitations on permissible transactions between the parent and 
affiliate; explicit non-guarantee disclosures to investors, regulators 
and counterparties; restrictions on operating under a common name or 
sharing employees and officers; and whether comprehensive resolution 
protocols exist in the foreign jurisdiction.\253\
---------------------------------------------------------------------------

    \251\ Letter from Sen. Levin at 10.
    \252\ Id. at 11.
    \253\ Letter from Senators Blumenthal, Boxer, Feinstein, Harkin, 
Levin, Merkley, Shaheen, and Warren (Jul. 3, 2013).
---------------------------------------------------------------------------

    AFR stated that the Commission's failure to clarify its 
interpretation of when affiliates of a ``U.S. person'' would be treated 
as guaranteed, or to capture ``the large grey area'' between explicit 
and informal guarantees, among other things, creates opportunities to 
escape Dodd-Frank regulations by shifting business overseas.\254\ AFR 
stressed that the Commission should clarify in the guidance that it 
``intends to follow through on properly implementing these principles 
and will not enable a `race to the bottom' in which incentives are 
created for derivatives affiliates of global banks . . . to relocate to 
areas of lax regulation to take advantage of an inadequate `substituted 
compliance' regime.'' \255\
---------------------------------------------------------------------------

    \254\ AFR (Aug. 27, 2012) at 4.
    \255\ Id. at 4.
---------------------------------------------------------------------------

3. Commission Guidance
a. Registration Thresholds for U.S. Persons and Non-U.S. Persons, 
Including Those Guaranteed by U.S. Persons
    Under the Final Entities Rules, a person is required to register as 
a swap dealer if its swap dealing activity activities over the 
preceding 12 months exceeds the de minimis threshold of swap dealing. 
In addition, Commission regulation 1.3(ggg)(4) requires that a person 
include, in determining whether its swap dealing activities exceed the 
de minimis threshold, the aggregate notional value of swap dealing 
transactions entered by its affiliates under common control.\256\
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    \256\ As discussed in greater detail below, in light of the 
global nature of the swaps markets, the Commission's policy is to 
interpret the aggregation requirement in Commission regulation 
1.3(ggg)(4) in a manner that applies the same aggregation principles 
to all affiliates in a corporate group, whether they are U.S. or 
non-U.S. persons.
---------------------------------------------------------------------------

    For purposes of determining whether a U.S. person is required to 
register as a swap dealer, a U.S. person should count all of its swap 
dealing activity, whether with U.S. or non-U.S. counterparties. This 
interpretation reflects that swaps markets are global, and therefore, 
in the Commission's view, all of a U.S. person's swap dealing 
activities, whether with U.S. persons or non-U.S. persons, have the 
requisite jurisdictional nexus and potential to impact the U.S. 
financial system. Similarly, the Commission believes that all of the 
swap dealing activities of a non-U.S. person that is an affiliate of a 
U.S. person and that is guaranteed by a U.S. person (a ``guaranteed 
affiliate''),\257\ or that is an ``affiliate conduit'' of a U.S. 
person,\258\ have the requisite statutory

[[Page 45319]]

nexus and potential to impact the U.S. financial system. Therefore, 
under the Commission's interpretation of 2(i), a guaranteed or conduit 
affiliate \259\ should count swap dealing transactions towards the de 
minimis threshold for swap dealer registration in the same manner as a 
U.S. person. That is, in light of the global nature of the swaps 
markets, a guaranteed or conduit affiliate should count all of its swap 
dealing transactions, whether with U.S. or non-U.S. counterparties, 
towards the de minimis threshold for swap dealer registration.
---------------------------------------------------------------------------

    \257\ See note 267 and accompanying text, supra, for guidance 
regarding the Commission's interpretation of the term ``guarantee.''
    \258\ When a non-U.S. person generally would be considered to be 
an affiliate conduit is discussed below in section G. As discussed 
below, for the purposes of the Commission's interpretation of CEA 
section 2(i), the Commission believes that certain factors are 
relevant to considering whether a non-U.S. person is an ``affiliate 
conduit.'' Such factors include whether: The non-U.S. person is a 
majority-owned affiliate of a U.S. person; the non-U.S. person is 
controlling, controlled by or under common control with the U.S. 
person; the financial results of the non-U.S. person are included in 
the consolidated financial statements of the U.S. person; and the 
non-U.S. person, in the regular course of business, engages in swaps 
with non-U.S. third-parties for the purpose of hedging or mitigating 
risks faced by, or to take positions on behalf of, its U.S. 
affiliate(s), and enters into offsetting swaps or other arrangements 
with its U.S. affiliate(s) in order to transfer the risks and 
benefits of such swaps with third-parties to its U.S. affiliates. 
The term ``conduit affiliate'' generally would not include swap 
dealers or affiliates thereof.
    \259\ This Guidance uses the term ``guaranteed or conduit 
affiliate'' to refer to a non-U.S. person whose swap obligations are 
guaranteed by a U.S. person or that is an affiliate conduit.
---------------------------------------------------------------------------

    However, under the Commission's interpretation of section 2(i), a 
more circumscribed registration policy applies to non-U.S. persons that 
are not guaranteed or conduit affiliates. In this case, the Commission 
believes that the non-U.S. person should count only its swap dealing 
transactions with U.S. persons (other than foreign branches of swap 
dealers that are registered with the Commission), and with guaranteed 
affiliates towards the de minimis thresholds for swap dealer 
registration, with three exceptions, which are described below. Non-
U.S. persons that are not guaranteed or conduit affiliates are not 
required to count swaps with a conduit affiliate towards the swap 
dealer de minimis calculation.
    Similarly, for purposes of determining whether a U.S. person is 
required to register as an MSP, as the Commission interprets section 
2(i), a U.S. person and a guaranteed or conduit affiliate should 
include all of swap positions with counterparties, whether they are 
U.S. or non-U.S. persons. With respect to whether a non-U.S. person 
must calculate whether its swap positions create exposures above the 
relevant MSP thresholds, the Commission believes, for policy reasons 
and consistent with principles of international comity, that CEA 
section 2(i) should not be interpreted to require non-U.S. persons that 
are not financial entities to include for MSP calculation purposes 
certain swap positions as explained below.
    As the Commission explained in the Proposed Guidance, in the event 
of a default or insolvency of a non-U.S. swap dealer with more than a 
de minimis level of swap dealing with U.S. persons, or a non-U.S. MSP 
with more than the threshold level of swaps positions with U.S. 
persons, the swap dealer's or MSP's U.S. counterparties could be 
adversely affected. Such an event may adversely affect numerous persons 
engaged in commerce within the United States, disrupt such commerce, 
and increase the risk of a widespread disruption to the financial 
system in the United States.
    Similar effects on U.S. persons and on the U.S. financial system 
may occur in the event of a default or insolvency of certain non-U.S. 
person with respect to swap dealing transactions in excess of the de 
minimis level, or swaps positions above the MSP threshold, entered into 
such non-U.S. persons with other non-U.S. persons whose swaps 
obligations are guaranteed by a U.S. person. The Commission interprets 
section 2(i) of the CEA to encompass swaps entered into by guaranteed 
or conduit affiliates in addition to encompassing swaps entered into by 
U.S. persons. In the final rule to further define the term ``swap,'' 
the Commission found that a guarantee of a swap is a term of that swap 
that affects the price or pricing attributes of that swap, and that 
when a swap has the benefit of a guarantee, the guarantee is an 
integral part of that swap.\260\ The Commission therefore interprets 
the term ``swap'' (that is not a security-based swap or mixed swap) 
``to include a guarantee of such swap, to the extent that a 
counterparty to a swaps position would have recourse to the guarantor 
in connection with the position.'' \261\ Because a guarantee of a swap 
is an integral part of the swap, and counterparties may not otherwise 
be willing to enter into a swap with the guaranteed affiliate, the 
affiliate would not have significant swap business if not for the 
guarantee. The Commission believes that swap activities outside the 
United States that are guaranteed by U.S. persons would generally have 
a direct and significant connection with activities in, or effect on, 
U.S. commerce in a similar manner as the underlying swap would 
generally have a direct and significant connection with activities in, 
or effect on, U.S. commerce if the guaranteed counterparty to the 
underlying swap were a U.S. person.\262\ Similarly, the Commission 
believes that swap activities outside the United States of an affiliate 
conduit would generally have a direct and significant connection with 
activities in, or effect on, U.S. commerce in a similar manner as would 
be the case if the affiliate conduit's U.S. affiliates entered into the 
swaps directly.
---------------------------------------------------------------------------

    \260\ See Final Swap Definition, 77 FR at 48225-48226. The 
Commission explained that when a swap counterparty typically uses a 
guarantee as credit support for its swaps obligations, the 
guarantor's resources are added to the analysis of the swap because 
``the market will not trade with that counterparty at the same 
price, on the same terms, or at all without the guarantee.'' Id. The 
Commission stated that it viewed a guarantee as, generally, ``a 
collateral promise by a guarantor to answer for the debt or 
obligation of a counterparty obligor under a swap.'' Id.
    \261\ Id. at 48226 n. 187. In response to a comment that 
guarantees are contingent obligations that do not necessarily 
replicate the economics of the underlying swap, the Commission 
stated:
    The CFTC is persuaded that when a swap (that is not a security-
based swap or mixed swap) has the benefit of a guarantee, the 
guarantee and related guaranteed swap must be analyzed together. The 
events surrounding the failure of [AIGFP] highlight how guarantees 
can cause major risks to flow to the guarantor. The CFTC finds that 
the regulation of swaps and the risk exposures associated with them, 
which is an essential concern of the Dodd- Frank Act, would be less 
effective if the CFTC did not interpret the term ``swap'' to include 
a guarantee of a swap.
    Id. at 48226.
    \262\ Congress has recognized the significance of guarantees of 
swaps obligations with respect to the activities of financial 
entities in section 210(c)(16) of the Dodd-Frank Act. There, 
Congress specifically addressed guarantees in the context of a Title 
II resolution proceeding. Section 210(c)(16) provides that, where a 
financial institution is in FDIC receivership, a ``qualified 
financial contract'' (or ``QFC,'' which includes swaps) with a 
subsidiary of that financial institution that is guaranteed by the 
financial institution cannot be terminated by a counterparty facing 
that subsidiary pursuant to the QFC based solely on the insolvency 
or receivership of the financial institution if certain conditions 
are satisfied.
---------------------------------------------------------------------------

    Accordingly, under section 2(i), the Commission intends to 
interpret section 2(i) as applying the swaps provisions of the CEA to 
swaps that are entered into by guaranteed or conduit affiliates in a 
manner similar to how section 2(i) would apply if a U.S. person had 
entered into the swap (subject to appropriate considerations of 
international comity for non-guaranteed, non-U.S. persons facing such 
guaranteed or conduit affiliates, as discussed below).
    Thus, in the case of a guaranteed or conduit affiliate, the 
Commission interprets CEA section 2(i) to provide that the guaranteed 
or conduit affiliate is expected to count toward the swap dealer de 
minimis threshold all of its swap dealing activities.\263\ Following a

[[Page 45320]]

similar rationale, the Commission interprets CEA section 2(i) to 
provide that a guaranteed or conduit affiliate, in calculating whether 
the applicable MSP threshold is met, would be expected to include, and 
attribute to the U.S. guarantor, the notional value of: (1) All swaps 
with U.S. and non-U.S. counterparties, and (2) any swaps between 
another non-U.S. person and a U.S. person or guaranteed affiliate, if 
the potential non-U.S. MSP guarantees the obligations of the other non-
U.S. person thereunder.
---------------------------------------------------------------------------

    \263\ The Commission notes that the SEC Cross-Border Proposal 
agrees that ``[i]n a security-based swap transaction between two 
non-U.S. persons where the performance of at least one side of the 
transaction is guaranteed by a U.S. person, . . . the guarantee 
creates risk to the U.S. financial system and counterparties 
(including U.S. guarantors) to the same degree as if the transaction 
were entered into directly by a U.S. person.'' SEC Cross-Border 
Proposal, 78 FR at 30986. However, the SEC does not propose to 
address the risk posed by the guarantee through requiring the non-
U.S. guaranteed affiliate to register as a security-based swap 
dealer, but rather through the application of principles of 
attribution in the major security-based swap participant definition. 
See id. at 31006.
    The Commission believes that while the SEC's proposed approach 
may be appropriate for the securities-based swaps market, it would 
not be desirable to follow a similar approach for the swaps markets 
within the Commission's jurisdiction. Due to the differing 
characteristics of the markets, such as the involvement of a much 
larger and more diverse number of commercial companies using swaps 
as compared to security-based swaps, the risks that may be 
transmitted through the interconnected financial system from the 
non-U.S. guaranteed affiliate operating as a swap dealer to the U.S. 
swaps market may not be adequately managed by the MSP structure, 
which has relatively high exposure thresholds before registration is 
required.
---------------------------------------------------------------------------

    In the Final Swap Definition, the Commission also acknowledged that 
a ``full recourse'' guarantee would have a greater effect on the price 
of a swap than a ``limited'' or ``partial recourse'' guarantee, yet 
nevertheless determined that the presence of any guarantee with 
recourse, no matter how robust, is price forming and an integral part 
of a guaranteed swap.\264\ Moreover, as the recent financial crisis has 
demonstrated, in a moment of crisis--whether at the firm-level or more 
generally, market-wide--it matters little whether the parent guarantees 
are capped or otherwise qualified. In the face of solvency concerns, 
the parent guarantor will find it necessary to assume the liabilities 
of its affiliates.\265\ For these reasons, the Commission declines to 
incorporate in the Guidance commenters' suggestions that only certain 
types of guarantees (e.g., under which there is a material likelihood 
of liability) should be considered for purposes of registration 
determinations for non-U.S. persons.
---------------------------------------------------------------------------

    \264\ Final Swap Definition, 77 FR at 48226.
    \265\ According to one commenter, these concerns may be present 
even where a guarantee is implicit, but not explicitly provided:
    A recent example of the importance of implicit guarantees is the 
collapse of Bear Stearns, which was brought down by the failure of 
non-guaranteed hedge fund affiliates. These hedge funds were foreign 
affiliates technically not guaranteed by the parent, and the 
investment by the parent company in the funds was minimal. However, 
the firm was forced to try to save the funds for reputational 
reasons and also because a fire sale of subsidiary assets could have 
seriously impacted correlated positions held by the parent company. 
. . . The example of Bear Stearns is only one among many instances 
where parent companies have been forced to rescue failing affiliates 
even in the absence of an explicit guarantee.
    AFR (Aug. 27, 2012) at 8. See also Letter from Sen. Levin, note 
216, supra.
---------------------------------------------------------------------------

    Finally, with respect to the Japanese Bankers Association's concern 
about potential constraints on their hedging activities, the Commission 
contemplates that swaps that are between foreign branches of U.S. swap 
dealers and dealing non-U.S. persons generally will be excluded from 
the swap dealer registration determination, as further described below. 
The Commission believes that under section 2(i) of the CEA, it would 
generally be appropriate for non-U.S. market participants, such as 
members of the Japanese Bankers Association, to engage in hedging 
activities with foreign branches of U.S. swap dealers without being 
expected to count such transactions for purposes of the swap dealer 
registration determination.
    The Commission also is affirming that, for purposes of this 
Guidance, the Commission would interpret the term ``guarantee'' 
generally to include not only traditional guarantees of payment or 
performance of the related swaps, but also other formal arrangements 
that, in view of all the facts and circumstances, support the non-U.S. 
person's ability to pay or perform its swap obligations with respect to 
its swaps.\266\ The Commission believes that it is necessary to 
interpret the term ``guarantee'' to include the different financial 
arrangements and structures that transfer risk directly back to the 
United States. In this regard, it is the substance, rather than the 
form, of the arrangement that determines whether the arrangement should 
be considered a guarantee for purposes of the application of section 
2(i).\267\
---------------------------------------------------------------------------

    \266\ See Proposed Guidance, 77 FR at 41221 n. 47.
    \267\ Thus, for example, while keepwells and liquidity puts, 
certain types of indemnity agreements, master trust agreements, 
liability or loss transfer or sharing agreements, and any other 
explicit financial support arrangements may provide for different 
third-party rights and/or address different risks than traditional 
guarantees, the Commission does not believe that these differences 
would generally be relevant for purposes of section 2(i). Under 
these agreements or arrangements, one party commits to provide a 
financial backstop or funding against potential losses that may be 
incurred by the other party, either from specific contracts or more 
generally. In the Commission's view, this is the essence of a 
guarantee.
---------------------------------------------------------------------------

b. Aggregation
    Commission regulation 1.3(ggg)(4) requires that a person include, 
in determining whether its swap dealing activities exceed the de 
minimis threshold, the aggregate notional value of swap dealing 
transactions entered by its affiliates under common control.\268\ 
Additionally, under the Proposed Guidance, a non-U.S. person, in 
determining whether its swap dealing transactions exceed the de minimis 
threshold, would include the aggregate notional value of swap dealing 
transactions entered into by its non-U.S. affiliates under common 
control but would not include the aggregate notional value of swap 
dealing transactions entered into by its U.S. affiliates.
---------------------------------------------------------------------------

    \268\ For purposes of this Guidance regarding the application of 
Commission regulation 1.3(ggg)(4), the Commission construes the 
phrase ``affiliates under common control'' with respect to 
affiliates as stated in the Final Entities Rules, which defines 
control as ``the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract or otherwise.'' See Final Entities Rules, 77 FR at 30631 n. 
437. Thus, for purposes of this Guidance, a reference to 
``affiliates under common control'' with a person includes 
affiliates that are controlling, controlled by, or under common 
control with such person.
---------------------------------------------------------------------------

    Numerous commenters objected to the aggregation interpretation 
regarding swap dealer registration in the Proposed Guidance.\269\ IIB 
and Cleary, while acknowledging the Commission's evasion concerns, 
contended that the aggregation interpretation in the Proposed Guidance 
would effectively eliminate the de minimis exemption for any affiliate 
of a registered swap dealer.\270\ IIB further stated that the proposed 
aggregation interpretation would require a significant amount of 
coordination among entities within a corporate group in order to gather 
the relevant information and to reconfigure their registration plans. 
These difficulties, according to IIB, would be compounded by 
uncertainties in the proposed interpretation of the term ``U.S. 
person.'' \271\
---------------------------------------------------------------------------

    \269\ See, e.g., Cleary (Aug. 16, 2012) at 9-10; IIB (Aug. 27, 
2012) at 22-24; FOA (Aug. 13, 2012) at 11-12; ISDA (Aug. 10, 2012) 
at 11-12; SocGen (Aug. 8, 2012) at 8; Deutsche Bank (Aug. 27, 2012) 
at 4-5, FSR (Aug. 27, 2012) at 4-6.
    \270\ Cleary (Aug. 16, 2012) at 9-10; IIB (Aug. 27, 2012) at 22.
    \271\ IIB (Aug. 9, 2012) at 6.
---------------------------------------------------------------------------

    Cleary argued that the positions of a registered swap dealer should 
be excluded from the de minimis calculation by its affiliate and 
further added that such aggregation relief should be available to any 
U.S. or non-U.S. affiliates of any U.S.- or non-U.S. registered swap 
dealer.\272\ FOA recommended that the Commission consider a policy that 
would permit non-U.S. persons to not aggregate the swap dealing 
activities of their non-U.S. swap dealing affiliates under common 
control and to require aggregation only

[[Page 45321]]

where there is evidence that a group of non-U.S. swap dealing 
affiliates sufficiently coordinate their swap dealing activities.\273\ 
ISDA asserted that the proposed asymmetric application of aggregation 
(i.e., U.S. affiliates aggregate the entire worldwide group, but non-
U.S. affiliates aggregate only non-U.S. affiliates) would produce 
arbitrary results, citing, as an example, a group that has a U.S. 
affiliate with $500 million of swaps and a non-U.S. affiliate with $7.6 
billion of swaps with non-U.S. persons. In that scenario, the U.S. 
affiliate must register; the non-U.S. affiliate is not required to 
register.\274\
---------------------------------------------------------------------------

    \272\ Cleary (Aug. 16, 2012) at 9-10.
    \273\ FOA (Aug. 13, 2012) at 11-12. FOA argued that the Proposed 
Guidance would have a disproportionate effect by providing that a 
non-U.S. person engaging in a de minimis amount of U.S.-facing swap 
dealing activities should register as a swap dealer simply because 
its other non-U.S. affiliates under common control, in the 
aggregate, exceed the de minimis threshold, even though there is no 
coordinated effort. Id.
    \274\ ISDA (Aug. 10, 2012) at 12 (noting that if an exclusion 
from aggregation for an affiliated swap dealer's swaps were in 
place, then the group in the above example could decide which entity 
registers and thereby bring the swaps attributable to the other 
entity under the threshold).
---------------------------------------------------------------------------

    In the Further Proposed Guidance, the Commission proposed an 
alternative interpretation of the aggregation requirement in Commission 
regulation 1.3(ggg)(4). Under this alternative, a non-U.S. person would 
be expected, in the consideration of whether its swap dealing 
transactions exceed the de minimis threshold, to include the aggregate 
notional value of swap dealing transactions entered into by all its 
affiliates under common control (i.e., both non-U.S. affiliates and 
U.S. affiliates), but not include the aggregate notional value of swap 
dealing transactions of any non-U.S. affiliate under common control 
that is registered as a swap dealer.\275\ The Commission noted that the 
application of the aggregation requirement in Commission regulation 
1.3(ggg)(4) to non-U.S. affiliates of non-U.S. swap dealers may, in 
certain circumstances, impose significant burdens on such non-U.S. 
affiliates without advancing significant regulatory interests of the 
Commission. Because the conduct of swap dealing business through 
locally-organized affiliates may in some cases be required in order to 
comply with legal requirements or business practices in foreign 
jurisdictions, such non-U.S. affiliates may be numerous and it could be 
impractical to require all such non-U.S. affiliates to register as swap 
dealers. Further, the Commission's interest in registration may be 
reduced for a non-U.S. affiliate of a registered non-U.S. swap dealer 
where the non-U.S. affiliate (or group of such affiliates) engages in 
only a small amount of swap dealing activity with U.S. persons.
---------------------------------------------------------------------------

    \275\ Also, under this alternative approach, a non-U.S. person 
would not be expected to include the aggregate notional value of 
swap dealing transactions of any of its non-U.S. affiliates under 
common control where the counterparty to such affiliate is also a 
non-U.S. person.
---------------------------------------------------------------------------

    On the other hand, the Commission also noted in the Further 
Proposed Guidance that, given the borderless nature of swap dealing 
activities, a swap dealer may conduct swap dealing activities through 
various affiliates in different jurisdictions, which suggests that its 
interpretation should take into account the applicable swap dealing 
transactions entered by all of a non-U.S. person's affiliates under 
common control worldwide. Otherwise, affiliated persons may not 
register solely because their swap dealing activities are divided, such 
that each affiliate falls below the de minimis level. The Commission 
noted its concern that a policy under which such affiliates whose swap 
dealing activities individually fall below the de minimis level, but 
whose swap dealing activities in the aggregate exceed the de minimis 
level, would not register as swap dealers could provide an incentive 
for firms to spread their swap dealing activities among several 
unregistered affiliates rather than centralize their swap dealing in 
registered firms. Such a result would increase systemic risks to U.S. 
market participants and impede the Commission's ability to protect U.S. 
markets.
    Two commenters supported the alternative interpretation of the 
aggregation requirement set out in the Further Proposed Guidance. 
Greenberger/AFR stated that the aggregation requirement helps to 
prevent the spreading of risk, because without aggregation U.S. persons 
could avoid registration as swap dealers by routing their swap activity 
through non-U.S. affiliates and thereby remain under the de minimis 
threshold.\276\ Better Markets supported the alternative interpretation 
in the Further Proposed Guidance because it contemplates that non-U.S. 
persons would aggregate all swap dealing of all affiliates, including 
U.S. affiliates, except where the affiliate is registered as a swap 
dealer.\277\
---------------------------------------------------------------------------

    \276\ Greenberger/AFR (Feb. 6, 2013) at 8-9.
    \277\ Better Markets (Feb. 15, 2013) at 8-9.
---------------------------------------------------------------------------

    Other commenters were opposed to the alternative interpretation in 
the Further Proposed Guidance. SIFMA/CH/FSR stated that aggregation of 
swap dealing activity across affiliates is not appropriate in any 
circumstance.\278\ ISDA stated that application of the aggregation 
principle to non-U.S. affiliates may impose significant burdens on the 
non-U.S. affiliates without advancing significant regulatory interests, 
and expanding the scope of aggregation to include swaps of U.S. 
affiliates would exacerbate this disproportionality.\279\
---------------------------------------------------------------------------

    \278\ SIFMA/CH/FSR (Feb. 6, 2013) at A2-3
    \279\ ISDA (Feb. 6, 2013) at 3-4 (relevant affiliates are 
unlikely to have systems to monitor U.S. person status of swap 
counterparties). See also European Federation of Energy Traders 
(``EFET'') (Feb. 6, 2013) at 3-4 (arguing that cost of system to 
monitor aggregation would be substantial and relative benefits of 
requiring aggregation are small, given that equivalent regulation 
already applies, or soon will apply, in non-U.S. jurisdictions). 
ISDA, IIB and CEWG all stated that the treatment in the January 
Order of grandfathered affiliates (i.e., those affiliates engaged in 
swap dealing with U.S. persons on December 21, 2012) should be made 
permanent in order to avoid disrupting established transactional 
relationships. See ISDA (Feb. 6, 2013) at 3; IIB (Feb. 6, 2013) at 
6; CEWG (Feb. 25, 2013) at 2-4.
---------------------------------------------------------------------------

    Mitsubishi UFJ Financial Group Inc. (``Mitsubishi UFJ'') asked the 
Commission to clarify its interpretation of the term ``control'' in the 
context of a non-U.S. joint venture where only one owner controls and 
operates, and financially consolidates, the joint venture entity.\280\ 
Mitsubishi UFJ stated that in this case the joint venture should be 
linked for aggregation purposes to the owner that has operational 
control, provided that the owner has at least one affiliate that is a 
registered swap dealer.\281\
---------------------------------------------------------------------------

    \280\ Mitsubishi UFJ (Feb. 1, 2013) at 3-4.
    \281\ Id. at 5.
---------------------------------------------------------------------------

    In the Further Proposed Guidance, the Commission asked commenters 
to address several questions regarding the aggregation provision. In 
particular, the Commission asked whether the alternative interpretation 
of the aggregation requirement should apply to non-U.S. persons that 
are guaranteed by a U.S. person with respect to their swaps obligations 
in the same way that it applies to non-U.S. persons that are not so 
guaranteed, and if so, should the Commission continue to construe the 
term ``guarantee'' for this purpose to mean any collateral promise by a 
guarantor to answer for the debt or obligation of an obligor under a 
swap and should the term include arrangements such as keepwells and 
liquidity puts.
    Greenberger/AFR replied to this question affirmatively, stating 
that the Commission should establish a rebuttable presumption that 
foreign affiliates are guaranteed by the parent company, and require 
clear evidence that the market has been explicitly informed that the 
parent will not stand behind affiliate liabilities in the event of

[[Page 45322]]

a default or bankruptcy.\282\ To do otherwise, they stated, would 
encourage swap activity through non-U.S. affiliates rather than U.S. 
persons.\283\
---------------------------------------------------------------------------

    \282\ Greenberger/AFR (Feb. 6, 2013) at 5-6.
    \283\ Id. at 6.
---------------------------------------------------------------------------

    Other commenters stated that the alternative interpretation should 
not apply to non-U.S. persons that are guaranteed by a U.S. person in 
the same way that it applies to non-U.S. persons that are not so 
guaranteed. SIFMA/CH/FSR stated that a guarantee by a U.S. person is 
not, in itself, a sufficient nexus for jurisdiction under section 2(i) 
of the CEA, since swaps may be guaranteed for a number of reasons that 
do not necessarily implicate U.S. jurisdiction.\284\ Thus, there may be 
no importation of risk to the United States through the guarantee and, 
in any event, concern about importation of risk is appropriately 
addressed where the guarantor is a prudentially regulated entity, and 
the Commission should rely on its anti-evasion authority to prevent use 
of guarantees to evade registration requirements.\285\ ISDA also stated 
that a guarantee constitutes an insufficient jurisdictional nexus, and 
that it would be consistent with international comity and regulatory 
reciprocity to regulate swaps between two non-U.S. persons primarily 
under non-U.S. regulation.\286\ Regarding the potential for risk 
transfer across borders, ISDA stated that much of the regulation 
applicable to swap dealers is not relevant to this concern--external 
and internal business conduct rules, for example, cannot assure the 
ultimate solvency of a swap dealer, and it is unclear that encouraging 
further capitalization of overseas affiliates of a U.S. guarantor, 
causing financial resources to be contributed overseas, would advance 
the stability of the U.S. financial system.\287\ The Financial Services 
Agency, Government of Japan (``Japan FSA'') also thought that a 
guarantee from a U.S. person should not, in itself, cause swaps with a 
non-U.S. person to be included in the de minimis calculation.\288\
---------------------------------------------------------------------------

    \284\ SIFMA/CH/FSR (Feb. 6, 2013) at A4.
    \285\ Id.
    \286\ ISDA (Feb. 6, 2013) at 2-3.
    \287\ Id. at 3.
    \288\ Japan FSA (Feb. 6, 2013) at 2.
---------------------------------------------------------------------------

    The Commission also asked if non-U.S. persons should not be 
expected to include in the de minimis calculation the swap dealing 
transactions of their U.S. affiliates under common control, or, 
alternatively, should the policy of the Commission contemplate that 
they would exclude from the de minimis calculation the swap dealing 
transactions of their U.S. affiliates under common control that are 
registered as swap dealers.
    Responding to this question, Greenberger/AFR stated it is important 
in any case to require aggregation across all non-U.S. affiliates of a 
global bank, in order to effectively capture transactions spread across 
multiple foreign affiliates; otherwise, it would be much easier to 
avoid registration as a swap dealer.\289\ They believe that the second 
alternative--excluding only the swap dealing transactions of U.S. 
affiliates that are registered as swap dealers--is much preferable to 
the first, because the first alternative would permit two groups of 
affiliates, one within the U.S. and another non-U.S., to both engage in 
swap dealing up to the de minimis level, which would create an 
incentive to split a swap dealing business between U.S. and non-U.S. 
affiliates.\290\ The second alternative would effectively allow a group 
of affiliates that individually and collectively fall below the de 
minimis threshold to forego registration, which they believed could be 
a sensible compromise, so long as aggregation across foreign affiliates 
is maintained.\291\
---------------------------------------------------------------------------

    \289\ Greenberger/AFR (Feb. 6, 2013) at 9.
    \290\ Id.
    \291\ Id.
---------------------------------------------------------------------------

    Several commenters were opposed to a policy under which non-U.S. 
persons would aggregate the swap dealing activities of U.S. affiliates 
that are registered swap dealers. CEWG argued that this policy could 
lead to registration of non-U.S. persons as swap dealers because of the 
activities of their U.S. affiliates, which it asserted would be 
contrary to the separation sometimes maintained between U.S. and non-
U.S. affiliates and unsupported by any policy rationale.\292\ ISDA and 
SIFMA/CH/FSR were of the view that all persons (both U.S. and non-U.S.) 
should be able to exclude from their de minimis calculations the swaps 
of any affiliate (whether U.S. or non-U.S.) that is registered with the 
Commission as a swap dealer, because swaps by a registered swap dealer 
are subject to Dodd-Frank protections and no purpose would be served by 
attributing them to affiliated entities in order to impose swap dealer 
registration on those affiliates.\293\
---------------------------------------------------------------------------

    \292\ CEWG (Feb. 25, 2013) at 2-4.
    \293\ ISDA (Feb. 6, 2013) at 4; SIFMA/CH/FSR (Feb. 6, 2013) at 
B11-12. CEWG and ISDA also both stated that U.S. persons should in 
no event be required to aggregate swaps of non-U.S. affiliates with 
non-U.S. persons, because such swaps have insufficient nexus to the 
United States. CEWG (Feb. 25, 2013) at 2; ISDA (Feb. 6, 2013) at 4.
---------------------------------------------------------------------------

    The Mizuho Corporate Bank, Ltd. (``Mizuho'') and Sumitomo submitted 
a joint letter arguing that the swap dealing activity of U.S. 
affiliates that are registered as swap dealers should be excluded from 
aggregation because otherwise the de minimis exception would be 
effectively unavailable to non-U.S. based firms that conduct U.S.-
facing swap dealing activity through a U.S. affiliate that is 
registered as a swap dealer.\294\ This result, in turn, would 
inappropriately disfavor these firms as compared to firms that conduct 
the same business through non-U.S. affiliates registered as swap 
dealers; the Commission's interpretation should encourage, rather than 
disfavor, registration of U.S. affiliates as swap dealers.\295\ IIB 
stated that the policy reasons for allowing the exclusion of swap 
dealing by non-U.S. affiliates registered as swap dealers also applies 
to the dealing activity of U.S affiliates that are registered.\296\
---------------------------------------------------------------------------

    \294\ Mizuho/Sumitomo (Feb. 6, 2013) at 3.
    \295\ Id. See also Japan FSA (Feb. 6, 2013) at 2 (arguing that 
the swap dealing activity of U.S. affiliates that are registered as 
swap dealers should be excluded because the affiliates are subject 
to supervision by the Commission).
    \296\ IIB (Feb. 6, 2013) at 5-6.
---------------------------------------------------------------------------

    Other commenters went further, stating that non-U.S. persons should 
not be required to aggregate the swap dealing activities of any of 
their U.S. affiliates. The Japanese Bankers Association stated U.S. 
affiliates should be excluded from the non-U.S. person's calculations 
because the U.S. persons are already subject to Dodd-Frank regulation 
as warranted by their activities.\297\ EDF Trading stated that non-U.S. 
persons that maintain minimal contacts with the United States should 
not be required to register as swap dealers due to the activities of 
their U.S. affiliates, because such a requirement would be inconsistent 
with the jurisdictional limitation in section 2(i) of the CEA; result 
in duplicative and potentially inconsistent regulatory requirements of 
multiple jurisdictions applying to the same swap activity; and 
encourage commercial firms to cease potential swap dealing activity in 
the U.S., resulting in reduced U.S. swaps market liquidity and 
fragmentation of the global swaps markets.\298\
---------------------------------------------------------------------------

    \297\ Japanese Bankers Association (Feb. 6, 2013) at 2-3. See 
also Japan FSA (Feb. 6, 2013) at 2 (arguing that all affiliates of 
Japanese financial institutions should be excluded from the de 
minimis calculation because the affiliates are supervised by Japan 
FSA on a consolidated basis).
    \298\ EDF Trading (Feb. 6, 2013) at 1-4. See also Brigard & 
Urrutia Abogados (Feb. 6, 2013) at 2 (non-U.S. persons should be 
allowed to exclude from the de minimis calculation the swap dealing 
activities of U.S. affiliates, and of any affiliate (U.S. or non-
U.S.) that is a registered swap dealer).
---------------------------------------------------------------------------

    Last, the Commission solicited commenters' views on whether a 
person

[[Page 45323]]

engaged in swap dealing activities could take advantage of an 
interpretation of the aggregation provision that allows a person to 
exclude the swap dealing activities of one or more of its affiliates 
under common control. The Commission asked whether, under such an 
interpretation, a person could spread its swap dealing activities into 
multiple affiliates, each under the de minimis threshold, and therefore 
avoid the registration requirement, even though the aggregate level of 
swap dealing by the affiliates exceeds the de minimis threshold. In 
this regard, the Commission asked if any such interpretation should 
include any conditions or limits on the overall amount of swap dealing 
engaged in by unregistered persons within an affiliated group.
    Greenberger/AFR opined that any approach that did not require 
significant aggregation of swap dealing activities across affiliates 
would create the danger of risk spreading outlined in the Further 
Proposed Guidance.\299\ They stated that financial institutions could 
easily remain under the de minimis threshold and thereby avoid 
registration by routing swaps through their non-U.S. affiliates.\300\
---------------------------------------------------------------------------

    \299\ Greenberger/AFR (Feb. 6, 2013) at 8-9.
    \300\ See id. (citing press reports that U.S. banks such as 
Morgan Stanley and Goldman Sachs are using foreign entities ``in 
seriatim fashion to avoid going over the $ 8 billion test''). Making 
a similar point, Better Markets emphasized that market participants 
may be expected to implement the lowest-cost structure, considering 
all regulatory costs. Better Markets (Feb. 6, 2013) at 15.
---------------------------------------------------------------------------

    The Japanese Bankers Association stated that while the approach in 
the Further Proposed Guidance could potentially prevent evasion, it 
would do so at the cost of requiring multiple non-U.S. affiliates to 
register as swap dealers even if the group of affiliates concentrated 
its U.S. swap dealing activity in one U.S. entity.\301\ In fact, they 
argued, concentrating U.S. swap dealing activity in a U.S. entity 
should be encouraged because it facilitates Commission supervision of 
that activity.\302\ Further, they stated that to expect non-U.S. 
persons to register as swap dealers as a result of dealing activity by 
their U.S. affiliates undermines the regulatory independence of 
different jurisdictions and international understandings on regulatory 
harmonization.\303\ Similarly, EDF Trading stated that expecting 
multiple entities within a corporate group to register as swap dealers 
would be burdensome and may not advance regulatory interests, and the 
alternative in the Further Proposed Guidance would merely increase 
economic and regulatory burdens without achieving a significant 
reduction in systemic risk, because it would encourage the 
concentration of swap dealing activity in non-U.S affiliates.\304\
---------------------------------------------------------------------------

    \301\ Japanese Bankers Association (Feb. 6, 2013) at 3.
    \302\ Id.
    \303\ Id. at 3-4.
    \304\ EDF Trading (Feb. 6, 2013) at 5.
---------------------------------------------------------------------------

    SIFMA/CH/FSR were of the view that it would be burdensome for 
market participants to use multiple affiliates to avoid swap dealer 
registration, because moving swap dealing activity between affiliates 
requires a significant legal, technological and operational investment, 
and fragmenting the activity among affiliates may make it harder for a 
multinational institutions to manage risk efficiently.\305\ Along the 
same lines, IIB stated that where one entity in a corporate group is 
registered as a swap dealer, there are substantial commercial and 
credit risk incentives to centralize swap dealing in the registered 
entity, because doing so maximizes the potential to net offsetting 
transactions, uses capital more efficiently, and is operationally 
efficient.\306\ On the other hand, IIB stated that using unregistered 
entities for swap dealing would not reduce the fixed costs incurred in 
registration and that the unregistered entities in the group would 
still be subject to swap costs such as clearing, reporting and trade 
execution.\307\
---------------------------------------------------------------------------

    \305\ SIFMA/CH/FSR (Feb. 6, 2013) at A3.
    \306\ IIB (Feb. 6, 2013) at 3.
    \307\ Id.
---------------------------------------------------------------------------

    Based on the comments received on the Proposed Guidance and the 
Further Proposed Guidance, and its further review of issues related to 
the aggregation requirement, the Commission's policy is to interpret 
the aggregation requirement in Commission regulation 1.3(ggg)(4) in a 
manner that applies the same aggregation principles to all affiliates 
in a corporate group, whether they are U.S. or non-U.S. persons. 
Further, the Commission will generally apply the aggregation principle 
(as articulated in the Final Entities Rules) such that, in considering 
whether a person is engaged in more than a de minimis level of swap 
dealing, a person (whether U.S. or non-U.S.) should generally include 
all relevant dealing swaps of all its U.S. and non-U.S. affiliates 
under common control,\308\ except that swaps of an affiliate (either 
U.S. or non-U.S.) that is a registered swap dealer are excluded, as 
discussed below. The Commission notes that this policy would ensure 
that the aggregate notional value of applicable swap dealing 
transactions of all such unregistered U.S. and non-U.S. affiliates does 
not exceed the de minimis level.
---------------------------------------------------------------------------

    \308\ For purposes of this Guidance, the Commission clarifies 
that a reference to ``affiliates under common control'' with a 
person includes affiliates that are controlling, controlled by, or 
under common control with such person. See note 268, supra. Further, 
in response to a question from a commenter, the Commission clarifies 
that for this purpose, the term ``affiliates under common control'' 
includes parent companies and subsidiaries, and is not limited to 
``sister companies'' at the same organizational level. See David Mu 
(Jan. 8, 2013).
---------------------------------------------------------------------------

    Stated in general terms, the Commission's interpretation allows 
both U.S. persons and non-U.S. persons in an affiliated group to engage 
in swap dealing activity up to the de minimis threshold. When the 
affiliated group meets the de minimis threshold in the aggregate, one 
or more affiliate(s) (inside or outside the United States) would 
generally have to register as swap dealer(s) so that the relevant swap 
dealing activity of the unregistered affiliates remains below the 
threshold.
    The Commission recognizes the borderless nature of swap dealing 
activities, in which a dealer may conduct swap dealing business through 
its various affiliates in different jurisdictions, and the Commission 
believes that its policy on aggregation outlined above addresses the 
concern that an affiliated group of U.S. and non-U.S. persons with 
significant swap dealing transactions with U.S. persons or guaranteed 
affiliates may not be required to register solely because such swap 
dealing activities are divided between affiliates that each fall below 
the de minimis level.
c. Exclusion of Certain Swaps by Non-U.S. Persons From the Swap Dealer 
De Minimis Threshold
    The Proposed Guidance would generally allow a non-U.S. person to 
exclude from its de minimis threshold calculation its swaps with 
foreign branches of U.S. swap dealers. This exclusion was intended to 
allow non-U.S. persons to continue their inter-dealer swap activities 
with foreign branches of U.S. swap dealers without exceeding the de 
minimis threshold, thereby triggering a requirement to register as a 
swap dealer.
    Commenters on the Proposed Guidance, such as Goldman Sachs, argued 
that the rationale for this exclusion is equally applicable when non-
U.S. persons that are banks or broker-dealers engage in swap dealing 
transactions with U.S. swap dealers that do not conduct overseas 
business through foreign branches. Absent a similar interpretation in 
these circumstances, the commenters argued, U.S. swap dealers would be 
at a

[[Page 45324]]

competitive disadvantage vis-[agrave]-vis foreign branches of U.S. swap 
dealers since non-U.S. persons would be incentivized to limit their 
dealing activities to foreign branches of U.S. swap dealers.\309\
---------------------------------------------------------------------------

    \309\ Goldman (Aug. 27, 2012) at 5-6.
---------------------------------------------------------------------------

    The Commission's policy is to generally allow non-U.S. persons that 
are not guaranteed or conduit affiliates of U.S. persons not to count 
toward their de minimis thresholds their swap dealing transactions with 
(i) A foreign branch of a U.S. swap dealer, (ii) a guaranteed affiliate 
of a U.S. person that is a swap dealer, and (iii) a guaranteed or 
conduit affiliate that is not a swap dealer and itself engages in de 
minimis swap dealing activity and which is affiliated with a swap 
dealer.\310\ The Commission believes that where the guaranteed 
affiliate of a U.S. person is registered as a swap dealer, or where the 
foreign branch is included within the swap dealer registration of its 
U.S. home office, then it is appropriate to generally permit such non-
U.S. not to count its swap dealing transactions with those entities 
against the non-U.S. person's de minimis threshold, because in these 
cases one counterparty to the swap is a swap dealer subject to 
comprehensive swap regulation and operating under the oversight of the 
Commission.
---------------------------------------------------------------------------

    \310\ Note that if a non-U.S. person that is not a guaranteed or 
conduit affiliate of a U.S. person engages in a swap dealing 
transaction with another non-U.S. person that is not a guaranteed 
affiliate of a U.S. person (including such non-U.S. person that is a 
swap dealer), then such swap dealing transaction does not count 
toward the de minimis threshold of the unregistered, swap dealing 
party.
---------------------------------------------------------------------------

    The Commission understands that commenters are concerned that 
foreign entities, in order to avoid swap dealer status, may decrease 
their swap dealing business with foreign branches of U.S. registered 
swap dealers and guaranteed affiliates that are swap dealers. 
Therefore, the Commission's policy, based on its interpretation of 
section 2(i) of the CEA, will be that swap dealing transactions with a 
foreign branch of a U.S. swap dealer or with guaranteed affiliates that 
are swap dealers should generally be excluded from the de minimis 
calculations of non-U.S. persons that are not guaranteed or conduit 
affiliates.\311\ However, the Commission is not persuaded that similar 
concerns arise regarding foreign entities that may engage in swap 
dealing business with such persons.\312\
---------------------------------------------------------------------------

    \311\ The types of offices the Commission would generally 
consider in this regard to be a ``foreign branch'' of a U.S. bank, 
and the circumstances in which a swap would generally be treated as 
being with such foreign branch, are discussed further in section C, 
infra.
    \312\ See Goldman (Aug. 27, 2012) at 3-4.
---------------------------------------------------------------------------

    With regard to non-U.S. persons that are not guaranteed or conduit 
affiliates of U.S. persons, such non-U.S. persons also generally would 
not count toward their de minimis thresholds their swap dealing 
transactions with a guaranteed affiliate that is not a swap dealer and 
itself engages in de minimis swap dealing activity and which is 
affiliated with a swap dealer. This interpretation reflects the 
Commission's view that when the aggregate level of swap dealing by a 
non-U.S. person that is not a guaranteed affiliate, considering both 
swaps with U.S. persons and swaps with unregistered guaranteed 
affiliates (together with any swap dealing transactions that the non-
U.S. person aggregates for purposes of the de minimis calculation as 
described below) exceeds the de minimis level of swap dealing, the non-
U.S. person's swap dealing transactions have the requisite ``direct and 
significant connection with activities in, or effect on, commerce of 
the United States.'' \313\ The Commission believes, however, that where 
the counterparty to a swap is a guaranteed affiliate and is not a 
registered swap dealer, the Commission's regulatory concerns are 
addressed because the guaranteed affiliate engages in a level of swap 
dealing below the de minimis threshold and is part of an affiliated 
group with a swap dealer.
---------------------------------------------------------------------------

    \313\ In the Proposed Guidance, the Commission asked whether the 
place of execution or clearing is relevant to the determination of 
whether a non-U.S. person should be required to register as a swap 
dealer. The Commission's policy is that a person generally would not 
be required to register as a swap dealer if the person's only 
connection to the United States is that the person uses a U.S.-
registered swap execution facility (``SEF'')or designated contract 
market (``DCM'') in connection with its swap dealing activities.
---------------------------------------------------------------------------

    In addition, non-U.S. persons that are not guaranteed or conduit 
affiliates of U.S. persons also generally would not count toward their 
de minimis thresholds their swap dealing transactions with a guaranteed 
affiliate where the guaranteed affiliate is guaranteed by a non-
financial entity.\314\ This exception is appropriate given that the 
risks to the U.S. financial markets are mitigated because the U.S. 
guarantor is a non-financial entity.
---------------------------------------------------------------------------

    \314\ See CEA section 2(h)(7)(C) for a definition of financial 
entity.
---------------------------------------------------------------------------

    The Commission notes that under its interpretation of section 2(i), 
a non-U.S. person that is not a guaranteed or conduit affiliate would 
not have to count its swap dealing transactions with other non-U.S. 
persons that are not guaranteed affiliates because, in the Commission's 
view, such swap dealing activity would not have the requisite ``direct 
and significant connection with activities in, or effect on, U.S. 
commerce.''
d. Exclusion of Certain Swaps by Non-U.S. Persons From the MSP 
Calculation
    Related to their discussion of the swap dealer de minimis 
threshold, some commenters, such as SIFMA and Citi, stated that a non-
U.S. person should not have to include swaps with foreign branches of 
U.S. swap dealers towards the MSP calculation.\315\
---------------------------------------------------------------------------

    \315\ See SIFMA (Aug. 27, 2012) at A28-29; Citi (Aug. 27, 2012) 
at 2-3.
---------------------------------------------------------------------------

    The Commission has considered whether, under section 2(i), the 
swaps that a non-U.S. person that is not a guaranteed or conduit 
affiliate enters into with a foreign branch of a U.S. swap dealer or a 
guaranteed affiliate that is a swap dealer should be excluded from the 
calculation of the non-U.S. person's MSP registration threshold. The 
Commission notes that its policy regarding such swaps for purposes of 
the MSP registration may reasonably be distinguished from its policy 
for purposes of the swap dealer registration threshold calculation. As 
described in the Final Entities Rules, MSP registration is required for 
non-dealers with swaps positions so large as to pose systemic risk. 
This is in contrast to swap dealer registration, which is a functional 
test focused on the nature of activities conducted by a potential 
registrant. Consequently, if all swaps between a non-U.S. person and 
foreign branches of U.S. swap dealers or swap dealers that are 
guaranteed affiliates were generally excluded under the Commission's 
policy with respect to MSP registration, a market participant that 
poses systemic risk within the meaning of the MSP definition could 
potentially be relieved of the requirement to register as an MSP. The 
Commission believes that such an outcome could undermine the MSP 
registration scheme. However, the Commission is persuaded that it is 
possible to control the potential risk of the non-U.S. person's risk 
with foreign branches of U.S. swap dealers and guaranteed affiliates 
that are swap dealers under certain limited circumstances and therefore 
that limited interpretive relief from the MSP calculation requirement 
is appropriate.\316\ Thus, a non-U.S. person that is not a guaranteed 
affiliate of a U.S. person and is a financial entity generally does not 
have to count toward

[[Page 45325]]

its MSP threshold its exposure under swaps with foreign branches of a 
U.S. swap dealer or guaranteed affiliates that are swap dealers; 
provided, that the swap is either cleared, or the documentation of the 
swap requires the foreign branch or guaranteed affiliate to collect 
daily variation margin, with no threshold, on its swaps with such non-
U.S. person. When this condition is met, the Commission believes that 
it would generally be appropriate for the non-U.S. person not to count 
its exposure under such swaps against its MSP threshold.
---------------------------------------------------------------------------

    \316\ The interpretation applies to non-U.S. persons that are 
not guaranteed by U.S. persons. Non-U.S. financial entities would be 
required to include swaps positions with foreign branches and 
guaranteed affiliates of U.S. persons unless they choose to comply 
with voluntary margining requirements, discussed below.
---------------------------------------------------------------------------

    The Commission notes that a non-U.S. person's swaps positions with 
guaranteed affiliates that are swap dealers and foreign branches of 
U.S. swap dealers must be addressed in the latter entities' risk 
management programs. Such programs must account for, among other 
things, overall credit exposures to non-U.S. persons.\317\ Second, the 
Commission notes that a non-U.S. person's swaps with a guaranteed 
affiliate that is a swap dealer would be included in exposure 
calculations and attributed to the U.S. guarantor for purposes of 
determining whether the U.S. guarantor's swap exposures are 
systemically-important on a portfolio basis and therefore require the 
protections provided by MSP registration.\318\
---------------------------------------------------------------------------

    \317\ See Commission regulation 23.600(c)(4)(ii), requiring swap 
dealers and MSPs to have credit risk policies and procedures that 
account for daily measurement of overall credit exposure to comply 
with counterparty credit limits, and monitoring and reporting of 
violations of counterparty credit limits performed by personnel that 
are independent of the business trading unit. See also Commission 
regulation 23.600(c)(1)(i), requiring the senior management and the 
governing body of each swap dealer and MSP to review and approve 
credit risk tolerance limits for the swap dealer or MSP.
    \318\ See Final Entities Rules at 30689, stating the 
Commission's interpretation that ``an entity's swap . . . positions 
in general would be attributed to a parent, other affiliate or 
guarantor for purposes of the major participant analysis to the 
extent that the counterparties to those position would have recourse 
to that other entity in connection with the position.'' The 
Commission stated further that ``entities will be regulated as major 
participants when they pose a high level of risk in connection with 
the swap . . . positions they guarantee.''
---------------------------------------------------------------------------

    Finally, a non-U.S. person that is not a guaranteed affiliate and 
is not a financial entity \319\ would generally not have to count 
toward its MSP thresholds its exposure under swaps with a foreign 
branch of a U.S. swap dealer or guaranteed affiliate that is a swap 
dealer. This exclusion reflects the Commission's recognition of the 
more modest risk to the U.S. financial markets from swaps activities 
with non-financial entities organized outside the United States.\320\ 
Further, the Commission notes that the Basel Committee on Banking 
Supervision (``BCBS'') and the International Organization of Securities 
Commissions (``IOSCO'') have recently issued a second consultative 
document under which, if finalized, would not apply margin requirements 
to the non-centrally cleared derivatives of non-financial entities, 
given that such transactions are viewed as posing little or no systemic 
risk and are exempt from clearing mandates in most jurisdictions.\321\
---------------------------------------------------------------------------

    \319\ See CEA section 2(h)(7)(C) for a definition of financial 
entity.
    \320\ Based on data the Bank for International Settlements 
obtained from thirteen reporting countries (Australia, Belgium, 
Canada, France, Germany, Italy, Japan, the Netherlands, Spain, 
Sweden, Switzerland, the United Kingdom and the United States), at 
the end of December 2012, notional amounts outstanding for OTC 
foreign exchange derivatives, interest rate derivatives, and credit 
default swaps with non-financial customers accounted for an average 
of less than 8 percent of the total aggregate amounts outstanding 
for these asset classes. See Bank for International Settlements, 
Statistical release: OTC derivatives statistics at end-December 2012 
(May 2013), available at http://www.bis.org/publ/otc_hy1305.pdf.
    \321\ See BCBS IOSCO, Margin Requirements for Non-Centrally 
Cleared Derivatives, Second Consultative Document, at 7 (issued for 
comment March 15, 2013), available at http://www.bis.org/publ/bcbs242.pdf.
---------------------------------------------------------------------------

e. Exclusion of Certain Swaps Executed Anonymously on a SEF, DCM, or 
Foreign Board of Trade (``FBOT'') and Cleared
    The Commission believes that when a non-U.S. person that is not a 
guaranteed or conduit affiliate enters into swaps anonymously on a 
registered DCM, SEF, or FBOT \322\ and such swaps are cleared, the non-
U.S. person would generally not have to count such swaps against its de 
minimis threshold. The Commission understands that in these 
circumstances, the non-U.S. person would not have any prior information 
regarding its counterparty to the swap. Also, as discussed below, the 
Commission is interpreting CEA section 2(i) such that, where a swap 
between such a non-U.S. person and a U.S. person is executed 
anonymously on a registered DCM, SEF, or FBOT and cleared the non-U.S. 
person generally will satisfy all of the applicable Category A 
Transaction-Level Requirements \323\ that pertain to such a swap 
transaction. The Commission believes that the regulatory interest in 
including such swaps in the non-U.S. person's de minimis calculation is 
outweighed by the practical difficulties involved in determining 
whether the non-U.S. person should include the swap in the calculation, 
given that the non-U.S. person would have no information regarding its 
swap counterparty prior to execution of the swap.
---------------------------------------------------------------------------

    \322\ As used herein, a registered FBOT means an FBOT that is 
registered with the Commission pursuant to part 48 of the 
regulations in order to permit direct access to the FBOT's order 
entry and trade matching system from within the U.S. Among others, 
16 FBOTs that currently permit direct access for the trading of 
futures and option contracts, but not swaps, pursuant to no-action 
relief letters issued by Commission staff have submitted complete 
applications for registration. In light of the fact that registered 
FBOTs can also list swaps for trading by direct access and in view 
of the time required to properly assess registration applications 
and the interest on the part of certain FBOTs operating pursuant to 
the no-action relief in listing swaps for trading by direct access, 
the Division of Market Oversight has determined to amend the 16 no-
action letters to permit those FBOTs, subject to certain conditions, 
to also list swaps for trading by direct access. Accordingly, all 
provisions in this document that apply to registered FBOTs also 
apply to the 16 FBOTs permitting trading by direct access pursuant 
to the amended no-action relief.
    \323\ The Commission notes that while the real-time reporting 
requirement will be satisfied for cleared swaps executed anonymously 
on a DCM or SEF, absent further affirmative actions by an FBOT, the 
requirement will not be satisfied through FBOT execution alone. See 
section G, infra.
---------------------------------------------------------------------------

    The Commission also believes that when a non-U.S. person that is 
not a guaranteed or conduit affiliate clears a swap through a 
registered derivatives clearing organization (``DCO''), such non-U.S. 
person would generally not have to count the resulting swap (i.e., the 
novated swap) against its swap dealer de minimis threshold or MSP 
threshold.\324\ Where a swap is created by virtue of novation, such 
swap does not implicate swap dealing, and therefore it would not be 
appropriate to include such swaps in determining whether a non-U.S. 
person should register as a swap dealer.
---------------------------------------------------------------------------

    \324\ A swap that is submitted for clearing is extinguished upon 
novation and replaced by new swap(s) that result from novation. See 
Commission regulation 39.12(b)(6). See also Derivatives Clearing 
Organization General Provisions and Core Principles, 76 FR 69334, 
69361 (Nov. 8, 2011).
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f. MSP-Parent Guarantees
    While under the Proposed Guidance swaps conducted by a non-U.S. 
person, where guaranteed by a U.S. person, would generally be 
attributed only to the U.S. person in determining who must register as 
an MSP, the Commission did not expressly address a guarantee by a non-
U.S. person of the swaps obligations of its U.S. subsidiary. In SIFMA's 
view, the Proposed Guidance created ambiguity as to the treatment of 
guarantees between other types of entities (e.g., where a U.S. person 
is guaranteed by a non-U.S. person or where a non-U.S. person is 
guaranteed by a non-U.S. person).\325\ In

[[Page 45326]]

addition, Cleary noted that the Commission determined in the Final 
Entities Rules not to include a parental guarantee of a subsidiary's 
swaps in the computation of the parent's outward exposure under the MSP 
definition where the subsidiary is subject to capital oversight by the 
Commission, SEC, or an appropriate banking regulator. They asked that 
the Commission consider extending comparable treatment for parental 
guarantees where the non-U.S. subsidiary is subject to Basel-compliant 
capital oversight by another G20 prudential supervisor.\326\
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    \325\ SIFMA (Aug. 27, 2012) at A32. Along similar lines, IIB 
commented that there might be circumstances under which a wholly-
owned subsidiary of a person already registered as a swap dealer 
enters into swaps with U.S. persons where its obligations are 
guaranteed by the swap dealer. IIB (Aug. 27, 2012) at 25.
    \326\ Cleary (Aug. 16, 2012) at 12.
---------------------------------------------------------------------------

    Under the Commission's interpretation of section 2(i) of the CEA, 
the discussion in the Final Entities Rules regarding attribution of 
swaps positions of guaranteed persons for purposes of the MSP 
definition should generally apply to non-U.S. persons. That is, as 
applied to non-U.S. persons, where there is no guarantee or recourse to 
another person under the swap, the swap should generally be attributed 
to the person who enters into the swap, and there generally would be no 
attribution or aggregation of the swaps position with the swaps 
positions of the person's affiliates.\327\ On the other hand, where the 
counterparty to the swap would have recourse to another person, such as 
a parent guarantor, the swap should generally be attributed to the 
person to whom there is recourse. Thus, if a U.S. person enters into a 
swap guaranteed by a non-U.S. person, the swap should generally be 
attributed to the non-U.S. person, and if a non-U.S. person enters into 
a swap guaranteed by a U.S. person, the swap should generally be 
attributed to the U.S. person.
---------------------------------------------------------------------------

    \327\ See Final Entities Rules, 77 FR at 30689.
---------------------------------------------------------------------------

    However, the Commission is also cognizant that, as a matter of 
international comity, regulation of non-U.S. persons can be less 
preferable where the same regulatory outcomes can be achieved by 
regulating an affiliated U.S. person. So where the swaps of a U.S. 
person are guaranteed by a non-U.S. person, the Commission would 
consider the possibility that registration of the non-U.S. person would 
not be required if the U.S. person registers as an MSP, and there may 
be circumstances where registration of the U.S. person would be 
preferable. Also, the same considerations of international comity 
suggest that regulation of non-U.S. persons should be effected in a 
manner that generally does not interfere with non-U.S. regulation. 
Thus, the Commission would be willing to consider that the swaps 
positions of non-U.S. persons that are guaranteed by other non-U.S. 
persons may be attributed to either the non-U.S. guarantor or the 
guaranteed non-U.S. person so long as all of the swaps positions that 
would trigger MSP registration are subject to the MSP registration and 
regulatory requirements. Thus, in IIB's scenario, the non-U.S.-based 
bank may consult with the Commission and decide to register itself--or 
its subsidiaries--as an MSP. The Commission would generally not expect 
both the parent guarantor bank and the guaranteed bank to register as 
MSPs. In the Commission's view, the related risk concerns should be 
adequately addressed by requiring either the guarantor or the 
guaranteed person to register, provided that the swap activities giving 
rise to MSP registration are regulated under Dodd-Frank.
    As to Cleary's request regarding comparable treatment for certain 
parental guarantees, the Commission agrees that, as a matter of policy, 
it would generally be appropriate to extend similar treatment to 
parental guarantees of a subsidiary that is subject to comparable and 
comprehensive capital oversight by a G20 prudential supervisor. In this 
respect, the Commission views Basel-compliant capital standards as 
sufficiently comparable and comprehensive to capital oversight by the 
Commission, SEC, or banking regulator. Thus, where a subsidiary is 
subject to Basel-compliant capital standards and oversight by a G20 
prudential supervisor, the subsidiary's positions would generally not 
be attributed to a parental guarantor in the computation of the 
parent's outward exposure under the MSP definition.
4. Summary
    The Commission's policy under this Guidance may be summarized as 
follows.
    The Commission will generally apply the aggregation principle (as 
articulated in the Final Entities Rules) such that, in considering 
whether a person is engaged in more than a de minimis level of swap 
dealing, a person (whether U.S. or non-U.S.) should generally include 
all relevant dealing swaps of all its U.S. and non-U.S. affiliates 
under common control, except that swaps of an affiliate (either U.S. or 
non-U.S.) that is a registered swap dealer are excluded. For this 
purpose, consistent with the Commission's policy on counting swap 
transactions towards the de minimis threshold for swap dealer 
registration detailed above, the dealing swaps of an affiliate under 
common control with such person would include:

    (i) In the case of a U.S. person or a guaranteed or conduit 
affiliate, all its swap dealing transactions; and
    (ii) in the case of a non-U.S. person that is not a guaranteed 
or conduit affiliate:
    a. all dealing swaps with counterparties who are U.S. persons 
(other than foreign branches of U.S. swap dealers); and
    b. all dealing swaps with guaranteed affiliates except:
    i. guaranteed affiliates that are swap dealers;
    ii. guaranteed affiliates that are not swap dealers but which 
are affiliated with a swap dealer and where the guaranteed affiliate 
itself engages in de minimis swap dealing activity;
    iii. guaranteed affiliates that are guaranteed by a non-
financial entity.
    In addition, a non-U.S. affiliate that is not a guaranteed or 
conduit affiliate may exclude any swaps that are entered into 
anonymously on a registered DCM, SEF, or FBOT and cleared, as more 
fully discussed above.

    The Commission's interpretation would allow both U.S. persons and 
non-U.S. persons in an affiliated group to engage in unregistered swap 
dealing activity up to the de minimis level for the entire group. When 
the affiliated group nears the de minimis threshold in the aggregate, 
it would have to register a number of affiliates (inside or outside the 
United States) as swap dealers sufficient to maintain the relevant 
dealing swaps of the unregistered affiliates below the threshold.
    In determining whether a non-U.S. person holds swap positions above 
the MSP thresholds, the non-U.S. person should consider the aggregate 
notional value of:

    (i) Any swap position between it and a U.S. person;
    (ii) any swap position between it and a guaranteed affiliate 
(but its swap positions where its own obligations thereunder are 
guaranteed by a U.S. person should be attributed to that U.S. person 
and not included in the non-U.S. person's determination); and
    (iii) any swap position between another (U.S. or non-U.S.) 
person and a U.S. person or guaranteed affiliate, where it 
guarantees the obligations of the other person thereunder.

    A non-U.S. person that is not a guaranteed affiliate of a U.S. 
person and is a financial entity would generally not have to count 
toward its MSP thresholds its exposure under swaps with foreign 
branches of U.S. swap dealers or guaranteed affiliates that are swap 
dealers, provided that the swap is either cleared, or the documentation 
of the

[[Page 45327]]

swap requires the foreign branch or guaranteed affiliate to, and the 
swap dealer actually does, collect daily variation margin, on its swaps 
with the non-U.S. person.
    In addition, a non-U.S. person that is not a guaranteed affiliate 
and is not a financial entity \328\ would generally not have to count 
toward its MSP thresholds its exposure under swaps with a foreign 
branch or guaranteed affiliate, in each case that is a swap dealer.
---------------------------------------------------------------------------

    \328\ See CEA section 2(h)(7)(C) for a definition of financial 
entity.
---------------------------------------------------------------------------

C. Interpretation of the Term ``Foreign Branch;'' When a Swap Should Be 
Considered To Be With the Foreign Branch of a U.S. Person That Is a 
Swap Dealer or MSP

1. Interpretation of the Term ``Foreign Branch'' and Treatment of 
Foreign Branches
    As discussed above, the Commission considers a foreign branch of a 
U.S. person to be a part of the U.S. person. Thus, in the Proposed 
Guidance, the Commission proposed that the U.S. person would be legally 
responsible for complying with all applicable Entity-Level 
Requirements. Under this approach, the foreign branch of the U.S. 
person would not register separately as a swap dealer. The Commission 
believes that this approach is appropriate because a foreign branch of 
a U.S. swap dealer is an integral part of a U.S. swap dealer and not a 
separate legal entity.
    In the Proposed Guidance, the Commission also proposed interpreting 
2(i) so that where a swap is with a foreign branch of a U.S.-based swap 
dealer, irrespective of whether the counterparty is a U.S. person or 
non-U.S. person, the foreign branch would be expected to comply with 
most of the Transaction-Level Requirements. The Commission stated that 
this proposed approach is appropriate in light of the Commission's 
strong supervisory interests in entities that are a part or an 
extension of a U.S.-based swap dealer. The Commission also proposed 
interpreting 2(i) so that swaps between a foreign branch of a U.S. 
person and a non-U.S. person counterparty (irrespective of whether that 
non-U.S. person counterparty's obligations under the swap are 
guaranteed by a U.S. person or not) would be eligible for substituted 
compliance with respect to Category A Transaction-Level Requirements. 
As discussed further below, where the counterparty to a swap with a 
foreign branch is a non-U.S. person (whether or not swaps such non-U.S. 
person is guaranteed or otherwise supported by, or is an affiliate 
conduit of, a U.S. person), the Commission continues to be of the view 
that the swap should be eligible for substituted compliance with 
respect to Category A Transaction-Level Requirements, to the extent 
applicable, in light of the supervisory interest of the foreign 
jurisdiction in the execution and clearing of trades occurring in that 
jurisdiction. As discussed further in section F below, the Commission's 
recognition of substituted compliance would be based on an evaluation 
of whether the requirements of the home jurisdiction are comparable and 
comprehensive to the applicable requirement(s) under the CEA and 
Commission regulations based on a consideration of all relevant 
factors, including among other things: (i) The comprehensiveness of the 
foreign regulator's supervisory compliance program and (ii) the 
authority of such foreign regulator to support and enforce its 
oversight of the registrant's branch or agency with regard to such 
activities to which substituted compliance applies.
    In the January Order, the Commission gave exemptive relief from 
Transaction-Level Requirements during the pendency of the January Order 
for swaps between a foreign branch of a U.S. swap dealer or U.S. MSP 
and a non-U.S. counterparty (including a non-U.S. swap dealer or non-
U.S. MSP). Thus, notwithstanding the Commission's view that the foreign 
branch of a U.S. swap dealer is a U.S. person, the Commission granted 
temporary relief during the pendency of the January Order for swaps 
between a foreign branch of a U.S. registrant and a non-U.S. swap 
dealer, allowing the non-U.S. swap dealer to treat the foreign branch 
as a non-U.S. person.
    In the January Order, the Commission also stated that because it 
believes a swap between two foreign branches of U.S. registrants is a 
swap between two U.S. persons, such swaps are fully subject to the 
Transaction-Level Requirements. Nevertheless, during the pendency of 
the January Order, the Commission determined it would be appropriate to 
permit foreign branches of U.S. registrants to comply only with 
transaction-level requirements required in the location of the foreign 
branch while the Commission further considered, and worked with 
international regulators regarding, the treatment of foreign branches 
of U.S. registrants. However, for purposes of this relief, the 
Commission stated that for a swap between foreign branches of U.S. 
registrants, the swap would be treated as with the foreign branch of a 
U.S. person when: (i) The personnel negotiating and agreeing to the 
terms of the swap are located in the jurisdiction of such foreign 
branch; (ii) the documentation of the swap specifies that the 
counterparty or ``office'' for the U.S. person is such foreign branch; 
and (iii) the swap is entered into by such foreign branch in its normal 
course of business (collectively the ``January Order Criteria''). If 
the swap failed to satisfy all three of the January Order Criteria, the 
Commission stated that the swap would be treated as a swap of the U.S. 
person and not as a swap of the foreign branch of the U.S. person, and 
would not be eligible for relief from transaction-level requirements 
under the January Order.\329\
---------------------------------------------------------------------------

    \329\ See the January Order, 78 FR at 873 n. 123.
---------------------------------------------------------------------------

    The Commission also stated in the January Order that as part of the 
Commission's further consideration of this issue, additional factors 
may be relevant to the consideration of whether a swap is with the 
foreign branch of a U.S. person. These factors could include, for 
example, that:

    (i) The foreign branch is the location of employment of the 
employees negotiating the swap for the U.S. person or, if the swap 
is executed electronically, the employees managing the execution of 
the swap;
    (ii) the U.S. person treats the swap as a swap of the foreign 
branch for tax purposes,
    (iii) the foreign branch operates for valid business reasons and 
is not only a representative office of the U.S. person; and
    (iv) the branch is engaged in the business of banking or 
financing and is subject to substantive regulation in the 
jurisdiction where it is located (collectively the ``Additional 
Factors'').\330\
---------------------------------------------------------------------------

    \330\ Id. at 873.

    The Commission also sought comment from market participants and 
other interested parties regarding whether it is appropriate to include 
these or other factors in the consideration of when a swap is with the 
foreign branch of a U.S. person.
2. Comments
    The Commission received several comments on how the Commission 
should determine whether a swap is ``with a foreign branch,'' both with 
regard to swaps between a foreign branch and a non-U.S. swap dealer and 
swaps between two foreign branches of U.S. swap dealers. In addition, 
several organizations commented on the term ``foreign branch'' of a 
U.S. bank.
    Commenters stated that in determining whether a swap between a non-
U.S. swap dealer and a non-U.S. branch of a U.S. bank is bona fide with 
the non-U.S. branch, the Commission should look to whether the swap is 
booked in the foreign branch (as defined in Regulation K), and that the 
four

[[Page 45328]]

additional factors that the Commission stated it was considering are 
unnecessary.\331\ These commenters stated that the first Additional 
Factor being considered (i.e., that the foreign branch is the location 
of employment of the employees negotiating the swap for the U.S. person 
or, if the swap is executed electronically, the employees managing the 
execution of the swap) should be deleted because employees that 
negotiate and agree to the terms of a swap may be located outside of 
the non-U.S. branch that books the trade for a variety of valid 
reasons.\332\ Similar arguments were made with regard to the first 
prong of the January Order Criteria (i.e., that the personnel 
negotiating and agreeing to the terms of the swap are located in the 
jurisdiction of such foreign branch).\333\ As noted above, State Street 
stated that in a global economy, foreign exchange swaps are negotiated 
24 hours a day, by parties in various locations. Therefore, the 
physical location of employees has little connection to the legal 
jurisdiction of the branch in which the swaps are booked. Determination 
of the branch in which the swap is booked is influenced by a number of 
factors, including the convenience of the swap counterparty and 
agreements between counterparties to book swaps to mutually agreeable 
and preferred locations. State Street further stated that limiting the 
ability to book transactions to a foreign branch would be inappropriate 
for U.S. dealers in foreign exchange because foreign exchange 
transactions are typically negotiated in large blocks, which combine 
the orders of a variety of asset owners, and which can include both 
U.S. persons and non-U.S. persons. Once negotiated and executed, these 
blocks are allocated to the various asset owners, and booked to the 
location preferred by the asset owner or in some cases the dealer's 
non-U.S. branch. This allows managers to trade foreign exchange more 
efficiently, using a single point of dealer contact, and ensures that 
all asset owners on whose behalf they are trading receive the same 
price. State Street also stated that the approach outlined in proposal 
would place U.S. businesses at a competitive disadvantage, as non-U.S. 
owners would be unwilling to do business that would subject them to the 
U.S. regulatory requirements.\334\
---------------------------------------------------------------------------

    \331\ See SIFMA/CH/FSR (Feb. 6, 2013) at B18-20; State Street 
(Feb. 6, 2013) at 2-4.
    \332\ See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at B18.
    \333\ Id. at B17.
    \334\ State Street (Feb. 6, 2013) at 3-4.
---------------------------------------------------------------------------

    A commenter stated that it does not strongly object to prongs 2, 3 
and 4 of the Additional Factors (that the swap is treated as a swap of 
the foreign branch for tax purposes, that the branch operates for valid 
business reasons and is not only a representative office, and that the 
branch is engaged in banking or financing and subject to substantive 
local regulation) since they could ``be reasonable indicia of a bona 
fide non-U.S. branch of a U.S. swap dealer.'' However, this commenter 
stated that each of these prongs may be challenging to properly define 
and evaluate.\335\
---------------------------------------------------------------------------

    \335\ State Street (Feb. 6, 2013) at 2.
---------------------------------------------------------------------------

    With respect to the proposed tax prong (prong 2 of the Additional 
Factors), other commenters stated that the income from a swap that is 
booked in a foreign branch of a U.S. person is subject to taxation in 
the local jurisdiction in which the foreign branch is resident, which 
demonstrates that such swaps are bona fide with the non-U.S. branch. 
The commenters further noted that a foreign tax credit is generally 
allowed for income taxes paid locally.\336\
---------------------------------------------------------------------------

    \336\ See SIFMA/CH/FSR (Feb. 6, 2013) at B18; State Street (Feb. 
6, 2013) at 2.
---------------------------------------------------------------------------

    With regard to prong 3 of the Additional Factors (that the branch 
operates for valid business reasons and is not only a representative 
office), as noted earlier, SIFMA/CH/FSR argued that the only criteria 
that is relevant in determining whether a swap is bona fide with a 
foreign branch of a U.S. swap dealer is whether the swap is booked in 
the foreign branch (as reflected in the trade confirm), with the term 
``foreign branch'' defined with reference to Regulation K. These 
commenters stated that the definition of a foreign branch in Regulation 
K makes it clear that a foreign branch of a U.S. bank is not a 
``representative office.'' In addition, Regulation K is a comprehensive 
regulation of the Federal Reserve Board that ensures that foreign 
branches operate for valid reasons.\337\
---------------------------------------------------------------------------

    \337\ See SIFMA/CH/FSR (Feb. 6, 2013) at B19.
---------------------------------------------------------------------------

    With regard to prong 4 of the Additional Factors (that the branch 
is engaged in banking or financing and subject to substantive local 
regulation), SIFMA/CH/FSR argue that this prong is unnecessary because, 
in addition to being regulated under Regulation K by the Federal 
Reserve, foreign branches are also subject to substantive local 
regulation and supervision, including licensing requirements and 
potentially local derivatives rules that the Commission could find to 
constitute substituted compliance. Although these commenters 
acknowledged that the nature and scope of these regulations will vary 
by jurisdiction, they state that many foreign jurisdictions require the 
same level of compliance with local regulations that U.S. regulators 
require of U.S. branches of foreign banks with regards to U.S. laws and 
regulations. They also stated that requiring foreign branches to show 
that they are subject to substantive regulation in their local 
jurisdiction so as to determine whether each swap they enter into is 
bona fide would be overly burdensome and unnecessary. In their view, 
the only relevant factor that the Commission should consider is whether 
the swap has been booked into the foreign branch, which the trade 
confirm would reflect.\338\
---------------------------------------------------------------------------

    \338\ See id. at B19-20.
---------------------------------------------------------------------------

    Conversely, one commenter argued that, consistent with clear 
evidence from the last crisis that the risks accrued by foreign 
branches, guaranteed subsidiaries, and even non-guaranteed subsidiaries 
all flow back to the parent entity, foreign branches of U.S. persons 
should under no circumstances be subject to weaker regulation than the 
parent company. This commenter also argues that there is no substantive 
difference between a branch and a subsidiary of a U.S. person in terms 
of covering derivatives losses, and that both must be held to the same 
high standards as apply to the U.S. person itself. Otherwise, the U.S. 
taxpayer will be exposed to the risk of another massive bailout.\339\ 
In addition, this commenter stated that claims made by industry groups 
that foreign branches of U.S. entities should not be classified as U.S. 
persons or they will find no foreign counterparties willing to do 
business with them are absurd and unsubstantiated, and taken literally, 
seem to suggest that the Commission should exempt all overseas swap 
activity from the requirements of Title VII of the Dodd-Frank Act, 
which would directly violate Congress's clear intent.
---------------------------------------------------------------------------

    \339\ Better Markets (Feb. 15, 2013) at 2, 4-5.
---------------------------------------------------------------------------

3. Commission Guidance
    In preparing the Guidance, the Commission has carefully considered 
commenters' concerns and recommendations related to both the 
appropriate scope of the term ``foreign branch'' for purposes of this 
Guidance and Commission consideration of when a swap should be 
considered to be ``with the foreign branch'' of a U.S. bank that is a 
swap dealer or MSP.
a. Scope of the Term ``Foreign Branch''
    The Commission notes that foreign branches of a U.S. bank are part 
of a

[[Page 45329]]

U.S. bank rather than a separate legal entity, and are therefore ``U.S. 
persons.'' Nevertheless, as a policy matter, the Commission believes 
that CEA section 2(i) should be interpreted so as to exclude swap 
dealing transactions with a foreign branch of a U.S. swap dealer from 
the de minimis calculations for swap dealer or MSP registration. In 
addition, the Commission believes that CEA section 2(i) should be 
interpreted so that swaps between a foreign branch of a U.S. swap 
dealer or MSP and a non-U.S. person should be eligible for substituted 
compliance with regard to Category A Transaction-Level 
Requirements.\340\ The Commission believes that CEA section 2(i) should 
be interpreted in this manner in order to avoid the potential result 
that foreign entities would cease doing swap dealing business with 
foreign branches of U.S. registered swap dealers. However, the 
Commission notes that interpreting CEA section 2(i) in this manner 
creates a distinction between swaps with foreign branches of U.S. banks 
and swaps with the U.S. principal bank. Therefore, the Commission also 
believes that Commission consideration of both the scope of the term 
``foreign branch'' and when a swap is with the foreign branch of a U.S. 
bank should be construed under CEA section 2(i) in a manner that does 
not create unnecessary distinctions between otherwise similar 
activities.
---------------------------------------------------------------------------

    \340\ As discussed further in section G, under the Commission's 
interpretation of 2(i), in the case of a swap with a U.S. swap 
dealer or U.S. MSP (including an affiliate of a non-U.S. person, and 
including a foreign branch of a U.S. bank that is a swap dealer or 
MSP), the parties to the swap generally would not be not eligible 
for substituted compliance with one exception--where the swap is 
between the foreign branch of a U.S. bank that is a swap dealer or 
MSP and a non-U.S. person (regardless of whether the non-U.S. person 
is guaranteed or otherwise supported by, or is an affiliate conduit 
of, a U.S. person).
---------------------------------------------------------------------------

    Therefore, the Commission interprets CEA section 2(i) such that, 
for purposes of this Guidance, the Commission will generally consider a 
``foreign branch'' of a U.S. swap dealer or U.S. MSP to be any 
``foreign branch'' (as defined in the applicable banking regulation) of 
a U.S. bank that is: (i) Subject to Regulation K \341\ or the FDIC 
International Banking Regulation,\342\ or otherwise designated as a 
``foreign branch'' by the U.S. bank's primary regulator, (ii) maintains 
accounts independently of the home office and of the accounts of other 
foreign branches with the profit or loss accrued at each branch 
determined as a separate item for each foreign branch,\343\ and (iii) 
subject to substantive regulation in banking or financing in the 
jurisdiction where it is located (the ``Foreign Branch 
Characteristics''). However, in addition to the foregoing Foreign 
Branch Characteristics, the Commission will consider other relevant 
facts and circumstances in considering whether a foreign office of a 
U.S. bank is a ``foreign branch'' of a U.S. bank for purposes of this 
Guidance.
---------------------------------------------------------------------------

    \341\ Regulation K is a regulation issued by the Board of 
Governors of the Federal Reserve (``Federal Reserve Board'') under 
the authority of the Federal Reserve Act (``FRA'') (12 U.S.C. 221 et 
seq.); the Bank Holding Company Act of 1956 (``BHC Act'') (12 U.S.C. 
1841 et seq.) and the International Banking Act of 1978 (``IBA'') 
(12 U.S.C. 3101 et seq.). Regulation K sets forth rules governing 
the international and foreign activities of U.S. banking 
organizations, including procedures for establishing foreign 
branches to engage in international banking.
    Under Regulation K, 12 CFR part 211, a ``foreign branch'' is 
defined as ``an office of an organization (other than a 
representative office) that is located outside the country in which 
the organization is legally established and at which a banking or 
financing business is conducted.'' See 17 CFR 211.2(k).
    \342\ 12 CFR part 347 is a regulation issued by the Federal 
Deposit Insurance Corporation under the authority of the Federal 
Deposit Insurance Act (12 U.S.C. 1828(d)(2)), which sets forth rules 
governing the operation of foreign branches of insured state 
nonmember banks (``FDIC International Banking Regulation''). Under 
12 CFR 347.102(j), a ``foreign branch'' is defined as ``an office or 
place of business located outside the United States, its 
territories, Puerto Rico, Guam, American Samoa, the Trust Territory 
of the Pacific Islands, or the Virgin Islands, at which banking 
operations are conducted, but does not include a representative 
office.''
    \343\ The Commission notes that national banks operating foreign 
branches are required under section 25 of the Federal Reserve Act, 
12 U.S.C. 604a, to conduct the accounts of each foreign branch 
independently of the accounts of other foreign branches established 
by it and of its home office, and are required at the end of each 
fiscal period to transfer to its general ledger the profit or loss 
accrued at each branch as a separate item.
---------------------------------------------------------------------------

    Further, for purposes of this Guidance, the Commission interprets 
CEA section 2(i) so that generally a foreign branch of a U.S. bank 
could include an office of a foreign bank that satisfies the foregoing 
Foreign Branch Characteristics. However, a foreign branch of a U.S. 
bank would generally not include an affiliate of a U.S. bank that is 
incorporated or organized as a separate legal entity.
    In considering the scope of the term ``foreign branch,'' the 
Commission agrees with commenters that stated that Regulation K of the 
Federal Reserve Board's regulations provides a useful reference because 
Regulation K provides a comprehensive regime for regulation of foreign 
branches that ensures that foreign branches of U.S. banks operate for 
valid reasons and are not ``representative offices.'' Similarly, the 
Commission believes that the FDIC International Banking Regulation 
provides a useful reference for U.S. banks that have foreign branches 
which are subject to FDIC jurisdiction.\344\
---------------------------------------------------------------------------

    \344\ See notes 341 and 342 above and accompanying text for 
additional information regarding the definition of a ``foreign 
branch'' in Regulation K and the FDIC International Banking 
Regulation.
---------------------------------------------------------------------------

    In addition, regardless of a foreign branch of a U.S. bank is 
subject to Regulation K or the FDIC International Banking Regulation or 
is otherwise designated as a ``foreign branch'' by the U.S. bank's 
primary regulator, the Commission believes that CEA section 2(i) should 
be interpreted so that, for purposes of this Guidance, a foreign branch 
of a U.S. bank should generally also be subject to substantive 
regulation in banking or financing in the jurisdiction where it is 
located. Finally, the Commission believes that in order for a foreign 
office of a U.S. bank to be viewed as a ``foreign branch'' for purposes 
of this Guidance, another factor should generally be present--the 
foreign branch should maintain its accounts independently of the home 
office and of the accounts of other foreign branches, and at the end of 
each fiscal period the U.S. bank should transfer to its general ledger 
the profit or loss accrued at each branch as a separate item.\345\
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    \345\ The Commission notes that section 25 of the Federal 
Reserve Act, 12 U.S.C. 604a, states that national banking 
associations with $1 million or more in capital and surplus may file 
an application with the Board of Governors of the Federal Reserve 
System for permission to exercise certain powers, including 
establishment of foreign branches. In addition, section 25(9) 
requires that every national banking association operating foreign 
branches conduct the accounts of each foreign branch independently 
of the accounts of other foreign branches established by it and of 
its home office, and at the end of each fiscal period transfer to 
its general ledger the profit or loss accrued at each branch as a 
separate item.
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b. Commission Consideration of Whether a Swap Is With a Foreign Branch 
of a U.S. Bank
    With regard to Commission consideration of whether a swap by a U.S. 
bank through a foreign office should be considered to be ``with a 
foreign branch'' of the U.S. person for purposes of the de minimis 
calculations for swap dealer and MSP registration \346\ or application 
of the Transaction-Level Requirements \347\ under this Guidance, the 
Commission has carefully considered the comments submitted on this 
question.
---------------------------------------------------------------------------

    \346\ See section B, supra.
    \347\ See section G, infra.
---------------------------------------------------------------------------

    SIFMA/CH/FSR stated that the only criteria that is relevant in 
determining whether a swap is bona fide with a foreign branch of a U.S. 
swap dealer is whether the swap is booked in the foreign branch (as 
reflected in the trade confirmation), with the term ``foreign branch'' 
defined with reference to Regulation K. However, the

[[Page 45330]]

Commission's view is that the trade confirmation generally is not 
relevant for purposes of determining whether to treat a swap as being 
with a foreign branch of a U.S. bank rather than with the U.S. 
principal bank. In reality, because the foreign branch of a U.S. bank 
is not a separate legal entity, the U.S. principal bank would generally 
be the party that is ultimately responsible for a swap with its foreign 
branch. The Commission's view is that a foreign branch of a U.S. bank 
should be considered a ``U.S. person'' under this Guidance because it 
is a part of the U.S. bank. Moreover, Better Markets has argued that 
foreign branches of U.S. banks as well as foreign subsidiaries and 
affiliates should be treated exactly the same as U.S. persons in all 
respects under this Guidance.
    However, in light of principles of international comity and giving 
consideration to comments that state that foreign branches of U.S. 
banks will be at a competitive disadvantage if foreign branches of U.S. 
banks are not treated the same as non-U.S. persons, the Commission 
believes that in considering whether a swap should be considered as 
being with the foreign branch of a U.S. bank under this Guidance, all 
of the facts and circumstances are relevant. In particular, the 
Commission's view is that if all of the following factors are present, 
generally the swap should be considered to be with the foreign branch 
of a U.S. bank for purposes of this Guidance:

    (i) The employees negotiating and agreeing to the terms of the 
swap (or, if the swap is executed electronically, managing the 
execution of the swap), other than employees with functions that are 
solely clerical or ministerial, are located in such foreign branch 
or in another foreign branch of the U.S. bank;
    (ii) the foreign branch or another foreign branch is the office 
through which the U.S. bank makes and receives payments and 
deliveries under the swap on behalf of the foreign branch pursuant 
to a master netting or similar trading agreement, and the 
documentation of the swap specifies that the office for the U.S. 
bank is such foreign branch;
    (iii) the swap is entered into by such foreign branch in its 
normal course of business;
    (iv) the swap is treated as a swap of the foreign branch for tax 
purposes; and
    (v) the swap is reflected in the local accounts of the foreign 
branch.

    However, if material terms of the swap are negotiated or agreed to 
by employees of the U.S. bank located in the United States, the 
Commission believes that generally the swap should be considered to be 
with the U.S. principal bank, rather than its foreign branch, for 
purposes of this Guidance.
    The Commission also believes that the factors enumerated above 
would be relevant both to an analysis of whether a swap should be 
considered to be between a foreign branch of a U.S. bank and a non-U.S. 
swap dealer and an analysis of whether a swap should be considered to 
be between two foreign branches of U.S. banks. The Commission discusses 
each of the enumerated factors in more detail below.
    The first of the five factors enumerated above is similar to prong 
1 of the Additional Factors (whether the employees negotiating the swap 
for the U.S. person are located in the foreign branch, or if the swap 
is executed electronically, the employees managing the execution of the 
swap); however, the first factor above considers whether the employees 
negotiating and agreeing to the terms of the swap are located in any 
foreign branch of the U.S. bank. This modification addresses the 
objection of commenters that stated that employees that negotiate and 
agree to swaps are often located outside the foreign branch for bona 
fide reasons.\348\ However, to the extent that material terms of the 
swap are negotiated or agreed by employees of the U.S. bank located in 
the United States, the Commission believes that generally the swap 
should be considered to be with the U.S. principal bank for purposes of 
this Guidance.
---------------------------------------------------------------------------

    \348\ See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at B18; State 
Street (Feb. 6, 2013) at 2-4.
---------------------------------------------------------------------------

    The second factor above is similar to prong (ii) of the January 
Order Criteria (that the documentation of the swap specifies that the 
counterparty or ``office'' for the U.S. person is such foreign branch). 
However, because a foreign branch of a U.S. bank is not a separate 
legal entity, the Commission believes that the U.S. principal bank 
generally should be considered to be the counterparty for purposes of 
this Guidance irrespective of whether the foreign branch is named as 
the counterparty in the swap documentation. Therefore, the Commission 
has modified the second factor, consistent with its other 
interpretations of section 2(i), so that it makes no reference to the 
foreign branch as counterparty. Rather, the second factor above relates 
to whether the foreign branch or another foreign branch is the office 
through which the U.S. bank makes and receives payments and deliveries 
under the swap on behalf of the foreign branch pursuant to a master 
netting or similar trading agreement, and whether the documentation of 
the swap specifies that the office for the U.S. bank is such foreign 
branch. This modification is consistent with the ISDA Master Agreement, 
which requires that each party specify an ``office'' for each swap, 
which is where a party ``books'' a swap and/or the office through which 
the party makes and receives payments and deliveries.
    The third factor above (whether the swap is entered into by such 
foreign branch in its normal course of business) is the same as prong 
(iii) in the January Order Criteria discussed above. The Commission is 
concerned about the material terms of a swap being negotiated or agreed 
by employees of the U.S. bank that are located in the United States and 
then routed to a foreign branch in order for the swap to be treated as 
a swap with the foreign branch for purposes of the de minimis 
calculations for swap dealer and MSP registration or application of the 
Transaction-Level Requirements under this Guidance.
    The fourth factor above (whether the swap is treated as a swap of 
the foreign branch for tax purposes) is the same as prong 2 of the 
Additional Factors. The Commission notes that State Street stated that 
it does not strongly object to prongs 2, 3 and 4 of the Additional 
Factors (that the swap is treated as a swap of the foreign branch for 
tax purposes, that the branch operates for valid business reasons and 
is not only a representative office, and that the branch is engaged in 
banking or financing and subject to substantive local regulation) since 
they could ``be reasonable indicia of a bona fide non-U.S. branch of a 
U.S. swap dealer.'' However, State Street stated that each of these 
prongs may be challenging to properly define and evaluate.\349\ Other 
commenters stated that the income from a swap that is booked in a 
foreign branch of a U.S. person is subject to taxation in the local 
jurisdiction in which the foreign branch is resident, which 
demonstrates that such swaps are bona fide with the non-U.S. 
branch.\350\ The Commission notes that the fourth factor above only 
refers to whether the tax treatment of the swap is consistent with the 
swap being treated as a swap of the foreign branch for tax purposes.
---------------------------------------------------------------------------

    \349\ See State Street (Feb. 6, 2013) at 2.
    \350\ See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at B18.
---------------------------------------------------------------------------

    The fifth factor above focuses on whether the swap is reflected in 
the accounts of the foreign branch. The Commission believes that where 
a swap is bona fide with the foreign branch of a U.S. bank, it 
generally would be

[[Page 45331]]

reflected in the foreign branch's accounts.

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

    Title VII of the Dodd-Frank Act establishes a comprehensive new 
regulatory framework for swap dealers and MSPs that Congress enacted 
with the goal of reducing systemic risk and enhancing market 
transparency. Under this framework, a swap dealer or MSP must, among 
other things, comport with certain standards (and regulations as the 
Commission may promulgate) governing risk management, internal and 
external business conduct, and reporting. Further, swap dealers and 
MSPs are required to comply with all of the requirements applicable to 
swap dealers and MSPs for all their swaps, not just the swaps that make 
them a swap dealer or MSP.
    Even before the Commission published the Proposed Guidance, a 
number of commenters recommended that the Commission, in interpreting 
the cross-border applicability of the Dodd-Frank Act swaps provisions, 
should distinguish between requirements that apply at an entity level 
(i.e., to the firm as a whole) as compared to those that apply at a 
transactional level (i.e., to the individual swap transaction or 
trading relationship).\351\ These commenters argued that requirements 
that relate to the core operations of a firm and should be applied to 
the entity as a whole would include the capital and related prudential 
requirements and recordkeeping, as well as certain risk mitigation 
requirements (e.g., information barriers and the designation of a chief 
compliance officer). The commenters stated that other requirements, 
such as margin, should apply on transaction-by-transaction basis and 
only to swaps with U.S. counterparties.
---------------------------------------------------------------------------

    \351\ See, e.g., SIFMA (Feb. 3, 2011); ISDA (Jan. 24, 2011); 
Cleary (Sept. 20, 2011); Barclays Bank PLC, BNP Paribas S.A., 
Deutsche Bank AG, Royal Bank of Canada, The Royal Bank of Scotland 
Group PLC, Societe Generale, and UBS AG (Jan. 11, 2011); Barclays 
Bank PLC, BNP Paribas S.A., Credit Suisse AG, Deutsche Bank AG, 
HSBC, Nomura Securities International, Inc., Rabobank Nederland, 
Royal Bank of Canada, The Royal Bank of Scotland Group PLC, Societe 
Generale, The Toronto-Dominion Bank, and UBS AG (Feb. 17, 2011).
---------------------------------------------------------------------------

    Commenters on the Proposed Guidance generally supported the 
division of Dodd-Frank's swaps provisions (and Commission regulations 
thereunder) into Entity-Level and Transaction-Level Requirements.\352\ 
Certain of these commenters, however, made specific recommendations for 
reclassification of some of these Requirements, which are discussed in 
section E below.
---------------------------------------------------------------------------

    \352\ See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug. 27, 2012) 
at 2; Clearing House (Aug. 27, 2012) at 22.
---------------------------------------------------------------------------

    The Commission agrees with the commenters that the various Dodd-
Frank Act swaps provisions applicable to swap dealers and MSPs can be 
conceptually separated into Entity-Level Requirements, which apply to a 
swap dealer or MSP firm as a whole, and Transaction-Level Requirements, 
which apply on a transaction-by-transaction basis. Descriptions of each 
of the Entity-Level Requirements under this Guidance are set out 
immediately below, followed by descriptions of the Transaction-Level 
Requirements. Additional information related to the categorization of 
Entity-Level and Transaction-Level Requirements is discussed in section 
E.
1. Description of the Entity-Level Requirements
    The Entity-Level Requirements under Title VII of the Dodd-Frank Act 
and the Commission's regulations promulgated thereunder relate to: (i) 
Capital adequacy; (ii) chief compliance officer; (iii) risk management; 
(iv) swap data recordkeeping; (v) swap data repository reporting (``SDR 
Reporting''); and (vi) physical commodity large swaps trader reporting 
(``Large Trader Reporting''). The Entity-Level Requirements apply to 
registered swap dealers and MSPs across all their swaps without 
distinctions as to the counterparty or the location of the swap 
(although under this Guidance in some circumstances the availability of 
substituted compliance may vary based on whether the counterparty is a 
U.S. person or a non-U.S. person).
    The Entity-Level Requirements are split into two categories. The 
first category of Entity-Level Requirements includes capital adequacy, 
chief compliance officer, risk management, and swap data recordkeeping 
under Commission regulations 23.201 and 23.203 (except certain aspects 
of swap data recordkeeping relating to complaints and sales materials) 
(``First Category''). The second category of Entity-Level Requirements 
includes SDR Reporting, certain aspects of swap data recordkeeping 
relating to complaints and marketing and sales materials under 
Commission regulations 23.201(b)(3) and 23.201(b)(4) and Large Trader 
Reporting (``Second Category'').
    Each of the Entity-Level Requirements is discussed in the 
subsections that follow.
a. First Category of Entity-Level Requirements
i. Capital Adequacy
    Section 4s(e)(2)(B) of the CEA specifically directs the Commission 
to set capital requirements for swap dealers and MSPs that are not 
subject to the capital requirements of U.S. prudential regulators 
(hereinafter referred to as ``non-bank swap dealers or MSPs'').\353\ 
With respect to the use of swaps that are not cleared, these 
requirements must: ``(1) [h]elp ensure the safety and soundness of the 
swap dealer or major swap participant; and (2) [be] appropriate for the 
risk associated with the non-cleared swaps held as a swap dealer or 
major swap participant.'' \354\ Pursuant to section 4s(e)(3), the 
Commission proposed regulations, which would require non-bank swap 
dealers and MSPs to hold a minimum level of adjusted net capital (i.e., 
``regulatory capital'') based on whether the non-bank swap dealer or 
MSP is: (i) Also a FCM; (ii) not an FCM, but is a non-bank subsidiary 
of a bank holding company; or (iii) neither an FCM nor a non-bank 
subsidiary of a bank holding company.\355\ The primary

[[Page 45332]]

purpose of the capital requirement is to reduce the likelihood and cost 
of a swap dealer's or MSP's default by requiring a financial cushion 
that can absorb losses in the event of the firm's default.
---------------------------------------------------------------------------

    \353\ See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the CEA 
explicitly requires the adoption of rules establishing capital and 
margin requirements for swap dealers and MSPs, and applies a 
bifurcated approach that requires each swap dealer and MSP for which 
there is a U.S. prudential regulator to meet the capital and margin 
requirements established by the applicable prudential regulator, and 
each swap dealer and MSP for which there is no prudential regulator 
to comply with the Commission's capital and margin regulations. See 
7 U.S.C. 6s(e). Further, systemically important financial 
institutions (``SIFIs'') that are not FCMs would be exempt from the 
Commission's capital requirements, and would comply instead with 
Federal Reserve Board requirements applicable to SIFIs, while 
nonbank (and non-FCM) subsidiaries of U.S. bank holding companies 
would calculate their Commission capital requirement using the same 
methodology specified in Federal Reserve Board regulations 
applicable to the bank holding company, as if the subsidiary itself 
were a bank holding company. The term ``prudential regulator'' is 
defined in CEA section 1a(39) as the Board of Governors of the 
Federal Reserve System, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the Farm Credit 
Administration, and the Federal Housing Finance Agency. See 7 U.S.C. 
1a(39). In addition, in the proposed capital regulations for swap 
dealers and MSPs, the Commission solicited comment regarding whether 
it would be appropriate to permit swap dealers and MSPs to use 
internal models for computing market risk and counterparty credit 
risk charges for capital purposes if such models had been approved 
by a foreign regulatory authority and were subject to periodic 
assessment by such foreign regulatory authority. See Capital 
Requirements of Swap Dealers and Major Swap Participants, 76 FR 
27802 (May 12, 2011) (``Proposed Capital Requirements'').
    \354\ See 7 U.S.C. 6s(e)(3)(A).
    \355\ See 7 U.S.C. 6s(e). See also Proposed Capital 
Requirements, 76 FR at 27817 (``The Commission's capital proposal 
for [swap dealers] and MSPs includes a minimum dollar level of $20 
million. A non-bank [swap dealer] or MSP that is part of a U.S. bank 
holding company would be required to maintain a minimum of $20 
million of Tier 1 capital as measured under the capital rules of the 
Federal Reserve Board. [A swap dealer] or MSP that also is 
registered as an FCM would be required to maintain a minimum of $20 
million of adjusted net capital as defined under [proposed] section 
1.17. In addition, [a swap dealer] or MSP that is not part of a U.S. 
bank holding company or registered as an FCM would be required to 
maintain a minimum of $20 million of tangible net equity, plus the 
amount of the [swap dealer's] or MSP's market risk exposure and OTC 
counterparty credit risk exposure.'').
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ii. Chief Compliance Officer
    Section 4s(k) requires that each swap dealer and MSP designate an 
individual to serve as its chief compliance officer (``CCO'') and 
specifies certain duties of the CCO.\356\ Pursuant to section 4s(k), 
the Commission adopted regulation 3.3, which requires swap dealers and 
MSPs to designate a CCO who would be responsible for administering the 
firm's compliance policies and procedures, reporting directly to the 
board of directors or a senior officer of the swap dealer or MSP, as 
well as preparing and filing with the Commission a certified report of 
compliance with the CEA. The chief compliance function is an integral 
element of a firm's risk management and oversight and the Commission's 
effort to foster a strong culture of compliance within swap dealers and 
MSPs.
---------------------------------------------------------------------------

    \356\ See 7 U.S.C. 6s(k).
---------------------------------------------------------------------------

iii. Risk Management
    Section 4s(j) of the CEA requires each swap dealer and MSP to 
establish internal policies and procedures designed to, among other 
things, address risk management, monitor compliance with position 
limits, prevent conflicts of interest, and promote diligent 
supervision, as well as maintain business continuity and disaster 
recovery programs.\357\ The Commission adopted implementing regulations 
23.600, 23.601, 23.602, 23.603, 23.605, and 23.606).\358\ The 
Commission also adopted regulation 23.609, which requires certain risk 
management procedures for swap dealers or MSPs that are clearing 
members of a DCO.\359\ Collectively, these requirements help to 
establish a robust and comprehensive internal risk management program 
for swap dealers and MSPs, which is critical to effective systemic risk 
management for the overall swaps market.
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    \357\ 7 U.S.C. 6s(j).
    \358\ Swap Dealer and Major Swap Participant Recordkeeping, 
Reporting, and Duties Rules; Futures Commission Merchant and 
Introducing Broker Conflicts of Interest Rules; and Chief Compliance 
Officer Rules for Swap Dealers, Major Swap Participants, and Futures 
Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (``Final Swap 
Dealer and MSP Recordkeeping Rule'') (relating to risk management 
program, monitoring of position limits, business continuity and 
disaster recovery, conflicts of interest policies and procedures, 
and general information availability, respectively).
    \359\ Customer Clearing Documentation, Timing of Acceptance for 
Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 9, 
2012) (``Final Customer Documentation Rules''). Also, swap dealers 
must comply with Commission regulation 23.608, which prohibits swap 
dealers providing clearing services to customers from entering into 
agreements that would: (i) disclose the identity of a customer's 
original executing counterparty; (ii) limit the number of 
counterparties a customer may trade with; (iii) impose counterparty-
based position limits; (iv) impair a customer's access to execution 
of a trade on terms that have a reasonable relationship to the best 
terms available; or (v) prevent compliance with specified time 
frames for acceptance of trades into clearing.
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iv. Swap Data Recordkeeping (Except Certain Aspects of Swap Data 
Recordkeeping Relating to Complaints and Sales Materials)
    CEA section 4s(f)(1)(B) requires swap dealers and MSPs to keep 
books and records for all activities related to their business.\360\ 
Sections 4s(g)(1) and (4) require swap dealers and MSPs to maintain 
trading records for each swap and all related records, as well as a 
complete audit trail for comprehensive trade reconstructions.\361\ 
Pursuant to these provisions, the Commission adopted regulations 
23.201and 23.203, which require swap dealers and MSPs to keep records 
including complete transaction and position information for all swap 
activities, including documentation on which trade information is 
originally recorded. Pursuant to Commission regulation 23.203, records 
of swaps must be maintained for the duration of the swap plus 5 years, 
and voice recordings for 1 year, and records must be ``readily 
accessible'' for the first 2 years of the 5 year retention period. Swap 
dealers and MSPs also must comply with Parts 43, 45 and 46 of the 
Commission's regulations, which, respectively, address the data 
recordkeeping and reporting requirements for all swaps subject to the 
Commission's jurisdiction, including swaps entered into before the date 
of enactment of the Dodd-Frank Act (``pre-enactment swaps'') and swaps 
entered into on or after the date of enactment of the Dodd-Frank Act 
but prior to the compliance date of the swap data reporting rules 
(``transition swaps'').\362\
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    \360\ 7 U.S.C. 6s(f)(1)(B).
    \361\ 7 U.S.C. 6s(g)(1).
    \362\ See 17 CFR part 46; Swap Data Recordkeeping and Reporting 
Requirements: Pre-Enactment and Transition Swaps, 76 FR 22833 (Apr. 
25, 2011) (``Proposed Data Rules'').
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b. Second Category of Entity-Level Requirements
i. SDR Reporting
    CEA section 2(a)(13)(G) requires all swaps, whether cleared or 
uncleared, to be reported to a registered SDR.\363\ CEA section 21 
requires SDRs to collect and maintain data related to swaps as 
prescribed by the Commission, and to make such data electronically 
available to particular regulators under specified conditions related 
to confidentiality.\364\ Part 45 of the Commission's regulations (and 
Appendix 1 thereto) sets forth the specific swap data that must be 
reported to a registered SDR, along with attendant recordkeeping 
requirements; and part 46 addresses recordkeeping and reporting 
requirements for pre-enactment and transition swaps (``historical 
swaps''). The fundamental goal of part 45 of the Commission's 
regulations is to ensure that complete data concerning all swaps 
subject to the Commission's jurisdiction is maintained in SDRs where it 
will be available to the Commission and other financial regulators for 
fulfillment of their various regulatory mandates, including systemic 
risk mitigation, market monitoring and market abuse prevention. Part 46 
supports similar goals with respect to pre-enactment and transition 
swaps and ensures that data needed by regulators concerning 
``historical'' swaps is available to regulators through SDRs. Among 
other things, data reported to SDRs will enhance the Commission's 
understanding of concentrations of risks within the market, as well as 
promote a more effective monitoring of risk profiles of market 
participants in the swaps market. The Commission also believes that 
there are benefits that will accrue to swap dealers and MSPs as a 
result of the timely reporting of comprehensive swap transaction data 
and consistent data standards for recordkeeping, among other things. 
Such benefits include more robust risk monitoring and management 
capabilities for swap dealers and MSPs, which in turn will improve the 
monitoring of their current swaps market positions.
---------------------------------------------------------------------------

    \363\ 7 U.S.C. 2(a)(13)(G).
    \364\ 7 U.S.C. 24a.

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[[Page 45333]]

ii. Swap Data Recordkeeping Relating to Complaints and Marketing and 
Sales Materials
    CEA section 4s(f)(1) requires swap dealers and MSPs to ``make such 
reports as are required by the Commission by rule or regulation 
regarding the transactions and positions and financial condition of the 
registered swap dealer or MSP.'' \365\ Additionally, CEA section 4s(h) 
requires swap dealers and MSPs to ``conform with such business conduct 
standards . . . as may be prescribed by the Commission by rule or 
regulation.'' \366\ Pursuant to these provisions, the Commission 
promulgated final rules that set forth certain reporting and 
recordkeeping for swap dealers and MSPs.\367\ Commission Regulation 
23.201 states that ``[e]ach swap dealer and major swap participant 
shall keep full, complete, and systematic records of all activities 
related to its business as a swap dealer or major swap participant.'' 
Such records must include, among other things, ``[a] record of each 
complaint received by the swap dealer or major swap participant 
concerning any partner, member, officer, employee, or agent,'' \368\ as 
well as ``[a]ll marketing and sales presentations, advertisements, 
literature, and communications.'' \369\
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    \365\ 7 U.S.C. 6s(f)(1).
    \366\ 7 U.S.C. 6s(h)(1); see 7 U.S.C. 6s(h)(3).
    \367\ Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 20128.
    \368\ 17 CFR 23.201(b)(3)(i).
    \369\ 17 CFR 23.201(b)(4).
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iii. Physical Commodity Large Swaps Trader Reporting (Large Trader 
Reporting)
    CEA section 4t authorizes the Commission to establish a large 
trader reporting system for significant price discovery swaps (of which 
the economically equivalent swaps subject to part 20 of the 
Commission's regulations are a subset).\370\ Pursuant thereto, the 
Commission adopted its Large Trader Reporting rules (part 20 of the 
Commission's regulations), which require routine reports from swap 
dealers, among other entities, that hold significant positions in swaps 
that are linked, directly or indirectly, to a prescribed list of U.S.-
listed physical commodity futures contracts.\371\ Additionally, Large 
Trader Reporting requires that swap dealers, among other entities, 
comply with certain recordkeeping obligations.
---------------------------------------------------------------------------

    \370\ 7 U.S.C. 6t.
    \371\ Large Trader Reporting for Physical Commodity Swaps, 76 FR 
43851 (July 22, 2011). The rules require routine position reporting 
by clearing organizations, as well as clearing members and swap 
dealers with reportable positions in the covered physical commodity 
swaps. The rules also establish recordkeeping requirements for 
clearing organizations, clearing members and swap dealers, as well 
as traders with positions in the covered physical commodity swaps 
that exceed a prescribed threshold. In general, the rules apply to 
swaps that are linked, directly or indirectly, to either the price 
of any of the 46 U.S. listed physical commodity futures contracts 
the Commission enumerates (Covered Futures Contracts) or the price 
of the physical commodity at the delivery location of any of the 
Covered Futures Contracts.
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2. Description of the Transaction-Level Requirements
    The Transaction-Level Requirements include: (i) Required clearing 
and swap processing; (ii) margining (and segregation) for uncleared 
swaps; (iii) mandatory trade execution; (iv) swap trading relationship 
documentation; (v) portfolio reconciliation and compression; (vi) real-
time public reporting; (vii) trade confirmation; (viii) daily trading 
records; and (ix) external business conduct standards.
    The Transaction-Level Requirements--with the exception of external 
business conduct standards--relate to both risk mitigation and market 
transparency. Certain of these requirements, such as clearing and 
margining, serve to lower a firm's risk of failure. In that respect, 
these Transaction-Level Requirements could be classified as Entity-
Level Requirements. Other Transaction-Level Requirements--such as trade 
confirmation, swap trading relationship documentation, and portfolio 
reconciliation and compression--also serve important risk mitigation 
functions, but are less closely connected to risk mitigation of the 
firm as a whole and thus are more appropriately applied on a 
transaction-by-transaction basis. Likewise, the requirements related to 
trade execution, trade confirmation, daily trading records, and real-
time public reporting have a closer nexus to the transparency goals of 
the Dodd-Frank Act, as opposed to addressing the risk of a firm's 
failure.
    As a result, whether a particular requirement of Title VII should 
apply on a transaction-by-transaction basis in the context of cross-
border activity for purposes of section 2(i) of the CEA requires the 
Commission to exercise some degree of judgment. Nevertheless, in the 
interest of comity principles, the Commission believes that the 
Transaction-Level Requirements may be applied on a transaction-by-
transaction basis. The Transaction-Level Requirements are split into 
two categories. All of the Transaction-Level Requirements except 
external business conduct standards are in Category A. The external 
business conduct standards are in Category B.
    Each of the Transaction-Level Requirements is discussed below.
a. Category A: Risk Mitigation and Transparency
i. Required Clearing and Swap Processing
    Section 2(h)(1) of the CEA requires a swap to be submitted for 
clearing to a DCO if the Commission has determined that the swap is 
required to be cleared, unless one of the parties to the swap is 
eligible for an exception from the clearing requirement and elects not 
to clear the swap.\372\ Clearing via a DCO mitigates the counterparty 
credit risk between swap dealers or MSPs and their counterparties.
---------------------------------------------------------------------------

    \372\ 7 U.S.C. 2(h)(1), (7).
---------------------------------------------------------------------------

    Commission regulations implementing the first designations of swaps 
for required clearing were published in the Federal Register on 
December 13, 2012.\373\ Under Commission regulation 50.2, all persons 
executing a swap that is included in a class of swaps identified under 
Commission regulation 50.4 must submit such swap to an eligible DCO for 
clearing as soon as technologically practicable after execution, but in 
any event by the end of the day of execution.
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    \373\ Clearing Requirement Determination Under Section 2(h) of 
the CEA, 77 FR 74284 (Dec. 13, 2012) (``Clearing Requirement 
Determination'').
---------------------------------------------------------------------------

    Regulation 50.4 establishes required clearing for certain classes 
of swaps. Currently, those classes include, for credit default swaps: 
Specified series of untranched North American CDX indices and European 
iTraxx indices; and for interest rate swaps: Fixed-to-floating swaps, 
basis swaps, forward rate agreements referencing U.S. Dollar, Euro, 
Sterling, and Yen, and overnight index swaps referencing U.S. Dollar, 
Euro, and Sterling. Each of the six classes is further defined in 
Commission regulation 50.4. Swaps that have the specifications 
identified in the regulation are required to be cleared and must be 
cleared pursuant to the rules of any eligible DCO \374\ unless an 
exception or exemption specified in the CEA or the Commission's 
regulations applies.
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    \374\ A DCO's eligibility to clear swaps that are required to be 
cleared pursuant to section 2(h)(1)(A) of the CEA and part 50 of the 
Commission's regulations is governed by regulation 39.5(a), relating 
to DCO eligibility.
---------------------------------------------------------------------------

    Generally, if a swap is subject to CEA section 2(h)(1)(A) and part 
50 of the Commission's regulations, it must be cleared through an 
eligible DCO, unless: (i) One of the counterparties is eligible for and 
elects the end-user exception

[[Page 45334]]

under Commission regulation 50.50; \375\ or (ii) both counterparties 
are eligible for and elect an inter-affiliate exemption under 
Commission regulation 50.52.\376\ To elect either the End-User 
Exception or the Inter-Affiliate Exemption, the electing party or 
parties and the swap must meet certain requirements set forth in the 
regulations.
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    \375\ See End-User Exception to the Clearing Requirement for 
Swaps, 77 FR 42560 (July 19, 2012) (``End-User Exception'').
    \376\ The Commission has adopted an exemption from required 
clearing for swaps between certain affiliated entities. Exemption 
for Swaps Between Certain Affiliated Entities, 78 FR 21750 (Apr. 11, 
2013) (``Inter-Affiliate Exemption'').
---------------------------------------------------------------------------

    Closely connected with the clearing requirement are the following 
swap processing requirements: (i) Commission regulation 23.506, which 
requires swap dealers and MSPs to submit swaps promptly for clearing; 
and (ii) Commission regulations 23.610 and 39.12, which establish 
certain standards for swap processing by DCOs and/or swap dealers and 
MSPs that are clearing members of a DCO.\377\ Together, required 
clearing and swap processing requirements promote safety and soundness 
of swap dealers and MSPs, and mitigate the credit risk posed by 
bilateral swaps between swap dealers or MSPs and their 
counterparties.\378\
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    \377\ 17 CFR 23.506 and 23.610. See also Final Customer 
Documentation Rules, 77 FR 21278.
    \378\ See section H regarding the application of required 
clearing rules to market participants that are not registered as 
swap dealers or MSPs, including the circumstances under which the 
parties to such swaps would be eligible for substituted compliance.
---------------------------------------------------------------------------

ii. Margin and Segregation Requirements For Uncleared Swaps
    Section 4s(e) of the CEA requires the Commission to set margin 
requirements for swap dealers and MSPs that trade in swaps that are not 
cleared.\379\ The margin requirements ensure that outstanding current 
and potential future risk exposures between swap dealers and their 
counterparties are collateralized, thereby reducing the possibility 
that swap dealers or MSPs take on excessive risks without having 
adequate financial backing to fulfill their obligations under the 
uncleared swap. In addition, with respect to swaps that are not 
submitted for clearing, section 4s(l) requires that a swap dealer or 
MSP notify the counterparty of its right to request that funds provided 
as margin be segregated, and upon such request, to segregate the funds 
with a third-party custodian for the benefit of the counterparty. In 
this way, the segregation requirement enhances the protections offered 
through margining uncleared swaps and thereby provides additional 
financial protection to counterparties. The Commission is working with 
foreign and domestic regulators to develop and finalize appropriate 
regulations for margin and segregation requirements.
---------------------------------------------------------------------------

    \379\ See 7 U.S.C. 6s(e). See also Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 FR 
23732, 23733-23740 (Apr. 28, 2011) (``Proposed Margin 
Requirements''). Section 4s(e) explicitly requires the adoption of 
rules establishing margin requirements for swap dealers and MSPs, 
and applies a bifurcated approach that requires each swap dealer and 
MSP for which there is a prudential regulator to meet the margin 
requirements established by the applicable prudential regulator, and 
each swap dealer and MSP for which there is no prudential regulator 
to comply with the Commission's margin regulations. In contrast, the 
segregation requirements in section 4s(1) do not use a bifurcated 
approach--that is, all swap dealers and MSPs are subject to the 
Commission's regulations regarding notice and third party custodians 
for margin collected for uncleared swaps.
---------------------------------------------------------------------------

iii. Trade Execution
    Integrally linked to the clearing requirement is the trade 
execution requirement, which is intended to bring the trading of swaps 
that are required to be cleared and are made available to trade onto 
regulated exchanges or execution facilities. Specifically, section 
2(h)(8) of the CEA provides that unless a clearing exception applies 
and is elected, a swap that is subject to a clearing requirement must 
be executed on a DCM or SEF, unless no such DCM or SEF makes the swap 
available to trade.\380\ Commission regulations implementing the 
process for a DCM or SEF to make a swap available to trade were 
published in the Federal Register on June 4, 2013.\381\ Under 
Commission regulations 37.10 and 38.12, respectively, a SEF or DCM may 
submit a determination for Commission review that a mandatorily cleared 
swap is available to trade based on enumerated factors. By requiring 
the trades of mandatorily cleared swaps that are made available to 
trade to be executed on an exchange or an execution facility--each with 
its attendant pre- and post-trade transparency and safeguards to ensure 
market integrity--the trade execution requirement furthers the 
statutory goals of financial stability, market efficiency, and enhanced 
transparency.
---------------------------------------------------------------------------

    \380\ See 7 U.S.C. 2(h)(8).
    \381\ See Process for a Designated Contract Market or Swap 
Execution Facility To Make a Swap Available to Trade, Swap 
Transaction Compliance and Implementation Schedule, and Trade 
Execution Requirement Under the Commodity Exchange Act, 78 FR 33606 
(Jun. 4, 2013).
---------------------------------------------------------------------------

iv. Swap Trading Relationship Documentation
    CEA section 4s(i) requires each swap dealer and MSP to conform to 
Commission standards for the timely and accurate confirmation, 
processing, netting, documentation and valuation of swaps. Pursuant 
thereto, Commission regulation 23.504(a) requires swap dealers and MSPs 
to ``establish, maintain and enforce written policies and procedures'' 
to ensure that the swap dealer or MSP executes written swap trading 
relationship documentation.\382\ Under Commission regulation 23.504(b), 
the swap trading relationship documentation must include, among other 
things: All terms governing the trading relationship between the swap 
dealer or MSP and its counterparty; credit support arrangements; 
investment and re-hypothecation terms for assets used as margin for 
uncleared swaps; and custodial arrangements.\383\ Further, the swap 
trading relationship documentation requirement applies to all swaps 
with registered swap dealers and MSPs. In addition, Commission 
regulation 23.505 requires swap dealers and MSPs to document certain 
information in connection with swaps for which exceptions from required 
clearing are elected.\384\ Swap documentation standards facilitate 
sound risk management and may promote standardization of documents and 
transactions, which are key conditions for central clearing, and lead 
to other operational efficiencies, including improved valuation.
---------------------------------------------------------------------------

    \382\ See also Confirmation, Portfolio Reconciliation, Portfolio 
Compression, and Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants; 77 FR 
55904 (Sept. 11, 2012) (``Final Confirmation Rules'').
    \383\ The requirement under section 4s(i) relating to trade 
confirmations is a Transaction-Level Requirement. Accordingly, 
Commission regulation 23.504(b)(2) requires a swap dealer's and 
MSP's swap trading relationship documentation to include all 
confirmations of swaps, will apply on a transaction-by-transaction 
basis.
    \384\ See also Final Confirmation Rules, 77 FR 55964.
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v. Portfolio Reconciliation and Compression
    CEA section 4s(i) directs the Commission to prescribe regulations 
for the timely and accurate processing and netting of all swaps entered 
into by swap dealers and MSPs. Pursuant to CEA section 4s(i), the 
Commission adopted regulations (23.502 and 23.503), which require swap 
dealers and MSPs to perform portfolio reconciliation and compression, 
respectively, for all swaps.\385\ Portfolio reconciliation is a

[[Page 45335]]

post-execution risk management tool to ensure accurate confirmation of 
a swap's terms and to identify and resolve any discrepancies between 
counterparties regarding the valuation of the swap. Portfolio 
compression is a post-trade processing and netting mechanism that is 
intended to ensure timely, accurate processing and netting of 
swaps.\386\ Regulation 23.503 requires all swap dealers and MSPs to 
establish policies and procedures for terminating fully offsetting 
uncleared swaps, when appropriate, and periodically participating in 
bilateral and/or multilateral portfolio compression exercises for 
uncleared swaps with other swap dealers or MSPs or conducted by a third 
party.\387\ The rule also requires policies and procedures for engaging 
in such exercises for uncleared swaps with non-swap dealers and non-
MSPs upon request. Further, participation in multilateral portfolio 
compression exercises is mandatory for dealer-to-dealer trades.
---------------------------------------------------------------------------

    \385\ See id.
    \386\ For example, the reduced transaction count may decrease 
operational risk as there are fewer trades to maintain, process, and 
settle.
    \387\ See Confirmation, Portfolio Reconciliation, and Portfolio 
Compression Requirements for Swap Dealers and Major Swap 
Participants, 75 FR 81519 (Dec. 28, 2010) (``Confirmation NPRM'').
---------------------------------------------------------------------------

vi. Real-Time Public Reporting
    Section 2(a)(13) of the CEA directs the Commission to promulgate 
rules providing for the public availability of swap transaction and 
pricing data on a real-time basis.\388\ In accordance with this 
mandate, the Commission promulgated part 43, which provides that all 
``publicly reportable swap transactions'' must be reported and publicly 
disseminated, and which establishes the method, manner, timing and 
particular transaction and pricing data that must be reported by 
parties to a swap transaction.\389\ Additionally, the Commission 
adopted regulation 23.205, which directs swap dealers and MSPs to 
undertake such reporting and to have the electronic systems and 
procedures necessary to transmit electronically all information and 
data required to be reported in accordance with part 43.\390\ The real-
time dissemination of swap transaction and pricing data supports the 
fairness and efficiency of markets and increases transparency, which in 
turn improves price discovery and decreases risk (e.g., liquidity 
risk).\391\
---------------------------------------------------------------------------

    \388\ See 7 U.S.C. 2(a)(13). See also Real-Time Public Reporting 
of Swap Transaction Data, 77 FR 1182, 1183 (Jan. 9, 2012) (``Final 
Real-Time Reporting Rule'').
    \389\ Part 43 defines a ``publicly reportable swap transaction'' 
as (i) any swap that is an arm's-length transaction between two 
parties that results in a corresponding change in the market risk 
position between the two parties; or (ii) any termination, 
assignment, novation, exchange, transfer, amendment, conveyance, or 
extinguishing of rights or obligations of a swap that changes the 
pricing of a swap. See Final Real-Time Reporting Rule, 77 FR 1182.
    \390\ Final Swap Dealer and MSP Recordkeeping Rule, 77 FR at 
20205.
    \391\ See Final Real-Time Reporting Rule, 77 FR at 1183.
---------------------------------------------------------------------------

vii. Trade Confirmation
    Section 4s(i) of the CEA \392\ requires that each swap dealer and 
MSP must comply with the Commission's regulations prescribing timely 
and accurate confirmation of swaps. The Commission has adopted 
regulation 23.501, which requires, among other things, a timely and 
accurate confirmation of swap transactions (which includes execution, 
termination, assignment, novation, exchange, transfer, amendment, 
conveyance, or extinguishing of rights or obligations of a swap) among 
swap dealers and MSPs by the end of the first business day following 
the day of execution.\393\ Timely and accurate confirmation of swaps--
together with portfolio reconciliation and compression--are important 
post-trade processing mechanisms for reducing risks and improving 
operational efficiency.\394\
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    \392\ 7 U.S.C. 6s(i).
    \393\ See also Final Confirmation Rules, 77 FR 55904.
    \394\ In addition, the Commission notes that regulation 
23.504(b)(2) requires that the swap trading relationship 
documentation of swap dealers and MSPs must include all 
confirmations of swap transactions.
---------------------------------------------------------------------------

viii. Daily Trading Records
    Pursuant to CEA section 4s(g), the Commission adopted regulation 
23.202, which requires swap dealers and MSPs to maintain daily trading 
records, including records of trade information related to pre-
execution, execution, and post-execution data that is needed to conduct 
a comprehensive and accurate trade reconstruction for each swap. The 
final rule also requires that records be kept of cash or forward 
transactions used to hedge, mitigate the risk of, or offset any swap 
held by the swap dealer or MSP.\395\ Accurate and timely recordkeeping 
regarding all phases of a swap transaction can serve to greatly enhance 
a firm's internal supervision, as well as the Commission's ability to 
detect and address market or regulatory abuses or evasion.
---------------------------------------------------------------------------

    \395\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 
20128.
---------------------------------------------------------------------------

b. Category B: External Business Conduct Standards
    Pursuant to CEA section 4s(h), the Commission has adopted external 
business conduct rules, which establish business conduct standards 
governing the conduct of swap dealers and MSPs in dealing with their 
counterparties in entering into swaps.\396\ Broadly speaking, these 
rules are designed to enhance counterparty protection by significantly 
expanding the obligations of swap dealers and MSPs towards their 
counterparties. Under these rules, swap dealers and MSPs will be 
required, among other things, to conduct due diligence on their 
counterparties to verify eligibility to trade, provide disclosure of 
material information about the swap to their counterparties, provide a 
daily mid-market mark for uncleared swaps and, when recommending a swap 
to a counterparty, make a determination as to the suitability of the 
swap for the counterparty based on reasonable diligence concerning the 
counterparty.
---------------------------------------------------------------------------

    \396\ See 7 U.S.C. 6s(h). See also External Business Conduct 
Rules, 77 FR at 9822-9829.
---------------------------------------------------------------------------

E. Categorization of Entity-Level and Transaction-Level Requirements

    As noted above, even before the Commission published the Proposed 
Guidance, a number of commenters recommended that the Commission, in 
interpreting the cross-border applicability of the Dodd-Frank Act swaps 
provisions, should distinguish between requirements that apply at an 
entity level (i.e., to the firm as a whole) as compared to those that 
apply at a transactional level (i.e., to the individual swap 
transaction or trading relationship).\397\ The Commission agrees with 
such commenters, and generally expects that it may apply its policies 
differently depending on the category (Entity-Level or Transaction-
Level) or sub-category (First or Second Category of Entity-Level 
Requirements or Category A or B of the Transaction-Level Requirements) 
into which such requirement falls, subject to its further consideration 
of all of the relevant facts and circumstances.
---------------------------------------------------------------------------

    \397\ See note 351, supra.
---------------------------------------------------------------------------

    After giving further consideration to the categorization in the 
Proposed Guidance, including comments received in this area, this 
Guidance makes a few minor modifications to the proposed categorization 
of Entity-Level and Transaction-Level Requirements, as described below.
1. Categorization Under the Proposed Guidance
    The Proposed Guidance separated the Entity-Level Requirements into 
two subcategories. The first included capital adequacy, chief 
compliance officer, risk management, and swap data

[[Page 45336]]

recordkeeping, all of which relate to risks to a firm as a whole. The 
second proposed subcategory included SDR Reporting and Large Trader 
Reporting, which relate directly to the Commission's market oversight.
    The Proposed Guidance separated the Transaction-Level Requirements 
into two subcategories, ``Category A'' and ``Category B.'' The 
``Category A'' Transaction-Level Requirements relate to risk mitigation 
and transparency: (1) Clearing and swap processing; (2) margining and 
segregation for uncleared swaps; (3) trade execution; (4) swap trading 
relationship documentation; (5) portfolio reconciliation and 
compression; (6) real-time public reporting; (7) trade confirmation; 
and (8) daily trading records.
    The ``Category B'' Transaction-Level Requirements--the external 
business conduct standards--are those requirements that may not be 
necessary to apply to swaps between non-U.S. persons taking place 
outside the United States. With respect to these swaps, the Commission 
believes that foreign regulators may have a relatively stronger 
supervisory interest in regulating sales practices concerns than the 
Commission.
2. Comments
    Commenters generally supported the division of Dodd-Frank's swaps 
provisions (and Commission regulations thereunder) into Entity-Level 
and Transaction-Level Requirements.\398\ Certain of these commenters, 
however, made specific recommendations for reclassification of some of 
these Requirements.
---------------------------------------------------------------------------

    \398\ See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug. 27, 2012) 
at 2; Clearing House (Aug. 27, 2012) at 22.
---------------------------------------------------------------------------

a. Reporting and Trade-Execution Requirements
    With regard to reporting and trade-execution requirements, a number 
of commenters argued that all forms of swaps reporting, including SDR 
Reporting and Large Trader Reporting, should be treated as Transaction-
Level Requirements and thereby could be eligible for substituted 
compliance for certain transactions with non-U.S. counterparties.\399\ 
In their view, SDR Reporting--like real-time public reporting--is 
implemented on a swap-by-swap basis and more closely linked to market 
transparency than risk mitigation. Credit Suisse noted that the 
Commission's bifurcated approach to SDR Reporting and real-time public 
reporting creates unnecessary complications. It argued that both sets 
of reporting requirements should apply to a non-U.S. swap dealer only 
when dealing with U.S. persons (excluding foreign branches of U.S. swap 
dealers).\400\
---------------------------------------------------------------------------

    \399\ See, e.g., SIFMA (Aug. 27, 2012) at A4, A34, A35; Credit 
Suisse (Aug. 27, 2012) at 10; Association for Financial Markets in 
Europe (AFME) (Aug. 24, 2012) at 8-9.
    \400\ Credit Suisse (Aug. 27, 2012) at 10.
---------------------------------------------------------------------------

    ISDA believed that real-time public reporting and trade execution 
should be treated like the external business conduct rules. It argued 
that these rules relate to pre-trade price discovery and market 
structure and client protections.\401\ Similarly, J.P. Morgan commented 
that the real-time public reporting and trade execution requirements 
should not apply to transactions between non-U.S. swap dealers or non-
U.S. MSPs and non-U.S. counterparties, arguing that these requirements 
do not reduce market risk but rather promote price competition.\402\ 
IIB stated that the Commission should treat mandatory trade execution, 
real-time public reporting and daily trading records as ``Category B'' 
Transaction-Level Requirements, since these requirements are intended 
to give customers enhanced access to the best pricing and affect not 
only individual counterparties but the overall market.\403\
---------------------------------------------------------------------------

    \401\ ISDA (Aug. 27, 2012) at 11. Similarly, Australian Bankers 
stated that the real-time public reporting and trade execution 
requirements should be treated in the same manner as the external 
business conduct standards and have no application to transactions 
involving a non-U.S. swap dealer and its non-U.S. counterparties. 
Australian Bankers (Aug. 27, 2012) at 5. See also SIFMA (Aug. 27, 
2012) at A37 (stating that real-time public reporting should be 
treated in the same way as external business conduct standards and, 
in particular, should not apply to non-U.S. swap entities or non-
U.S. branches for transactions with non-U.S. persons).
    \402\ See also The Clearing House (Aug. 27, 2012) at 22 (stating 
that no pre- or post-trade transparency rules or conflict of 
interest rules should apply to transactions with non-U.S. 
counterparties. These rules should be treated similarly to the 
external business conduct rules--excluded from the Transaction-Level 
and Entity-Level categories, and not applied at all to transactions 
between a non-U.S. entity (including a non-U.S. branch of a U.S. 
entity) and its non-U.S. counterparty, regardless of whether that 
counterparty is guaranteed by, or a conduit for, a U.S. person).
    \403\ IIB (Aug. 27, 2012) at 17, 32-33. IIB further stated that 
application of these pre- and post-trade requirements to swaps 
between non-U.S. persons outside the United States would raise 
``serious, unprecedented'' concerns relating to the sovereignty of 
foreign markets. IIB (Aug. 27, 2012) at 34.
---------------------------------------------------------------------------

    On the other hand, Senator Levin stated that reporting and trade 
execution requirements should be applied broadly to all swaps of non-
U.S. swap dealers and non-U.S. MSPs that are affiliates of U.S. 
financial institutions, so as to provide transparency regarding their 
swap activities and to protect the U.S. financial system.\404\ He 
stated that standard trade execution helps to ensure that complex swaps 
are properly booked, and reporting discourages ``below-the-radar'' 
transactions involving complex swaps.\405\
---------------------------------------------------------------------------

    \404\ Letter from Sen. Levin at 11-12.
    \405\ Id.
---------------------------------------------------------------------------

b. Swap Trading Relationship Documentation, Portfolio Reconciliation 
and Compression, Daily Trading Records and External Business Conduct 
Standards
    Sumitomo stated that certain Transaction-Level Requirements, 
including swap trading relationship documentation, portfolio 
reconciliation and compression, daily trading records, and external 
business conduct standards, should instead be classified as Entity-
Level Requirements. It contended that these are not logically linked to 
particular transactions and would be required to be conducted on a 
daily basis per counterparty.\406\ IATP stated that portfolio 
compression and reconciliation requirements are critical to a firm's 
central risk mitigation functions and therefore should be classified as 
Entity-Level Requirements. This commenter also argued that margin, 
segregation and other requirements for swaps that are so designated by 
non-U.S. affiliates of U.S. persons as to be unclearable should be 
regulated under the Entity-Level Requirements.\407\
---------------------------------------------------------------------------

    \406\ Sumitomo (Aug. 24, 2012) at 3.
    \407\ IATP (Aug. 27, 2012) at 7.
---------------------------------------------------------------------------

    Similarly, Senator Levin stated that clearing, margin and portfolio 
reconciliation and compression requirements and external business 
conduct standards should be applied to all swaps of non-U.S. swap 
dealers and non-U.S. MSPs that are affiliates of U.S. financial 
institutions.\408\ In the Senator's view, margin requirements are 
critical safeguards against rapidly increasing losses, portfolio 
reconciliation and compression procedures help to maintain an accurate 
understanding of the size and nature of a firm's swaps positions, and 
external business conduct standards encourage integrity in the swaps 
markets.\409\ Societe Generale also stated that rules relating to 
confirmation processing and portfolio reconciliation and compression 
should be categorized as Entity-Level Requirements, explaining that 
these all relate to the functioning of a swap dealer's ``back office'' 
operations and are tied to its trading systems. As a result, 
implementing confirmation rules, for

[[Page 45337]]

example, for swaps with U.S. persons only is ``extremely difficult from 
a technological standpoint.'' \410\
---------------------------------------------------------------------------

    \408\ Letter from Sen. Levin at 11-12.
    \409\ Id.
    \410\ SocGen (Aug. 8, 2012) at 6 (stating that banks with a 
centralized booking model will face technological difficulties in 
applying confirmation processing and portfolio reconciliation and 
compression rules only with respect to U.S. persons, and that a 
requirement to apply these rules to all customers (even non-U.S. 
persons) is inconsistent with international comity). See also 
Australian Bankers (Aug. 27, 2012) at 5 (stating that portfolio 
reconciliation and compression requirements should be categorized as 
Entity-Level Requirements, as they are critical to risk mitigation 
and back-office functions).
---------------------------------------------------------------------------

    IIB recommended that the daily trading records requirements 
(Commission regulation 23.202) be categorized as a Category B 
Transaction-Level Requirement. It reasoned that this rule is most 
relevant when a non-U.S. swap dealer or non-U.S. MSP is trading with a 
U.S. person to whom it owes U.S. sales practice obligations and for 
whom the Commission's interest in addressing market abuses is highest. 
It also noted that the obligation to make and retain records of pre-
execution oral conversations, a principal element of the rule, is most 
likely to give rise to conflicts with foreign privacy laws.\411\
---------------------------------------------------------------------------

    \411\ IIB (Aug. 27, 2012) at 32-33.
---------------------------------------------------------------------------

c. Internal Conflicts of Interest Requirement
    IIB noted that the internal conflicts of interest requirement 
(Commission regulation 23.605) is categorized as an Entity-Level 
Requirement in the Proposed Guidance. It stated that internal research 
conflicts of interest procedures are intended to promote the integrity 
of research reports to customers, and that internal clearing conflicts 
of interest procedures are intended to promote client access to better 
pricing on execution and clearing. As a result, IIB views the 
Commission's interest in applying these requirements to non-U.S. 
clients as minimal and recommends that the internal conflicts of 
interest requirement be categorized as a new ``Category B'' Entity-
Level Requirement.\412\
---------------------------------------------------------------------------

    \412\ IIB (Aug. 27, 2012) at 32. This would render internal 
conflicts of interest requirements applicable only in connection 
with personnel of its research department or clearing unit preparing 
research reports for use with, or providing clearing services to, 
respectively, U.S. persons.
---------------------------------------------------------------------------

d. Position Limits and Anti-Manipulation Rules
    SIFMA stated that position limits and anti-manipulation rules, 
which were not addressed in the Proposed Guidance, should be 
categorized as Transaction-Level Requirements and, therefore, be 
eligible for relief in some circumstances. They argued that these rules 
have a close nexus to market transparency, as opposed to risk 
mitigation of a firm's failure.\413\
---------------------------------------------------------------------------

    \413\ SIFMA (Aug. 27, 2012) at A35-36.
---------------------------------------------------------------------------

3. Commission Guidance
    In general, the Commission would apply the Dodd-Frank provisions 
differently depending on the category (Entity-Level or Transaction-
Level) or sub-category (First or Second Category of Entity-Level 
Requirements or Category A or B of the Transaction-Level Requirements) 
into which such requirement falls. Therefore, the Commission has 
carefully reviewed comments on the classification of the Entity-Level 
Requirements and Transaction-Level Requirements, as well as comments 
regarding whether and how Entity-Level and Transaction-Level 
Requirements should apply to swaps between various types of 
counterparties, and under what circumstances the Commission's policy 
should contemplate that various swaps should generally be eligible for 
substituted compliance, or provide that certain of the Commission's 
requirements would generally not apply.
    After careful consideration, the Commission would generally treat 
swaps requirements as Entity-Level Requirements and Transaction-Level 
Requirements largely in accordance with the Proposed Guidance, with 
certain minor modifications described below.
a. Entity-Level Requirements
    Consistent with CEA section 2(i), the Commission would treat the 
following requirements as Entity-Level Requirements, as proposed: 
Capital adequacy, chief compliance officer, risk management, swap data 
recordkeeping, SDR Reporting, and Large Trader Reporting.
    At the core of a robust internal risk controls system is the firm's 
capital--and particularly, how the firm identifies and manages its risk 
exposure arising from its portfolio of activities.\414\ Equally 
foundational to the financial integrity of a firm is an effective 
internal risk management process, which must be comprehensive in scope 
and reliant on timely and accurate data regarding its swap activities. 
To be effective, such a system must have a strong and independent 
compliance function. These internal controls-related requirements--
namely, the requirements related to chief compliance officer, risk 
management, swap data recordkeeping--are designed to serve that end. 
Given their functions, the Commission's policy is that these 
requirements should be applied on a firm-wide basis to effectively 
address risks to the swap dealer or MSP as a whole, and should be 
classified as Entity-Level Requirements.
---------------------------------------------------------------------------

    \414\ By way of illustration, consistent with the purpose of the 
capital requirement, which is intended to reduce the likelihood and 
cost of a swap dealer's default by requiring a financial cushion, a 
swap dealer's or MSP's capital requirements would be set on the 
basis of its overall portfolio of assets and liabilities.
---------------------------------------------------------------------------

    SDR Reporting and Large Trader Reporting relate more closely to 
market transparency and to the Commission's market surveillance 
program. Among other things, data reported to SDRs will enhance the 
Commission's understanding of concentrations of risks within the 
market, as well as promote a more effective monitoring of risk profiles 
of market participants in the swaps market. Large Trader Reporting, 
along with an analogous reporting system for futures contracts, is 
essential to the Commission's ability to conduct effective surveillance 
of markets in U.S. physical commodity futures and economically 
equivalent swaps. Given the functions of these reporting requirements, 
the Commission's view is that each requirement generally should be 
applied across swaps, irrespective of the counterparty or the location 
of the swap, in order to ensure that the Commission has a comprehensive 
and accurate picture of market activities. Otherwise, the intended 
value of these requirements would be significantly compromised, if not 
undermined. Therefore, the Commission's policy is to generally treat 
SDR Reporting and Large Trader Reporting as Entity-Level Requirements.
    The Commission did not address in the Proposed Guidance whether 
position limits and anti-manipulation provisions should fall in the 
Entity-Level or Transaction-Level Requirements category. It is the 
Commission's view that these provisions relate more to market 
integrity, as opposed to the financial integrity of a firm, and it is 
essential that they apply regardless of the counterparty's status (U.S. 
person or not) in order to fully achieve the underlying purpose of 
these respective provisions. Accordingly, these requirements are 
outside the scope of this Guidance. However, the monitoring of position 
limits under Commission regulation 23.601 is included in the Entity-
Level Requirements under this Guidance.
    After considering the input of market participants and others 
through the comment process, and giving further consideration to how 
the language in CEA section 2(i) should be interpreted for purposes of 
applying the Entity-

[[Page 45338]]

Level Requirements and permitting substituted compliance, the 
Commission's policy is to treat the Entity-Level Requirements in 
subcategories largely as proposed.
    As explained above, Entity-Level Requirements ensure that 
registered swap dealers and MSPs implement and maintain a comprehensive 
and robust system of internal controls to ensure the financial 
integrity of the firm, and in turn, the protection of the financial 
system. In this respect, the Commission has strong supervisory 
interests in applying the same rigorous standards, or comparable and 
comprehensive standards, to non-U.S. swap dealers and non-U.S. MSPs 
whose swap activities or positions are substantial enough to require 
registration under the CEA. Requiring such swap dealers and MSPs to 
rigorously monitor and address the risks they incur as part of their 
day-to-day businesses would lower the registrants' risk of default--and 
ultimately protect the public and the financial system.
    Therefore, the Commission contemplates that non-U.S. swap dealers 
and non-U.S. MSPs will comply with all of the First Category of Entity-
Level Requirements. In addition, consistent with principles of 
international comity, substituted compliance may be available for these 
Entity-Level Requirements in certain circumstances, as explained 
further below. In contrast, with regard to Entity-Level Requirements in 
the Second Category, substituted compliance should generally be 
available only where the counterparty is a non-U.S. person.\415\
---------------------------------------------------------------------------

    \415\ In addition, as noted in section G below, reflecting its 
interpretation of CEA section 2(i), the Commission generally 
contemplates that U.S. swap dealers and MSPs would comply in full 
with the Entity-Level Requirements (regardless of whether the 
Entity-Level Requirements are classified as being in the First 
Category or Second Category), without substituted compliance 
available. This interpretation also applies to swaps with U.S. swap 
dealers or U.S. MSPs that are affiliates of non-U.S. persons.
---------------------------------------------------------------------------

i. The First Category--Capital Adequacy, Chief Compliance Officer, Risk 
Management, and Swap Data Recordkeeping (Except for Certain 
Recordkeeping Requirements)
    The Commission's policy generally is to treat the requirements 
related to capital adequacy, chief compliance officer, risk management, 
and swap data recordkeeping (except swap data recordkeeping relating to 
complaints and marketing and sales materials under Commission 
regulations 23.201(b)(3) and 23.201(b)(4), respectively) in the First 
Category. These requirements address and manage risks that arise from a 
firm's operation as a swap dealer or MSP. Collectively, they constitute 
a firm's first line of defense against financial, operational, and 
compliance risks that could lead to a firm's default.
    The First Category is identical to the first subcategory proposed 
by the Commission in the Proposed Guidance, except that the 
Commission's policy is to treat swap data recordkeeping under part 43 
and part 46 of the Commission's regulations and swap data recordkeeping 
related to complaints and marketing and sales materials under 
Commission regulations 23.201(b)(3) and 23.201(b)(4) as part of the 
``Second Category'' of Entity-Level Requirements. As noted above, for 
Entity-Level Requirements in the First Category, substituted compliance 
generally would be available for a non-U.S. swap dealer or non-U.S. MSP 
(including one that is an affiliate of a U.S. person) regardless of 
whether the counterparty is a U.S. person or a non-U.S. person.\416\ In 
contrast, for Entity-Level Requirements in the Second Category, 
substituted compliance generally would be available for a non-U.S. swap 
dealer or MSP only where the counterparty is a non-U.S. person.
---------------------------------------------------------------------------

    \416\ As explained in section G below, the Commission's policy 
is that where a swap dealer or MSP is a U.S. person, all of the 
entity-level requirements would generally apply in full (without 
substituted compliance available), regardless of the type of 
counterparty.
---------------------------------------------------------------------------

ii. The Second Category--SDR Reporting, Certain Swap Data Recordkeeping 
Requirements and Large Trader Reporting
    The Commission's policy retains SDR Reporting in the Second 
Category, as proposed. SDR Reporting furthers the goals of the Dodd-
Frank Act to reduce systemic risk, increase transparency and promote 
market integrity. Specifically, data reported to SDRs under the SDR 
Reporting rules provide the Commission with information necessary to 
better understand and monitor concentrations of risk, as well as risk 
profiles of individual market participants for cleared and uncleared 
swaps.
    The Commission believes that retaining SDR Reporting in the Second 
Category would be appropriate. Consistent with section 2(i), the 
Commission's policy is that U.S. swap dealers or MSPs (including those 
that are affiliates of a non-U.S. person) generally should comply in 
full with all of the Entity-Level Requirements, including SDR 
Reporting. Further, non-U.S. swap dealers and non-U.S. MSPs (including 
those that are affiliates of a U.S. person), generally should comply 
with SDR Reporting, and substituted compliance should be available (to 
the extent applicable) only where the swap counterparty is a non-U.S. 
person, provided that the Commission has direct access (including 
electronic access) to the relevant swap data that is stored at the 
foreign trade repository.\417\
---------------------------------------------------------------------------

    \417\ See section G, infra, for additional information on the 
application of the Entity-Level Requirements.
---------------------------------------------------------------------------

    The Commission contemplates treating swap data recordkeeping 
related to complaints and marketing and sales materials under 
Commission regulations 23.201(b)(3) and 23.201(b)(4) as part of the 
``Second Category'' because, in the Commission's view, non-U.S. swap 
dealers and non-U.S. MSPs (including those that are affiliates of a 
U.S. person) generally should comply with SDR Reporting. Further, 
substituted compliance should be available for non-U.S. swap dealers or 
MSPs, to the extent applicable, only where the swap counterparty is a 
non-U.S. person.
    Large Trader Reporting furthers the goals of the Dodd-Frank Act to 
reduce systemic risk, increase transparency and promote market 
integrity. Large Trader Reporting, in conjunction with the Commission's 
large trader reporting system for futures contracts, is essential to 
the Commission's ability to conduct effective surveillance of markets 
in U.S. physical commodity futures and economically equivalent swaps. 
Given the regulatory function of Large Trader Reporting, the 
Commission's policy is to apply these requirements to non-U.S. persons 
whose trading falls within its scope to the same extent as U.S. 
persons. Accordingly, as discussed further in section G below, the 
Commission would not recognize substituted compliance in place of 
compliance with Large Trader Reporting.
b. Transaction-Level Requirements
    As previously noted, whether a particular Dodd-Frank Act 
requirement should apply on a transaction-by-transaction basis in the 
context of cross-border activity for purposes of section 2(i) of the 
CEA requires the exercise of some degree of judgment. Nevertheless, 
bearing in mind principles of international comity, the Commission 
anticipates that, in general, the Transaction-Level Requirements may be 
applied on a transaction-by-transaction basis.
    The Commission's policy contemplates treating as Transaction-Level 
Requirements all of the requirements that the Commission proposed to 
include. Thus, the

[[Page 45339]]

Transaction-Level Requirements are: (1) Required clearing and swap 
processing; (2) margining and segregation for uncleared swaps; (3) 
trade execution; (4) swap trading relationship documentation; (5) 
portfolio reconciliation and compression; (6) real-time public 
reporting; (7) trade confirmation; (8) daily trading records; and (9) 
external business conduct standards.
    The Commission contemplates treating the Transaction-Level 
Requirements in two subcategories, designated as Category A and 
Category B, largely as proposed. Generally, these categories reflect 
how the Commission generally contemplates applying various Transaction-
Level Requirements to various types of counterparties, and in guiding 
the consideration of when substituted compliance will be available 
under this Guidance.\418\
---------------------------------------------------------------------------

    \418\ Substituted compliance is discussed in section F, infra. 
The application of the Category A Transaction-Level Requirements and 
eligibility for substituted compliance is discussed in section 
IV.G.4. The application of the Category B Transaction-Level 
Requirements is discussed in section IV.G.5. The application of 
certain CEA provisions and certain Entity and Transaction-Level 
Requirements to non-registrants is discussed in section IV.H.
---------------------------------------------------------------------------

i. The Category A Transaction-Level Requirements
    The ``Category A'' Transaction-Level Requirements relate to risk 
mitigation and transparency, and included the first eight Transaction-
Level requirements referenced above.
    The Commission does not believe it would be appropriate to treat, 
as suggested by commenters, swap trading relationship documentation, 
portfolio reconciliation and compression, daily trading records and 
external business conduct standards as Entity-Level Requirements. The 
Commission recognizes that firms may find a certain degree of 
operational efficiency in applying these requirements on a firm-wide 
basis. On the other hand, the Commission expects that treatment of 
these as Transaction-Level Requirements should allow for greater 
flexibility in terms of whether and how Dodd-Frank requirements apply. 
For example, under the Proposed Guidance, the Commission would not 
interpret section 2(i) generally to apply the Dodd-Frank's clearing 
requirement to a swap between a non-U.S. swap dealer and a non-U.S. 
counterparty. In the Commission's judgment, allowing swap trading 
relationship documentation, portfolio reconciliation and compression 
and external business conduct standards to be applied on a transaction 
basis would not undermine the underlying regulatory objectives and, 
yet, will give due recognition to the home jurisdiction's supervisory 
interest. Consistent with this rationale, the Commission would treat 
margin, segregation, and related requirements as Transaction-Level 
Requirements.
    The Commission also is retaining the trade execution requirement, 
as proposed, in Category A. The trade execution requirement is intended 
to bring the trading of mandatorily cleared swaps that are made 
available to trade onto regulated exchanges or execution facilities. By 
requiring the trades of mandatorily cleared swaps that are made 
available to trade to be executed on an exchange or an execution 
facility--each with its attendant pre- and post-trade transparency and 
safeguards to ensure market integrity--the trade execution requirement 
furthers the statutory goals of promoting financial stability, market 
efficiency and enhanced transparency.
    The Commission's policy will treat real-time public reporting as a 
Transaction-Level Requirement. However, for the reasons discussed 
below, the Commission clarifies that it does not intend that its policy 
would preclude a market participant from applying real-time public 
reporting with respect to swap transactions that are not necessarily 
subject to this Transaction-Level Requirement if doing so would be more 
efficient for the market participant.
    Part 43 of the Commission's regulations and part 45 of the 
Commission's regulations, respectively, prescribe the data fields that 
are to be included in real-time public reporting and SDR Reporting 
reports with respect to a reportable swap transaction.\419\
---------------------------------------------------------------------------

    \419\ See generally Final Real-Time Reporting Rule, 77 FR at 
1250-1266; Swap Data Recordkeeping and Reporting Requirements, 77 FR 
2136, 2210-2224 (Jan. 13, 2012) (``Final Data Rules''). Part 43 
applies to reports of swap transaction and pricing data to a 
registered SDR, in order that the SDR can publicly disseminate such 
data pursuant to part 43 and Appendix A to part 43 as soon as 
technologically practicable after execution of the publicly 
reportable swap. Final Real-Time Reporting Rule, 77 FR 1249. Under 
part 45, counterparties report creation data for the swap--including 
all primary economic terms (``PET'') data and confirmation data--as 
well as continuation data also as soon as technologically 
practicable. See Final Data Rules, 77 FR at 2149-2151, 2199-2202.
---------------------------------------------------------------------------

    The Commission understands from commenters that in certain 
circumstances, reporting part 43 and part 45 data for the same swap 
transaction in separate reports (``two stream reporting'') could 
accommodate market participants that have a transactional structure 
and/or systems that are designed or suited to send separate 
submissions.\420\ However, the Commission also recognizes that in other 
circumstances, permitting market participants to include part 43 and 
part 45 data for the same swap transaction in a single report (``single 
stream reporting'') could optimize efficiency.\421\
---------------------------------------------------------------------------

    \420\ See Final Real-Time Reporting Rule, 77 FR 1237 (Jan. 9, 
2012) (noting that `` . . . coordination is expected to reduce costs 
by allowing reporting parties, SEFs and DCMs to send one set of data 
to an SDR for the purpose of satisfying the requirements of both 
rules.''); id. at 1210 (noting that '' . . . although reporting 
parties may use the same data stream for reporting regulatory data 
and real-time data, Commission regulation 43.4(d)(2) clarifies the 
intent of the Proposing Release: The reporting requirements for 
SEFs, DCMs and reporting parties for real-time public reporting 
purposes are separate from the requirement to report to an SDR for 
regulatory reporting purposes.'').
    \421\ Final Data Rules, 77 FR 2150, 2182. If SDR Reporting and 
real-time public reporting do not both apply to a swap transaction, 
market participants that have connected to registered SDRs and 
employed single stream reporting infrastructure and systems may be 
required to change such systems to bifurcate the part 43 and part 45 
data sets, which are generated and transmitted in a single report. 
The Commission understands that such bifurcation could occur due to 
the manner with which Transaction-Level and Entity-Level 
requirements apply to the particular swap transaction.
---------------------------------------------------------------------------

    The Commission anticipated that reporting parties might elect to 
use one data reporting stream for both SDR Reporting and real-time 
public reporting under part 45 and part 43 respectively, to reduce 
costs and optimize efficiency, and many market participants have chosen 
to build and integrate single stream reporting systems.\422\ The 
Commission is aware that, as commenters have stated, categorizing SDR 
Reporting under part 45 as an Entity-Level requirement and real-time 
public reporting under part 43 as a Transaction-Level requirement 
could, in certain circumstances, negate the benefits of single stream 
reporting, and could present challenges to market participants who have 
built single stream reporting infrastructure.
---------------------------------------------------------------------------

    \422\ Real-Time Public Reporting of Swap Transaction Data, 77 FR 
1217. See also Final Data Rules, 77 FR at 2182.
---------------------------------------------------------------------------

    In view of these concerns, the Commission would, in general, treat 
real-time public reporting as a Transaction-Level Requirement. However, 
the Commission does not intend that its policy would preclude a market 
participant from applying real-time public reporting with respect to 
swap transactions that are not necessarily subject to this Transaction-
Level Requirement if, for example, this would allow the market 
participant to realize efficiency gains from single stream reporting or 
otherwise as discussed above.

[[Page 45340]]

ii. The Category B Transaction-Level Requirements (External Business 
Conduct Standards)
    As proposed, the Commission's policy will treat external business 
conduct standards as a ``Category B'' Transaction-Level Requirement for 
purposes of the general application of this Transaction-Level 
Requirement to various categories of swap counterparties.\423\ External 
business conduct standards are oriented toward customer-protection. 
Among other obligations, the external business conduct rules generally 
require registrants to conduct due diligence on their counterparties to 
verify eligibility to trade (including eligible contract participant 
status), refrain from engaging in abusive market practices, provide 
disclosure of material information about the swap to their 
counterparties, provide a daily mid-market mark for uncleared swaps 
and, when recommending a swap to a counterparty, make a determination 
as to the suitability of the swap for the counterparty based on 
reasonable diligence concerning the counterparty. In the Commission's 
view, such rules have an attenuated link to, and are distinguishable 
from, market-oriented protections such as the trade execution mandate. 
Additionally, the Commission believes that the foreign jurisdictions in 
which non-U.S. persons are located are likely to have a significant 
interest in the type of business conduct standards that would be 
applicable to transactions with such non-U.S. persons within their 
jurisdiction. Because the Commission believes that foreign regulators 
may have a relatively stronger supervisory interest in regulating sales 
practices concerns related to swaps between non-U.S. persons taking 
place outside the United States than the Commission, the Commission 
believes that generally it is appropriate that the business conducts 
standards of the home jurisdiction, rather than those established by 
the Commission, apply to such transactions between non-U.S. persons.
---------------------------------------------------------------------------

    \423\ The application of the Category B Transaction-Level 
Requirements to swap dealers and MSPs is discussed in section 
IV.G.5.
---------------------------------------------------------------------------

    After reviewing the comments on internal conflicts of interest 
procedures, the Commission has given consideration to whether to treat 
internal conflicts of interest rules relating to clearing under 
Commission regulation 23.605 under Category B of the Transaction-Level 
Requirements. The Commission considered the view of commenters that 
stated that this particular requirement is generally more akin to the 
external business conduct standards and, as such, can reasonably be 
expected to be narrowly targeted to apply only with respect to U.S. 
clients, without undermining the regulatory benefits associated with 
the rule. However, because the Commission believes that internal 
conflicts of interest related to clearing should be applied on a firm-
wide basis, the Commission's policy is that this requirement generally 
should be treated as an Entity-Level Requirement as proposed.
    The Commission also has considered whether internal conflicts of 
interest procedures relating to research should be treated as Entity-
Level Requirements as proposed. These informational and supervisory 
firewalls are designed to ensure that research reports are free from 
undue influence by the firm's trading personnel. As a practical matter, 
it is generally difficult, if not impossible, to establish and maintain 
such safeguards on a transaction or client basis. Because the 
Commission believes that these firewalls, in order to achieve their 
regulatory purpose, should be applied on a firm-wide basis, the 
Commission's policy is that internal conflicts of interest procedures 
relating to research generally should be treated as Entity-Level 
Requirements.

F. Substituted Compliance

1. Proposed Guidance
    In the Proposed Guidance, the Commission stated that a cross-border 
policy that allows for flexibility in the application of the CEA while 
ensuring the high level of regulation contemplated by the Dodd-Frank 
Act and avoiding potential conflicts between U.S. regulations and 
foreign law is consistent with principles of international comity. To 
that end, the Commission set forth a general framework for substituted 
compliance. Under this ``substituted compliance'' regime, the 
Commission may determine that certain laws and regulations of a foreign 
jurisdiction are comparable to and as comprehensive as a corresponding 
category of U.S. laws and regulations. If the Commission makes such a 
determination, then an entity or transaction in that foreign 
jurisdiction that is subject to the category of U.S. laws and 
regulations for which comparability is determined will be deemed to be 
in compliance therewith if that entity or transaction complies with the 
corresponding foreign laws and regulations.
2. Comments
    Several commenters urged the Commission to use a principles-based 
approach and to review the legal regime as a whole, rather than 
evaluate comparability on an issue-by-issue basis.\424\ A commenter 
supported the Commission's view that comparable does not mean 
identical, and urged the Commission to place an emphasis on shared 
principles and mutual recognition.\425\
---------------------------------------------------------------------------

    \424\ See, e.g., SIFMA, (Aug. 27, 2012) at 3, A46; State Street 
(Aug. 27, 2012) at 3; Global Financial Markets Association 
(``GFMA'') (Aug. 27, 2012) at 2; Association for Financial Markets 
in Europe (``AFME'') (Aug. 27, 2012) at 2; J.P. Morgan (Aug. 13, 
2012) at 5; Australian Bankers (Aug. 27, 2012) at 2; Japanese 
Bankers Association (Aug. 27, 2012) at 3; Comissao de Valores 
Mobiliarios (``CVM'') (Aug. 27, 2012) at 2.
    \425\ See, e.g., FSR (Aug. 27, 2012) at 6-7.
---------------------------------------------------------------------------

    Some commenters stated that foreign jurisdiction laws and 
regulations are unlikely to be identical to those in the United States 
and that they thus support the Commission's proposed ``outcomes based 
approach'' to evaluating whether foreign regulatory requirements meet 
Dodd-Frank normative objectives.\426\ One of these commenters stated 
that in some cases foreign regulators would be faced with several 
challenges, noting that in ``light touch'' or principle-based 
regulatory jurisdictions, commodity derivatives data collection and 
surveillance is weak or even non-existent, as is concomitant 
enforcement.\427\
---------------------------------------------------------------------------

    \426\ See IATP (Aug. 27, 2012) at 11-12; IIAC (Aug. 27, 2012) at 
2, 9-11.
    \427\ See IATP (Aug. 27, 2012) at 11-12.
---------------------------------------------------------------------------

    Commenters stressed the need to avoid imposing duplicative or 
conflicting regulatory requirements which could result in unnecessary 
costs.\428\ Commenters urged the Commission to engage in a dialogue 
with other regulators \429\ and to build on work done at the 
international level.\430\
---------------------------------------------------------------------------

    \428\ See, e.g., ICI (Aug. 23, 2012) at 7-11; Capital Markets 
(Aug. 24, 2012) at 5-6.
    \429\ See Deutsche Bank, Aug. 27, 2012 at 5-6; Lloyds (Aug. 24, 
2012) at 2.
    \430\ See Australian Securities and Investments Commission; Hong 
Kong Monetary Authority; Monetary Authority of Singapore; Reserve 
Bank of Australia; Securities and Futures Commission, Hong Kong 
(Aug. 27, 2012) at 3-4.
---------------------------------------------------------------------------

    Some commenters expressed the view that substituted compliance 
should not require Commission approval if the applicable foreign 
regulator promulgates applicable regulations in accordance with G20 
commitments, or that a presumption that foreign rules are comparable 
should apply if the rules are consistent with G20 principles.\431\ Some 
commenters urged the Commission to take what they described as an

[[Page 45341]]

``equivalence approach'' similar to EMIR in the European Union,\432\ by 
making substituted compliance determinations based on recognition of 
``equivalent'' jurisdictions and not of individual firms.\433\ The 
European Commission stated that EU firms dealing with U.S. 
counterparties would always be subject to the Dodd-Frank Act, while 
U.S. firms dealing with EU counterparties could not be subject to EU 
rules if the EU decides to grant equivalence to the United States. The 
European Commission stated that it is difficult to understand why 
comparable foreign legislation in the EU should not be sufficient.\434\
---------------------------------------------------------------------------

    \431\ See CEWG (Aug. 27, 2012) at 7; CVM (Aug. 27, 2012) at 2; 
ICI (Aug. 23, 2012) at 9; IIB (Aug. 27, 2012) at 38-39; Hong Kong 
Banks (Aug. 27, 2012) at 2, 10, 14, 15; Korea Federation of Banks 
(``Korea Banks'') (Aug. 27, 2012) at 2-3; The Clearing House (Aug. 
27, 2012) at 3-4, 31-35.
    \432\ See Australian Securities and Investments Commission; Hong 
Kong Monetary Authority; Monetary Authority of Singapore; Reserve 
Bank of Australia; Securities and Futures Commission, Hong Kong 
(Aug. 27, 2012) at 2-3.
    \433\ See Deutsche Bank (Aug. 27, 2012) at 6.
    \434\ See European Commission (Aug. 24, 2012) at 4.
---------------------------------------------------------------------------

    Commenters, including foreign regulators, requested that the 
Commission more clearly outline the circumstances under which a 
particular foreign jurisdiction would be acceptable for substituted 
compliance purposes.\435\ Commenters stressed the need for 
comparability determinations to be transparent.\436\ One commenter 
stated that comparability determinations should allow for notice and 
comment.\437\ Another commenter stated that there should be a procedure 
for appeals, that memoranda of understanding (``MOUs'') should form the 
framework for comparability determinations, and that the Commission 
should develop a process for periodic review of comparability 
determinations.\438\
---------------------------------------------------------------------------

    \435\ See, e.g., Financial Services Authority (United Kingdom) 
(Aug. 24, 2012) at 3.
    \436\ See IIB (Aug. 27, 2012) at 40; American Bankers 
Association, (Aug. 27, 2012) at 2; IATP (Aug. 27, 2012) at 11.
    \437\ See American Bankers Association (Aug. 27, 2012) at 2.
    \438\ See IATP (Aug. 27, 2012) at 11-13.
---------------------------------------------------------------------------

    Some commenters found the Commission's proposed approach to 
substituted compliance too narrow or limiting. The European Securities 
and Markets Authority (``ESMA'') stated that when equivalence or 
substituted compliance is granted for an entire jurisdiction, 
registration should not be a prerequisite before substituted compliance 
can apply. ESMA also stated that the Commission's approach is quite 
limited because it is applied not uniformly but ``chapter by chapter,'' 
which ESMA represents contradicts what they described as EMIR's 
concepts of equivalence and mutual recognition.\439\ Japan FSA and Bank 
of Japan expressed concern that the scope of application of substituted 
compliance is too narrow and requested that it be extended to avoid 
overlap or conflict with foreign regulations.\440\ Other commenters 
stated that the approach being taken toward substituted compliance was 
narrow and not in accordance with comity.\441\ However, another 
commenter stated that substituted compliance procedures are an inferior 
option to direct compliance with Commission regulations. This commenter 
stated that the Commission does not violate principles of international 
comity by extending the cross-border application to cover how ``U.S. 
persons'' operate in foreign jurisdictions, particularly when those 
jurisdictions lack the laws and/or regulatory capacity to prevent 
damage to the U.S. economy resulting from counterparty defaults 
originating in foreign affiliate swaps.\442\
---------------------------------------------------------------------------

    \439\ See ESMA (Aug. 27, 2012) at 3-4.
    \440\ See Japan FSA and Bank of Japan (Aug. 13, 2012) at 2-3.
    \441\ See SIFMA (Aug. 27, 2012) at 3, A46; Futures Industry 
Association (FIA), (Aug. 27, 2012) at 5-7.
    \442\ See IATP (Aug. 27, 2012) at 2-3.
---------------------------------------------------------------------------

    Another commenter stated that substituted compliance should be 
expanded to a broader category of swap transactions, specifically, to 
the trade execution requirement.\443\
---------------------------------------------------------------------------

    \443\ See Tradeweb Markets LLC (Aug. 27, 2012) at 4.
---------------------------------------------------------------------------

    Some commenters urged the Commission to clarify which law is 
``substituted'' for U.S. law and allow swap entities to determine which 
jurisdictions' laws apply where it could be more than one.\444\
---------------------------------------------------------------------------

    \444\ See SIFMA (Aug. 27, 2012) at A48; Deutsche Bank (Aug. 27, 
2012) at 6.
---------------------------------------------------------------------------

    Some commenters expressed concern regarding the timing of reform in 
other jurisdictions, urging the Commission to delay substituted 
compliance implementation or provide a grace period for these 
jurisdictions.\445\
---------------------------------------------------------------------------

    \445\ See, e.g., CFA Institute (Aug. 27, 2012) at 3; Financial 
Services Authority (United Kingdom) (Aug. 24, 2012) at 3; Barclays 
(Aug. 27, 2012) at 2; ICAP Group (Aug. 27, 2012) at 2; IIB (Aug. 27, 
2012) at 39.
---------------------------------------------------------------------------

    Some commenters urged the Commission not to allow substituted 
compliance or to use it only sparingly, pointing out the risks of 
substituted compliance by the Commission. For example, one commenter 
contended that substituted compliance fails to ensure rigorous 
regulation of derivatives markets and so should not be allowed for 
foreign subsidiaries of U.S. parents as these subsidiaries pose a 
severe risk to the U.S. economy.\446\ This commenter also stated that 
substituted compliance should only be used in ``rare circumstances'' 
and only after such rules in foreign jurisdictions have come into 
existence,\447\ stating that the Commission ``cannot, through its use 
of comity, consider other countries' interests to the total derogation 
of Congress's intent to protect U.S. taxpayers.'' \448\ Citizen and 
taxpayer groups contended that substituted compliance should not be 
permitted when the swap transaction is with a U.S. counterparty,\449\ 
including subsidiaries of a U.S. person.\450\
---------------------------------------------------------------------------

    \446\ See Greenberger (Aug. 27, 2012) at 20-24.
    \447\ See Greenberger (Aug. 27, 2012) at 3, 19, 22-23.
    \448\ See Greenberger (Aug. 27, 2012) at 19.
    \449\ See Public Citizen (Aug. 27, 2012) at 13, 16, 19.
    \450\ See Better Markets (Aug. 27, 2012) at 10.
---------------------------------------------------------------------------

    Commenters also urged that, to the extent substituted compliance is 
permitted, a rigorous approach be applied, including examining the 
history of enforcement in a foreign jurisdiction, the ability to revoke 
substituted compliance where necessary, the ability of the public to 
comment on substituted compliance applications, periodic review of the 
application of substituted compliance and a requirement that the 
applicant immediately inform the Commission of any material changes in 
its jurisdiction.\451\
---------------------------------------------------------------------------

    \451\ See, e.g., Better Markets (Aug. 27, 2012) at 10-11; Public 
Citizen (Aug. 27, 2012) at 13, 16, 19.
---------------------------------------------------------------------------

    With regard to SDR Reporting, some commenters disagreed with the 
Commission that a foreign trade repository must allow Commission access 
to information to be considered comparable, arguing that comparability 
should be based solely on the foreign jurisdiction's regulatory 
regime,\452\ or that access is unnecessary where swaps are between non-
U.S. counterparties.\453\ In contrast, another commenter stated that 
open access to foreign swap data repositories is necessary to ensure 
that foreign surveillance of transaction-level swaps data flow 
requirements is comparable and comprehensive.\454\
---------------------------------------------------------------------------

    \452\ See Deutsche Bank (Aug. 27, 2012) at 6.
    \453\ See Japanese Bankers Association (Aug. 27, 2012) at 10.
    \454\ See IATP (Aug. 27, 2012) at 6-7.
---------------------------------------------------------------------------

    International regulators have continued to express commitment to 
the Pittsburgh G20 reforms of OTC derivatives regulation, including a 
commitment to harmonize cross-border regulations and allow for 
substituted compliance or equivalence arrangements when appropriate. 
However, no international consensus has emerged regarding the 
implementation of such reforms or the

[[Page 45342]]

circumstances under which substituted compliance should be permitted. 
In an April 18, 2013 letter to Treasury Secretary Lew, nine 
international financial regulators expressed concern about 
fragmentation in the OTC derivatives market as a result of lack of 
regulatory coordination, noting that ``[a]n approach in which 
jurisdictions require that their own domestic regulatory rules be 
applied to their firms' derivatives transactions taking place in 
broadly equivalent regulatory regimes abroad is not sustainable.'' 
\455\ The letter expressed concern that such an approach would lead the 
global derivatives market to ``recede into localized and less efficient 
structures, impairing the ability of business across the globe to 
manage risk.'' The letter also suggested, among other things, that 
cross-border rules be adopted that would not result in duplicative or 
conflicting requirements through substituted compliance or equivalence 
arrangements, and that a reasonable transition period and measures be 
provided to foreign entities to ensure a smooth transition.\456\
---------------------------------------------------------------------------

    \455\ See letter to Treasury Secretary Lew regarding cross-
border OTC derivatives regulation from Deputy Prime Minister Taro 
Aso, Minister of State for Finance Services, Government of Japan; 
Commissioner Michel Barnier, Commissioner for Internal Markets and 
Services, European Commission; Minister Pravin Gordhan, Minister of 
Finance, Government of South Africa; Minister Guido Mantega, 
Ministry of Finance, Government of Brazil; Minister Pierre 
Moscovici, Ministry of Finance, Government of France; Chancellor 
George Osborne, Chancellor of the Exchequer, Government of the 
United Kingdom; Minister Wolfgang Sch[auml]uble, Ministry of 
Finance, Government of Germany; Minister Anton Siluanov, Minister of 
Finance, Government of Russia; and Minister Eveline Widmer-Schlumpf, 
Finance Minister, Government of Switzerland (``Nine International 
Regulators'') (Apr. 18, 2013). See also letter to Treasury Secretary 
Lew from Sens. Kirsten E. Gillibrand, Thomas R. Carper, Kay R. 
Hagan, Heidi Heitkamp, Michael F. Bennet, and Charles E. Schumer 
(June 26, 2013) (advocating domestic and international harmonization 
of derivatives regulation).
    \456\ Id.
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    A group of 25 organizations from numerous nations responded by 
asserting that the letter to Treasury Secretary Lew ``appears to place 
a higher priority on preventing `fragmentation' in global financial 
markets than on effective management of global financial risks.'' \457\ 
Emphasizing that the global financial crisis of 2008-2009 caused ``mass 
unemployment, home foreclosures, and cutbacks in key public services,'' 
these organizations argued that ``[s]ince G-20 nations have not yet met 
their 2009 Pittsburgh commitment to put in place effective derivatives 
regulation by the close of 2012, the first priority should be to 
complete this crucial element of financial oversight.'' \458\ Although 
these organizations recognized the challenge of effectively regulating 
the global financial markets, they asserted that ``the path to 
addressing these challenges does not lie in further delays that prevent 
any nation from acting until every jurisdiction globally has agreed on 
a similar approach.'' \459\ Instead, these organizations urged the 
international community ``to coordinate around a shared high level of 
financial oversight, and in the meantime to support the efforts of 
individual nations to ensure that the scope of their financial 
regulation properly captures all transactions, wherever conducted, that 
affect the safety and stability of each national financial system.'' 
\460\

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    \457\ See letter to Nine International Regulators from ActionAid 
International; AFL-CIO (American Federation of Labor And Congress of 
Industrial Organizations); Americans for Financial Reform; Berne 
Declaration; Center of Concern; The Centre for Research on 
Multinational Corporations (SOMO); Centre national de 
coop[eacute]ration au d[eacute]veloppement, CNCD-11.11.11; CGIL--
Italian General Confederation of Labour; Consumer Federation of 
America; Global Progressive Forum; IBON International; The 
International Institute for Monetary Transformation; Institute for 
Agriculture and Trade Policy (IATP); Institute for Policy Studies, 
Global Economy Project; Jubilee Debt Campaign, UK; Kairos Europe 
(Brussels); Missionary Oblates--USP (Washington, DC); Oxfam; Red 
Latinoamericana sobre Deuda, Desarrollo y Derechos--LATINDADD; Stamp 
Out Poverty; Tax Justice Network; UBUNTU Forum; War on Want; WEED 
(World Economy, Ecology, and Development); and World Development 
Movement (Jul. 1, 2013).
    \458\ Id.
    \459\ Id.
    \460\ Id.
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3. Overview of the Substituted Compliance Regime
    Once registered, a non-U.S. swap dealer or non-U.S. MSP would 
become subject to all of the substantive requirements under Title VII 
of the Dodd-Frank Act that apply to registered swap dealers or MSPs. In 
other words, the requirements under Title VII of the Dodd-Frank Act 
related to swap dealers and MSPs apply to all registered swap dealers 
and MSPs, irrespective of where they are based.
    Consistent with CEA section 2(i) and comity principles, the 
Commission's policy generally is that eligible entities may comply with 
a substituted compliance regime under certain circumstances, subject, 
however, to the Commission's retention of its examination authority 
\461\ and its enforcement authority. To the extent that the substituted 
compliance regime applies, the Commission generally would permit a non-
U.S. swap dealer or MSP, U.S. bank that is a swap dealer or MSP with 
respect to its foreign branches,\462\ or non-U.S. non-registrant that 
is a guaranteed or conduit affiliate, as applicable, to substitute 
compliance with the requirements of the relevant home jurisdiction's 
law and regulations (or in the case of foreign branches of a bank, the 
foreign location of the branch) in lieu of compliance with the 
attendant Entity-Level Requirements and/or Transaction-Level 
Requirements under the CEA and Commission regulations, provided that 
the Commission finds that such home jurisdiction's requirements (or in 
the case of foreign branches of a bank, the foreign location of the 
branch) are comparable with and as comprehensive as the corollary 
area(s) of regulatory obligations encompassed by the Entity- and 
Transaction-Level Requirements. Significantly, the Commission will rely 
upon an outcomes-based approach to determine whether these requirements 
achieve the same regulatory objectives of the Dodd-Frank Act. An 
outcomes-based approach in this context means that the Commission is 
likely to review the requirements of a foreign jurisdiction for rules 
that are comparable to and as comprehensive as the requirements of the 
Dodd-Frank Act, but it will not require that the foreign jurisdiction 
have identical requirements to those

[[Page 45343]]

established under the Dodd-Frank Act. This approach builds on the 
Commission's longstanding policy of recognizing comparable regulatory 
regimes based on international coordination and comity principles with 
respect to cross-border activities involving futures (and options on 
futures).\463\ The Commission anticipates that its approach also will 
require close consultation, cooperation, and coordination among the 
Commission and relevant foreign regulators regarding ongoing compliance 
efforts. To date, the Commission notes that it has engaged in many 
multilateral and bilateral consultations and efforts to coordinate on 
the substance of OTC derivatives reform efforts.
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    \461\ Under Commission regulations 23.203 and 23.606, all 
records required by the CEA and the Commission's regulations to be 
maintained by a registered swap dealer or MSP shall be maintained in 
accordance with Commission regulation 1.31 and shall be open for 
inspection by representatives of the Commission, the United States 
Department of Justice, or any applicable prudential regulator.
    In the January Order, the Commission noted that an applicant for 
registration as a swap dealer or MSP must file a Form 7-R with the 
National Futures Association and that Form 7-R was being modified at 
that time to address existing blocking, privacy or secrecy laws of 
foreign jurisdictions that applied to the books and records of swap 
dealers and MSPs acting in those jurisdictions. See 78 FR at 871-872 
n. 107. The modifications to Form 7-R were a temporary measure 
intended to allow swap dealers and MSPs to apply for registration in 
a timely manner in recognition of the existence of the blocking, 
privacy, and secrecy laws. The Commission clarifies that the change 
to Form 7-R impacts the registration application only and does not 
modify the Commission's authority under the CEA and its regulations 
to access records held by registered swap dealers and MSPs. 
Commission access to a registrant's books and records is a 
fundamental regulatory tool necessary to properly monitor and 
examine each registrant's compliance with the CEA and the 
regulations adopted pursuant thereto. The Commission has maintained 
an ongoing dialogue on a bilateral and multilateral basis with 
foreign regulators and with registrants to address books and records 
access issues and may consider appropriate measures where requested 
to do so.
    \462\ The types of offices which the Commission would consider 
to be a ``foreign branch'' of a U.S. bank, and the circumstances in 
which a swap is with such foreign branch, are discussed further in 
section IV.C.3, supra.
    \463\ For example, under part 30 of the Commission's 
regulations, if the Commission determines that compliance with the 
foreign regulatory regime would offer comparable protection to U.S. 
customers transacting in foreign futures and options and there is an 
appropriate information-sharing arrangement between the home 
supervisor and the Commission, the Commission has permitted foreign 
brokers to comply with their home regulations (in lieu of the 
applicable Commission regulations), subject to appropriate 
conditions. See, e.g., Foreign Futures and Options Transactions, 67 
FR 30785 (May 8, 2002); Foreign Futures and Options Transactions, 71 
FR 6759 (Feb. 9, 2009).
    Upon promulgating part 30, the Commission stated that it 
``intends to monitor closely the application of this regulatory 
scheme for the offer and sale of foreign futures and foreign options 
in the U.S. and to make adjustments in these rules, as necessary, 
based, in part, on it experience in administering the exemptive 
procedure [i.e., 30.10 relief] as well as other requests for 
interpretations of the provisions herein.'' Foreign Futures and 
Foreign Options Transactions, 52 FR 28980, 28993 (Aug. 5, 1987). For 
example, the Commission has expanded part 30 to allow 30.10-exempt 
foreign brokers to act as introducing brokers for the purpose of 
executing linked U.S. transactions on behalf of U.S. customers under 
certain circumstances. The Commission also promulgated regulation 
30.12 to allow unlicensed ``local'' brokers located outside the 
United States to execute trades through the customer omnibus account 
of an FCM or 30.10 exempt foreign broker, again under certain 
circumstances. The Commission expects that the substituted 
compliance process contemplated by this Guidance may similarly 
evolve.
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    In part, because many foreign jurisdictions have been implementing 
OTC derivatives reforms in an incremental manner, the Commission's 
comparability determinations may be made on a requirement-by-
requirement basis, rather than on the basis of the foreign regime as a 
whole. For example, many jurisdictions have moved more quickly to 
implement reporting to trade repositories, and so the Commission may 
focus first on comparability with those requirements. In addition, in 
making its comparability determinations, the Commission may include 
conditions that take into account timing and other issues related to 
coordinating the implementation of reform efforts across jurisdictions.
    A non-U.S. swap dealer or non-U.S. MSP, a U.S. bank that is a swap 
dealer or MSP with respect to its foreign branches, or non-U.S. non-
registrant that is a guaranteed or conduit affiliate, to the extent 
applicable under this Guidance, may comply with regulations in its home 
jurisdiction (or in the case of foreign branches of a bank, the foreign 
location of the branch) to the extent that the Commission determines 
that these requirements are comparable to, and as comprehensive as, the 
corollary areas of the CEA and Commission regulations.\464\ As noted 
above, however, the home jurisdiction's requirements do not have to be 
identical to the Dodd-Frank Act requirements. Moreover, the Commission 
notes, however, that entities relying on substituted compliance may be 
required to comply with certain of the Dodd-Frank Act requirements 
where comparable and comprehensive regulation in their home 
jurisdiction (or in the case of foreign branches of a bank, the foreign 
locations of the branches) are determined to be lacking.\465\
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    \464\ As stated in note 88, for purposes of this Guidance, the 
terms ``home jurisdiction'' or ``home country'' are used 
interchangeably and refer to the jurisdiction in which the person or 
entity is established, including the European Union. Further, the 
Commission clarifies that where a non-U.S. swap dealer (or non-U.S. 
MSP), or a non-U.S. non-registrant that is a guaranteed or conduit 
affiliate, transacts outside the home jurisdiction, substituted 
compliance is available and they may comply with the comparable and 
comprehensive requirements of the home jurisdiction, provided that 
they comply with such requirements in that other jurisdiction.
    \465\ The Commission recognizes that substantial progress has 
been made in other jurisdictions towards implementing OTC 
derivatives reform. For example, EMIR requires financial 
counterparties, including hedge funds, to clear OTC derivatives 
contracts subject to the clearing obligation through a central 
counterparty registered or recognized in accordance with EMIR. EMIR 
also requires such entities to comply with EMIR's risk mitigation 
techniques for uncleared OTC derivatives contracts; risk mitigation 
techniques include, confirmation, portfolio reconciliation, 
compression, valuation and dispute resolution. Lastly, EMIR requires 
financial counterparties to report all derivatives contracts to a 
trade repository registered or recognized in accordance with EMIR.
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    In evaluating whether a particular category of foreign regulatory 
requirement(s) is comparable and comprehensive to the applicable 
requirement(s) under the CEA and Commission regulations, the Commission 
will take into consideration all relevant factors, including but not 
limited to, the comprehensiveness of those requirement(s), the scope 
and objectives of the relevant regulatory requirement(s), the 
comprehensiveness of the foreign regulator's supervisory compliance 
program, as well as the home jurisdiction's authority to support and 
enforce its oversight of the registrant. In this context, comparable 
does not necessarily mean identical. Rather, the Commission would 
evaluate whether the home jurisdiction's regulatory requirement is 
comparable to and as comprehensive as the corresponding U.S. regulatory 
requirement(s).
    In response to comments requesting greater clarity with respect to 
the substituted compliance determinations, the Commission notes that a 
comparability analysis would begin with a consideration of the 
regulatory objectives of a foreign jurisdiction's regulation of swaps 
and swaps market participants. In this regard, the Commission will 
first look to foreign regulator's swap-specific regulations. The 
Commission recognizes, however, that jurisdictions may not have swap-
specific regulations in some areas, and instead may have regulatory or 
supervisory regimes that achieve comparable and comprehensive 
regulatory objectives as the Dodd-Frank Act requirements, but on a more 
general, entity-wide, or prudential, basis.\466\ In addition, portions 
of a foreign regulatory regime may have similar regulatory objectives, 
but the means by which these objectives are achieved with respect to 
swaps market activities may not be clearly defined, or may not 
expressly include specific regulatory elements that the Commission 
concludes are critical to achieving the regulatory objectives or 
outcomes required under the CEA and the Commission's regulations. In 
these circumstances, the Commission anticipates that, as part of its 
broader efforts to consult and coordinate with foreign jurisdictions, 
it will work with the regulators and registrants in these jurisdictions 
to consider alternative approaches that may result in a determination 
that substituted compliance applies.\467\
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    \466\ The Commission notes that, of the 35 provisionally 
registered non-U.S. swap dealers as of July 12, 2013, all but one of 
them are banking entities that are subject to prudential supervision 
by banking supervisors in their home jurisdictions or affiliates of 
such banks. By comparison, 19 of the provisionally registered U.S. 
swap dealers and MSPs are not regulated by a prudential supervisor 
or the SEC.
    \467\ The Commission notes that such alternatives are available 
for both Entity- and Transaction-Level Requirements, but are more 
likely appropriate for Entity-Level Requirements.
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    The approaches used will vary depending on the circumstances 
relevant to each jurisdiction. One example would include coordinating 
with the foreign regulators in developing appropriate regulatory

[[Page 45344]]

changes or new regulations, particularly where changes or new 
regulations already are being considered or proposed by the foreign 
regulators or legislative bodies. As another example, the Commission 
may, after consultation with the appropriate regulators and market 
participants, include in its substituted compliance determination a 
description of the means by which certain swaps market participants can 
achieve substituted compliance within the construct of the foreign 
regulatory regime. The identification of the means by which substituted 
compliance is achieved would be designed to address the regulatory 
objectives and outcomes of the relevant Dodd-Frank Act requirements in 
a manner that does not conflict with a foreign regulatory regime and 
reduces the likelihood of inconsistent regulatory obligations. For 
example, the Commission may specify that swap dealers and MSPs in the 
jurisdiction undertake certain recordkeeping and documentation for swap 
activities that otherwise is only addressed by the foreign regulatory 
regime with respect to financial activities generally. In addition, the 
substituted compliance determination may include provisions for summary 
compliance and risk reporting to the Commission to allow the Commission 
to monitor whether the regulatory outcomes are being achieved. By using 
these approaches, in the interest of comity, the Commission would seek 
to achieve its regulatory objectives with respect to the Commission's 
registrants that are operating in foreign jurisdictions in a manner 
that works in harmony with the regulatory interests of those 
jurisdictions.\468\
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    \468\ The Commission anticipates that non-U.S. swap dealers and 
MSPs may require additional time after a Substituted Compliance 
Determination in order to phase in compliance with the relevant 
requirements of the jurisdiction in which the non-US swap dealer or 
MSP is established. The Commission and its staff intend to address 
the need for any further transitional relief at the time that the 
subject Substituted Compliance Determination is made.
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4. Process for Comparability Determinations
    Any comparability analysis will be based on a comparison of 
specific foreign requirements against specific related CEA provisions 
and Commission regulations in 13 categories of regulatory obligations 
and will consider the factors described above. After receiving a 
submission from an applicant, the resulting comparability determination 
would be made by the Commission with regard to each of the 13 
categories of regulatory obligations, as appropriate. More 
specifically, the Commission could determine that a particular set of 
foreign laws and regulations provides a sufficient basis for an 
affirmative finding of comparability with respect to a relevant area of 
regulatory obligations. Where no comparability determination can be 
made,\469\ the non-U.S. swap dealer or non-U.S. MSP, U.S. bank that is 
a swap dealer or MSP with respect to its foreign branches, or non-
registrant, to the extent applicable under this Guidance, may be 
required to comply with the applicable Entity- or Transactional-Level 
requirements under the CEA and Commission regulations.
---------------------------------------------------------------------------

    \469\ A finding of comparability may not be possible for a 
number of reasons, including the fact that the foreign jurisdiction 
has not yet implemented or finalized particular requirements.
---------------------------------------------------------------------------

    Anyone who is eligible for substituted compliance may apply, either 
individually or collectively, as may foreign regulators. Persons who 
may request a comparability determination include: (i) Foreign 
regulators, (ii) an individual non-U.S. entity, or group of non-U.S. 
entities; (iii) a U.S. bank that is a swap dealer or MSP with respect 
to its foreign branches; \470\ or (iv) a trade association, or other 
group, on behalf of similarly-situated entities. Persons requesting a 
comparability determination may want to coordinate their application 
with other market participants and their home regulators to simplify 
and streamline the process. Once a comparability determination is made 
for a jurisdiction, it will apply for all entities or transactions in 
that jurisdiction to the extent provided in the determination, as 
approved by the Commission.
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    \470\ As previously noted, where the counterparty to a swap with 
a foreign branch is a non-U.S. person (whether or not such non-U.S. 
person is guaranteed or otherwise supported by, or is an affiliate 
conduit of, a U.S. person), the Commission continues to be of the 
view that compliance with comparable and comprehensive requirements 
in the foreign jurisdiction should be permitted in light of the 
supervisory interest of the foreign jurisdiction in the swaps 
transacted in that jurisdiction, together with the fact that foreign 
branches of U.S. swap dealers or U.S. MSPs are subject generally to 
direct or indirect oversight by U.S. regulators because they are 
part of a U.S. person. As discussed further in section IV.F.3, 
supra, the Commission's recognition of substituted compliance would 
be based on an evaluation of whether the requirements of the home 
jurisdiction are comparable and comprehensive to the applicable 
requirement(s) under the CEA and Commission regulations based on a 
consideration of all relevant factors, including among other things: 
(i) The comprehensiveness of the foreign regulator's supervisory 
compliance program and (ii) the authority of such foreign regulator 
to support and enforce its oversight of the registrant's branch or 
agency with regard to such activities to which substituted 
compliance applies.
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    Generally, the Commission would expect that the applicant, at a 
minimum, state with specificity the factual and legal basis for 
requesting that the Commission find that a particular set of foreign 
laws and regulations is comparable to, and as comprehensive as, 
particular Dodd-Frank Act requirements as described above; include with 
specificity all applicable legislation, rules, and policies; and 
provide an assessment whether the objectives of the two regulatory 
regimes are comparable and comprehensive.\471\ If the applicant is a 
registered swap dealer or MSP, it also would generally be helpful to 
understand the capacity in which the applicant is licensed with the 
applicant's regulator(s) in its home country and whether the applicant 
is in good standing.
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    \471\ The Commission may, as it deems appropriate and necessary, 
conduct an on-site examination of the applicant, as well as consult 
with the applicant's home regulator regarding the status of the 
applicant. For certain matters, the Commission may request an 
opinion of counsel.
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    The Commission expects that the comparability analysis process 
would, in most cases, involve consultation with the regulators in each 
jurisdiction for which a substituted compliance application has been 
submitted so that the Commission may better analyze the compliance 
regime of a jurisdiction. Consultations are particularly important in 
the near future because many jurisdictions are in the process of 
finalizing and implementing their derivatives reforms incrementally and 
the Commission's comparability determinations may need to take into 
account the timing of regulatory reforms that have been proposed or 
finalized, but not yet implemented.
    Further, the Commission expects that, in connection with a 
determination that substituted compliance is appropriate, it would 
enter into an appropriate MOU or similar arrangement between the 
Commission and the relevant foreign regulator(s). Existing information-
sharing and/or enforcement arrangements would be indicative of a 
foreign supervisor's ability to share information and otherwise work 
with the Commission. However, going forward, the Commission and 
relevant foreign supervisor(s) would need to establish supervisory MOUs 
or other arrangements that provide for information sharing and 
cooperation in the context of supervising swap dealers and MSPs. The 
Commission contemplates that such a supervisory MOU would establish the 
type of coordination activities that would continue on an ongoing basis 
between the Commission and the foreign supervisor(s), including topics 
such as procedures for confirming continuing oversight activities, 
access to

[[Page 45345]]

information,\472\ on-site visits, and notification procedures in 
certain situations.\473\
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    \472\ As previously noted, the Commission observes that under 
section 4s(j)(3) and (4) of the CEA and Commission regulation 
23.606, a registered swap dealer or MSP must make all records 
required to be maintained in accordance with Commission regulation 
1.31 available to the Commission promptly upon request to 
representatives of the Commission. The Commission reserves this 
right to access records held by registered swap dealers and MSPs, 
including those that are non-U.S. persons who may comply with the 
Dodd-Frank recordkeeping requirement through substituted compliance. 
See also 7 U.S.C. 6s(f); 17 CFR 23.203.
    \473\ In this regard, the Commission has started working with 
foreign regulators to prepare for such arrangements.
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    The Commission expects that an applicant would notify the 
Commission of any material changes to information submitted in support 
of a comparability determination (including, but not limited to, 
changes in the relevant supervisory or regulatory regime) as the 
Commission's comparability determination may no longer be valid.
    Within four years of issuing any Substituted Compliance 
Determination, the Commission will reevaluate its initial determination 
to ascertain whether any changes should be made to its finding and 
shall reissue the relevant Commission action, conditionally or 
unconditionally, as it deems appropriate.
    SDR Reporting and real-time public reporting would generally be 
eligible for substituted compliance, as outlined above, but only if the 
Commission has direct access to all of the reported swap data elements 
that are stored in a foreign trade repository. The Commission intends 
that direct access would generally include, at a minimum, real time, 
direct electronic access to the data and the absence of any legal 
impediments to the Commission's access to the data. Due to the 
technical nature of this inquiry, a comparability evaluation for SDR 
Reporting and real-time public reporting would generally entail a 
detailed comparison and technical analysis. The Commission notes that 
while direct access to swap data is a threshold matter to be addressed 
in a comparability evaluation, a more particularized analysis would 
generally be necessary to determine whether the data stored in a 
foreign trade repository provides for effective Commission use, in 
furtherance of the regulatory purposes of the Dodd-Frank Act.
    Comparability determinations for SDR Reporting and real-time public 
reporting would generally take into account whether the Commission may 
effectively access and use data stored in foreign trade repositories, 
both in isolation and when compared to and aggregated with swap data 
from other foreign trade repositories, as well as registered SDRs. At a 
minimum, effective use would generally require that the data elements 
stored in foreign trade repositories are sufficient to permit 
comparison and aggregation, and that all transactions with comparable 
required data elements, otherwise required to be reported to a 
registered SDR, are available in the foreign trade repository.
5. Conflicts Arising Under Privacy and Blocking Laws
    Potential and actual conflicts between the Commission's regulations 
and the privacy and blocking laws of some non-U.S. jurisdictions may, 
in certain circumstances, limit or prohibit the disclosure of data that 
is required to be reported under the Dodd-Frank Act and implementing 
regulations.\474\ For example, the Commission's part 45 and part 46 
swap data reporting rules establish swap data recordkeeping and SDR 
reporting requirements applicable to reporting counterparties. Among 
other requirements, these rules prescribe certain reporting data fields 
for all swaps subject to the Commission's jurisdiction, including the 
identity of each counterparty to a swap. The privacy laws of some non-
U.S. jurisdictions may, however, restrict or prohibit the disclosure by 
a reporting party or registrant of a non-reporting party's identity. In 
some jurisdictions, this privacy restriction may be overcome if the 
counterparty consents to the disclosure. In others, the restriction may 
take the form of a blocking statute which acts as an absolute 
prohibition to the disclosure of information, creating a direct 
conflict with the requirements of the Dodd-Frank Act.
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    \474\ Section 727 of the Dodd Frank Act added to the CEA new 
section 2(a)(13)(G), which requires all swaps, whether cleared or 
uncleared, to be reported to registered SDRs. Section 21 of the CEA, 
added by section 728 of the Dodd Frank Act, directs the Commission 
to prescribe standards that specify the data elements for each swap 
that shall be collected and maintained by each registered SDR. Part 
45 of the Commission's regulations establishes swap data 
recordkeeping and SDR reporting requirements; part 46 establishes 
similar requirements for pre-enactment and transition swaps 
(collectively, ``historical swaps'').
---------------------------------------------------------------------------

    The Commission recognizes that, notwithstanding the importance of 
swap data to its mandate under the Dodd-Frank Act, its regulations may 
be in conflict with the blocking, privacy, and/or secrecy laws of other 
jurisdictions. The Commission is mindful of the challenges presented by 
such circumstances and continues to work on a bilateral and 
multilateral basis with foreign regulators to address these issues. 
Where appropriate, the Commission may consider reasonable alternatives 
that allow the Commission to fulfill its mandate while respecting the 
regulatory interests of other jurisdictions. In that regard, where a 
real conflict of laws exists, the Commission strongly encourages 
regulators and registrants to consult directly with its staff.
6. Clearing
a. Clearing Venues
    With respect to acceptable clearing venues, the Commission notes 
that section 2(h)(1) of the CEA provides that swaps subject to the 
clearing requirement must be submitted for clearing to a registered DCO 
or a DCO that is exempt from registration under the CEA.\475\
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    \475\ As noted above, EMIR requires financial counterparties, 
including hedge funds, to clear OTC derivatives contracts subject to 
the clearing obligation through a CCP registered or recognized in 
accordance with EMIR.
---------------------------------------------------------------------------

    The Commission has previously recognized the role of foreign-based 
clearing organizations, including in the context of FBOTs. 
Specifically, in the final rules pertaining to Registration of Foreign 
Boards of Trade, the Commission required that an FBOT, in order to be 
registered, clear through a clearing organization that either is 
registered with the Commission as a DCO or observes the Principles for 
Financial Market Infrastructures (``PFMIs'').\476\ Other relevant 
requirements in the FBOT final rules include, among other things, that 
the clearing organization be in good regulatory standing in its home 
country.
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    \476\ Registration of Foreign Boards of Trade, 76 FR 80674, 
80681-80682 (Dec. 23, 2011) (the PFMIs are the successor standards 
to the Recommendations for Central Counterparties (``RCCPs''), which 
were issued jointly by the Committee on Payment and Settlement 
Systems (``CPSS'') and the Technical Committee of IOSCO).
---------------------------------------------------------------------------

    In addition, in the final rules adopting the Inter-Affiliate 
Exemption, the Commission permitted eligible affiliated counterparties 
that are located in certain jurisdictions to satisfy a condition to 
electing the exemption (requiring counterparties to clear their swaps 
with third-parties) by clearing the swap through a registered DCO or a 
clearing organization that is subject to supervision by appropriate 
government authorities in the clearing organization's home country and 
that has been assessed to be in compliance with the PFMIs.\477\
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    \477\ Inter-Affiliate Exemption, 78 FR at 21784 (adopting 17 CFR 
50.52(b)(4)(i)(E)).

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[[Page 45346]]

    More recently, in the final rulemaking adopting Core Principles and 
Other Requirements for Swap Execution Facilities, the Commission noted 
that under section 5b(h) of the CEA it has discretionary authority to 
exempt DCOs, conditionally or unconditionally, from the applicable DCO 
registration requirements.\478\ Thus, the Commission has discretion to 
exempt from registration DCOs that, at a minimum, are subject to 
comparable and comprehensive supervision by another regulator. The 
Commission further noted that it had not yet exercised its 
discretionary authority to exempt DCOs from registration. The 
Commission explained that, notwithstanding that there were no exempt 
DCOs at that time, certain swaps executed on a SEF could be cleared at 
an exempt DCO, if and when the Commission determined to exercise its 
authority to exempt DCOs from applicable registration requirements, at 
which time the Commission would likely address, among other things, the 
conditions and limitations applicable to clearing swaps for customers 
subject to section 4d(f) of the CEA.\479\
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    \478\ Specifically, section 5b(h) of the CEA provides that 
``[t]he Commission may exempt, conditionally or unconditionally, a 
derivatives clearing organization from registration under this 
section for the clearing of swaps if the Commission determines that 
the [DCO] is subject to comparable, comprehensive supervision and 
regulation by the Securities and Exchange Commission or the 
appropriate government authorities in the home country of the 
organization.'' 7 U.S.C. 7a-1(h). See also Core Principles and Other 
Requirements for Swap Execution Facilities, 78 FR 33476, 33591 (Jun. 
4, 2013) (adopting 17 CFR 37.701) (``Part 37 SEF Regulations'').
    \479\ Id. at 33534.
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    The conditions that may have to be met for a clearing organization 
to be eligible to qualify as an exempt DCO could include, among other 
things: (i) The Commission having entered into an appropriate 
memorandum of understanding or similar arrangement with the relevant 
foreign supervisor in the clearing organization's home country and (ii) 
the clearing organization having been assessed to be in compliance with 
the PFMIs.\480\ The use of the PFMIs, an international standard that is 
substantially similar to the requirements for registered DCOs under 
part 39 of the Commission's regulations, would be consistent with the 
Commission's determination in the context of FBOTs.\481\
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    \480\ The PFMIs were developed with significant input and public 
comment from market participants, and benefited from broad 
participation of market regulators and prudential supervisors from 
multiple nations. The PFMIs were approved by both IOSCO's Technical 
Committee and the CPSS and published in April 2012.
    \481\ The Commission recognizes that certain DCOs registered 
with the Commission also may be authorized, licensed, or recognized 
by a foreign authority. The Commission continues to work on a 
bilateral basis with such non-US authorities with respect to issues 
of central counterparty supervision. The Commission also 
participates in multilateral discussions with its foreign 
counterparts through a number of international groups.
---------------------------------------------------------------------------

    The Commission notes that its exemptive authority under CEA section 
5b(h) is entirely discretionary. Accordingly, the Commission is not 
compelled to exempt any clearing organization from the DCO registration 
requirements, even upon a finding that a facility is ``subject to 
comparable, comprehensive supervision and regulation'' by another 
regulator.
b. Foreign End-Users
    One of the conditions of the Inter-Affiliate Exemption, known as 
the ``treatment of outward-facing swaps'' condition, generally requires 
the clearing of swaps between affiliated counterparties and their 
unaffiliated counterparties.\482\ Pursuant to Commission regulation 
50.52(b)(4)(i)(C), eligible affiliate counterparties \483\ can satisfy 
the treatment of outward-facing swaps condition by complying with the 
requirements of an exception or exemption under section 2(h)(7) of the 
CEA or part 50 of the Commission's regulations. Pursuant to section 
2(h)(7) of the CEA, also known as the end-user exception, a 
counterparty to a swap that is subject to the clearing requirement 
\484\ may elect not to clear the swap provided that such counterparty 
meets the conditions of section 2(h)(7)(A)(i)-(iii) of the CEA and the 
attendant regulations.\485\
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    \482\ See Clearing Exemption for Swaps Between Certain 
Affiliated Entities, 78 FR 21749; Commission regulation 
50.52(b)(4)(i).
    \483\ As such term is defined in Commission regulation 50.52(a).
    \484\ See Clearing Requirement Determination, 77 FR 74284.
    \485\ See End-User Exception to the Clearing Requirement for 
Swaps, 77 FR 42560.
---------------------------------------------------------------------------

    For the purposes of the Inter-Affiliate Exemption, consistent with 
section 2(i), the Commission will permit a non-U.S. person eligible 
affiliate counterparty to satisfy Commission regulation 
50.52(b)(4)(i)(C) for swaps entered into with an unaffiliated non-US 
person that is not otherwise subject to the CEA (``Foreign End-User''), 
under certain circumstances. The Foreign End-User may elect the end-
user exception as if the provisions of sections 2(h)(7)(A)(i) and (ii) 
of the CEA apply to the Foreign End-User and the Foreign End-User 
elects not to clear the swap.\486\
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    \486\ If the Foreign End-User is an issuer of securities under, 
or required to file reports pursuant to, the Securities Exchange Act 
of 1934 (``SEC Filer''), then the Foreign End-User must obtain the 
approval to enter into uncleared swaps from an appropriate committee 
of the SEC Filer's board of directors (or governing body). See 
section 2(j) of the CEA. The Commission considers a counterparty 
controlled by an SEC Filer to be an SEC Filer itself for the 
purposes of the end-user exception. See 77 FR 42570.
---------------------------------------------------------------------------

    Accordingly, a Foreign End-User may elect not to clear a swap if 
(1) the Foreign End-User and non-US person eligible affiliate 
counterparty are not located in a foreign jurisdiction in which the 
Commission has determined that a comparable and comprehensive clearing 
requirement exists and that the exceptions and/or exemptions thereto 
are comparable and comprehensive; \487\ (2) the Foreign End-User is not 
a financial entity as provided in section 2(h)(7)(A)(i) of the CEA; and 
(3) the Foreign End-User enters into the swap to hedge or mitigate 
commercial risk as provided in section 2(h)(7)(A)(ii) of the CEA.\488\ 
In the interests of international comity, the Commission will not 
require the Foreign End-User to satisfy the provisions of section 
2(h)(7)(A)(iii) of the CEA which require the end-user to notify the 
Commission how it generally meets its financial obligations associated 
with entering into non-cleared swaps.\489\
---------------------------------------------------------------------------

    \487\ In these situations, the counterparties should comply with 
laws of the foreign jurisdiction. See Commission regulations 
50.52(b)(4)(i)(B) and (D).
    \488\ Foreign End-Users may look to Commission regulation 
50.50(c) in order to determine whether a swap hedges or mitigates 
commercial risk.
    \489\ This guidance is only applicable to Commission regulation 
50.52(b)(4)(i)(C); all other persons electing the End-User Exception 
must comply with the requirements of section 2(h)(7) of the CEA and 
Commission regulation 50.50.
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G. Application of the Entity-Level and Transaction-Level Requirements 
to Swap Dealers and MSPs

    This section sets forth the Commission's policy on application of 
the Entity-Level and Transaction-Level Requirements to swap dealers and 
MSPs, including when swaps generally would be eligible for substituted 
compliance.
1. Comments
    As noted in section E above, commenters generally supported the 
division of Dodd-Frank's swaps provisions (and Commission regulations 
thereunder) into Entity-Level and Transaction-Level Requirements for 
purposes of this Guidance. Certain of these commenters, however, made 
specific recommendations for

[[Page 45347]]

reclassification of some of these requirements.\490\
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    \490\ See section E, supra.
---------------------------------------------------------------------------

    In addition, some commenters addressed perceived disparities in the 
application of Transaction-Level Requirements to U.S. swap dealers, 
stating that transactions between U.S. swap dealers and non-U.S. 
counterparties should be eligible for substituted compliance for 
Transaction-Level Requirements so as to avoid putting U.S. swap dealers 
at a competitive disadvantage.\491\
---------------------------------------------------------------------------

    \491\ See SIFMA (Aug. 27, 2012) at A36. See also State Street 
(Aug. 27, 2012) at 2; IIB (Aug. 27, 2012) at 27-28; The Clearing 
House (Aug. 27, 2012) at 4, 27.
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    Other commenters supported the Commission's proposed application of 
the Transaction-Level Requirements to the transactions of U.S. persons 
with non-U.S. persons.\492\ One commenter stated that the Transaction-
Level Requirements should apply to transactions by registered swap 
dealers and MSPs with U.S. persons.\493\
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    \492\ See Public Citizen (Aug. 27, 2012) at 13 (arguing that 
substituted compliance should not be permitted when the swap 
involves a U.S. counterparty and that Transaction-Level Requirements 
should be required for counterparties that are non-U.S. persons). 
See also IATP (Aug. 27, 2012) at 7-8 (recommending that Transaction-
Level Requirements apply to transactions between non-U.S. swap 
dealers or MSPs and a U.S. person who is not a swap dealer or MSP).
    \493\ See IIAC (Aug. 27, 2012) at 8.
---------------------------------------------------------------------------

    Several commenters objected to the applicability of certain 
Transaction-Level Requirements to transactions between two non-U.S. 
parties.\494\ One commenter stated that Transaction-Level Requirements 
should never apply to swaps between counterparties that are both non-
U.S. persons.\495\
---------------------------------------------------------------------------

    \494\ See, e.g., Clearing House (Aug. 27, 2012) at 22-24 
(arguing that pre- and post-trade transparency rules should not 
apply to interactions with non-U.S. customers); SIFMA (Aug. 27, 
2012) at A37 (stating that real-time public reporting requirements 
would be inappropriate for swaps involving only non-U.S. 
counterparties).
    \495\ See Australian Bankers (Aug. 27, 2012) at 5, A8.
---------------------------------------------------------------------------

    With respect to external business conduct standards, one commenter 
stated that these standards should not apply to swaps between U.S. swap 
entities and non-U.S. persons because the Commission's supervisory 
interest in these transactions are less implicated when the 
counterparty is a non-U.S. person.\496\ Other commenters also stated 
that the external business conduct standards should not apply to 
transactions between two non-U.S. persons.\497\
---------------------------------------------------------------------------

    \496\ See SIFMA (Aug. 27, 2012) at A38.
    \497\ See Australian Bankers (Aug. 27, 2012) at 4, A10. See also 
IIAC (Aug. 27, 2012) at 8 (agreeing that external business conduct 
standards should not apply to swaps between non-U.S. swap dealers 
and MSPs and non-U.S. counterparties (whether or not guaranteed by a 
U.S. person)).
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2. Commission Guidance
    The Commission has carefully considered the comments on Entity-
Level and Transaction-Level Requirements. With regard to U.S. swap 
dealers and U.S. MSPs, the Commission's policy is that they generally 
would be expected to comply in full with all of the Entity-Level 
Requirements and Transaction-Level Requirements, without substituted 
compliance available. The Commission's policy would apply regardless of 
whether the counterparty to the swap is a U.S. person or non-U.S. 
person. This is consistent with the Commission's traditional approach 
to registered FCMs, wherein a person, once registered as an FCM, is 
subject to the full panoply of regulations applicable to such 
registrants, without distinctions based on whether the counterparties 
are U.S. or non-U.S. counterparties.
    Further, the Commission believes that its cross-border policy and 
interpretation with respect to U.S. swap dealers and MSPs must be 
informed by the purposes of the Dodd-Frank Act. As discussed earlier, 
the Dodd-Frank Act was enacted to reduce systemic risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things, providing for the comprehensive regulation of 
swap dealers and MSPs. In doing so, Congress understood the highly 
integrated nature of the global swaps business, with regard to both 
individual firms and the market at large, and that risk to U.S. firms 
and in turn, U.S. financial markets may arise anywhere in the world.
    In view of the policy goals underlying the Dodd-Frank Act swaps 
reforms, the Commission's view is that U.S. swap dealers and MSPs 
should be fully subject to the robust oversight contemplated by the 
Dodd-Frank Act, without regard to whether their counterparty is a U.S. 
or non-U.S person. These firms are conducting their swap dealing 
business within the territory of the United States. That some of their 
business may be directed to foreign clients does not diminish the 
Commission's obligation to ensure that swaps between U.S. swap dealers 
and MSPs and their counterparties are subject to Dodd-Frank's financial 
safeguards and transparency requirements, to the fullest extent. 
Therefore, in the Commission's view, substituted compliance is 
incompatible with the Commission's ability to effectively discharge its 
statutory responsibilities.
    For substantially the same reasons, the Commission believes that 
full U.S. regulation of U.S. swap dealers and MSPs, even when they 
transact swaps with non-U.S. counterparties, is a reasonable exercise 
of U.S. jurisdiction under the principles of foreign relations law. 
Among the factors supporting this exercise of U.S. jurisdiction are the 
links between the U.S. swap dealers and MSPs and their swap activities 
to U.S. commerce, and the generally accepted importance of regulating 
the activities of these entities both to the United States and the 
international financial system.\498\ In addition, having an agency of 
the U.S. government serve as the primary regulator of U.S. entities is 
generally consistent with normal expectations and with traditions of 
the international system.\499\ To the extent that other countries have 
an interest in regulating transactions with their nationals, the 
Commission notes that the U.S. regulatory scheme for swap dealers and 
MSPs does not preclude other countries from imposing their regulations 
if they consider it necessary for transactions affecting their 
interests.\500\ As discussed below, the Commission will work with other 
regulators to avoid, and resolve where necessary, direct conflicts, as 
well as to reduce unnecessary burdens. The Commission observes that 
very few conflicts between the foreign regimes and Dodd-Frank Act 
requirements have been identified as part of many multilateral and 
bilateral consultations between staff of the CFTC and their foreign 
counterparts. For these purposes, conflict means that actions required 
for compliance under one jurisdiction's law are prohibited under the 
other jurisdiction's law, or compliance with the regulations of both 
jurisdictions is otherwise impossible.
---------------------------------------------------------------------------

    \498\ See Restatement secs. 403(2)(a)-(c), 403(2)(e).
    \499\ See Restatement secs. 403(2)(d), 403(2)(f).
    \500\ See Restatement sec. 403(2)(g).
---------------------------------------------------------------------------

    With regard to non-U.S. swap dealers or MSPs (including those that 
are affiliates of a U.S. person), the Commission's policy is that these 
firms should be subject to all of the Entity-Level Requirements, but 
under certain circumstances substituted compliance should be available 
(except with regard to Large Trader Reporting). The Commission's policy 
with regard to the application of Transaction-Level Requirements to 
non-U.S. swap dealers or MSPs, and the availability of substituted 
compliance, depends in part on the type of counterparty to the swap 
transaction.
    The foreign branch of a U.S. bank that is a swap dealer or MSP is 
expected to

[[Page 45348]]

comply in full with the Entity-Level Requirements, without substituted 
compliance available, because it is not a separate legal entity.\501\ 
In some circumstances the Commission's policy is that a foreign branch 
of a U.S. swap dealer or MSP would be expected to comply in full with 
Category A Transaction-Level Requirements where its counterparty is a 
U.S. person. However, as further explained below, substituted 
compliance would generally be available to a foreign branch of a U.S. 
bank with regard to Category A Transaction-Level Requirements where the 
counterparty to a swap transaction is a non-U.S. person or a foreign 
branch of a U.S. bank that is a swap dealer or MSP. In addition, the 
Commission's policy with regard to the application of the Category B 
Transaction-Level Requirements is explained below.
---------------------------------------------------------------------------

    \501\ The types of offices the Commission would consider to be a 
``foreign branch'' of a U.S. bank, and the circumstances in which a 
swap is with such foreign branch, are discussed further in section 
C, supra.
---------------------------------------------------------------------------

    Below, the Commission describes its policies regarding how Entity-
Level and Transaction-Level Requirements should apply to both U.S. and 
non-U.S. swap dealers and MSPs, and to foreign branches of a U.S. banks 
that are swap dealers and MSPs, as well as the circumstances under 
which substituted compliance would be available.
3. Application of the Entity-Level Requirements to Swap Dealers and 
MSPs
    In this section, the Commission discusses its policy regarding the 
application of the Entity-Level Requirements to swap dealers and MSPs 
in cross-border transactions under its interpretation of 2(i), as well 
as the circumstances under which such swaps would be eligible for 
substituted compliance.
    Section a discusses the Commission's view on the application of 
Entity-Level Requirements to swaps with U.S. swap dealers and U.S. 
MSPs, including subsidiaries and affiliates of non-U.S. persons, and 
foreign branches of U.S. swap dealers or U.S. MSPs, under CEA section 
2(i).
    Section b discusses the Commission's view on the application of 
Entity-Level Requirements to swaps with non-U.S. swaps dealers and 
MSPs, including subsidiaries and affiliates of U.S. persons.
    The Commission's policy on application of the Entity-Level 
Requirements to swap dealers and MSPs, as well as substituted 
compliance, is discussed below and summarized in Appendix C to this 
Guidance, which should be read in conjunction with the rest of the 
Guidance.
a. To U.S. Swap Dealers and MSPs
    As explained above, U.S. swap dealers and U.S. MSPs generally would 
be expected to comply in full with all of the Entity-Level 
Requirements, without substituted compliance available. The 
Commission's policy generally would apply regardless of whether the 
counterparty to the swap is a U.S. person or non-U.S. person.
    Because under this Guidance the term ``U.S. person'' includes 
corporations, partnerships, limited liability companies, and other 
legal entities (as discussed above), the foregoing interpretation also 
applies to affiliates of non-U.S. persons that are U.S. swap dealers or 
U.S. MSPs. It also applies to U.S. banks that are swap dealers or MSPs 
when the swap is with their foreign branch. In this case, because a 
foreign branch of a U.S. bank is an integral part of the U.S. principal 
entity and has no separate legal existence, and the U.S. principal bank 
is the entity that registers as a swap dealer or MSP, under the 
Commission's interpretation of CEA section 2(i), the U.S. bank 
(principal entity) would be the party ultimately responsible for 
compliance with the Entity-Level Requirements for the entire legal 
entity.
b. To Non-U.S. Swap Dealers and MSPs
    Consistent with CEA section 2(i), the Commission would expect non-
U.S. swap dealers and non-U.S. MSPs to comply with all of the Entity-
Level Requirements. This policy also applies to foreign affiliates of a 
U.S. person that are independently required to register as swap dealers 
or MSPs and to comply with applicable Dodd-Frank Act requirements.
    However, in considering whether substituted compliance is available 
to a non-U.S. swap dealer or MSP with respect to particular Entity-
Level Requirements, the Commission would consider it relevant whether 
the Entity-Level Requirement is classified in the First Category or 
Second Category (and with respect to the Second Category, whether the 
counterparty is a U.S. person).
    The Commission recognizes that non-U.S swap dealers or MSPs are 
likely to have their principal swap business in their home 
jurisdiction, and in consideration of international comity principles, 
is interpreting CEA section 2(i) such that such non-U.S swap dealers or 
MSPs generally would be eligible for substituted compliance with regard 
to Entity-Level Requirements in the First Category (i.e., capital 
adequacy, chief compliance officer, risk management, and swap data 
recordkeeping, except certain aspects of swap data recordkeeping 
relating to complaints and marketing and sales materials \502\).\503\
---------------------------------------------------------------------------

    \502\ See 17 CFR 23.201(b)(3), (4).
    \503\ As noted in the Proposed Guidance, the Commission 
anticipates that non-U.S. swap dealers and non-U.S. MSPs will likely 
have their principal swap business in their home jurisdiction. In 
these circumstances, the Commission notes that the home regulator 
would have a primary relationship to the swap dealer or MSP, which, 
coupled with the firm-wide focus of the Entity-Level Requirements, 
supports generally making the non-U.S. registrant eligible for 
substituted compliance. Therefore, consistent with the Proposed 
Guidance, the Commission believes that it is appropriate to make 
non-U.S. swap dealers and MSPs eligible for substituted compliance 
with respect to Entity-Level Requirements in the First Category 
where the non-U.S. swap dealers or non-U.S. MSPs are subject to 
comparable regulation in their home jurisdiction.
---------------------------------------------------------------------------

    With respect to Entity-Level Requirements in the First Category, as 
noted by commenters on the Proposed Guidance, an affiliate of a U.S. 
swap dealer that is guaranteed by such U.S. swap dealer (or guaranteed 
by a U.S.-based parent or other affiliate of such swap dealer) may 
under certain circumstances be required to register as a swap dealer 
based on its swap dealing activity solely with non-U.S. persons, 
including those non-U.S. persons that are neither guaranteed affiliates 
or affiliate conduits of U.S. persons. Commenters have represented that 
some corporate groups may be required to register many of these 
guaranteed affiliates as swap dealers, even though such affiliates 
provide swap dealing services only to non-U.S. markets, and that many 
of such guaranteed affiliates exist only because the law of the local 
jurisdiction requires that a subsidiary be incorporated in the 
jurisdiction in order to enter into swaps with counterparties located 
in such jurisdiction. The Commission recognizes that certain structural 
conditions required to comply with the regulatory obligations of swap 
dealers may be burdensome for a corporate group with many of these 
guaranteed affiliates due to the requirement that such obligations be 
complied with at the individual entity level (e.g., Commission 
regulations Sec. Sec.  3.3 (Chief compliance officer), 23.600 (Risk 
Management Program for swap dealers and major swap participants), 
23.601 (Monitoring of position limits), 23.602 (Diligent supervision), 
23.603 (Business continuity and disaster recovery), and 23.606 (General 
information: Availability for disclosure and inspection)).

[[Page 45349]]

    Specifically, the Commission notes that Commission regulations 
Sec. Sec.  3.3 (Chief compliance officer), 23.600 (Risk Management 
Program for swap dealers and major swap participants), 23.601 
(Monitoring of position limits), 23.602 (Diligent supervision), 23.603 
(Business continuity and disaster recovery), and 23.606 (General 
information: Availability for disclosure and inspection) mandate that 
each swap dealer in a corporate group under common control individually 
establish policies, procedures, governance structures, reporting lines, 
operational units, and systems specified in the rules. Thus, the 
Commission would consider relief, subject to appropriate conditions and 
restrictions to be determined, that would permit guaranteed affiliates 
in a corporate group under common control that do not enter into swaps 
with U.S. persons to comply with such regulations by establishing 
consolidated policies, procedures, governance structures, reporting 
lines, operational units, and systems, thereby increasing operational 
efficiencies and lessening the economic burden on these groups with 
respect to their guaranteed affiliates that do not directly face U.S. 
persons when engaging in swaps activities.\504\ The Commission notes, 
however, that any such relief would require a consolidated program to 
manage the risks of the included guaranteed affiliates on an 
individual, rather than a net, basis.
---------------------------------------------------------------------------

    \504\ ``Swaps activities'' are defined in Commission regulation 
23.600(a)(7).
---------------------------------------------------------------------------

    The Commission encourages interested parties to contact the 
Director of the Division of Swap Dealer and Intermediary Oversight to 
discuss the necessary conditions and restrictions of appropriate 
relief.
    The Commission clarifies that, in the interest of international 
comity and for the purpose of permitting efficiencies in compliance 
programs, it would remain open to considering (or directing its staff 
to consider) relief, subject to appropriate conditions and restrictions 
to be determined, that would permit guaranteed affiliates in a 
corporate group under common control (that do not enter into swaps with 
U.S. persons or U.S. guaranteed affiliates or affiliate conduits of 
U.S. persons) to comply with certain of such regulations on a 
consolidated or group basis. The Commission notes, however, that any 
such relief would require a consolidated program to manage the risks of 
the included guaranteed affiliates on an individual, rather than a net, 
basis.
    With respect to one of the Entity-Level Requirements in the Second 
Category, SDR Reporting (i.e., SDR Reporting and swap data 
recordkeeping related to complaints and marketing and sales 
materials),\505\ the Commission interprets CEA section 2(i) such that 
swap dealers or MSPs that are not U.S. persons generally would be 
eligible for substituted compliance only with respect to swaps where 
the counterparty is a non-U.S. person that is not a guaranteed or 
conduit affiliate.
---------------------------------------------------------------------------

    \505\ See 17 CFR 23.201(b)(3), (4).
---------------------------------------------------------------------------

    With respect to the other Entity-Level Requirement in the Second 
Category (i.e., swap data recordkeeping related to complaints and 
marketing and sales materials),\506\ the Commission interprets CEA 
section 2(i) such that swap dealers or MSPs that are not U.S. persons 
generally would be eligible for substituted compliance only with 
respect to swaps where the counterparty is a non-U.S. person. However, 
as explained below, with respect to Large Trader Reporting, the 
Commission's policy would not recognize substituted compliance in place 
of compliance with Large Trader Reporting.
---------------------------------------------------------------------------

    \506\ See id.
---------------------------------------------------------------------------

    Specifically, with respect to SDR Reporting, the Commission 
interprets CEA section 2(i) such that substituted compliance may be 
available to non-U.S. swap dealers and non-U.S. MSPs (whether or not 
such swap dealers or MSPs are affiliates of or are guaranteed by U.S. 
persons) for swaps with non-U.S. counterparties, provided that the 
Commission has direct access (including electronic access) to the 
relevant swap data that is stored at the foreign trade repository. The 
Commission believes that this ensures that the Commission will have 
access to information that is critical to its oversight of these 
entities even where substituted compliance with regard to SDR Reporting 
would be applicable under this Guidance.\507\ However, the Commission 
interprets section 2(i) as applied to these requirements such that 
substituted compliance generally would not be available for non-U.S. 
swap dealers and non-U.S. MSPs (whether or not such swap dealers or 
MSPs are guaranteed by U.S. persons) with respect to swaps with U.S. 
counterparties. The Commission believes that in general, application of 
these requirements, without eligibility for substituted compliance, is 
appropriate given its strong supervisory interest in a swap between a 
registered swap dealer or MSP and a U.S. counterparty.
---------------------------------------------------------------------------

    \507\ As the Commission noted in the Proposed Guidance, data 
reported to SDRs is critical to ensure that the Commission has a 
comprehensive and accurate picture of swap dealers and MSPs that are 
its registrants, including the gross and net counterparty exposures 
of swaps of all swap dealers and MSPs, to the greatest extent 
possible. Therefore, the Commission's view is that non-U.S. swap 
dealers and non-U.S. MSPs generally should be expected to report all 
of their swaps to a registered SDR. At the same time, the Commission 
recognized the interests of foreign jurisdictions with respect to 
swaps between a non-U.S. swap dealer or non-U.S. MSP with a non-U.S. 
counterparty. Therefore, the Commission would interpret section 2(i) 
so that swaps between non-U.S. swap dealers or MSPs with non-U.S. 
counterparties generally are eligible for substituted compliance 
with regard to SDR Reporting, but only if the Commission has direct 
access to all of the reported swap data elements that are stored at 
a foreign trade repository.
---------------------------------------------------------------------------

    However, with regard to the SDR reporting requirements, for the 
future, the Commission has agreed to continue to work collaboratively 
and to consider any unforeseen implementation effects that might arise 
in the application of our respective rules. The Commission will 
continue discussions with other international partners with a view to 
establishing a more generalized system that would allow, on the basis 
of these countries' implementation of the G-20 commitments, an 
extension of the treatment the EU and the CFTC will grant to each 
other.
    With regard to certain aspects of swap data recordkeeping that 
relate to complaints and marketing and sales materials, the Commission 
interprets CEA section 2(i) such that non-U.S. swap dealers or non-U.S. 
MSPs generally would be eligible for substituted compliance with 
respect to swaps with non-U.S. counterparties.\508\
---------------------------------------------------------------------------

    \508\ In the Proposed Guidance, the Commission included all of 
the swap data recordkeeping requirements of regulations 23.201 and 
23.203 in the proposed first subcategory of Entity-Level 
Requirements. 77 FR at 41225. In this Guidance, swap data 
recordkeeping related to complaints and marketing and sales 
materials under regulations 23.201(b)(3) and 23.201(b)(4), 
respectively, are being moved from the First Category to the Second 
Category because the Commission does not believe that substituted 
compliance generally should be available for requirements relating 
to complaints and marketing and sales materials where the 
counterparty is a U.S. person. This policy pertains equally to swaps 
with foreign affiliates of a U.S. person that are required to 
independently register as swap dealers and to comply with applicable 
Entity-Level Requirements.
---------------------------------------------------------------------------

    To the extent that swap data reported to a foreign trade repository 
would include data regarding the physical commodity swaps covered by 
Large Trader Reporting, the Commission--even if provided with direct 
access to such data--would still likely be required to convert it to 
``futures equivalent'' positional data in order to render it comparable 
to the data obtained through Large Trader Reporting, which contemplates 
conversion by the entity required to

[[Page 45350]]

report data to the Commission.\509\ Given that Large Trader Reporting 
is intended to enable the Commission, in a prompt and efficient manner, 
to identify significant traders in the covered physical commodity swaps 
and to collect data on their trading activity in order to reconstruct 
market events, the time and resources expended by the Commission in 
conversion could significantly impede its market surveillance efforts.
---------------------------------------------------------------------------

    \509\ Large Trader Reporting provides the Commission with data 
regarding large positions in swaps that are linked, directly or 
indirectly, to a discrete list of U.S.-listed physical commodity 
futures contracts, in order to enable the Commission to implement 
and conduct effective surveillance of these economically equivalent 
swaps and futures. To facilitate surveillance efforts and the 
monitoring of trading across the swaps and futures markets, swaps 
positions must be converted to equivalent positions of the related 
U.S. futures contract (``futures equivalents'') for reporting 
purposes; reportable thresholds are also defined in terms of 
``futures equivalents.''
---------------------------------------------------------------------------

    The Commission notes further that its interpretation of CEA section 
2(i) to permit substituted compliance with comparable and comprehensive 
regimes in certain circumstances recognizes the interests of foreign 
jurisdictions with respect to swaps between non-U.S. persons. Large 
Trader Reporting, however, reflects a very specific interest of the 
Commission in conducting effective surveillance of markets in swaps 
that have been determined to be economically equivalent to certain 
U.S.-listed physical commodity futures contracts. In light of this 
specific Commission interest--which is reflected in the particularized 
scope and methodology of Large Trader Reporting--and in light of the 
anticipated impediments to obtaining directly comparable positional 
data through any foreign swap data reporting regime, the Commission's 
policy would not recognize substituted compliance in place of 
compliance with Large Trader Reporting.
4. Application of the ``Category A'' Transaction-Level Requirements to 
Swap Dealers and MSPs
    This section discusses the Commission's guidance on the application 
of the Category A Transaction Level Requirements to the parties to a 
swap where one of the parties is a registered swap dealer or MSP,\510\ 
including when substituted compliance may be available to various types 
of counterparties.
---------------------------------------------------------------------------

    \510\ Some of the Transaction-Level and Entity-Level 
Requirements also are applicable to market participants that are not 
swap dealers or MSPs, which are referred to herein as non-
registrants. See section H, infra, for a discussion of the 
Commission's interpretation of how these requirements would apply to 
non-registrants under CEA section 2(i).
---------------------------------------------------------------------------

    As noted above, the Category A Transaction Level Requirements 
include: (1) Required clearing and swap processing; (2) margining and 
segregation requirements for uncleared swaps; (3) trade execution; (4); 
swap trading relationship documentation; (5) portfolio reconciliation 
and compression; (6) real-time public reporting; (7) trade 
confirmation; and (8) daily trading records.\511\
---------------------------------------------------------------------------

    \511\ The categorization of Transaction-Level Requirements into 
Categories A and B is discussed in section E, supra. See Appendix B 
for a descriptive list of the Category A and Category B requirements 
and Appendix D for a table summarizing the application of the 
Category A Transaction-Level Requirements to Swap Dealers and MSPs.
---------------------------------------------------------------------------

    The Commission's policy on application of the Category A 
Transaction-Level Requirements is summarized in Appendix D to this 
Guidance, which should be read in conjunction with the rest of the 
Guidance.
a. Swaps With U.S. Swap Dealers and MSPs
    As explained above, where one of the counterparties to a swap is a 
U.S. swap dealer or U.S. MSP, under the Commission's interpretation of 
CEA section 2(i), the Commission would generally expect the parties to 
the swap to comply with Category A Transaction-Level Requirements with 
respect to the transaction, without regard to whether the other 
counterparty to the swap is a U.S. person or a non-U.S. person.
    Because the Commission interprets section 2(i) so that the term 
``U.S. person'' would include any legal entity organized or 
incorporated under the laws of the United States or having its 
principal place of business in the United States, this interpretation 
also would apply where one of the parties to the swap is a U.S. swap 
dealer or U.S. MSP that is an affiliate of a non-U.S. person.\512\ In 
addition, because the Commission considers a foreign branch of a U.S. 
person to be a part of the U.S. person, the foregoing interpretation 
also applies to swaps with foreign branches of a U.S. bank that is a 
swap dealer or MSP (although in some circumstances substituted 
compliance may be available as explained below).
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    \512\ See the Proposed Guidance, 77 FR 1218.
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    Further, as explained above, with regard to substituted compliance, 
where one of the counterparties to a swap is a U.S. swap dealer or U.S. 
MSP (including those that are affiliates of a non-U.S. person), other 
than a foreign branch of a U.S. bank that is a swap dealer or MSP, the 
Commission's policy is that substituted compliance generally would not 
be available for the Category A Transaction-Level Requirements, without 
regard to whether the other counterparty is a U.S. person or a non-U.S. 
person. The Commission has a strong supervisory interest in ensuring 
that the Category A Transaction-Level Requirements apply to swaps with 
a U.S. swap dealer or MSP.\513\
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    \513\ Consistent with the foregoing rationale, the Commission 
takes the view that a U.S. branch of a non-U.S. swap dealer or MSP 
would be subject to Transaction-Level requirements, without 
substituted compliance available. As discussed above, a branch does 
not have a separate legal identity apart from its principal entity. 
Therefore, the Commission considers a U.S. branch of a non-U.S. swap 
dealer or non-U.S. MSP to be a non-U.S. person (just as the 
Commission considers a foreign branch of a U.S. person to be a U.S. 
person). Nevertheless, the Commission also recognizes its strong 
supervisory interest in regulating the dealing activities that occur 
with the United States, irrespective of the counterparty (just as 
the Commission allows for substituted compliance for foreign 
branches in certain instances to take into account the strong 
supervisory interest of local regulators).
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    Similarly, under the Commission's interpretation of 2(i), where a 
swap is between a foreign branch of a U.S. bank that is a swap dealer 
or MSP, on the one hand, and a U.S. person on the other, the 
Commission's policy is that substituted compliance generally would not 
be available with respect to the Category A Transaction-Level 
Requirements. In this case, the Commission also has a strong 
supervisory interest in ensuring that the Category A Transaction-Level 
Requirements fully apply to the transaction because it views the swap 
transaction as being between two U.S. persons. The Commission believes 
that this approach is appropriate in light of the Commission's strong 
supervisory interests in entities that are part or an extension of a 
U.S. swap dealer or U.S. MSP.
    However, where a swap is between two foreign branches of U.S. banks 
that are both swap dealers or MSPs, the Commission believes that the 
interests of foreign regulators in applying their transaction-level 
requirements to a swap taking place in their jurisdiction, together 
with the fact that foreign branches of U.S. swap dealers or U.S. MSPs 
are subject generally to direct or indirect oversight by U.S. 
regulators, weigh in favor of allowing substituted compliance with 
comparable and comprehensive foreign regulatory requirements (to the 
extent applicable).
    In addition, where a swap is between the foreign branch of a U.S. 
bank that is a swap dealer or MSP, on the one hand, and a non-U.S. 
person on the other

[[Page 45351]]

(regardless of whether the non-U.S. person is a guaranteed or conduit 
affiliate), as a policy matter, the Commission believes that 
substituted compliance should be available (if otherwise applicable). 
In this case, even though the Commission considers the foreign branch 
of a U.S. person to be a U.S. person, the Commission believes that the 
interests of foreign regulators in applying their transaction-level 
requirements to a swap taking place in their jurisdiction, together 
with the fact that foreign branches of U.S. swap dealers or U.S. MSPs 
are subject generally to direct or indirect oversight by U.S. 
regulators because they are part of a U.S. person, may weigh in favor 
of allowing substituted compliance with comparable and comprehensive 
foreign regulatory requirements (to the extent applicable) where the 
counterparty to the foreign branch is a non-U.S. person.
    In a modification to the Proposed Guidance, where a swap between 
the foreign branch of a U.S. swap dealer or U.S. MSP and a non-U.S. 
person (that is not a guaranteed or conduit affiliate) takes place in a 
foreign jurisdiction other than Australia, Canada, the European Union, 
Hong Kong, Japan, or Switzerland,\514\ the Commission's policy is to 
interpret CEA section 2(i) so that counterparties may comply with the 
transaction-level requirements applicable to entities domiciled or 
doing business in the foreign jurisdiction where the foreign branch is 
located, rather than the Transaction-Level Requirements that would 
otherwise be applicable, if two elements are present. First, the 
aggregate notional value (expressed in U.S. dollars and measured on a 
quarterly basis) of the swaps of all U.S. swap dealer's foreign 
branches in foreign jurisdictions other than Australia, Canada, the 
European Union, Hong Kong, Japan, or Switzerland does not exceed five 
percent of the aggregate notional value (expressed in U.S. dollars and 
measured on a quarterly basis) of all of the swaps of the U.S. swap 
dealer. Second, the U.S. person maintains records with supporting 
information to verify that the first element is present, as well as to 
identify, define, and address any significant risk that may arise from 
the non-application of the Transaction-Level Requirements. The 
Commission believes this policy is appropriate because U.S. swap 
dealers' dealing activities through branches or agencies in 
jurisdictions other than the six jurisdictions referenced above, though 
not significant in many cases, may be nevertheless an integral element 
of their global business. The Commission notes that this exception is 
not available in the six jurisdictions referenced above because the 
Commission has received, or expects to receive in the near term, a 
request for substituted compliance determinations for transactions in 
these jurisdictions.
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    \514\ Market participants or regulators in all of these 
jurisdictions have submitted requests for Substituted Compliance 
Determinations.
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    Although the foreign branch of a U.S. registrant would not register 
separately as a swap dealer or MSP, the Commission interprets 2(i) in a 
manner that would permit the U.S. registrant to task its foreign branch 
to fulfill its regulatory obligations with respect to the Category A 
Transaction-Level Requirements. The Commission would generally consider 
compliance by the foreign branch to constitute compliance with these 
Transaction-Level Requirements. However, under the Commission's 
interpretation of 2(i), the U.S. person (principal entity) would remain 
responsible for compliance with the Category A Transaction-Level 
Requirements.
b. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs
    Under the Commission's interpretation of CEA section 2(i), where a 
swap is between a non-U.S. swap dealer or non-U.S. MSP (including an 
affiliate of a U.S. person), on the one hand, and a U.S. person (other 
than a foreign branch of a U.S. swap dealer or MSP), on the other, the 
Commission would generally expect the parties to comply with Category A 
Transaction-Level Requirements with respect to the transaction.\515\
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    \515\ Under the Commission's futures regulatory regime, any 
person located outside the U.S. that seeks to serve as an 
intermediary to U.S. persons trading on a U.S. designated contract 
market or in foreign futures and option contracts is required to 
register in the appropriate category and comply with related 
regulations, absent the availability of an exemption from 
registration (e.g., relief pursuant to Commission regulation 30.10 
in the foreign futures and option context).'' See, e.g., Commission 
regulation 30.4.
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    The Commission notes, however, that where a swap is executed 
anonymously between any non-U.S. person, whether a swap dealer or an 
MSP, and a U.S. person (other than a foreign branch of a U.S. swap 
dealer or MSP) on a registered DCM or SEF and cleared, the non-U.S. 
person will generally be considered to have satisfied each of the eight 
Category A Transaction-Level Requirements that apply to such a swap 
transaction as a consequence of being so executed on a DCM or SEF. 
Thus, neither the non-U.S. person (nor its U.S. person counterparty) 
will need to take any further steps to comply with the Category A 
Transaction-Level Requirements in connection with such a 
transaction.\516\
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    \516\ However, non-U.S. swap dealers and MSPs must satisfy the 
daily trading record requirement found in Commission regulation 
23.202(a)(1).
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    In making this determination, the Commission observes that where a 
cleared swap transaction is executed anonymously on a registered DCM or 
SEF, certain independent requirements that apply to DCM and SEF 
transactions generally, pursuant to the CEA or the Commission's 
regulations, will ensure that four of the eight Category A Transaction-
Level Requirements will be met for such transactions--required clearing 
and swap processing,\517\ trade execution,\518\ real-time public 
reporting,\519\ and trade confirmation.\520\
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    \517\ Pursuant to Commission regulations 37.702 and 38.601, each 
SEF and DCM must coordinate with each DCO to which it submits 
transactions for clearing in the development of rules and procedures 
to facilitate prompt and efficient transaction processing to meet 
the requirements of Commission regulation 39.12(b)(7). Commission 
regulation 39.12(b)(7)(ii) requires a DCO to accept or reject swaps 
executed on a SEF or DCM for clearing ``as quickly after execution 
as would be technologically practicable if fully automated systems 
were used.'' See also 17 CFR 23.506(a); 39.12(b)(7)(iii); Final 
Customer Documentation Rules, 77 FR at 21306-21310. As stated in the 
Final Customer Documentation Rules, these rules, taken as a whole, 
``require SEFs, DCMs, swap dealers, MSPs, and DCOs to coordinate in 
order to facilitate real time acceptance or rejection of trades for 
clearing.'' Id. at 21296.
    \518\ CEA section 2(h)(8)(A) provides that transactions in swaps 
subject to the trade execution mandate must be executed on a 
registered DCM or SEF, or a SEF that has been exempted from 
registration. The Commission clarifies that the trading mandate 
under CEA section 2(h)(8)(A) is satisfied by trading on a registered 
DCM or SEF or a SEF that has been exempted from registration.
    \519\ Parties that execute a swap transaction on a DCM or SEF 
meet their real-time public reporting obligations by operation of a 
set of Commission regulations that essentially delegate the 
obligations to the DCM or SEF on which the transaction was executed, 
and the SDR to which the DCM or SEF reports the transaction. 
Specifically, Commission regulation 43.3(a)(2) provides that a party 
to a publicly reportable swap transaction satisfies its real-time 
reporting obligations by executing a publicly reportable swap 
transaction on or pursuant to the rules of a registered SEF or DCM. 
In turn, Commission regulation 43.3(b)(1) requires a SEF or DCM to 
transmit swap transaction and pricing data to a registered SDR, as 
soon as technically practicable after the publicly reportable swap 
transaction has been executed on or pursuant to the rules of such 
trading platform or facility. Finally, Commission regulation 
43.3(b)(2) requires a registered SDR to ensure that swap transaction 
and pricing data is publicly disseminated, as soon as 
technologically practicable after such data is received from a 
registered SEF or DCM.
    \520\ See Commission regulation 23.501(a)(4)(i) (``Any swap 
transaction executed on a swap execution facility or designated 
contract market shall be deemed to satisfy the requirements of this 
section, provided that the rules of the swap execution facility or 
designated contract market establish that confirmation of all terms 
of the transactions shall take place at the same time as 
execution''); 37.6(b); Part 37 SEF Regulations, 78 FR at 33585 (``A 
swap execution facility shall provide each counterparty to a 
transaction that is entered on or pursuant to the rules of the swap 
execution facility with a written record of all of the terms of the 
transaction which shall legally supersede any previous agreement and 
serve as confirmation of the transaction. The confirmation of all 
terms shall take place at the same time as execution . . . '').

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[[Page 45352]]

    For a combination of reasons, the Commission also believes that the 
four remaining Transaction-Level Requirements do not, or should not, 
apply to cleared, anonymous DCM or SEF transactions. So, for instance, 
the fact that the DCM or SEF swap transaction will be cleared, obviates 
the need for margining or segregation requirements applicable to 
uncleared swaps. Two other Category A Transaction-Level Requirements--
swap trading relationship documentation and portfolio reconciliation 
and compression--would not apply because the Commission regulations 
that establish those requirements make clear that they do not apply to 
cleared DCM or SEF transaction.\521\ The last requirement--the daily 
trading records requirement \522\--would only be applicable to the non-
U.S. swap dealer and only with regard to pre-trade execution swaps. 
However, because the non-U.S. swap dealer will have no information 
about its counterparty where the swap is executed anonymously, the 
Commission is of the view that, as a matter of international comity, 
CEA section 2(i) should not be interpreted to apply all of the daily 
trading records requirements to such a swap.\523\
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    \521\ See 17 CFR 23.504(a)(1) (``The requirements of this 
section [swap trading relationship documentation] shall not apply to 
. . . swaps executed on a board of trade designated as a contract 
market under section 5 of the Act or to swaps executed anonymously 
on a swap execution facility under section 5h of the Act, provided 
that such swaps are cleared by a derivatives clearing organization . 
. .''); 23.502(d) (``Nothing in this section [portfolio 
reconciliation] shall apply to a swap that is cleared by a 
derivatives clearing organization''); 23.503(c) (``Nothing in this 
section [portfolio compression] shall apply to a swap that is 
cleared by a derivatives clearing organization.'').
    \522\ See 17 CFR 23.202.
    \523\ The Commission is of the view that CEA section 2(i) should 
not be interpreted to apply the daily trading records requirements, 
with the exception of those found in Commission regulation 
23.202(a)(1).
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    In addition, the Commission is interpreting CEA section 2(i) such 
that, where a swap between a non-U.S. person, regardless of its swap 
dealer or MSP status, and a U.S. person is executed anonymously on an 
FBOT registered with the Commission pursuant to part 48 and cleared the 
non-U.S. person will generally be considered to have satisfied the 
Category A Transaction-Level Requirements that pertain to such a swap 
transaction. Some of the requirements will be satisfied by requirements 
levied by regulation on the FBOT and some will be satisfied because a 
registered FBOT is analogous to a DCM and is subject to comprehensive 
supervision and regulation in its home country that is comparable to 
that exercised over a DCM by the Commission. Thus, neither the non-U.S. 
person (nor its U.S. person counterparty) will need to take any further 
steps to satisfy the applicable Category A Transaction-Level 
Requirements in connection with such a transaction.\524\
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    \524\ However, a non-U.S. swap dealer or non-U.S. MSP must 
satisfy the daily trading record requirement found in Commission 
regulation 23.202(a)(1).
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    In making this determination, the Commission observes that where a 
cleared swap transaction is executed anonymously on a registered FBOT, 
the FBOT, similar to a DCM, based on certain independent requirements 
that apply to DCM transactions generally pursuant to the CEA or the 
Commission's regulations, will ensure that two of the eight Category A 
Transaction-Level Requirements will be satisfied for such transactions: 
Required clearing and swap processing \525\ and trade execution.\526\ 
The Commission notes that while the real-time reporting requirement 
will be satisfied for cleared swaps executed anonymously on a DCM by 
operation of the Commission's real-time reporting regulations, absent 
further affirmative actions by an FBOT, the real-time public reporting 
requirements will not be satisfied through FBOT execution alone.\527\
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    \525\ As discussed above, pursuant to Commission regulation 
48.7(c)(1)(ii), all contracts, including swaps, made available in 
the U.S. by a registered FBOT must be cleared. The clearing 
organization must be either a DCO or must observe international 
clearing standards: The RCCP or the successor standards, PFMI.
    \526\ See discussion of clearing at section IV.F.6, supra. The 
Commission clarifies that the trading mandate under CEA section 
2(h)(8)(A) is satisfied by trading on a registered FBOT.
    \527\ Pursuant to Commission regulation 48.8(a)(9), the 
registered FBOT must ensure that all transaction data relating to 
each swap transaction, including price and volume, are reported as 
soon as technologically practicable after execution of the swap 
transaction to a SDR that is either registered with the Commission 
or has an information sharing arrangement with the Commission. While 
Commission regulation 43(b)(2) requires that an SDR ensure that swap 
transaction and pricing data is publicly disseminated as soon as 
technologically practicable after such data is received from a 
registered SEF, DCM or reporting party, it does not specifically 
require public dissemination of swap transaction and pricing data 
from the FBOT. Therefore, in order for the FBOT to ensure that the 
real-time public reporting requirement is satisfied, the FBOT must 
either report the data to the public itself or enter into an 
arrangement with the SDR to which the data are reported pursuant to 
which the SDR agrees to publicly disseminate the data as soon as 
technologically practicable.
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    For a combination of reasons, including the fact that the swap will 
be cleared, the Commission also is of the view that the remaining 
Transaction-Level Requirements do not apply to such transactions 
executed on a registered FBOT. For instance, the fact that the swap 
will be cleared, as required by regulation 48.7(c)(1)(ii), renders 
inapplicable the margining or segregation requirements for uncleared 
swaps. As the Commission observed above with respect to swaps executed 
anonymously on DCMs, certain of the other Category A Transaction-Level 
Requirements would not apply to the swap. Consistent with this 
determination, three of the other Category A Transaction-Level 
Requirements--swap trading relationship documentation, portfolio 
reconciliation and compression and trade confirmation--would not apply 
to the swap executed on a registered FBOT because the underlying 
Commission regulations themselves do not apply those requirements to 
cleared DCM or SEF transactions. The last requirement--the daily 
trading records requirement--would only be applicable to the non-U.S. 
swap dealer and only with regard to pre-trade execution swaps. However, 
because the non-U.S. swap dealer will have no information about its 
counterparty where the swap is executed anonymously on a registered 
FBOT, the Commission is of the view that, as a matter of international 
comity, CEA section 2(i) should be interpreted such that certain of the 
daily trading records requirements also would not apply to the 
swap.\528\
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    \528\ The Commission is of the view that CEA section 2(i) should 
not be interpreted to apply the daily trading records requirements, 
with the exception of those found in Commission regulation 
23.202(a)(1).
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    In addition, for the reasons discussed in the next two sections, 
where a swap is between a non-U.S. swap dealer or non-U.S. MSP, on the 
one hand, and a non-U.S. person that is a guaranteed or conduit 
affiliate, on the other, under the Commission's interpretation of 2(i), 
the Commission would generally expect the parties to comply with the 
Category A Transaction-Level Requirements.\529\
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    \529\ Where one of the parties to the swap is a conduit 
affiliate, the Commission would generally expect the parties to the 
swap only to comply with (to the extent that the Inter-Affiliate 
Exemption is elected), the conditions of the Inter-Affiliate 
Exemption, including the treatment of outward-facing swaps condition 
in Commission regulation 50.52(b)(4)(i). In addition, the part 43 
real-time reporting requirements must be satisfied.
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    However, where a swap is between a non-U.S. swap dealer or non-U.S. 
MSP (including an affiliate of a U.S. person), on the one hand, and a 
non-U.S. person

[[Page 45353]]

that is not a guaranteed or conduit affiliate, on the other, under the 
Commission's interpretation of 2(i), the Commission would not expect 
the parties to the swap to comply with the Category A Transaction-Level 
Requirements.\530\ In this case, the Commission believes that generally 
there may be a relatively greater supervisory interest on the part of 
foreign regulators with respect to transactions between two 
counterparties that are non-U.S. persons so that application of the 
Category A Transaction-Level Requirements may not be warranted.\531\
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    \530\ Thus, for example, a swap between a registered non-U.S. 
swap dealer and a German person would not be subject to Category A 
Transaction-Level Requirements.
    \531\ Where the counterparty to a non-U.S. swap dealer or non-
U.S. MSP is an international financial institution such as the World 
Bank, the Commission also generally would not expect the parties to 
the swap to comply with the Category A Transaction-Level 
Requirements, even if the principal place of business of the 
international financial institution were located in the United 
States.
    For this purpose, the Commission would consider the 
international financial institutions to be the institutions listed 
as such in the Final Entities Rules, 77 FR at 30692 n. 1180, which 
include the International Monetary Fund, International Bank for 
Reconstruction and Development, International Development 
Association, International Finance Corporation, Multilateral 
Investment Guarantee Agency, the Inter-American Development Bank, 
and the Inter-American Investment Corporation. Even though some or 
all of these international financial institutions may have their 
principal place of business in the United States, the Commission 
would generally not consider the application of the Category A 
Transaction-Level Requirements to be warranted, for the reasons of 
the traditions of the international system discussed in the Final 
Entities Rules.
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    With regard to substituted compliance, where a swap is between a 
non-U.S. swap dealer or non-U.S. MSP (including an affiliate of a U.S. 
person), on the one hand, and a U.S. person (other than a foreign 
branch of a U.S. bank swap dealer or U.S. MSP), on the other, the 
Commission's policy is that substituted compliance would generally not 
be available for the Category A Transaction-Level Requirements. The 
Commission believes that this approach is appropriate in this case 
because the Commission has a strong interest in ensuring that the swap 
fully complies with the Category A Transaction Level Requirements, 
without substituted compliance. A number of related reasons support 
this conclusion. As discussed above, a major purpose of Title VII is to 
control the potential harm to U.S. markets that can arise from risks 
that are magnified or transferred between parties via swaps. As also 
discussed above, swaps between U.S. persons and non-U.S. persons 
inherently raise the possibility of such risk magnification and 
transfer. The Category A Transaction Level Requirements are designed to 
constrain such risk magnification and transfer. The United States thus 
has a strong interest in applying the Dodd-Frank Act requirements, 
rather than substitute requirements adopted by non-U.S. authorities, to 
swaps with U.S. persons. Exercise of U.S. jurisdiction with respect to 
the Category A Transaction Level Requirements over swaps between U.S. 
persons and non-U.S. persons is a reasonable exercise of jurisdiction 
because of the strong U.S. interest in minimizing the potential risks 
that may flow to the U.S. economy as a result of such swaps.\532\
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    \532\ See Restatement secs. 403(2)(a) (effect on territory of 
regulating state), 403(2)(c) (importance of regulated activity to 
the regulating state); 403 cmt. b (weight to be given to 
reasonableness factors depends on circumstances).
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    Even though substituted compliance is not available with respect to 
swaps between a non-U.S. swap dealer or non-U.S. MSP, on the one hand, 
and a U.S. person (other than a foreign branch of a U.S. bank swap 
dealer or U.S. MSP), on the other, a market participant would be deemed 
in compliance with the relevant Dodd-Frank requirements where it 
complies with requirements in its home jurisdiction that are 
essentially identical to the Dodd-Frank requirements. Whether the home 
jurisdiction's requirements are essentially identical to the corollary 
Dodd-Frank requirements would be evaluated on a provision-by-provision 
basis. The Commission intends that a finding of essentially identical 
generally would be made through Commission action but in appropriate 
cases could be made through staff no-action.
    Based on the foregoing principles, the Commission staff issued a 
no-action letter related to risk mitigation.\533\ The Commission staff 
found that the Commission and the EU have essentially identical rules 
in important areas of risk mitigation for the largest counterparty swap 
market participants. Specifically, the Commission staff determined that 
under the European Market Infrastructure Regulation (EMIR), the EU has 
adopted risk mitigation rules that are essentially identical to certain 
provisions of the Commission's business conduct standards for swap 
dealers and major swap participants. In areas such as confirmation, 
portfolio reconciliation, portfolio compression, valuation, and dispute 
resolution, the Commission staff found that the respective regimes are 
essentially identical. The Commission staff determined that where a 
swap/OTC derivative is subject to concurrent jurisdiction under US and 
EU risk mitigation rules, compliance under EMIR will achieve compliance 
with the relevant Commission rules because they are essentially 
identical.\534\
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    \533\ See No-Action Relief for Registered Swap Dealers and Major 
Swap Participants from Certain Requirements under Subpart I of Part 
23 of Commission Regulations in Connection with Uncleared Swaps 
Subject to Risk Mitigation Techniques under EMIR, CFTC Letter No. 
13-45 (Jul. 11, 2013) (``Risk Mitigation Letter'').
    \534\ The Risk Mitigation Letter provides an example of when 
requirements in a foreign jurisdiction would be essentially 
identical to Dodd-Frank requirements. See id.
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    However, where the swap is between a non-U.S. swap dealer or non-
U.S. MSP (including an affiliate of a U.S. person) and a foreign branch 
of a U.S. bank that is a swap dealer or MSP, as a policy matter, the 
Commission believes that substituted compliance should be available for 
the Category A Transaction-Level Requirements, to the extent 
applicable. Under substituted compliance, a counterparty can choose to 
follow a foreign jurisdiction's rules even though those rules are not 
essentially identical, provided that the regime is comparable and 
comprehensive. The Commission believes that international comity 
principles support taking this more flexible approach where the 
transaction, although it involves a U.S. person, takes place in a 
foreign jurisdiction.
    In addition, where a swap is between a non-U.S. swap dealer or non-
U.S. MSP (including an affiliate of a U.S. person), on the one hand, 
and a non-U.S. person that is a guaranteed or conduit affiliate, on the 
other, substituted compliance may be available to satisfy the Category 
A Transaction Level Requirements, to the extent applicable, as 
discussed in the next two sections.
c. Swaps With a Non-U.S. Person Guaranteed by a U.S. Person
i. Proposed Guidance
    In the Proposed Guidance, with respect to swaps between a non-U.S. 
swap dealer or non-U.S. MSP, on the one hand, and a non-U.S. 
counterparty on the other hand, the Commission proposed to interpret 
CEA section 2(i) such that a non-U.S. swap dealer or non-U.S. MSP would 
be expected to comply with the Category A Transaction-Level 
Requirements for swaps where the non-U.S. counterparty's performance is 
guaranteed, or otherwise supported by, a U.S. person.\535\ In 
consideration of international comity principles, the Commission 
further proposed to interpret CEA section 2(i) so as to

[[Page 45354]]

permit substituted compliance for these Transaction-Level Requirements.
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    \535\ See Proposed Guidance, 77 FR 41288.
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    The Commission explained that it proposed to interpret section 2(i) 
in this manner because, where a non-U.S. counterparty's swaps 
obligations are guaranteed by a U.S. person, the risk of non-
performance by the counterparty rests with the U.S. person that is the 
guarantor of performance or payment. If the non-U.S. person defaults on 
its obligations under the swaps, then the U.S. person guarantor will be 
held responsible (or would bear the cost) to settle those obligations. 
In circumstances in which a U.S. person ultimately bears the risk of 
non-performance of a counterparty to a swap with a non-U.S. swap dealer 
or non-U.S. MSP, the Commission noted its strong regulatory interest in 
performance by both parties to the swap, and hence proposed to apply 
these Transaction-Level Requirements.\536\
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    \536\ See id.
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ii. Comments
    Some commenters concurred in the Commission's emphasis on a 
guarantee by a U.S. person as an interpretive guidepost. IATP, for 
example, stated that ``the U.S. person's guarantee is a crucial 
criterion for the Commission's determination of whether a non-U.S. 
person would be subject to compliance with Dodd-Frank or whether 
substituted compliance would be appropriate.'' \537\ Similarly, AFR, in 
commenting on the Proposed Order, expressed concern about U.S. taxpayer 
exposure to ``foreign affiliates of U.S. banks whose liabilities are 
guaranteed (implicitly or explicitly) by the parent company.'' \538\
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    \537\ See IATP (Aug. 27, 2012) at 3-4.
    \538\ See AFR (Aug. 14, 2012) at 1-2.
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    Other commenters, by contrast, stated that: (1) The Transaction-
Level Requirements should never apply to swaps between counterparties 
that are both non-U.S. persons; \539\ (2) the Commission should exclude 
the swap dealing transactions of a non-U.S. person where the 
counterparties to the swaps are, themselves, non-U.S. persons, 
irrespective of whether such counterparties' obligations are guaranteed 
by the U.S. person; \540\ and (3) section 2(i) does not provide a legal 
basis for jurisdiction over a swap between non-U.S. persons based on a 
guaranty by a U.S. person because guarantees ``do not alter the 
location of activity.'' \541\ In a similar vein, IIB stated that the 
Commission's proposed treatment of guarantees based on its concern that 
the U.S. guarantor is exposed to risks incurred by one of its non-U.S. 
affiliates, ``is unduly broad.'' \542\
---------------------------------------------------------------------------

    \539\ See Australian Bankers (Aug. 27, 2012) at A8.
    \540\ See Sumitomo (Aug. 24, 2012) at 3. Sumitomo added that, at 
a minimum, the Commission should exclude swaps obligations in excess 
of a capped guaranty. Id.
    \541\ See CEWG (Aug. 27, 2012) at 6-7.
    \542\ See IIB (Aug. 27, 2012) at 14-15.
---------------------------------------------------------------------------

    IIB explained that guarantees are a very common way for U.S. 
multinational corporations (both financial and non-financial) to 
provide credit support for their non-U.S. subsidiaries. According to 
IIB, parent credit support enables these subsidiaries to hedge their 
risks cost-effectively in the markets in which they operate, thereby 
reducing the cost of risk management and therefore the costs of 
operations.\543\ Citi noted that ordinary course parent support 
commitments, general payment guarantees and capital maintenance 
commitments are often necessary to enter foreign banking markets. It 
added that U.S. multinationals also guarantee obligations of local 
subsidiaries so that their subsidiaries can effectively hedge risks in 
local markets.\544\
---------------------------------------------------------------------------

    \543\ Id. at 15-16.
    \544\ See Citi (Aug. 27, 2012) at 4-9.
---------------------------------------------------------------------------

    IIB argued that these arrangements ``are in stark contrast to 
circumstances where an unregulated foreign `shell' affiliate is used 
for purposes of entering into significant swap dealing activity outside 
the scope of Dodd-Frank and systematically transferring the market and 
credit risks arising from the activity to a U.S. affiliate.'' \545\ 
Accordingly, IIB maintained that application of Transaction-Level 
Requirements where a non-U.S. counterparty to a non-U.S. swap dealer or 
non-U.S. MSP is guaranteed by a U.S. person is unnecessary because the 
Commission already has adopted an anti-evasion rule to address such 
schemes.\546\
---------------------------------------------------------------------------

    \545\ See IIB (Aug. 27, 2012) at 20.
    \546\ Id. See also Sullivan & Cromwell (Aug. 13, 2012) at 7 
(``the counterparty should be considered a non-U.S. person for 
purposes of the regulatory requirements, provided that the 
transactions are not being conducted by the non-U.S. persons as an 
evasion''); The Clearing House (Aug. 27, 2012) at 17 (stating that 
``[a]ny guaranteed entity of a U.S. Person should only include 
`shell' entities that have transferred substantially all of their 
market and credit risk to a U.S. Person (excluding non-financial 
entities) or any entities created to evade U.S. swaps rules.''); 
Citi (Aug. 27, 2012) at 4-9 (``. . . Title VII should not apply to 
non-U.S. subsidiaries on the basis of guarantees . . . where such 
subsidiaries are bona fide companies.'').
---------------------------------------------------------------------------

    Commenters stated that in many instances, the Commission's concerns 
about a guarantee by a U.S. person can be addressed as a safety and 
soundness matter by the Federal Reserve Board when it supervises both 
the guarantor and its subsidiaries; further, where the U.S. providing a 
guarantee is itself a swap dealer or MSP, it also will be subject to 
Title VII requirements.\547\ In a related vein, the Commission was 
urged to adopt an exception from its proposed treatment of a non-U.S. 
counterparty with a guarantee from a U.S. person if either: (1) The 
counterparty is subject to U.S. capital requirements or comparable 
foreign (i.e., Basel-compliant) capital requirements; or (2) the 
guarantor is a U.S. bank holding company.\548\
---------------------------------------------------------------------------

    \547\ See Sullivan & Cromwell (Aug. 13, 2012) at 15.
    \548\ See IIB (Aug. 27, 2012) at 17-18.
---------------------------------------------------------------------------

    IIB also stated that the Commission should tie the application of 
Title VII requirements to the cross-border activities of U.S.-
guaranteed foreign subsidiaries to the significance of the risk to the 
United States arising from the underlying guaranteed activity--that is, 
where the existence of a guarantee gives rise to direct and significant 
risks to the United States.\549\ Otherwise, IIB stated, ``the level of 
risk to the United States is too contingent, remote or low to justify 
application of U.S. regulation in the face of strong and more direct 
non-U.S. regulatory interests.'' \550\ Under such an approach, IIB 
stated, the Commission should adopt an exception from its proposed 
treatment of a non-U.S. counterparty with a guarantee from a U.S. 
person if the non-U.S. counterparty is not a financial entity and is 
entering into the transaction for hedging or risk mitigation 
purposes.\551\ More particularly, IIB posited, if the level of the non-
U.S. counterparty's swap activity is insubstantial in relation to its 
net equity, or if the aggregate potential liability of the U.S. 
guarantor with respect to the non-U.S. counterparty's swap activity is 
insubstantial in relation to the net equity of the guarantor, then the 
risk to the United States will not be significant and Transaction-Level 
Requirements should not be applied.\552\
---------------------------------------------------------------------------

    \549\ Id. at 15-16, 18-19.
    \550\ Id. at 4.
    \551\ Id. at 16-17.
    \552\ Id. at 15-16.
---------------------------------------------------------------------------

    Many of the comments on this topic stated that the Commission's 
proposal in this regard would result in adverse competitive 
consequences.\553\ Others,

[[Page 45355]]

though, objected that Transaction-Level Requirements should not apply 
to entities guaranteed by U.S. persons because non-U.S. counterparties 
will likely be unwilling to agree to the legal documents necessary to 
comply with those requirements.\554\ And others stated that the 
proposed interpretation will not achieve the objective of mitigating 
counterparties' exposure to the credit risks of swap dealers because 
the U.S. guarantor's exposure in this scenario is to the credit risk of 
the guaranteed non-U.S. counterparty, not to the non-U.S. swap dealer 
that is transacting with that guaranteed non-U.S. counterparty.\555\
---------------------------------------------------------------------------

    \553\ See End Users Coalition (Aug. 27, 2012) at 3 (Commission's 
proposal may disadvantage non-U.S. affiliates of U.S. end-users 
whose non-U.S. counterparties may require guarantees to do 
business); Citi (Aug. 27, 2012) at 4-9 (applying Transaction-Level 
Rules in these circumstances would place U.S. multinationals at a 
severe competitive disadvantage relative to foreign-based 
corporations, as their subsidiaries abroad would have to either 
forgo parent support or comply with different transaction-level 
rules than those of the local market); IIB (Aug. 27, 2012) at 18 
(non-U.S. persons that register as swap dealers due to their trading 
with U.S. persons would be disadvantaged vis-[agrave]-vis non-U.S. 
firms that do not have a U.S. swap dealing business because only the 
former would be obligated to comply with the Transaction-Level 
Requirements for swaps with U.S.-guaranteed counterparties); 
Sullivan & Cromwell (Aug. 13, 2012) at 6 (Title VII should not apply 
to the non-U.S. operations and activities of an entity simply 
because it has a U.S. parent that provides a guarantee because this 
would impose duplicative regulation and unnecessary costs on non-
U.S. operations that are already subject to local foreign rules and 
regulations).
    \554\ See Hong Kong Banks (Aug. 27, 2012) at 4-5.
    \555\ See, e.g., ISDA (Aug. 10, 2012) at 10.
---------------------------------------------------------------------------

    Citi commented that if Transaction-Level Requirements were to be 
applied to swaps of non-U.S. persons whose obligations were guaranteed 
by a U.S. person, then U.S.-based firms may be forced to remove parent 
support from their overseas subsidiaries in order to remain 
competitive. It argued that this would cause significant additional 
capital, resources, and personnel to be moved abroad so that these non-
U.S. subsidiaries could manage swap risk on a stand-alone basis which, 
it averred, would fragment and harm the safety and soundness of U.S.-
based firms, U.S. swaps markets, and the U.S. economy.\556\ 
Accordingly, it urged the Commission to further study the issue of 
guarantees before finalizing its cross-border guidance.\557\
---------------------------------------------------------------------------

    \556\ See Citi (Aug. 27, 2012) at 4-9.
    \557\ Id. See also CEWG (Aug. 27, 2012) at 4-5 (recommending 
that the Commission ``undertake a more thorough regulatory analysis 
with respect to guarantees of swaps obligations'').
---------------------------------------------------------------------------

    One commenter requested that the Commission clarify the scope of a 
``guarantee'' that can trigger application of Transaction-Level 
Requirements in these circumstances.\558\ Another objected to the scope 
of the term ``guarantee'' if it were defined to include not only a 
guarantee of payment or performance of swaps obligations, but also 
other formal arrangements to support the ability of a person to perform 
its obligations (such as liquidity puts and keepwell agreements).\559\
---------------------------------------------------------------------------

    \558\ See Hong Kong Banks at 4-5.
    \559\ See CEWG (Aug. 27, 2012) at 4-5.
---------------------------------------------------------------------------

iii. Commission Guidance
    Under this Guidance, with respect to swaps between a non-U.S. swap 
dealer or non-U.S. MSP (including an affiliate of a U.S. person) on the 
one hand, and a non-U.S. counterparty on the other hand where the non-
U.S. counterparty's performance is guaranteed (or otherwise supported 
by) a U.S. person, the Commission would generally expect the parties to 
the swap to comply with all of the Category A Transaction-Level 
Requirements. The Commission believes that this policy is warranted in 
light of the significant regulatory interest in managing and reducing 
the risks to U.S. firms, markets and commerce from such transactions. 
Further, this policy is based on the Commission's view that the failure 
to apply Category A Transaction-Level Requirements to such swaps could 
leave a significant gap in the regulation of risks presented by swap 
activities undertaken by U.S. firms. However, as proposed, the 
Commission's policy contemplates that substituted compliance (to the 
extent applicable) could satisfy the Category A Transaction-Level 
Requirements that otherwise might apply to such swaps, as further 
discussed below.
    In response to commenters that requested clarification of the 
nature of the guarantee of a non-U.S. counterparty by a U.S. person 
that will trigger the application of Transaction-Level Requirements to 
swaps with non-U.S. swap dealers or non-U.S. MSPs, the Commission 
references the approach set forth in the final rule further defining 
the term ``swap,'' among others.\560\ That is, for this purpose, a 
guarantee of a swap is a collateral promise by a guarantor to answer 
for the debt or obligation of a counterparty obligor under a swap.\561\ 
Thus, to the extent that the non-U.S. swap dealer or non-U.S. MSP would 
have recourse to the U.S. guarantor in connection with its swaps 
position, the Commission would generally expect such non-U.S. swap 
dealer or MSP to comply with the Category A Transaction-Level 
Requirements for such a guaranteed swap (although substituted 
compliance may satisfy compliance with such requirements to the extent 
it is applicable, as discussed above). This interpretation also is 
consistent with the interpretation related to the MSP definition that 
the Commission set forth in the Final Entities Rules.\562\
---------------------------------------------------------------------------

    \560\ See Final Swap Definition, 77 FR at 48225-48227. The 
interpretation herein applies only to a swap that is not a security-
based swap or a mixed swap.
    \561\ Id. at 48226 n.186.
    \562\ See Final Entities Rules, 77 FR at 30689 (``[A]n entity's 
swap or security-based swaps positions in general would be 
attributed to a parent, other affiliate or guarantor for purposes of 
major participant analysis to the extent that counterparties to 
those positions would have recourse to that other entity in 
connection with the position. Positions would not be attributed in 
the absence of recourse.'').
---------------------------------------------------------------------------

    Conversely, where a non-U.S. swap dealer or non-U.S. MSP enters 
into a swap with a non-U.S. counterparty that does not have a guarantee 
as so described from a U.S. person and is not an affiliate conduit, the 
Commission's view is that the Transaction-Level Requirements should not 
apply.\563\ Considerations relevant to application of the Transaction-
Level Requirements also relate to persons guaranteeing swaps 
obligations. As noted in the proposal, the Transaction-Level 
Requirements with respect to required clearing and swap processing, 
margin (and segregation), and portfolio reconciliation and compression 
can serve to significantly mitigate risks to the swap dealer's 
counterparties, and by extension, the risk to the U.S. person 
guaranteeing the non-U.S. counterparty's obligations under the swap. 
Other Transaction-Level Requirements--trade confirmation, swap trading 
relationship documentation, and daily trading records--protect the 
counterparties to the swap, and thus also protect a U.S. person that 
guarantees a non-U.S. counterparty's obligations under the swap, by 
ensuring that swaps are properly documented and recorded.
---------------------------------------------------------------------------

    \563\ The Commission agrees with commenters who stated that 
Transaction-Level Requirements should not apply if a non-U.S. swap 
dealer or non-U.S. MSP relies on a written representation by a non-
U.S. counterparty that its obligations under the swap are not 
guaranteed with recourse by a U.S. person. Such an approach is 
consistent with Commission practice in other contexts such as the 
external business conduct rules.
---------------------------------------------------------------------------

    In the Commission's view, because Congress directed that the trade 
execution requirement apply to swaps that are subject to the clearing 
requirement and made available to trade, it is appropriate for the 
trade execution requirement to apply to those cross-border swaps that 
are subject to the clearing mandate and are made available to trade. 
The Commission believes that both requirements--the clearing mandate 
and trade execution requirement--are of fundamental importance to the 
management and reduction of risks posed by swap activities of market 
participants. Requiring swaps to be traded on a regulated exchange or 
execution facility provides market participants with

[[Page 45356]]

greater pre- and post-trade transparency. Real-time public reporting 
improves price discovery by requiring that swap and pricing data be 
made publicly available. Taken together, the trade execution and real-
time public reporting Transaction-Level Requirements provide important 
information to market participants and regulators with resulting 
efficiency in the marketplace. This, in turn, facilitates risk 
management which benefits swap counterparties and also serves to reduce 
the likelihood that a U.S. guarantor will be called upon to satisfy a 
non-U.S. counterparty's swaps obligations.\564\
---------------------------------------------------------------------------

    \564\ Accordingly, the Commission disagrees with commenters who 
objected to the proposed interpretation on the ground that it would 
not advance the goal of mitigating the risk of credit exposure of 
the guarantor U.S. person to the non-U.S. swap dealer or non-U.S. 
MSP. The Transaction-Level Requirements also serve to protect 
against risk to the guarantor U.S. person by reducing the likelihood 
that its obligations under the guarantee will be called upon in the 
first instance.
---------------------------------------------------------------------------

    Further, in the Final Swap Definition, the Commission found that a 
guarantee of a swap is a term of that swap that affects the price or 
pricing attributes of that swap. The Commission therefore concluded 
that when a swap has the benefit of a guarantee, the guarantee is an 
integral part of that swap. The Commission explained that typically 
when a swap counterparty uses a guarantee as credit support for its 
swaps obligations, the guarantor's resources are added to the analysis 
of the swap because ``the market will not trade with that counterparty 
at the same price, on the same terms, or at all without the 
guarantee.'' \565\
---------------------------------------------------------------------------

    \565\ See Final Swap Definition, 77 FR 48225-48226.
---------------------------------------------------------------------------

    For all the foregoing reasons, the Commission disagrees with 
commenters that asserted that it should not, or lacks the legal 
authority to, interpret CEA section 2(i) as to apply to swaps where one 
counterparty is a non-U.S. swap dealer or a non-U.S. MSP and the other 
counterparty is a non-U.S. person whose obligations under the swap are 
guaranteed by a U.S. person. Where a U.S. person provides a guarantee 
of a non-U.S. counterparty's swaps obligations for which there is 
recourse to the U.S. person, where that guarantee is a term of the swap 
and affects the price or pricing attributes of that swap, and where the 
Transaction-Level Requirements serve to protect and mitigate risk to 
that U.S. person guarantor, the Commission believes that such swaps, 
either individually or in the aggregate, have a direct and significant 
connection with activities in, or effect on, U.S. commerce.
    The application of Dodd-Frank Act requirements to swaps of non-U.S. 
persons whose swaps obligations are guaranteed by U.S. persons is also 
consistent with foreign relations law. As noted in the discussion above 
regarding the application of these requirements to swaps of U.S. 
persons with non-U.S. persons, a major purpose of Title VII is to 
control the potential harm to U.S. markets that can arise from risks 
that are magnified or transferred between parties via swaps. Similarly, 
a guarantee--which is an integral part of a swap--can lead to the 
transfer of risk from the guaranteed non-U.S. person to the U.S. 
guarantor. Because Category A Transaction Level Requirements are 
designed to mitigate such risk transfer, the Commission believes there 
is a strong interest in applying the Dodd-Frank Act requirements to 
swaps of non-U.S. persons that are guaranteed by U.S. persons.\566\ 
However, the Commission also understands the countervailing interest of 
home country regulators in such swaps, and therefore believes that 
substituted compliance should generally be available in this context.
---------------------------------------------------------------------------

    \566\ See generally note 532 and related discussion, supra.
---------------------------------------------------------------------------

    The Commission also disagrees with commenters that suggested that 
its interpretation on this score should apply only to certain 
guaranteed swaps (e.g., not to swaps by non-financial entities entered 
into for hedging or risk mitigation purposes), or only to in certain 
circumstances (e.g., where the guaranteed non-U.S. counterparty's swap 
activity is a certain percentage of its net equity or the aggregate 
potential liability of the U.S. guarantor with respect to the non-U.S. 
counterparty's swaps obligations is a certain percentage of the 
guarantor's net equity), or only to a certain extent (e.g., to swaps 
obligations in excess of a capped guarantee). In the Final Swap 
Definition, the Commission acknowledged that a ``full recourse'' 
guarantee would have a greater effect on the price of a swap than a 
``limited'' or ``partial recourse'' guarantee, yet nevertheless 
determined that the presence of any guarantee with recourse, no matter 
how robust, is price forming and an integral part of a guaranteed 
swap.\567\
---------------------------------------------------------------------------

    \567\ Id. at 48226.
---------------------------------------------------------------------------

    The Commission similarly believes that the presence of any 
guarantee with recourse by a U.S. person of the swaps obligations of a 
non-U.S. counterparty to a swap with a non-U.S. swap dealer or non-U.S. 
MSP suffices to justify the application of Transaction-Level 
Requirements that swap. Therefore, as noted above, to the extent that a 
non-U.S. swap dealer or non-U.S. MSP would have recourse to the U.S. 
guarantor in connection with its swaps position, the Commission would 
generally expect such non-U.S. swap dealer or MSP to comply with the 
Category A Transaction-Level Requirements for such a guaranteed swap 
(although substituted compliance may satisfy compliance with such 
requirements to the extent it is applicable). Although the Commission 
believes all relevant facts and circumstances should be analyzed, as a 
general matter the Commission is of the view that the purpose for which 
the non-U.S. counterparty is entering into the swap, or the net equity 
of the non-U.S. counterparty or the guarantor, or the extent of the 
guarantee, would generally not warrant a different conclusion.
    Finally, the Commission disagrees with commenters that urged it to 
limit its interpretation in this regard to cases of evasion, or to 
exclude from the scope of its interpretation those swaps in which the 
non-U.S. counterparty is subject to appropriate capital requirements or 
the guarantor is a U.S. bank holding company. The events surrounding 
the collapse of AIGFP highlight how guarantees can cause major risks to 
flow to the guarantor. ``AIGFP's obligations were guaranteed by its 
highly rated parent company . . . an arrangement that facilitated easy 
money via much lower interest rates from the public markets, but 
ultimately made it difficult to isolate AIGFP from its parent, with 
disastrous consequences.'' \568\
---------------------------------------------------------------------------

    \568\ AIG Report, supra note 5, at 20.
---------------------------------------------------------------------------

    The Commission's view is that the protections and mitigation of 
risk exposures afforded by the Category A Transaction-Level 
Requirements would be rendered far less effective if in the case of 
swaps where one counterparty is a non-U.S. swap dealer or a non-U.S. 
MSP and the other counterparty is a non-U.S. person guaranteed by a 
U.S. person such requirements only apply when such swaps are part of a 
scheme to evade the Dodd-Frank Act. Further, while capital requirements 
are an important element of the Title VII regime to reduce systemic 
risk,\569\ the

[[Page 45357]]

comprehensive regulatory structure established by the Dodd-Frank Act 
goes beyond such requirements. The CEA, as amended by the Dodd-Frank 
Act, also requires the imposition of the Transaction-Level Requirements 
\570\ except to the extent that section 2(i) limits their application 
to cross-border transactions or activities. Therefore, the Commission 
believes that, rather than excluding the swaps at issue from the scope 
of the Title VII regulatory regime, with the corresponding increase in 
risk to U.S. persons and to the U.S. financial system, in most cases 
compliance with the Category A Transaction-Level Requirements is 
appropriate where non-U.S. swap dealers and non-U.S. MSPs that enter 
into swaps with non-U.S. counterparties guaranteed by a U.S. person. 
Further, the Commission does not believe that a different 
interpretation should be taken solely because applicable capital 
requirements are satisfied.\571\
---------------------------------------------------------------------------

    \569\ CEA section 4s(e)(1) provides that each registered swap 
dealer and MSP for which there is a prudential regulator shall meet 
such minimum capital requirements as the applicable prudential 
regulator shall prescribe, but that each registered swap dealer and 
MSP for which there is not a prudential regulator shall meet such 
minimum capital requirements as the Commission shall prescribe.
    \570\ See Appendix B for information regarding the Transaction-
Level Requirements and the provisions of the CEA which they 
implement.
    \571\ In the Final Entities Rules, the Commission stated that it 
does ``not believe that it is necessary to attribute a person's swap 
or security-based swaps positions to a parent or other guarantor if 
the person is already subject to capital regulation by the CFTC or 
SEC (i.e., swap dealers, security-based swap dealers, MSPs, major 
security-based swap participants, FCMs and broker-dealers) or if the 
person is a U.S. entity regulated as a bank in the United States. 
Positions of those regulated entities already will be subject to 
capital and other requirements, making it unnecessary to separately 
address, via major participant regulations, the risks associated 
with guarantees of those positions.'' See Final Entities Rules, 77 
FR at 30689. The Commission continued, ``As a result of this 
interpretation, holding companies will not be deemed to be major 
swap participants as a result of guarantees to certain U.S. entities 
that are already subject to capital regulation.'' Id. at 30689 n. 
1134. Subsequently, in the Final Swap Definition, the Commission 
stated that ``[a]s a result of interpreting the term `swap' (that is 
not a security-based swap or mixed swap) to include a guarantee of 
such swap, to the extent that a counterparty to a swaps position 
would have recourse to the guarantor in connection with the 
position, and based on the reasoning set forth [in the Final 
Entities Rules] in connection with major swap participants, the CFTC 
will not deem holding companies to be swap dealers as a result of 
guarantees to certain U.S. entities that are already subject to 
capital regulation.'' See Final Swap Definition, 77 FR at 48266 
n.188. The Commission's conclusion that capital compliance and 
prudential regulation, in certain circumstances, can obviate the 
need for registration as a swap dealer or MSP does not bear upon, 
and is not inconsistent with, the Commission's interpretation herein 
that notwithstanding capital compliance and prudential regulation, 
Transaction-Level Requirements may be applied where a non-U.S. swap 
dealer or non-U.S. MSP enters into a swap with a non-U.S. 
counterparty whose obligations under that swap are guaranteed, with 
recourse, by a U.S. person.
---------------------------------------------------------------------------

    In addition, the Commission believes that this Guidance, which 
contemplates a system of substituted compliance in accordance with 
principles of international harmonization, may allow non-U.S. swap 
dealers and non-U.S. MSPs to comply, in appropriate circumstances, with 
their home-country requirements when transacting with non-U.S. 
counterparties whose swaps obligations are guaranteed with recourse by 
U.S. persons. The Commission believes that the substituted compliance 
regime contemplated by the Guidance will facilitate equivalent 
regulatory treatment of equivalent swaps without undermining the swaps 
reforms enacted by Congress in Title VII.
d. Swaps With a Non-U.S. Person That is an Affiliate Conduit
i. Proposed Guidance
    The Commission proposed to interpret CEA section 2(i) such that the 
Category A Transaction-Level Requirements would apply to a swap if at 
least one of the parties to the swap is an ``affiliate conduit.'' Under 
the Proposed Guidance, an affiliate conduit exists when: (1) A non-U.S. 
person that is majority-owned, directly or indirectly, by a U.S. 
person; (2) the non-U.S. person regularly enters into swaps with one or 
more of its U.S. affiliates of its U.S. person owner; and (3) the 
financial results of such non-U.S. person are included in the 
consolidated financial statements of its U.S. person owner.\572\ The 
Commission explained that it believed the proposed application of 
Transaction-Level Requirements was necessary because, ``given the 
nature of the relationship between the conduit and the U.S. person, the 
U.S. person is directly exposed to risks from and incurred by'' the 
affiliate conduit.\573\ The Commission further indicated that it was 
concerned that a U.S. swap dealer or U.S. MSP would utilize affiliate 
conduits to conduct swaps outside the Dodd-Frank regulatory regime.
---------------------------------------------------------------------------

    \572\ See Proposed Guidance, 77 FR at 41229.
    \573\ Id.
---------------------------------------------------------------------------

ii. Comments
    The commenters who addressed the Commission's proposed approach to 
affiliate conduits expressed concerns about what they felt was an 
overly broad scope of the term ``affiliate conduit.'' Several of these 
commenters stated that the non-U.S. affiliate conduit concept should be 
omitted from the Guidance.\574\ SIFMA stated that the term ``regular'' 
is too vague in that ``it does not account for the purpose of the 
inter-affiliate swap, the relative amount of the conduit's risk 
transferred, the nature of the transferred risk, or whether some or all 
of the risk is transferred.''\575\ SIFMA also commented that activities 
of a non-U.S. affiliate conduit do not satisfy the requisite nexus to 
the United States under section 2(i) to justify different treatment 
from other non-U.S. counterparties. Further, SIFMA stated that where 
substituted compliance is unavailable, a non-U.S. swap dealer 
transacting with an affiliate conduit is subject to applicable 
Transaction-Level Requirements, which could cause non-U.S. swap dealers 
to cease doing business with non-U.S. affiliate conduits.\576\ As an 
alternative, SIFMA recommended that the proposed affiliate conduit 
provision that the conduit ``regularly enter into swaps'' should be 
replaced with a provision that the conduit ``regularly enter[ ] into 
swaps with one or more other U.S. affiliates of the U.S. person for the 
purpose of transferring to that U.S. person all risk of swap 
activity.''
---------------------------------------------------------------------------

    \574\ SIFMA (Aug. 27, 2012) at A22-23; IIB at (Aug. 27, 2012) at 
20-21; Hong Kong Banks (Aug. 27, 2012) at 13.
    \575\ SIFMA (Aug. 27, 2012) at A23. See also IIAC (stating that 
the Commission should clarify the meaning of ``regularly enters into 
swaps with . . . affiliates'' and circumstances under which the 
Commission would interpret the financials of a non-U.S. counterparty 
to be combined with the financial statements of the U.S. person for 
purposes of applying Transaction-Level Requirements to transactions 
by U.S. persons that might be using conduits to avoid such 
requirements) (Aug. 27, 2012) at 8.
    \576\ SIFMA (Aug. 27, 2012) at A22.
---------------------------------------------------------------------------

    Other commenters raised similar objections concerning the scope of 
the affiliate conduit provision. Goldman stated that the proposed 
description of an affiliate conduit was so broad that ``an entity could 
be rendered a conduit by executing even a single trade despite the fact 
that the entity otherwise would be eligible for substituted compliance, 
or would not fall within Title VII's jurisdiction at all.'' \577\ Such 
a broad definition, in Goldman's view, will result in competitive 
disparities for foreign affiliates of U.S.-based swap dealers and may 
even cover non-financial entities attempting to hedge risk.\578\ SIFMA 
added that the concept

[[Page 45358]]

of indirect majority ownership is imprecise and its application to non-
U.S. affiliate conduits is unclear.\579\ Hong Kong Banks believed that 
the conduit proposal is unnecessary since its activities would be 
captured in the registration process.\580\ Peabody stated that the 
application of Transaction-Level Requirements to affiliate conduits 
seemingly contradicts the Proposed Guidance's treatment of foreign 
affiliates as non-U.S. persons.\581\ If the affiliate conduit concept 
remains in the Guidance, SIFMA requested that the Commission clarify 
whether or not swap dealers may rely on a counterparty's 
representations as to its non-U.S.-affiliate's conduit status.\582\
---------------------------------------------------------------------------

    \577\ Goldman (Aug. 27, 2012) at 6. See also Japanese Bankers 
Association (Aug. 27, 2012) at 11 (stating that it is difficult to 
determine under the Proposed Guidance when a counterparty is a 
conduit for a U.S. person, and that the conduit provisions should 
not be implemented).
    \578\ Goldman (Aug. 27, 2012) at 6. See also Peabody (Aug. 27. 
2012) at 3 (stating that applying the Dodd-Frank requirements to 
swaps entered into or booked by affiliates of commercial end-users 
outside the United States to hedge or mitigate commercial risks of 
activities outside the United States will create an overlapping (and 
potentially inconsistent) tangle of international laws that will 
increase costs and potential liabilities associated with such swaps, 
and materially undermine their utility and risk mitigation benefits; 
stating further that foreign entities wishing to avoid becoming 
subject to Dodd-Frank requirements will decline to enter into swaps 
with such affiliates, thereby decreasing market liquidity, 
increasing market risk competition, imposing higher commercial 
costs, and resulting in higher prices for customers and downstream 
consumers, and would put U.S. business at a competitive disadvantage 
in global markets).
    \579\ SIFMA (Aug. 27, 2012) at A24.
    \580\ Hong Kong Banks (Aug. 27, 2012) at 13.
    \581\ Peabody (Aug. 28, 2012) at 2-3.
    \582\ SIFMA (Aug. 27, 2012) at A24. SIFMA stated that the 
determination of whether a counterparty to a swap is a non-U.S. 
affiliate conduit should be made at the inception of the swap based 
on the most recent updated representation from the counterparty, 
which should be renewed by the counterparty once per calendar year. 
Id. at A25.
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    IIB stated that the Commission should withdraw its proposal on 
affiliate conduits and instead, where there is clear circumvention, 
rely on its existing anti-evasion authority.\583\ It added that the 
Commission's proposal for the ``conduit'' treatment of a foreign entity 
that ``regularly'' engages in back-to-back swaps with a U.S. affiliate 
is unjustifiably broad. IIB also stated that the proposed standard is 
inconsistent with statutory standards for the extraterritorial 
application of Title VII, and that there is no basis to conclude that 
inter-affiliate swaps create direct and significant risk to the United 
States simply because they occur ``regularly.'' \584\
---------------------------------------------------------------------------

    \583\ IIB (Aug. 27, 2012) at 20-21.
    \584\ Id. at 19.
---------------------------------------------------------------------------

iii. Commission Guidance
    In the Proposed Guidance, the Commission explained that it believed 
the proposed application of Transaction-Level Requirements was 
necessary because, ``given the nature of the relationship between the 
conduit and the U.S. person, the U.S. person is directly exposed to 
risks from and incurred by'' the affiliate conduit.\585\ The Commission 
further indicated that it was concerned that a U.S. swap dealer or U.S. 
MSP would utilize affiliate conduits to conduct swaps outside the Dodd-
Frank regulatory regime.
---------------------------------------------------------------------------

    \585\ See Proposed Guidance, 77 FR at 41229.
---------------------------------------------------------------------------

    For purposes of this policy statement, the Commission is clarifying 
that an affiliate conduit encompasses those entities that function as a 
conduit or vehicle for U.S. persons conducting swaps transactions with 
third-party counterparties. In response to comments received, the 
Commission is identifying some of the factors that the Commission 
believes are relevant to determining whether a non-U.S. person is an 
``affiliate conduit'' of a U.S. person. As explained in greater detail 
below, modifications to the Proposed Guidance with regard to the term 
``affiliate conduit'' are intended to respond to commenters' concerns 
about a lack of clarity on the scope of the term affiliate conduit and 
to better identify those non-U.S. affiliates whose swap activities, 
either individually or in the aggregate, have a direct and significant 
connection with activities in, or effect on, U.S. commerce as a result 
of their relationship with their U.S. affiliates. Specifically, the 
Commission is modifying the factors that might be relevant to the 
consideration of whether a non-U.S. affiliate of a U.S. person is an 
affiliate conduit by: (1) clarifying the meaning of ``regularly enters 
into swaps,'' and in particular, the activities of a non-U.S. 
counterparty that renders it an affiliate conduit; and (2) adding the 
concept of ``control.''
    As the Commission understands, it is common for large global 
companies to centralize their hedging or risk-management activities in 
one or more affiliates (informally referred to as a ``treasury 
conduit'' or ``conduit''). Under this structure, the conduit may enter 
into swaps with its affiliates and then enter into offsetting swaps 
with third-parties. In other cases, the conduit may enter into swaps 
with third-parties as agent for its affiliates. In either case, the 
conduit functions as a vehicle by which various affiliates engage in 
swaps with third-parties (i.e., the market). This paradigm promotes 
operational efficiency and prudent risk management by enabling a 
company to manage its risks on a consolidated basis at a group 
level.\586\ Accordingly, based on comments, rather than considering 
whether a non-U.S. person ``regularly enters into swaps'' with one or 
more of its U.S. affiliates of its U.S. person owner, the Commission 
will generally consider whether the non-U.S. person, in the regular 
course of business, engages in swaps with non-U.S. third-parties for 
the purpose of hedging or mitigating risks faced by, or to take 
positions on behalf of, its U.S. affiliates, and enters into offsetting 
swaps or other arrangements with its U.S. affiliates in order to 
transfer the risks and benefits of such swaps with third-parties to its 
U.S. affiliates.
---------------------------------------------------------------------------

    \586\ One market participant described the functions of such a 
conduit and its relationship with respect to other affiliates within 
the corporate group in the following manner:
    Many business enterprises, including [Prudential Financial Inc., 
or ``PFI''], elect to operate in a manner that assigns specific 
functions to related and commonly-controlled affiliates. With regard 
to swap transactions, it has long been our practice, as an 
enterprise-type company with separate legal entities that are 
commonly owned by PFI to use one affiliate, Prudential Global 
Funding LLC (``PGF''), to directly face the market as a ``conduit'' 
to hedge the net commercial and financial risk of the various 
operating affiliates within PFI. Under this practice, only PGF 
(i.e., the conduit) is required to trade with external market 
participants, while the internal affiliates within PFI trade 
directly with the PGF. The use of PGF as the single conduit for the 
various operating affiliates within PFI diminishes the demands on 
PFI's financial liquidity, operational assets and management 
resources, as affiliates within PFI avoid having to establish 
independent relationships and unique infrastructure to face the 
market. Moreover, use of PGF as a conduit within PFI permits the 
netting of our affiliates' trades (e.g., one affiliate is hedging 
floating rates while another is hedging fixed rates). This 
effectively reduces the overall risk of PFI and our affiliates, and 
allows us to manage fewer outstanding positions with external market 
participants.
    The Prudential Insurance Company of America (Feb. 17, 2011) at 
2.
---------------------------------------------------------------------------

    The Commission recognizes the significant benefits associated with 
a corporate group's use of a single entity to conduct the group's 
market-facing swap business. The Commission also believes, though, that 
in this situation the risks resulting from swaps of the entity that 
faces the market as a conduit on behalf of its affiliates in fact 
reside with those affiliates; that is, while the swaps are entered into 
by the conduit, through back-to-back swaps or other arrangements the 
conduit passes the risks and benefits of those swaps to its 
affiliates.\587\ Where the conduit is located outside the United 
States, but is owned and controlled by a U.S. person, the Commission 
believes that to recognize the economic reality of the situation, the 
conduit's swaps should be attributed to the U.S. affiliate(s). The fact 
that the conduit is located outside the United States does not alter 
the economic reality that its swaps are undertaken for the benefit of, 
and at the economic risk of, the U.S. affiliate(s), and more broadly, 
for the corporate group that is owned and controlled by a U.S. person. 
Under these circumstances, the Commission believes that the swap 
activities of the non-U.S. conduit may meet the ``direct and

[[Page 45359]]

significant'' jurisdictional nexus within the meaning of CEA section 
2(i).\588\
---------------------------------------------------------------------------

    \587\ See The Prudential Insurance Company of America (Feb. 17, 
2011); Kraft Foods (``Kraft'') (Feb. 11, 2011).
    \588\ In this respect, it is irrelevant whether the risk is 
wholly or partly transferred back to the U.S. affiliate(s); the 
jurisdictional nexus is met by reason of the trading relationship 
between the conduit and the affiliated U.S. persons.
---------------------------------------------------------------------------

    Further, in order to facilitate a consistent application of the 
term affiliate conduit and to mitigate any undue burden or complexity 
for market participants in assessing affiliate conduit status, the 
Commission clarifies that its policy contemplates that a market 
participant may reasonably rely on counterparty representations as to 
its non-U.S. affiliate conduit status.\589\
---------------------------------------------------------------------------

    \589\ This is consistent with the Commission's approach to the 
determination of whether a counterparty is a ``U.S. person.'' See 
section IV.A, supra.
---------------------------------------------------------------------------

    Finally, the Commission notes in response to commenters that an 
affiliate conduit would not necessarily be guaranteed by its parent. As 
one market participant explained, ``centralized hedging centers are 
generally evaluated as wholly-owned subsidiaries of the corporate group 
that do not require additional credit support, such as a parent 
guaranty or collateral.'' \590\ Therefore, the Commission believes that 
it is reasonable and appropriate to interpret CEA section 2(i) in a 
manner that recognizes an affiliate conduit as a separate category of 
counterparty whose swaps with non-U.S. persons may be subject to 
certain Transaction-Level Requirements. Specifically, where one of the 
parties to the swap is a conduit affiliate, the Commission would 
generally expect the parties to the swap only to comply with (to the 
extent that the Inter-Affiliate Exemption is elected), the conditions 
of the Inter-Affiliate Exemption, including the treatment of outward-
facing swaps condition in Commission regulation 50.52(b)(4)(i). In 
addition, the part 43 real-time reporting requirements must be 
satisfied.
---------------------------------------------------------------------------

    \590\ See Kraft (Feb. 11, 2011) at 3.
---------------------------------------------------------------------------

    In summary, for the purposes of the Commission's interpretation of 
CEA section 2(i), the Commission believes that certain factors are 
relevant to considering whether a non-U.S. person is an ``affiliate 
conduit.'' Such factors include whether:

    (i) the non-U.S. person is a majority-owned affiliate \591\ of a 
U.S. person;
---------------------------------------------------------------------------

    \591\ Commission regulation 1.3(ggg)(6)(i) defines ``majority-
owned affiliates'' as follows:
    [C]ounterparties to a swap are majority-owned affiliates if one 
counterparty directly or indirectly owns a majority interest in the 
other, or if a third party directly or indirectly owns a majority 
interest in both counterparties to the swap, where `majority 
interest' is the right to vote or direct the vote of a majority of a 
class of voting securities of an entity, the power to sell or direct 
the sale of a majority of a class of voting securities of an entity, 
or the right to receive upon dissolution or the contribution of a 
majority of the capital of a partnership.
---------------------------------------------------------------------------

    (ii) the non-U.S. person is controlling, controlled by or under 
common control \592\ with the U.S. person;
---------------------------------------------------------------------------

    \592\ Commission regulation 1.3(ggg)(4)(i) refers to an ``entity 
controlling, controlled by or under common control with the 
person.'' Final Entities Rules elaborated on this provision, 
stating:
    For these purposes, we interpret control to mean the possession, 
direct or indirect, of the power to direct or cause the direction of 
the management and policies of a person, whether through the 
ownership of voting securities, by contract or otherwise. This is 
consistent with the definition of ``control'' and ``affiliate'' in 
connection with Exchange Act rules regarding registration 
statements. See Exchange Act rule 12b-2. . . .
    77 FR 30631 n. 437, and
    [I]f a parent entity controls two subsidiaries which both engage 
in activities that would cause the subsidiaries to be covered by the 
dealer definitions, then each subsidiary must aggregate the swaps or 
security-based swaps that result from both subsidiaries' dealing 
activities in determining if either subsidiary qualifies for the de 
minimis exception.
    Id. at n. 438.
---------------------------------------------------------------------------

    (iii) the financial results of the non-U.S. person are included 
in the consolidated financial statements of the U.S. person; and
    (iv) the non-U.S. person, in the regular course of business, 
engages in swaps with non-U.S. third-party(ies) for the purpose of 
hedging or mitigating risks faced by, or to take positions on behalf 
of, its U.S. affiliate(s), and enters into offsetting swaps or other 
arrangements with its U.S. affiliate(s) in order to transfer the 
risks and benefits of such swaps with third-party(ies) to its U.S. 
affiliates.

Other facts and circumstances also may be relevant. The Commission does 
not intend that the term ``conduit affiliate'' would include affiliates 
of swap dealers.
5. Application of the ``Category B'' Transaction-Level Requirements to 
Swap Dealers and MSPs
    This section discusses the Commission's policy on the application 
of the Category B Transaction-Level Requirements to swaps in which at 
least one of the parties to the swap is a registered swap dealer or 
MSP. As noted earlier, the Category B Transaction Level Requirements 
pertain to external business conduct standards which the Commission 
adopted pursuant to CEA section 4s(b) as a Category B Transaction-Level 
Requirement.\593\
---------------------------------------------------------------------------

    \593\ The categorization of Transaction-Level Requirements into 
Categories A and B is discussed in section E, supra. See Appendix B 
for a descriptive list of the Category A and Category B requirements 
and Appendix D for a table summarizing the application of the 
Category A Transaction-Level Requirements to Swap Dealers and MSPs. 
The Appendices to this Guidance should be read in conjunction with 
this section and the rest of the Guidance.
---------------------------------------------------------------------------

    Consistent with the Proposed Guidance, the Commission will 
generally interpret CEA section 2(i) so that the Category B 
Transaction-Level Requirements (i.e., the external business conduct 
standards) either do or do not apply to the swap, based on the 
counterparties to the swap, as explained below. Under this 
interpretation, substituted compliance is generally not expected to be 
applicable with regard to the Category B Transaction-Level Requirements 
under this Guidance.\594\
---------------------------------------------------------------------------

    \594\ See Appendix E to this Guidance for a summary of these 
requirements and the discussion in section D, supra.
---------------------------------------------------------------------------

    In considering whether Category B Transaction-Level Requirements 
are applicable, the Commission would generally consider whether the 
swap is with a:

    (i) U.S. swap dealer or U.S. MSP (including affiliates of non-
U.S. persons);
    (ii) foreign branch of a U.S. bank that is a swap dealer or MSP; 
or
    (iii) non-U.S. swap dealer or non-U.S. MSP (including an 
affiliate of a U.S. person).

    Specifically, as explained more below, where a swap is with a U.S. 
swap dealer or U.S. MSP, the parties to the swap generally should be 
subject to the Category B Transaction-Level Requirements in full, 
regardless of whether the other counterparty to the swap is a U.S. 
person or a non-U.S. person. However, in the case of a foreign branch 
of a U.S. bank that is a swap dealer or MSP, or a non-U.S. swap dealer 
or non-U.S. MSP, the parties to the swap should generally only be 
subject to the Category B Transaction-Level Requirements when the 
counterparty to the swap is a U.S. person (other than a foreign branch 
of a U.S. bank that is a swap dealer or MSP). Conversely, under the 
Commission's interpretation of 2(i), where a swap is between a non-U.S. 
swap dealer or non-U.S. MSP (including an affiliate of a U.S. person) 
and a non-U.S. counterparty (regardless of whether the non-U.S. 
counterparty is a guaranteed or conduit affiliate), the parties to the 
swap would not be expected to comply with the Category B Transaction-
Level Requirements. The reasons for the Commission's policies are 
discussed below.
    The application of the Category B Transaction-Level Requirements is 
summarized in Appendix E to this Guidance, which should be read in 
conjunction with the rest of this Guidance.
a. Swaps With U.S. Swap Dealers and U.S. MSPs
    As explained above, where a swap is with a U.S. swap dealer or U.S. 
MSP (including an affiliate of a non-U.S. person), the Commission's 
policy is that the parties to the swap should be subject

[[Page 45360]]

to the Category B Transaction-Level Requirements in full, regardless of 
whether the counterparty is a U.S. person or a non-U.S. person, without 
substituted compliance available.
b. Swaps With Foreign Branches of a U.S. Bank That Is a Swap Dealer or 
MSP
    In the case of a swap with a foreign branch of a U.S. bank that is 
a swap dealer or MSP, the Commission's policy is that the Category B 
Transaction-Level Requirements should apply only if the counterparty to 
the swap is a U.S. person (other than a foreign branch of a U.S. bank 
that is a swap dealer or MSP).\595\
---------------------------------------------------------------------------

    \595\ For the reasons discussed in note 531, supra, where the 
counterparty to the swap is an international financial institution, 
the Commission also generally would not expect the parties to the 
swap to comply with the Category B Transaction-Level Requirements, 
even if the principal place of business of the international 
financial institution were located in the United States.
---------------------------------------------------------------------------

    The Commission believes that where a swap is between a foreign 
branch of a U.S. bank that is a swap dealer or MSP \596\ and a U.S. 
person (other than a foreign branch of a U.S. bank that is a swap 
dealer or MSP), the swap has a direct and significant connection with 
activities in, or effect on, U.S. commerce. Because of the significant 
risks to U.S. persons and the financial system presented by such swap 
activities, under the Commission's interpretation of CEA section 2(i), 
generally the parties to the swap should comply with the Category B 
Transaction Level Requirements. Whenever a swap involves at least one 
counterparty that is a U.S. person, the Commission believes it has a 
strong supervisory interest in regulating and enforcing Transaction-
Level Requirements, including external business conduct standards. In 
this case, the Commission believes the transaction should be viewed as 
being between two U.S. persons. For these reasons, the Commission's 
policy under section 2(i) is that substituted compliance would not be 
available.\597\
---------------------------------------------------------------------------

    \596\ See section C, supra, regarding the definition of a 
foreign branch and the determination of when a swap transaction is 
with a foreign branch for purposes of this Guidance.
    \597\ In this case, although the foreign branch would not 
register separately as a swap dealer, the Commission interprets 2(i) 
in a manner that would permit the U.S. person to task its foreign 
branch to fulfill its regulatory obligations with respect to the 
Category B Transaction-Level Requirements. The Commission would 
consider compliance by the foreign branch or agency to constitute 
compliance with these Transaction-Level Requirements. However, under 
the Commission's interpretation of 2(i), the U.S. person (principal 
entity) would remain responsible for compliance with the Category B 
Transaction-Level Requirements.
---------------------------------------------------------------------------

    However, where the swap is between a foreign branch of a U.S. bank 
that is a swap dealer or MSP, on the one hand, and a non-U.S. person on 
the other (whether or not such non-U.S. person is a guaranteed or 
conduit affiliate), the Commission believes that the interests of the 
foreign jurisdiction in applying its own transaction-level requirements 
to the swap are sufficiently strong that the Category B Transaction-
Level Requirements generally should not apply under section 2(i). In 
this case, even though the Commission considers a foreign branch of a 
U.S. bank that is a swap dealer or MSP to be a U.S. person, the 
Commission believes that because the counterparty is a non-U.S. person 
and the swap takes place outside the United States, foreign regulators 
may have a relatively stronger supervisory interest in regulating and 
enforcing sales practices related to the swap. Therefore, in light of 
international comity principles, the Commission believes that 
application of the Category B Transaction-Level Requirements may not be 
warranted in this case. Therefore, under the Commission's 
interpretation of section 2(i), the parties to the swap generally would 
not be expected to comply with the Category B Transaction-Level 
Requirements.
    The Commission believes that, in the context of the Category B 
Transaction-Level Requirements, the same reasoning also should apply to 
a swap between two foreign branches of U.S. banks that are each swap 
dealers or MSPs. Just as the Commission would have a strong supervisory 
interest in regulating and enforcing sales practices associated with 
activities taking place within the United States, the foreign 
regulators would have a similar claim to overseeing sales practices 
occurring within their jurisdiction.
    Accordingly, the Commission interprets CEA section 2(i) so that 
where a swap is between the foreign branch of a U.S. bank that is a 
swap dealer or MSP, on the one hand, and either a non-U.S. person or a 
foreign branch of a U.S. bank that is a swap dealer or MSP, on the 
other, the parties to the swap generally would not be expected to 
comply with the Category B Transaction-Level Requirements.
c. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs
    Under the Commission's interpretation of 2(i), where a swap is 
between a non-U.S. swap dealer or non-U.S. MSP (including an affiliate 
of a U.S. person), on the one hand, and a U.S. person, on the other, 
the parties to the swap generally would be expected to comply with the 
Category B Transaction-Level Requirements.\598\ In the Commission's 
view, in this case, the swap should be subject to the provisions of 
Title VII of the Dodd-Frank Act and Commission implementing 
regulations, including the Category B Transaction-Level Requirements. 
Because of the significant risks to U.S. persons and the financial 
system presented by swap activities outside the United States where one 
of the counterparties to the swap is a U.S. person (whether inside or 
outside the United States), the Commission believes that a U.S. 
person's swap activities with a non-U.S. counterparty has the requisite 
direct and significant connection with activities in, or effect on, 
U.S. commerce under CEA section 2(i) to apply the Category B 
Transaction-Level Requirements to the transaction.
---------------------------------------------------------------------------

    \598\ As noted above, for the reasons discussed in note 531, 
where the counterparty to the swap is an international financial 
institution, the Commission also generally would not expect the 
parties to the swap to comply with the Category B Transaction-Level 
Requirements, even if the principal place of business of the 
international financial institution were located in the United 
States.
---------------------------------------------------------------------------

    The Commission observes that, where a swap between a non-U.S. swap 
dealer and a U.S. person is executed anonymously on a registered DCM or 
SEF and cleared by a registered DCO,\599\ the Category B Transaction-
Level Requirements would not be applicable.\600\
---------------------------------------------------------------------------

    \599\ As discussed in greater detail above, the Commission notes 
that there are no exempt DCOs at this time. If and when the 
Commission determines to exercise its authority to exempt DCOs from 
applicable registration requirements, the Commission would likely 
address, among other things, the conditions and limitations 
applicable to clearing swaps for customers subject to section 4d(f) 
of the CEA.
    \600\ See 17 CFR 23.402(b)-(c) (requiring swap dealers and MSPs 
to obtain and retain certain information only about each 
counterparty ``whose identity is known to the swap dealer or MSP 
prior to the execution of the transaction''); 23.430(e) (not 
requiring swap dealers and MSPs to verify counterparty eligibility 
when a transaction is entered on a DCM or SEF and the swap dealer or 
MSP does not know the identity of the counterparty prior to 
execution); 23.431(c) (not requiring disclosure of material 
information about a swap if initiated on a DCM or SEF and the swap 
dealer or MSP does not know the identity of the counterparty prior 
to execution); 23.450(h) (not requiring swap dealers and MSPs to 
have a reasonable basis to believe that a Special Entity has a 
qualified, independent representative if the transaction with the 
Special Entity is initiated on a DCM or SEF and the swap dealer or 
MSP does not know the identity of the Special Entity prior to 
execution); 23.451(b)(2)(iii) (disapplying the prohibition on 
entering into swaps with a governmental Special Entity within two 
years after any contribution to an official of such governmental 
Special Entity if the swap is initiated on a DCM or SEF and the swap 
dealer or MSP does not know the identity of the Special Entity prior 
to execution).
---------------------------------------------------------------------------

    Because a registered FBOT is analogous to a DCM, the Commission is 
of the view that the requirements

[[Page 45361]]

likewise would not be applicable where such a swap is executed 
anonymously on a registered FBOT and cleared.
    Conversely, under the Commission's interpretation of 2(i), where a 
swap is between a non-U.S. swap dealer or non-U.S. MSP (including an 
affiliate of a U.S. person) and a non-U.S. counterparty (regardless of 
whether the non-U.S. counterparty is a guaranteed or conduit 
affiliate), the parties to the swap would not be expected to comply 
with the Category B Transaction-Level Requirements. The Commission 
believes that regulators may have a relatively stronger supervisory 
interest in regulating the Category B Transaction-Level Requirements 
related to swaps between non-U.S. persons taking place outside the 
United States than the Commission, and that therefore applying the 
Category B Transaction-Level Requirements to these transactions may not 
be warranted. The Commission notes that just as the Commission would 
have a strong supervisory interest in regulating and enforcing the 
Category B Transaction-Level Requirements associated with activities 
taking place in the United States, foreign regulators would have a 
similar claim to overseeing sales practices for swaps occurring within 
their jurisdiction.
    For the reasons stated in section b above, under the Commission's 
interpretation of section 2(i), where a swap is between a non-U.S. swap 
dealer or non-U.S. MSP (including an affiliate of a U.S. person), on 
the one hand, and the foreign branch of a U.S. bank that is a swap 
dealer or MSP, on the other, the parties to the swap generally would 
not be expected to comply with the Category B Transaction-Level 
Requirements.
    As noted previously, under the 2(i) interpretations, substituted 
compliance is generally not expected to be applicable to the Category B 
Transaction-Level Requirements under this Guidance.\601\
---------------------------------------------------------------------------

    \601\ See Appendix E to this Guidance for a summary of these 
requirements and the discussion in section E, supra.
---------------------------------------------------------------------------

H. Application of the CEA's Swap Provisions and Commission Regulations 
to Market Participants That Are Not Registered as a Swap Dealer or MSP

    This section sets forth the Commission's general policy on 
application of the CEA's swaps provisions and Commission regulations to 
swap counterparties that are not registered as swap dealers or MSPs 
(``non-registrants''), including the circumstances under which the 
counterparties would be eligible for substituted compliance.
    Several of the CEA's swaps provisions and Commission regulations--
namely, those relating to required clearing, trade execution, real-time 
public reporting, Large Trader Reporting, SDR Reporting, and swap data 
recordkeeping (collectively, the ``Non-Registrant Requirements'') 
\602\--also apply to persons or counterparties other than a swap dealer 
or MSP. In this section, the Commission sets forth the Commission's 
policy on application of these Non-Registrant Requirements to cross-
border swaps in which neither counterparty is a swap dealer or MSP 
(i.e., all other market participants including ``financial entities,'' 
as defined in CEA section 2(h)(7)(C)).\603\
---------------------------------------------------------------------------

    \602\ See section IV.D, supra. Part 45 of the Commission's 
regulations requires swap counterparties that are not swap dealers 
or MSPs to keep ``full, complete and systematic records, together 
with all pertinent data and memoranda'' with respect to each swap to 
which they are a counterparty. See 17 C.F. R. 45.2. Such records 
must include those demonstrating that they are entitled, with 
respect to any swap, to make use of the clearing exception in CEA 
section 2(h)(7). Swap counterparties that are not swap dealers or 
MSPs must also comply with the Commission's regulations in part 46, 
which address the reporting of data relating to pre-enactment swaps 
and data relating to transition swaps.
    \603\ Nothing in this Guidance should be construed to address 
the ability of a foreign board of trade to offer swaps to U.S. 
persons pursuant to part 48 of the Commission's regulations.
---------------------------------------------------------------------------

    Section 1 discusses the Commission's policy under CEA section 2(i) 
with regard to the application of the Non-Registrant Requirements to 
cross-border swaps between two non-registrants where one (or both) of 
the counterparties to the swap is a U.S. person. Substituted compliance 
is not applicable where one (or both) swap counterparties is a U.S. 
person.
    Section 2 discusses the Commission's policy under CEA section 2(i) 
with regard to the application of the Non-Registrant Requirements to 
cross-border swaps between two non-registrants where both 
counterparties to the swap are non-U.S. persons. The eligibility of 
various counterparties to such swaps for substituted compliance is also 
addressed in section 2.
    The application of the specified Dodd-Frank provisions and 
Commission regulations specified below to swaps between counterparties 
that are neither swap dealers nor MSPs is summarized in Appendix F to 
this Guidance, which should be read in conjunction with the rest of 
this Guidance.
1. Swaps Between Non-Registrants Where One or More of the Non-
Registrants is a U.S. Person
    As noted in the Proposed Guidance, to manage risks in a global 
economy, U.S. persons may need to, and frequently do, transact swaps 
with both U.S. and non-U.S. counterparties. The swap activities of U.S. 
persons, particularly those with global operations, frequently occur 
outside of U.S. borders.
    With regard to cross-border swaps between two non-registrants where 
one (or both) of the counterparties to the swap is a U.S. person 
(including an affiliate of a non-U.S. person), the Commission's 
interprets CEA 2(i) such that the parties to the swap generally would 
be expected to comply with the Non-Registrant Requirements. As the 
Commission noted in the Proposed Guidance, the risks to U.S. persons 
and the U.S. financial system do not depend on the location of the swap 
activities of U.S. persons.\604\ Where one or both of the 
counterparties to a swap between two non-registrants is a U.S. person, 
the Commission believes that the U.S. persons' swap activities (whether 
inside or outside the United States)--due their presence in the U.S. 
and relationship to U.S. commerce--have a direct and significant 
connection with activities in, or effect on, U.S. commerce. Therefore, 
the Commission's policy is that where a swap transaction is between 
non-registrants, and one or more of the counterparties is a U.S. 
person, generally the parties to the swap will be expected to comply in 
full with the Non-Registrant Requirements.\605\ In addition, where one 
or more of the counterparties to a swap between non-registrants is a 
U.S. person, the Commission's policy generally is that

[[Page 45362]]

substituted compliance is not available, for the reasons discussed 
below.
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    \604\ See Proposed Guidance, 77 FR 41234 n. 138. Further, in the 
Proposed Guidance, the Commission stated that it believes that 
section 2(i) does not require a transaction-by-transaction 
determination that a particular swap outside the United States has a 
direct and significant connection with activities in, or effect on, 
commerce of the United States in order to apply the swaps provisions 
of the CEA to such transactions; rather, it is the aggregate of such 
activities and the aggregate connection of such activities with 
activities in the U.S. or effect on U.S. commerce that warrants 
application of the CEA swaps provisions to all such activities. See 
Hoffmann-La Roche, 542 U.S. at 168 (responding that respondents' 
recommendation that the court should take account of comity 
considerations on a case by case basis is ``too complex to prove 
workable'').
    \605\ For the reasons discussed in note 531, supra, one or more 
of the counterparties to a swap between non-registrants is an 
international financial institution, the Commission generally would 
not expect the parties to the swap to comply with the Non-Registrant 
Requirements, even if the principal place of business of the 
international financial institution were located in the United 
States.
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    As noted in section D above, the Dodd-Frank Act's required clearing 
and swap processing requirements protect counterparties from the 
counterparty credit risk of their original counterparties, which in 
turn, protects against the accumulation of systemic risk because of the 
risk mitigation benefits offered by central clearing. Similarly, the 
trade execution and real-time public reporting requirements serve to 
promote both pre- and post-trade transparency which, in turn, enhance 
price discovery and decrease risk. Together, these requirements serve 
an essential role in protecting U.S. market participants and the 
general market against financial losses. The Commission cannot fully 
and responsibly fulfill its charge to protect the U.S. markets and 
market participants through a substituted compliance regime where one 
counterparty is a U.S. person. Accordingly, the Commission's policy is 
to expect full compliance with the Non-Registrant Requirements relating 
to required clearing, trade execution, and real-time public reporting 
with regard to any swaps between non-registrants where one or both of 
the counterparties is a U.S. person. For substantially the same 
reasons, application of U.S. requirements in these transactions is a 
reasonable exercise of U.S. jurisdiction under principles of foreign 
relations law.\606\
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    \606\ See Restatement Sec. Sec.  403(2)(a)-(c).
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    Large Trader Reporting provides the Commission with data regarding 
large positions in swaps with a direct or indirect linkage to specified 
U.S.-listed physical commodity futures contracts, in order to enable 
the Commission to implement and conduct effective surveillance of these 
economically equivalent swaps and futures. To facilitate the monitoring 
of trading across the swaps and futures markets, swaps positions must 
be converted to futures equivalents for reporting purposes; reportable 
thresholds are also defined in terms of futures equivalents. As 
discussed in further detail in section G above, in light of the very 
specific interest of the Commission in conducting effective 
surveillance of markets in swaps that have been determined to be 
economically equivalent to U.S. listed physical commodity futures 
contracts, and given the anticipated impediments to obtaining directly 
comparable positional data through any foreign swap data reporting 
regime, the Commission's policy is to construe CEA section 2(i) in a 
manner that would not recognize substituted compliance in lieu of 
compliance with Large Trader Reporting.
    As noted in section E, data reported under the SDR Reporting rules 
provide the Commission with information necessary to better understand 
and monitor concentrations of risk, as well as risk profiles of 
individual market participants. Swap data recordkeeping is an important 
component of an effective internal risk management process. Therefore, 
the Commission's policy is that generally both SDR Reporting and swap 
data recordkeeping should apply in full where one of the counterparties 
to a swap between two non-registrants (non-swap dealers or non-MSPs) is 
a U.S. person.
    As noted above, the clearing of swaps through a DCO mitigates 
counterparty credit risk and collateralizes the credit exposures posed 
by swaps. Section 2(h)(1) of the CEA requires a swap to be submitted 
for clearing to a registered DCO or a DCO that is exempt from 
registration under the CEA, if the Commission has determined that the 
swap is required to be cleared.\607\ The Commission has adopted a 
clearing requirement determination pursuant to the CEA and rules under 
part 50 of the Commission's regulations such that certain classes of 
swaps are required to be cleared, unless counterparties to the swap 
qualify for an exception or exemption from clearing under the CEA or 
part 50 of the Commission's regulations.\608\ In the final rules 
adopting the Inter-Affiliate Exemption, the Commission stated that a 
U.S. person that enters into any swap that is required to be cleared is 
subject to the clearing requirements of the CEA and part 50 of the 
Commission's regulations.\609\ Accordingly, in the context of this 
Guidance, the Commission's policy is that the clearing requirement 
under section 2(h)(1) and part 50 of the Commission's regulations 
applies in full to a swap where at least one of the counterparties to 
the swap is a U.S. person, without substituted compliance available. 
But substituted compliance may be available with respect to the 
clearing requirement for swaps between, on the one hand, a U.S. swap 
dealer or U.S. MSP acting through its foreign branch or a non-U.S. 
person that is a guaranteed or conduit affiliate, and on the other 
hand, a non-U.S. swap dealer, non-U.S. MSP or other non-U.S. person.
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    \607\ The Commission notes that under CEA section 5b(h), the 
Commission has discretionary authority to exempt DCOs, conditionally 
or unconditionally, from the applicable DCO registration 
requirements. Specifically, section 5b(h) of the Act provides that 
``[t]he Commission may exempt, conditionally or unconditionally, a 
derivatives clearing organization from registration under this 
section for the clearing of swaps if the Commission determines that 
the [DCO] is subject to comparable, comprehensive supervision and 
regulation by the Securities and Exchange Commission or the 
appropriate government authorities in the home country of the 
organization.'' Thus, the Commission has discretion to exempt from 
registration DCOs that, at a minimum, are subject to comparable and 
comprehensive supervision by another regulator. The Commission 
further notes that it has not yet exercised its discretionary 
authority to exempt DCOs from registration, and that until such time 
as the Commission determines to exercise such authority, swaps 
subject to the clearing requirement must be submitted to registered 
DCOs for clearing.
    \608\ In addition to the End-User Exception under CEA section 
2(h)(7), which is codified in Commission regulation 50.50, as noted 
above, the Commission has adopted an exemption from required 
clearing for swaps between certain affiliated entities, codified at 
Commission regulation 50.52. See Inter-Affiliate Exemption, 78 FR 
21750.
    \609\ Id. at 21765 (requiring, among other conditions, that 
eligible affiliate counterparties electing the exemption from 
clearing for the inter-affiliate swap must clear their swaps with 
unaffiliated counterparties, and permitting eligible affiliate 
counterparties located in foreign jurisdictions to clear such swaps 
pursuant to their applicable foreign jurisdictions' clearing regime, 
if the Commission determines that such regime is comparable and 
comprehensive to the U.S. clearing mandate).
---------------------------------------------------------------------------

    With respect to the clearing requirement, the Commission has 
previously addressed both the scope and process of a comparability 
determination, which also would apply to the extent that substituted 
compliance is applicable under this Guidance.\610\
---------------------------------------------------------------------------

    \610\ In particular, in the Inter-Affiliate Exemption, the 
Commission permitted eligible affiliate counterparties located 
outside of the U.S. to comply with a condition of the exemption to 
clear their swaps with unaffiliated counterparties (not located in 
the U.S.), to the extent such swaps are subject to the clearing 
requirement under section 2(h)(1) of the CEA, by complying with the 
requirements of a foreign jurisdiction's clearing mandate, including 
any exception or exemption granted under the foreign clearing 
mandate, provided that the Commission determines that: (i) such 
foreign jurisdiction's clearing mandate is comparable and 
comprehensive, but not necessarily identical, to the clearing 
requirement established under the CEA and part 50 of the 
Commission's regulations, and (ii) the exception or exemption is 
determined to be comparable to an exception or exemption provided 
under the CEA or part 50 of the Commission's regulations. See 17 CFR 
50.52(b)(4)(i).
---------------------------------------------------------------------------

    As for the process for determining comparability of a foreign 
jurisdiction's clearing mandate, the Commission has also previously 
stated that it will review the comparability and comprehensiveness of a 
foreign jurisdiction's clearing mandate by reviewing: (i) The foreign 
jurisdiction's laws and regulations with respect to its mandatory 
clearing regime (i.e., jurisdiction-specific review) and (ii) the 
foreign jurisdiction's clearing determinations with respect to each 
class of swaps for which the

[[Page 45363]]

Commission has issued a clearing determination under Commission 
regulation 50.4 (i.e., product-specific review).\611\ In determining 
whether an exemption or exception under a comparable foreign mandate is 
comparable to an exception or exemption under the CEA or part 50, the 
Commission anticipates that it would review, for comparability 
purposes, the foreign jurisdiction's laws and regulations with respect 
to its mandatory clearing regime, as well as the relevant exception or 
exemption, and would exercise broad discretion to determine whether the 
requirements and objectives of such exemption are consistent with those 
under the comparable foreign clearing regime.
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    \611\ The Commission further explained that comparability will 
not require a regime identical to the clearing framework established 
under the CEA and the Commission regulations. Rather, the Commission 
anticipates that it will make jurisdiction-specific comparability 
determinations by comparing the regulatory requirements of a foreign 
jurisdiction's clearing regime with the requirements and objectives 
of the Dodd-Frank Act. The Commission further noted that it 
anticipates that the product-specific comparability determination 
will necessarily be made on the basis of whether the applicable swap 
is included in a class of swaps covered under Commission regulation 
50.4.
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    The Commission is also of the view that where a swap is executed 
anonymously on a registered DCM or SEF between two non-registrants and 
cleared by a registered DCO, and one (or both) of the counterparties to 
the swap is a U.S. person, neither party to the swap should be required 
to comply with the Non-Registrant Requirements that otherwise apply to 
the swap, with the exception of Large Trader Reporting,\612\ SDR 
Reporting, and swap data recordkeeping.\613\ The Commission notes that 
in this case, the DCM or SEF will fulfill the required clearing, trade 
execution,\614\ and real-time public reporting requirements that apply 
to the swap.
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    \612\ The Commission's part 20 regulations set forth large 
trader reporting rules for physical commodity swaps. See 76 FF 43851 
(Jul. 22, 2011). Part 20 requires routine swaps position reports 
from clearing organizations, clearing members and swap dealers, and 
establishes certain non-routine reporting requirements for large 
swaps traders. Among other things, part 20 requires that a reporting 
entity, as defined in Commission regulation 20.1, disclose the 
identity of the counterparty in respect of which positional 
information is being reported in large swap trader reports and 
associated filings. See 76 FR. 43851 at 43863-4 n.11.
    \613\ The Dodd-Frank Act added to the CEA provisions requiring 
the retention and reporting of data related to swap transactions. 
Section 727 of the Dodd-Frank Act added section 2(a)(13)(g), which 
requires that all swaps, whether cleared or uncleared, be reported 
to an SDR. Section 728 of the Dodd-Frank Act added section 21(b), 
which directs the Commission to prescribe standards for swap data 
recordkeeping and reporting. Section 723 of the Dodd-Frank Act added 
section 2(h)(5), which addresses the reporting of swap data for 
swaps executed before the enactment of the Dodd-Frank Act and swaps 
executed on or after the date of its enactment. The Commission's 
swap data reporting and recordkeeping requirements are found in part 
45, which establishes swap data recordkeeping and SDR reporting 
requirements; and part 46, which establishes swap data recordkeeping 
and SDR reporting requirements for pre-enactment and transition 
swaps (collectively, ``historical swaps''). See 77 FR 2136 (Jan. 13, 
2012) (part 45); 77 FR 35200 (June 12, 2012) (part 46). Under both 
part 45 and part 46 (collectively, the ``swap data reporting 
rules'') reporting parties have swap data reporting obligations. The 
swap data reporting rules further prescribe certain data fields that 
must be included in swap data reporting. See Appendix 1 to part 45; 
Appendix 1 to part 46. For all swaps subject to the Commission's 
jurisdiction, each counterparty must be identified by means of a 
single legal entity identifier (``LEI'') in all swap data reporting 
pursuant to parts 45 and 46. A reporting counterparty, as defined in 
Commission regulations 45.1 and 46.1, respectively, has obligations 
that include providing certain data to the SDR relating to the 
primary economic terms (``PET'') of the swap, including the LEI of 
the non-reporting counterparty.
    \614\ The Commission clarifies that the trading mandate under 
CEA section 2(h)(8)(A) is satisfied by trading on a registered DCM 
or SEF or a SEF that is exempt from registration.
---------------------------------------------------------------------------

    Further, the Commission is of the view that where a swap is 
executed anonymously between two non-registrants on a registered FBOT 
and cleared and one (or both) of the counterparties to the swap is a 
U.S. person, neither party to the swap (as is the case when the swap is 
executed anonymously on a DCM) should be required to comply with the 
Non-Registrant Requirements that otherwise apply to the swap, with the 
exception of Large Trader Reporting, SDR Reporting and swap data 
recordkeeping. The Commission notes that in this case, the registered 
FBOT, as would the DCM, will fulfill the required clearing and trade 
execution requirements \615\ that apply to the swap but not, without 
further action, the real-time public reporting requirements.
---------------------------------------------------------------------------

    \615\ The Commission clarifies that the trading mandate under 
CEA section 2(h)(8)(A) is satisfied by trading on a registered FBOT.
---------------------------------------------------------------------------

    The Commission expects that derivatives markets and regulatory 
regimes will continue to evolve in the future. In order to ensure a 
level playing field, promote participation in transparent markets, and 
promote market efficiency, the Commission will, through staff no action 
letters, extend appropriate time-limited transitional relief to certain 
European Union-regulated multilateral trading facilities (MTFs), in the 
event that the Commission's trade execution requirement is triggered 
before March 15, 2014. Such relief would be available through March 
15th for MTFs that have multilateral trading schemes, a sufficient 
level of pre- and post-trade price transparency, non-discriminatory 
access by market participants, and an appropriate level of oversight. 
In addition, the Commission will consult with the European Commission 
in giving consideration to extending regulatory relief to European 
Union-regulated trading platforms that are subject to requirements that 
achieve regulatory outcomes that are comparable to those achieved by 
the requirements for SEFs. Both parties will assess progress in January 
2014.
2. Swaps Between Non-Registrants That Are Both Non-U.S. Persons
    As noted above, where a swap is between two non-U.S. persons and 
neither counterparty is required to register as a swap dealer or MSP, 
the Commission proposed interpreting CEA section 2(i) so as not to 
apply the Non-Registrant Requirements,\616\ with the exception of Large 
Trader Reporting.\617\
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    \616\ See the Proposed Guidance, 77 FR 41234-41235.
    \617\ See id. at 41234 n. 139, 41235.
---------------------------------------------------------------------------

    Section a discusses the Commission's policy on application of Large 
Trader Reporting to swaps between two non-registrants that are not U.S. 
persons. Section b discusses the application of the other Non-
Registrant Requirements to swaps between two non-registrants that are 
not U.S. persons, where each of the counterparties to the swap is a 
guaranteed or conduit affiliate, and the availability of substituted 
compliance for the parties to such swaps. Section c discusses the 
Commission's policy on application of the Non-Registrant Requirements 
other than Large Trader Reporting to swaps between non-registrants that 
are not U.S. persons where neither or only one of the counterparties is 
a guaranteed or conduit affiliate.
a. Large Trader Reporting
    Large Trader Reporting requires routine positional reports from 
clearing members in addition to clearing organizations and swap 
dealers. As is the case with swap dealers, routine reports are required 
from clearing members to the extent that they hold significant 
positions in the swaps subject to Large Trader Reporting--swaps that 
are directly or indirectly linked to specified U.S.-listed physical 
commodity futures contracts. Routine reporting provides essential 
visibility into the trading activity of large market participants, 
which enables the Commission to conduct effective surveillance of 
markets in swaps and futures that have been determined to be 
economically equivalent. Given the

[[Page 45364]]

linkage of the swaps covered by Large Trader Reporting to U.S. futures 
markets, the Commission believes that any non-U.S. clearing member that 
holds positions in such swaps that are significant enough to trigger 
routine reporting obligations is engaged in activities that have a 
direct and significant connection with activities in, or effect on, 
commerce of the United States. Consistent with the Proposed Guidance, 
the Commission's policy, in light of its interpretation of CEA section 
2(i), is that any such non-U.S. clearing member should report all 
reportable positions to the Commission.\618\
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    \618\ To the extent that they transact in the physical commodity 
swaps covered by the Commission's Large Trader Reporting rules, non-
U.S. clearing members also should maintain the records required by 
such rules.
---------------------------------------------------------------------------

    Large Trader Reporting also establishes recordkeeping requirements 
for traders with significant positions in the covered physical 
commodity swaps. Given the vital role that Large Trader Reporting plays 
in ensuring that the Commission has access to comprehensive data 
regarding trading activity in swaps linked to U.S. futures, the 
Commission's policy, in light of its interpretation of CEA section 
2(i), is that non-U.S. persons with positions that meet the prescribed 
recordkeeping thresholds should comply with the prescribed 
recordkeeping requirements. The Commission notes that traders, which 
are not swap dealers or clearing members with routine Large Trader 
Reporting obligations, may generally keep books and records regarding 
their transactions in the covered physical commodity swaps and produce 
them for inspection by the Commission in the record retention format 
that such traders have developed in the normal course of their business 
operations.
b. Swaps Where Each of The Counterparties Is Either a Guaranteed or 
Conduit Affiliate
    In contrast to the Proposed Guidance, where a swap is between two 
non-registrants that are not U.S. persons, and each of the 
counterparties to the swap is a guaranteed or conduit affiliate,\619\ 
the parties to the swap generally should be expected to comply with the 
Non-Registrant Requirements with respect to the transaction. However, 
where at least one of the parties to the swap is an ``affiliate 
conduit,'' the Commission would generally expect the parties to the 
swap only to comply with (to the extent that the Inter-Affiliate 
Exemption is elected), the conditions of the Inter-Affiliate Exemption, 
including the treatment of outward-facing swaps condition in Commission 
regulation 50.52(b)(4)(i). In addition, the part 43 real-time reporting 
requirements must be satisfied.
---------------------------------------------------------------------------

    \619\ As noted above, this Guidance uses the term ``guaranteed 
or conduit affiliate'' to refer to a non-U.S. person that is 
guaranteed by a U.S. person or that is an affiliate conduit.
---------------------------------------------------------------------------

    The Commission has not interpreted CEA section 2(i) so as to 
include a guaranteed or conduit affiliate in the interpretation of the 
term ``U.S. person'' solely because of the guarantee or affiliation. 
Where each of the counterparties to the swap are non-registrants that 
are guaranteed or conduit affiliates, the Commission believes that the 
risks to U.S. persons and to the U.S. financial system sufficiently 
increase so that the additional measure of applying the Non-Registrant 
Requirements to the swap is warranted (but with substituted compliance 
available, to the extent applicable).\620\ The Commission notes that in 
the case of guarantees by U.S. persons, if there is a default by the 
non-U.S. person, the U.S. guarantor generally would be held responsible 
to settle the obligations. In the case of affiliate conduits, a non-
U.S. affiliate could effectively operate as a conduit for the U.S. 
person, and could be used to execute swaps with counterparties in 
foreign jurisdictions, outside the Dodd-Frank Act regulatory regime.
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    \620\ The Commission proposed to interpret section 2(i) so that 
the Non-Registrant Requirements would not apply to swaps between two 
non-registrants (whether or not one or more counterparties was 
guaranteed by a U.S. person), with the exception of Large Trader 
Reporting. The Commission noted in the Proposed Guidance that it 
intended to review the issue of affiliate conduits. See Proposed 
Guidance, 77 FR 1234-41235.
---------------------------------------------------------------------------

    Therefore, where a swap is between two non-registrants that are 
guaranteed or conduit affiliates, the Commission believes that the swap 
has a ``direct and significant connection with activities in, or effect 
on, commerce of the United States'' within the meaning of CEA section 
2(i) so that certain Entity-Level and Transaction-Level Requirements 
would apply to the swap counterparties. Consistent with section 2(i), 
however, the Commission's policy generally is to make the parties to 
the swap eligible for substituted compliance (except with regard to 
Large Trader Reporting, and provided that SDR Reporting would be 
eligible for substituted compliance only if the Commission has direct 
access to all of the reported swap data elements that are stored at a 
foreign trade repository).
c. Swaps Where Neither or Only One of the Parties is a Guaranteed or 
Conduit Affiliate
    With respect to swaps between two non-registrants where neither or 
only one party is a guaranteed or conduit affiliate, the Commission's 
policy is that the parties to the swap generally should not be expected 
to comply with the Non-Registrant Requirements, except as described 
below.
    As discussed above, where a counterparty to a swap is a guaranteed 
or conduit affiliate, the risks to U.S. persons and to the U.S. 
financial system increase. In the case of guarantees by U.S. persons, 
if there is a default by the non-U.S. person, the U.S. guarantor would 
be held responsible to settle the obligations. In the case of affiliate 
conduits, a non-U.S. affiliate could effectively operate as a 
``conduit'' for the U.S. person, and could be used to execute swaps 
with counterparties in foreign jurisdictions, outside the Dodd-Frank 
Act regulatory regime. Nevertheless, the Commission also recognizes 
that foreign jurisdictions may have an interest in regulating swaps 
between two non-registrants where both counterparties to the swap are 
non-U.S. persons. Therefore, consistent with international comity 
principles, the Commission would generally expect the parties to the 
swap only to comply with (to the extent that the Inter-Affiliate 
Exemption is elected), the conditions of the Inter-Affiliate Exemption, 
including the treatment of outward-facing swaps condition in Commission 
regulation 50.52(b)(4)(i), and Large Trader Reporting. The Commission 
believes that this policy strikes the right balance between U.S. 
interests in regulating such a swap and the interest of foreign 
regulators.

V. Appendix A--The Entity-Level Requirements

A. First Category of Entity-Level Requirements

    The First Category of Entity-Level Requirements includes capital 
adequacy, chief compliance officer, risk management, and swap data 
recordkeeping (except certain aspects of swap data recordkeeping 
relating to complaints and sales materials).
1. Capital Adequacy
    Section 4s(e)(2)(B) of the CEA specifically directs the Commission 
to set capital requirements for swap dealers and MSPs that are not 
subject to the capital requirements of U.S. prudential regulators 
(hereinafter referred to as ``non-bank swap dealers or

[[Page 45365]]

MSPs'').\621\ With respect to the use of swaps that are not cleared, 
these requirements must: ``(1) [h]elp ensure the safety and soundness 
of the swap dealer or major swap participant; and (2) [be] appropriate 
for the risk associated with the non-cleared swaps held as a swap 
dealer or major swap participant.'' \622\ Pursuant to section 4s(e)(3), 
the Commission proposed regulations, which would require non-bank swap 
dealers and MSPs to hold a minimum level of adjusted net capital (i.e., 
``regulatory capital'') based on whether the non-bank swap dealer or 
MSP is: (i) also a FCM; (ii) not an FCM, but is a non-bank subsidiary 
of a bank holding company; or (iii) neither an FCM nor a non-bank 
subsidiary of a bank holding company.\623\ The primary purpose of the 
capital requirement is to reduce the likelihood and cost of a swap 
dealer's or MSP's default by requiring a financial cushion that can 
absorb losses in the event of the firm's default.
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    \621\ See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the CEA 
explicitly requires the adoption of rules establishing capital and 
margin requirements for swap dealers and MSPs, and applies a 
bifurcated approach that requires each swap dealer and MSP for which 
there is a U.S. prudential regulator to meet the capital and margin 
requirements established by the applicable prudential regulator, and 
each swap dealer and MSP for which there is no prudential regulator 
to comply with the Commission's capital and margin regulations. See 
7 U.S.C. 6s(e). Further, systemically important financial 
institutions (``SIFIs'') that are not FCMs would be exempt from the 
Commission's capital requirements, and would comply instead with 
Federal Reserve Board requirements applicable to SIFIs, while 
nonbank (and non-FCM) subsidiaries of U.S. bank holding companies 
would calculate their Commission capital requirement using the same 
methodology specified in Federal Reserve Board regulations 
applicable to the bank holding company, as if the subsidiary itself 
were a bank holding company. The term ``prudential regulator'' is 
defined in CEA section 1a(39) as the Board of Governors of the 
Federal Reserve System, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the Farm Credit 
Administration, and the Federal Housing Finance Agency. See 7 U.S.C. 
1a(39). In addition, in the proposed capital regulations for swap 
dealers and MSPs, the Commission solicited comment regarding whether 
it would be appropriate to permit swap dealers and MSPs to use 
internal models for computing market risk and counterparty credit 
risk charges for capital purposes if such models had been approved 
by a foreign regulatory authority and were subject to periodic 
assessment by such foreign regulatory authority. See Proposed 
Capital Requirements, 76 FR 27802.
    \622\ See 7 U.S.C. 6s(e)(3)(A).
    \623\ See 7 U.S.C. 6s(e). See also Proposed Capital 
Requirements, 76 FR 27802. ``The Commission's capital proposal for 
[swap dealers] and MSPs includes a minimum dollar level of $20 
million. A non-bank [swap dealer] or MSP that is part of a U.S. bank 
holding company would be required to maintain a minimum of $20 
million of Tier 1 capital as measured under the capital rules of the 
Federal Reserve Board. [A swap dealer] or MSP that also is 
registered as an FCM would be required to maintain a minimum of $20 
million of adjusted net capital as defined under [proposed] section 
1.17. In addition, an [swap dealer] or MSP that is not part of a 
U.S. bank holding company or registered as an FCM would be required 
to maintain a minimum of $20 million of tangible net equity, plus 
the amount of the [swap dealer's] or MSP's market risk exposure and 
OTC counterparty credit risk exposure.'' See id. at 27817.
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2. Chief Compliance Officer
    Section 4s(k) requires that each swap dealer and MSP designate an 
individual to serve as its chief compliance officer (``CCO'') and 
specifies certain duties of the CCO.\624\ Pursuant to section 4s(k), 
the Commission adopted regulation 3.3, which requires swap dealers and 
MSPs to designate a CCO who would be responsible for administering the 
firm's compliance policies and procedures, reporting directly to the 
board of directors or a senior officer of the swap dealer or MSP, as 
well as preparing and filing with the Commission a certified report of 
compliance with the CEA. The chief compliance function is an integral 
element of a firm's risk management and oversight and the Commission's 
effort to foster a strong culture of compliance within swap dealers and 
MSPs.
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    \624\ See 7 U.S.C. 6s(k).
---------------------------------------------------------------------------

3. Risk Management
    Section 4s(j) of the CEA requires each swap dealer and MSP to 
establish internal policies and procedures designed to, among other 
things, address risk management, monitor compliance with position 
limits, prevent conflicts of interest, and promote diligent 
supervision, as well as maintain business continuity and disaster 
recovery programs.\625\ The Commission adopted implementing regulations 
(23.600, 23.601, 23.602, 23.603, 23.605, and 23.606).\626\ The 
Commission also adopted regulation 23.609, which requires certain risk 
management procedures for swap dealers or MSPs that are clearing 
members of a derivatives clearing organization (``DCO'').\627\ 
Collectively, these requirements help to establish a robust and 
comprehensive internal risk management program for swap dealers and 
MSPs, which is critical to effective systemic risk management for the 
overall swaps market.
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    \625\ 7 U.S.C. 6s(j).
    \626\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 
20128 (relating to risk management program, monitoring of position 
limits, business continuity and disaster recovery, conflicts of 
interest policies and procedures, and general information 
availability, respectively).
    \627\ Customer Documentation Rule, 77 FR 21278. Also, swap 
dealers must comply with Commission regulation 23.608, which 
prohibits swap dealers providing clearing services to customers from 
entering into agreements that would: (i) Disclose the identity of a 
customer's original executing counterparty; (ii) limit the number of 
counterparties a customer may trade with; (iii) impose counterparty-
based position limits; (iv) impair a customer's access to execution 
of a trade on terms that have a reasonable relationship to the best 
terms available; or (v) prevent compliance with specified time 
frames for acceptance of trades into clearing.
---------------------------------------------------------------------------

i. Swap Data Recordkeeping (Except Certain Aspects of Swap Data 
Recordkeeping Relating to Complaints and Sales Materials)
    CEA section 4s(f)(1)(B) requires swap dealers and MSPs to keep 
books and records for all activities related to their business.\628\ 
Sections 4s(g)(1) and (4) require swap dealers and MSPs to maintain 
trading records for each swap and all related records, as well as a 
complete audit trail for comprehensive trade reconstructions.\629\ 
Pursuant to these provisions, the Commission adopted regulations 
23.201and 23.203, which require swap dealers and MSPs to keep records 
including complete transaction and position information for all swap 
activities, including documentation on which trade information is 
originally recorded. Pursuant to regulation 23.203, records of swaps 
must be maintained for the duration of the swap plus 5 years, and voice 
recordings for 1 year, and records must be ``readily accessible'' for 
the first 2 years of the 5 year retention period. Swap dealers and MSPs 
also must comply with Parts 43, 45 and 46 of the Commission's 
regulations, which, respectively, address the data recordkeeping and 
reporting requirements for all swaps subject to the Commission's 
jurisdiction, including swaps entered into before the date of enactment 
of the Dodd-Frank Act (``pre-enactment swaps'') and swaps entered into 
on or after the date of enactment of the Dodd-Frank Act but prior to 
the compliance date of the swap data reporting rules (``transition 
swaps'').\630\
---------------------------------------------------------------------------

    \628\ 7 U.S.C. 6s(f)(1)(B).
    \629\ 7 U.S.C. 6s(g)(1).
    \630\ 17 CFR part 46; Proposed Data Rules, 76 FR 22833.
---------------------------------------------------------------------------

B. Second Category of Entity-Level Requirements

    The Second Category of Entity-Level Requirements includes SDR 
Reporting, certain aspects of swap data recordkeeping relating to 
complaints and marketing and sales materials under Commission 
regulations 23.201(b)(3) and 23.201(b)(4) and Large Trader Reporting.
1. SDR Reporting
    CEA section 2(a)(13)(G) requires all swaps, whether cleared or 
uncleared, to be reported to a registered SDR.\631\ CEA section 21 
requires SDRs to collect and maintain data related to swaps as 
prescribed by the Commission, and to

[[Page 45366]]

make such data electronically available to particular regulators under 
specified conditions related to confidentiality.\632\ Part 45 of the 
Commission's regulations (and Appendix 1 thereto) sets forth the 
specific swap data that must be reported to a registered SDR, along 
with attendant recordkeeping requirements; and part 46 addresses 
recordkeeping and reporting requirements for pre-enactment and 
transition swaps (``historical swaps''). The fundamental goal of the 
part 45 rules is to ensure that complete data concerning all swaps 
subject to the Commission's jurisdiction is maintained in SDRs where it 
will be available to the Commission and other financial regulators for 
fulfillment of their various regulatory mandates, including systemic 
risk mitigation, market monitoring and market abuse prevention. Part 46 
supports similar goals with respect to pre-enactment and transition 
swaps and ensures that data needed by regulators concerning 
``historical'' swaps is available to regulators through SDRs. Among 
other things, data reported to SDRs will enhance the Commission's 
understanding of concentrations of risks within the market, as well as 
promote a more effective monitoring of risk profiles of market 
participants in the swaps market. The Commission also believes that 
there are benefits that will accrue to swap dealers and MSPs as a 
result of the timely reporting of comprehensive swap transaction data 
and consistent data standards for recordkeeping, among other things. 
Such benefits include more robust risk monitoring and management 
capabilities for swap dealers and MSPs, which in turn will improve the 
monitoring of their current swaps market positions.
---------------------------------------------------------------------------

    \631\ 7 U.S.C. 2(a)(13)(G).
    \632\ 7 U.S.C. 24a.
---------------------------------------------------------------------------

2. Swap Data Recordkeeping Relating to Complaints and Marketing and 
Sales Materials
    CEA section 4s(f)(1) requires swap dealers and MSPs to ``make such 
reports as are required by the Commission by rule or regulation 
regarding the transactions and positions and financial condition of the 
registered swap dealer or major swap participant.'' \633\ Additionally, 
CEA section 4s(h) requires swap dealers and MSPs to ``conform with such 
business conduct standards . . . as may be prescribed by the Commission 
by rule or regulation.'' \634\ Pursuant to those authorities, the 
Commission promulgated final rules that set forth certain reporting and 
recordkeeping for swap dealers and MSPs.\635\ Commission Regulation 
23.201 states that ``[e]ach swap dealer and major swap participant 
shall keep full, complete, and systematic records of all activities 
related to its business as a swap dealer or major swap participant.'' 
Such records must include, among other things, ``[a] record of each 
complaint received by the swap dealer or major swap participant 
concerning any partner, member, officer, employee, or agent,'' \636\ as 
well as ``[a]ll marketing and sales presentations, advertisements, 
literature, and communications.'' \637\
---------------------------------------------------------------------------

    \633\ 7 U.S.C. 6s(f)(1).
    \634\ 7 U.S.C. 6s(h)(1). See 7 U.S.C. 6s(h)(3).
    \635\ Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 20128.
    \636\ 17 CFR 23.201(b)(3)(i).
    \637\ 17 CFR 23.201(b)(4).
---------------------------------------------------------------------------

3. Physical Commodity Large Swaps Trader Reporting (Large Trader 
Reporting)
    CEA section 4t \638\ authorizes the Commission to establish a large 
trader reporting system for significant price discovery swaps (of which 
the economically equivalent swaps subject to the Commission's part 20 
rules are a subset). Pursuant thereto, the Commission adopted its Large 
Trader Reporting rules (part 20 of the Commission regulations), which 
require routine reports from swap dealers, among other entities, that 
hold significant positions in swaps that are linked, directly or 
indirectly, to a prescribed list of U.S.-listed physical commodity 
futures contracts.\639\ Additionally, Large Trader Reporting requires 
that swap dealers, among other entities, comply with certain 
recordkeeping obligations.
---------------------------------------------------------------------------

    \638\ 7 U.S.C. 6t.
    \639\ Large Trader Reporting for Physical Commodity Swaps, 76 FR 
43851. The rules require routine position reporting by clearing 
organizations, as well as clearing members and swap dealers with 
reportable positions in the covered physical commodity swaps. The 
rules also establish recordkeeping requirements for clearing 
organizations, clearing members and swap dealers, as well as traders 
with positions in the covered physical commodity swaps that exceed a 
prescribed threshold. In general, the rules apply to swaps that are 
linked, directly or indirectly, to either the price of any of the 46 
U.S.-listed physical commodity futures contracts the Commission 
enumerates (Covered Futures Contracts) or the price of the physical 
commodity at the delivery location of any of the Covered Futures 
Contracts.
---------------------------------------------------------------------------

VI. Appendix B--The Transaction-Level Requirements

    The Transaction-Level Requirements cover a range of Dodd-Frank 
requirements: some of the requirements more directly address financial 
protection of swap dealers (or MSPs) and their counterparties; others 
address more directly market efficiency and/or price discovery. 
Further, some of the Transaction-Level Requirements can be classified 
as Entity-Level Requirements and applied on a firm-wide basis across 
all swaps or activities. Nevertheless, in the interest of comity 
principles, the Commission believes that the Transaction-Level 
Requirements may be applied on a transaction-by-transaction basis.

A. Category A: Risk Mitigation and Transparency

1. Required Clearing and Swap Processing
    Section 2(h)(1) of the CEA requires a swap to be submitted for 
clearing to a DCO if the Commission has determined that the swap is 
required to be cleared, unless one of the parties to the swap is 
eligible for an exception from the clearing requirement and elects not 
to clear the swap.\640\ Clearing via a DCO mitigates the counterparty 
credit risk between swap dealers or MSPs and their counterparties.
---------------------------------------------------------------------------

    \640\ 7 U.S.C. 2(h)(1), (7).
---------------------------------------------------------------------------

    Commission regulations implementing the first designations of swaps 
for required clearing were published in the Federal Register on 
December 13, 2012.\641\ Under Commission regulation 50.2, all persons 
executing a swap that is included in a class of swaps identified under 
Commission regulation 50.4 must submit such swap to an eligible 
derivatives clearing organization (DCO) for clearing as soon as 
technologically practicable after clearing, but in any event by the end 
of the day of execution.
---------------------------------------------------------------------------

    \641\ 77 FR 72284.
---------------------------------------------------------------------------

    Regulation 50.4 establishes required clearing for certain classes 
of swaps. Currently, those classes include, for credit default swaps: 
Specified series of untranched North American CDX indices and European 
iTraxx indices; and for interest rate swaps: Fixed-to-floating swaps, 
basis swaps, forward rate agreements referencing U.S. Dollar, Euro, 
Sterling, and Yen, and overnight index swaps referencing U.S. Dollar, 
Euro, and Sterling. Each of the six classes is further defined in 
Commission regulation 50.4. Swaps that have the specifications 
identified in the regulation are required to be cleared and must be 
cleared pursuant to the rules of any eligible DCO unless an exception 
or exemption specified in the CEA or the Commission's regulations 
applies.
    Generally, if a swap is subject to Section 2(h)(1)(A) of the CEA 
and part 50 of the Commission's regulations, it must be cleared through 
an eligible DCO, unless: (i) One of the counterparties is eligible for 
and elects

[[Page 45367]]

the End-User Exception under Commission regulation 50.50; \642\ or (ii) 
both counterparties are eligible for and elect an Inter-Affiliate 
Exemption under Commission regulation 50.52. To elect either the end-
user exception or the Inter-Affiliate Exemption, the electing party or 
parties and the swap must meet certain requirements set forth in the 
regulations.
---------------------------------------------------------------------------

    \642\ See End-User Exception to the Clearing Requirement for 
Swaps, 77 FR 42560 (Jul. 19, 2012).
---------------------------------------------------------------------------

    Closely connected with the clearing requirement are the following 
swap processing requirements: (i) Commission regulation 23.506, which 
requires swap dealers and MSPs to submit swaps promptly for clearing; 
and (ii) Commission regulations 23.610 and 39.12, which establish 
certain standards for swap processing by DCOs and/or swap dealers and 
MSPs that are clearing members of a DCO.\643\ Together, required 
clearing and swap processing requirements promote safety and soundness 
of swap dealers and MSPs, and mitigate the credit risk posed by 
bilateral swaps between swap dealers or MSPs and their 
counterparties.\644\
---------------------------------------------------------------------------

    \643\ See Final Customer Documentation Rules, 77 FR 21278.
    \644\ See section IV.H, supra, regarding the application of 
required clearing rules to market participants that are not 
registered as swap dealers or MSPs, including the circumstances 
under which the parties to such swaps would be eligible for 
substituted compliance.
---------------------------------------------------------------------------

2. Margin and Segregation Requirements for Uncleared Swaps
    Section 4s(e) of the CEA requires the Commission to set margin 
requirements for swap dealers and MSPs that trade in swaps that are not 
cleared.\645\ The margin requirements ensure that outstanding current 
and potential future risk exposures between swap dealers and their 
counterparties are collateralized, thereby reducing the possibility 
that swap dealers or MSPs take on excessive risks without having 
adequate financial backing to fulfill their obligations under the 
uncleared swap. In addition, with respect to swaps that are not 
submitted for clearing, section 4s(l) requires that a swap dealer or 
MSP notify the counterparty of its right to request that funds provided 
as margin be segregated, and upon such request, to segregate the funds 
with a third-party custodian for the benefit of the counterparty. In 
this way, the segregation requirement enhances the protections offered 
through margining uncleared swaps and thereby provides additional 
financial protection to counterparties. The Commission is working with 
foreign and domestic regulators to develop and finalize appropriate 
regulations for margin and segregation requirements.
---------------------------------------------------------------------------

    \645\ See 7 U.S.C. 6s(e). See also Proposed Margin Requirements, 
76 FR at 23733-23740. Section 4s(e) explicitly requires the adoption 
of rules establishing margin requirements for swap dealers and MSPs, 
and applies a bifurcated approach that requires each swap dealer and 
MSP for which there is a prudential regulator to meet the margin 
requirements established by the applicable prudential regulator, and 
each swap dealer and MSP for which there is no prudential regulator 
to comply with the Commission's margin regulations. In contrast, the 
segregation requirements in section 4s(1) do not use a bifurcated 
approach--that is, all swap dealers and MSPs are subject to the 
Commission's rule regarding notice and third party custodians for 
margin collected for uncleared swaps.
---------------------------------------------------------------------------

3. Trade Execution
    Integrally linked to the clearing requirement is the trade 
execution requirement, which is intended to bring the trading of 
mandatorily cleared swaps that are made available to trade onto 
regulated exchanges or execution facilities. Specifically, section 
2(h)(8) of the CEA provides that unless a clearing exception applies 
and is elected, a swap that is subject to a clearing requirement must 
be executed on a DCM or SEF, unless no such DCM or SEF makes the swap 
available to trade.\646\ Commission regulations implementing the 
process for a DCM or SEF to make a swap available to trade were 
published in the Federal Register on June 4, 2013.\647\ Under 
Commission regulations 37.10 and 38.12, respectively, a SEF or DCM may 
submit a determination for Commission review that a mandatorily cleared 
swap is available to trade based on enumerated factors. By requiring 
the trades of mandatorily cleared swaps that are made available to 
trade to be executed on an exchange or an execution facility--each with 
its attendant pre- and post-trade transparency and safeguards to ensure 
market integrity--the trade execution requirement furthers the 
statutory goals of financial stability, market efficiency, and enhanced 
transparency.
---------------------------------------------------------------------------

    \646\ See 7 U.S.C. 2(h)(8).
    \647\ 78 FR 33606.
---------------------------------------------------------------------------

4. Swap Trading Relationship Documentation
    CEA section 4s(i) requires each swap dealer and MSP to conform to 
Commission standards for the timely and accurate confirmation, 
processing, netting, documentation and valuation of swaps.\648\ 
Pursuant thereto, Commission regulation 23.504(a) requires swap dealers 
and MSPs to ``establish, maintain and enforce written policies and 
procedures'' to ensure that the swap dealer or MSP executes written 
swap trading relationship documentation.\649\ Under Commission 
regulation 23.504, the swap trading relationship documentation must 
include, among other things: all terms governing the trading 
relationship between the swap dealer or MSP and its counterparty; 
credit support arrangements; investment and re-hypothecation terms for 
assets used as margin for uncleared swaps; and custodial 
arrangements.\650\ Further, the swap trading relationship documentation 
requirement applies to all swaps with registered swap dealers and MSPs. 
In addition, Commission regulation 23.505 requires swap dealers and 
MSPs to document certain information in connection with swaps for which 
exceptions from required clearing are elected.\651\ A robust swap 
documentation standard may promote standardization of documents and 
transactions, which are key conditions for central clearing, and lead 
to other operational efficiencies, including improved valuation and 
risk management.
---------------------------------------------------------------------------

    \648\ See 7 U.S.C. 6s(i).
    \649\ See Final Confirmation Rules, 77 FR 55904.
    \650\ The requirements under section 4s(i) relating to trade 
confirmations is a Transaction-Level Requirement. Accordingly, 
Commission regulation 23.504(b)(2) requires a swap dealer's and 
MSP's swap trading relationship documentation to include all 
confirmations of swaps, will apply on a transaction-by-transaction 
basis.
    \651\ See Final Confirmation Rules, 77 FR at 55964.
---------------------------------------------------------------------------

5. Portfolio Reconciliation and Compression
    CEA section 4s(i) directs the Commission to prescribe regulations 
for the timely and accurate processing and netting of all swaps entered 
into by swap dealers and MSPs. Pursuant to CEA section 4s(i), the 
Commission adopted regulations (23.502 and 23.503), which require swap 
dealers and MSPs to perform portfolio reconciliation and compression, 
respectively, for all swaps.\652\ Portfolio reconciliation is a post-
execution risk management tool to ensure accurate confirmation of a 
swap's terms and to identify and resolve any discrepancies between 
counterparties regarding the valuation of the swap. Portfolio 
compression is a post-trade processing and netting mechanism that is 
intended to ensure timely, accurate processing and netting of 
swaps.\653\ Regulation 23.503 requires all swap dealers and MSPs to 
participate in bilateral compression exercises and/or multilateral 
portfolio compression

[[Page 45368]]

exercises conducted by a third party.\654\ The rule also requires 
policies and procedures for engaging in such exercises for uncleared 
swaps with non-swap dealers and non-MSPs upon request. Further, 
participation in multilateral portfolio compression exercises is 
mandatory for dealer-to-dealer trades.
---------------------------------------------------------------------------

    \652\ See id.
    \653\ For example, the reduced transaction count may decrease 
operational risk as there are fewer trades to maintain, process, and 
settle.
    \654\ See 17 CFR 23.503(c); Confirmation NPRM, 75 FR 81519.
---------------------------------------------------------------------------

6. Real-Time Public Reporting
    Section 2(a)(13) of the CEA also directs the Commission to 
promulgate rules providing for the public availability of swap 
transaction and pricing data on a real-time basis.\655\ In accordance 
with this mandate, the Commission promulgated part 43 of its 
regulations, which provide that all ``publicly reportable swap 
transactions'' must be reported and publicly disseminated, and which 
establish the method, manner, timing and particular transaction and 
pricing data that must be reported by parties to a swap 
transaction.\656\ The real-time dissemination of swap transaction and 
pricing data supports the fairness and efficiency of markets and 
increases transparency, which in turn improves price discovery and 
decreases risk (e.g., liquidity risk).\657\
---------------------------------------------------------------------------

    \655\ See 7 U.S.C. 2(a)(13). See also Real-Time Reporting Rule, 
77 FR 1183.
    \656\ Part 43 defines a ``publicly reportable swap transaction'' 
as: (i) Any swap that is an arm's-length transaction between two 
parties that results in a corresponding change in the market risk 
position between the two parties; or (ii) any termination, 
assignment, novation, exchange, transfer, amendment, conveyance, or 
extinguishing of rights or obligations of a swap that changes the 
pricing of a swap. See Real-Time Reporting Rule, 77 FR 1182. 
Additionally, the Commission adopted regulation 23.205, which 
directs swap dealers and MSPs to undertake such reporting and to 
have the electronic systems and procedures necessary to transmit 
electronically all information and data required to be reported in 
accordance with part 43. See Final Swap Dealer and MSP Recordkeeping 
Rule, 77 FR 20205.
    \657\ See Real-Time Reporting Rule, 77 FR 1183.
---------------------------------------------------------------------------

7. Trade Confirmation
    Section 4s(i) of the CEA \658\ requires that each swap dealer and 
MSP must comply with the Commission's regulations prescribing timely 
and accurate confirmation of swaps. The Commission has adopted 
regulation 23.501, which requires, among other things, a timely and 
accurate confirmation of swap transactions (which includes execution, 
termination, assignment, novation, exchange, transfer, amendment, 
conveyance, or extinguishing of rights or obligations of a swap) among 
swap dealers and MSPs by the end of the first business day following 
the day of execution.\659\ Timely and accurate confirmation of swaps--
together with portfolio reconciliation and compression--are important 
post-trade processing mechanisms for reducing risks and improving 
operational efficiency.\660\
---------------------------------------------------------------------------

    \658\ 7 U.S.C. 6s(i).
    \659\ See Final Confirmation Rules, 77 FR 55904.
    \660\ In addition, the Commission notes that regulation 
23.504(b)(2) requires that the swap trading relationship 
documentation of swap dealers and MSPs must include all 
confirmations of swap transactions.
---------------------------------------------------------------------------

8. Daily Trading Records
    Pursuant to section CEA 4s(g), the Commission adopted regulation 
23.202, which requires swap dealers and MSPs to maintain daily trading 
records, including records of trade information related to pre-
execution, execution, and post-execution data that is needed to conduct 
a comprehensive and accurate trade reconstruction for each swap. The 
final rule also requires that records be kept of cash or forward 
transactions used to hedge, mitigate the risk of, or offset any swap 
held by the swap dealer or MSP.\661\ Accurate and timely recordkeeping 
regarding all phases of a swap transaction can serve to greatly enhance 
a firm's internal supervision, as well as the Commission's ability to 
detect and address market or regulatory abuses or evasion.
---------------------------------------------------------------------------

    \661\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 
20128.
---------------------------------------------------------------------------

B. Category B: External Business Conduct Standards

    Pursuant to CEA section 4s(h), the Commission has adopted external 
business conduct rules, which establish business conduct standards 
governing the conduct of swap dealers and MSPs in dealing with their 
counterparties in entering into swaps.\662\ Broadly speaking, these 
rules are designed to enhance counterparty protection by significantly 
expanding the obligations of swap dealers and MSPs towards their 
counterparties. Under these rules, swap dealers and MSPs will be 
required, among other things, to conduct due diligence on their 
counterparties to verify eligibility to trade, provide disclosure of 
material information about the swap to their counterparties, provide a 
daily mid-market mark for uncleared swaps and, when recommending a swap 
to a counterparty, make a determination as to the suitability of the 
swap for the counterparty based on reasonable diligence concerning the 
counterparty.
---------------------------------------------------------------------------

    \662\ See 7 U.S.C. 6s(h). See also External Business Conduct 
Rules, 77 FR 9822-9829.
---------------------------------------------------------------------------

VII. Appendix C--Application of the Entity-Level Requirements to Swap 
Dealers and MSPs *

------------------------------------------------------------------------
 
------------------------------------------------------------------------
U.S. Swap Dealer or MSP (including an    Apply.
 affiliate of a non-U.S. person). Also
 applies when acting through a foreign
 branch.\1\
Non-U.S. Swap Dealer or MSP (including   First Category: \2\ Substituted
 an affiliate of a U.S. person)..         Compliance.
                                         Second Category: \3\ Apply for
                                          U.S. counterparties;
                                          Substituted Compliance for SDR
                                          reporting with non-U.S.
                                          counterparties that are not
                                          guaranteed or conduit
                                          affiliates; Substituted
                                          compliance (except for Large
                                          Trader Reporting) with non-
                                          U.S. counterparties.\4\
------------------------------------------------------------------------
* The Appendices to the Guidance should be read in conjunction with the
 rest of the Guidance.
------------------------------------------------------------------------
\1\ Both Entity-Level and Transaction-Level Requirements are the
  ultimate responsibilities of the U.S.-based swap dealer or MSP.
\2\ First Category is capital adequacy, Chief Compliance Officer, risk
  management, and swap data recordkeeping (except Commission regulations
  23.201(b)(3) and (4)).
\3\ Second Category is SDR Reporting, certain aspects of swap data
  recordkeeping relating to complaints and marketing and sales materials
  (Commission regulations 23.201(b)(3) and (4)), and Large Trader
  Reporting.
\4\ Substituted compliance does not apply to Large Trader Reporting,
  i.e., non-U.S. persons that are subject to part 20 would comply with
  it in the same way that U.S. persons comply. With respect to the SDR
  Reporting requirement, the Commission may make substituted compliance
  available only if direct access to swap data stored at a foreign trade
  repository is provided to the Commission.

[[Page 45369]]

VIII. Appendix D--Application of the Category A Transaction-Level 
Requirements to Swap Dealers and MSPs *

(Category A includes (1) Clearing and swap processing; (2) Margining 
and segregation for uncleared swaps; (3) Trade Execution; (4) Swap 
trading relationship documentation; (5) Portfolio reconciliation and 
compression; (6) Real-time public reporting; (7) Trade confirmation; 
and (8) Daily trading records).**

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      U.S. Person (other than                               Non-U.S. Person
                                       Foreign Branch of U.S.   Foreign Branch of U.S.     Guaranteed by, or     Non-U.S. Person Not  Guaranteed by, and
                                        Bank that is a Swap      Bank that is a Swap     Affiliate Conduit \1\    Not  an Affiliate Conduit \1\ of,  a
                                           Dealer or MSP)           Dealer or MSP          of, a U.S. Person                   U.S. Person
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. Swap Dealer or MSP (including    Apply..................  Apply..................  Apply.................  Apply.
 an affiliate of a non-3U.S. person).
Foreign Branch of U.S. Bank that is   Apply..................  Substituted Compliance.  Substituted             Substituted Compliance.\2\
 a Swap Dealer or MSP.                                                                   Compliance.\2\
Non-U.S. Swap Dealer or MSP           Apply..................  Substituted Compliance.  Substituted Compliance  Do Not Apply.
 (including an affiliate of a U.S.
 person).
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.
--------------------------------------------------------------------------------------------------------------------------------------------------------
** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would expect the parties to the swap to comply with the
 conditions of the Inter-Affiliate Exemption, including the treatment of outward-facing swaps condition in Commission regulation 50.52(b)(4)(i).
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Factors that are relevant to the consideration of whether a non-U.S. person is an ``affiliate conduit'' include whether: (i) the non-U.S. person is
  majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the
  U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging
  or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with
  such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial
  results of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be
  relevant.
\2\ Under a limited exception, where a swap between the foreign branch of a U.S. swap dealer or U.S. MSP and a non-U.S. person (that is not a guaranteed
  or conduit affiliate) takes place in a foreign jurisdiction other than Australia, Canada, the European Union, Hong Kong, Japan, or Switzerland, the
  counterparties generally may comply only with the transaction-level requirements in the foreign jurisdiction where the foreign branch is located if
  the aggregate notional value of all the swaps of the U.S. swap dealer's foreign branches in such countries does not exceed 5% of the aggregate
  notional value of all of the swaps of the U.S. swap dealer, and the U.S. person maintains records with supporting information for the 5% limit and to
  identify, define, and address any significant risk that may arise from the non-application of the Transaction-Level Requirements.
Notes:
\1\ The swap trading relationship documentation requirement applies to all transactions with registered swap dealers and MSPs.
\2\ Participation in multilateral portfolio compression exercises is mandatory for dealer to dealer trades.

IX. Appendix E--Application of the Category B Transaction-Level 
Requirements to Swap Dealers and MSPs *

(Category B is External Business Conduct Standards).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      U.S. Person (other than                               Non-U.S. Person
                                       Foreign Branch of U.S.   Foreign Branch of U.S.     Guaranteed by, or     Non-U.S. Person Not  Guaranteed by, and
                                        Bank that is a Swap      Bank that is a Swap     Affiliate Conduit \1\  Not an Affiliate Conduit \1\ of,  a U.S.
                                           Dealer or MSP)           Dealer or MSP         of,  a U.S. Person                     Person
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. Swap Dealer or MSP (including    Apply..................  Apply..................  Apply.................  Apply.
 an.
affiliate of a non-U.S. person).....
U.S. Swap Dealer or MSP (when it      Apply..................  Do Not Apply...........  Do Not Apply..........  Do Not Apply.
 solicits and negotiates through a
 foreign subsidiary or affiliate).
Foreign Branch of U.S. Bank that is   Apply..................  Do Not Apply...........  Do Not Apply..........  Do Not Apply.
 a Swap Dealer or MSP.
Non-U.S. Swap Dealer or MSP           Apply..................  Do Not Apply...........  Do Not Apply..........  Do Not Apply.
 (including an affiliate of a U.S.
 person).
--------------------------------------------------------------------------------------------------------------------------------------------------------
*The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Factors that are relevant to the consideration of whether a non-U.S. person is an ``affiliate conduit'' include whether: (i) the non-U.S. person is
  majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the
  U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging
  or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with
  such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial
  results of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be
  relevant.

[[Page 45370]]

X. Appendix F--Application of Certain Entity-Level and Transaction-
Level Requirements to Non-Swap Dealer/Non-MSP Market Participants*

(The relevant Dodd-Frank requirements are those relating to: clearing, 
trade execution, real-time public reporting, Large Trader Reporting, 
SDR Reporting and swap data recordkeeping).**

----------------------------------------------------------------------------------------------------------------
                                                                    Non-U.S. Person        Non-U.S. Person Not
                                        U.S. Person (including     Guaranteed by, or        Guaranteed by, or
                                        an affiliate of  non-    Affiliate Conduit \1\    Affiliate Conduit \1\
                                             U.S. person)          of,  a U.S. Person      of,  by U.S. Person
----------------------------------------------------------------------------------------------------------------
U.S. Person (including an affiliate    Apply..................  Apply..................  Apply.
 of non-U.S. person).
Non-U.S. Person Guaranteed by, or      Apply..................  Substituted              Do Not Apply.
 Affiliate Conduit \1\ of, a U.S.                                Compliance.\2\
 person.
Non-U.S. Person Not Guaranteed by, or  Apply..................  Do Not Apply...........  Do Not Apply.
 Affiliate Conduit \1\ of, U.S.
 Person.
----------------------------------------------------------------------------------------------------------------
* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance.
----------------------------------------------------------------------------------------------------------------
** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would generally
 expect the parties to the swap to comply with the conditions of the Inter-Affiliate Exemption, including the
 treatment of outward-facing swaps condition in Commission regulation 50.52(b)(4)(i).
----------------------------------------------------------------------------------------------------------------
\1\ Factors that are relevant to the consideration of whether a non-U.S. person is an ``affiliate conduit''
  include whether: (i) the non-U.S. person is majority-owned, directly or indirectly, by a U.S. person; (ii) the
  non-U.S. person controls, is controlled by, or is under common control with the U.S. person; (iii) the non-
  U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the
  purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and
  enters into offsetting swaps or other arrangements with such U.S. affiliate(s) in order to transfer the risks
  and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results of the
  non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and
  circumstances also may be relevant.
\2\ Substituted compliance does not apply to Large Trader Reporting, i.e., non-U.S. persons that are subject to
  part 20 would comply with it in the same way that U.S. persons comply. With respect to the SDR Reporting
  requirement, the Commission may permit substituted compliance only if direct access to swap data stored at a
  foreign trade repository is provided to the Commission.

    Issued in Washington, DC, on July 17, 2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendices to Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations--Commission Voting Summary and 
Statements of Commissioners

    Note: The following appendices do not constitute a part of the 
Interpretive Guidance and Policy Statement itself.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and 
Wetjen voted in the affirmative; Commissioner O'Malia voted in the 
negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the Interpretive Guidance and Policy Statement 
Regarding Compliance with Certain Swap Regulations (Guidance) and 
the related phase-in exemptive order also being adopted today. With 
this Commission action another important step has been taken to make 
swaps market reform a reality.
    This Guidance is being adopted just shy of the third anniversary 
of President Obama signing the Dodd-Frank Act, and that law was 
historic. It was an historic answer to an historic problem: the near 
collapse of the American economy driven, in part, by the unregulated 
derivatives marketplace. Congress and the President were clear in 
their intention to bring transparency to this marketplace, to lower 
risk to the public, and to ensure the regulation of swap dealers and 
major swap participants.
    In 2008, when both the financial system and the financial 
regulatory system failed the public, Americans paid the price 
through the crisis with their jobs, their pensions, and their homes. 
We lost 8 million jobs in that crisis and thousands of businesses 
shuttered. The swaps market was central to the crisis and financial 
institutions operating complicated swaps businesses and offshore 
entities nearly toppled the economy. Congress responded. Americans 
are remarkably resilient--but the public really does expect us to 
learn from the lessons of the crisis, and to do everything possible 
to prevent this from happening to any of us again.
    It's pretty straightforward, I think. Even though we oversee, 
here at the CFTC, a complex and sometimes difficult to understand 
market (my mom consistently asks me, ``Gary, what are swaps?''), the 
questions the American people are looking for us to answer are 
simple: Have we lowered risk? Have we brought transparency to these 
markets? Have we promoted competition and openness in these markets 
so that end users can get the greatest benefit when they seek to 
lower their risk and focus on what they do well--which is employing 
people, innovating and moving our economy forward? That is why 
reform matters.
    Five years after the crisis and three years after Dodd-Frank 
passed, market participants are coming into compliance with the 
common sense reforms that Congress and the President laid out. 
Through Dodd-Frank and the rules that this agency has put in place, 
no longer will the markets be opaque and dark, and we will have 
transparency in the markets. In fact, throughout this year, for the 
first time, the public and regulators have benefitted from reporting 
to swap data repositories and reporting to the public. And later 
this year, starting actually in August, facilities called swap 
execution facilities will start so that the public can benefit from 
greater openness and competition before the transaction occurs. And 
by the end of this year, there are likely to be trade execution 
mandates for interest rate and credit derivative index products, as 
well.
    Central clearing became required for the broader market earlier 
this year, with key phase in dates to come this Fall and Winter, as 
well. We have 80 swap dealers, and, yes, two major swap 
participants, now provisionally registered. As part of the 
responsibilities accompanying registration, they're responsible for 
sales practice, record keeping and other business conduct 
requirements that help lower the risk to the public.
    Yesterday, we took another significant step when we and the 
European Commission announced a path forward regarding joint 
understandings regarding the regulation of cross border derivatives. 
I want to publicly thank Commissioner Michel Barnier, his Director 
General Jonathan Faull, and their staffs, the staffs at the European 
Securities Market Authority, and Steven Maijoor's leadership, for 
collaborating throughout the reform process. This was a significant 
step forward in harmonizing and giving clarity to the markets as to 
when there might be jurisdictional overlaps with regard to this 
reform.
    Today, we are considering two important actions, the Guidance, 
as well as a related

[[Page 45371]]

phase-in exemptive order. And as you probably have heard me say 
before, the nature of modern finance is that financial institutions 
commonly set up hundreds, even thousands of legal entities around 
the globe. In fact, the U.S.'s largest banks each have somewhere 
between 2,000 and 3,000 legal entities around the globe. Some of 
them have hundreds of legal entities just in the Cayman Islands 
alone. We have to remind ourselves that the largest banks and 
institutions are global in nature, and when a run starts on any part 
of an overseas affiliate or branch of a modern financial 
institution, risk comes crashing right back to our shores.
    Similarly, if it's an EU financial institution and it has some 
guaranteed affiliate in the U.S. or overseas that gets into trouble, 
that risk can flow back to their shores. That's why, together both 
we and Europe recognize the importance of covering guaranteed 
affiliates, whether they're guaranteed affiliates of a U.S. person 
or of an EU person.
    There's no question to me, at least, that the words of Dodd-
Frank addressed this (i.e., risk importation) when they said that a 
direct and significant connection with activities and/or effect on 
commerce in the United States covers these risks that may come back 
to us.
    I want to publicly thank Chairman Barney Frank along with 
Spencer Bachus, Frank Lucas, and Collin Peterson, and their staffs 
for reaching out to the CFTC and the public to ask how to best 
address offshore risks that could wash back to our economy in Dodd-
Frank.
    In addition, we should not forget the actual events over the 
past several years that remind us of the risks to the U.S. that can 
be posed by offshore entities:
    AIG nearly brought down the U.S. economy. Lehman Brothers had 
3,300 legal entities, including a London affiliate that was 
guaranteed here in the U.S., and it had 130,000 outstanding swap 
transactions. Citigroup had structured investment vehicles that were 
set up in the Cayman Islands, run out of London, and yet were 
central to not one, but two bailouts of that institution. Bear 
Stearns, in 2007 had two sinking hedge funds that had to be bailed 
out by Bear Stearns--and, yes, those hedge funds were organized in 
the jurisdiction of the Cayman Islands.
    More than a decade earlier, I was working in my position as 
Assistant Secretary of the United States Department of the Treasury. 
I found myself making a call from Connecticut to then Treasury 
Secretary Robert Rubin to report that Long Term Capital Management's 
$1.2 trillion swaps book was not only going to go down within a day 
or two, but that the business--that we thought was in Connecticut--
was actually incorporated in the Cayman Islands as a PO Box 
facility.
    Even last year, we had yet another reminder that branches of big 
U.S. banks can bring risk back to the US. Even though they were not 
the risks as large as I've just related, JPMorgan Chase's Chief 
Investment Office's credit default swaps were executed primarily in 
the U.K. branch.
    Each of these examples demonstrated a direct and significant 
connection with activities and/or an effect on commerce in the 
United States. Congress knew this painful history when it provided 
the cross border provisions of swaps market reform. And as market 
participants asked the CFTC to provide interpretive guidance on 
Congress's word, I believe that we have had to keep this painful 
history in mind. Two and a half years ago, the CFTC started working 
on guidance, which was published for notice and comment in June 
2012, and for which we sought further input on in December 2012. We 
have greatly benefitted from this public input. The Guidance the 
Commission will adopt today incorporates the public's input and, I 
think, appropriately interprets the cross border provisions of Dodd-
Frank.
    There are four areas that I think really are important:
    First, the CFTC interprets the cross-border provisions to cover 
swaps between non U.S. swap dealers and guaranteed affiliates of 
U.S. Persons, as well as swaps between two guaranteed affiliates 
that are not swap dealers. The guidance does, as was proposed, 
recognize and embrace the concept of substituted compliance where 
there are comparable and comprehensive rules abroad. But the history 
of AIG, Lehman Brothers, Citigroup and the others, and of guaranteed 
affiliates, is a strong lesson that Congress knew when we were 
approaching these issues.
    Second, the definition of U.S. person in this guidance captures 
offshore hedge funds and collective investment vehicles that have 
their principal place of business here in the U.S., or that are 
majority owned by U.S. persons. Addressing ourselves to guidance, 
and yet forgetting the lessons of Long Term Capital Management or 
Bear Stearns, is not in my opinion what Congress wanted.
    Third, under the guidance, foreign branches, like the JPMorgan's 
U.K. branch, of U.S. swap dealers may also comply with Dodd-Frank 
through substituted compliance if they are appropriately ring-
fenced--that is, they are truly branches where employees and the 
booking and the taxes are actually offshore in the foreign branch. 
The Guidance allows, if there are comparable and comprehensive 
regimes overseas and supervisory authorities overseas looking at 
those branches, that those branches can avail themselves to 
substituted compliance in the manner offshore guaranteed affiliates 
would.
    Lastly, the guidance provides that swap dealers, foreign or 
U.S., transacting with U.S. persons (whether they be in New Jersey, 
Maryland, Michigan, Arkansas, Iowa--I have to get all the right 
states, recognizing where my fellow Commissioners come from) 
anywhere in the United States, must comply with Dodd-Frank's swap 
market reform. The guidance does provide, though, that U.S. Persons 
can meet international people anonymously, and not only on our 
exchanges called designated contract markets, but also on the new 
swap execution facilities, as well as foreign boards of trade. 
International parties trading on those platforms do not have to 
worry about whether those swaps might make them a swap dealer, or 
whether they need to worry about certain transaction level 
requirements. And I think that was important to maintain and promote 
the liquidity of these three very important types of platforms--
foreign boards of trade, swap execution facilities, and designated 
contract markets.
    In conclusion, I will be voting in support of the Guidance and 
the related phase-in exemptive order also being adopted today. I'll 
say more about the exemptive order in my statement of support for 
that document, but I think these are both critical steps for the 
Commission and swaps reform. They add to the approximately 56 final 
guidance and rules that this Commission has adopted. We're well over 
90 percent through the various rule and guidance writing. And the 
markets are probably well towards half way implementing these 
reforms. I have a deep respect for how much work market participants 
are doing to come into compliance.
    So now, 3 years after the passage of financial reform, and a 
full year after the Commission proposed guidance with regard to the 
cross border application of reform, it is time for reforms to 
properly apply to and cover those activities that, as identified by 
Congress in section 722(d) of the Dodd-Frank Act, have ``a direct 
and significant connection with activities in, or effect on, 
commerce of the United States.'' With the additional transitional 
phase-in period provided by this Order, it is now time for the 
public to get the full benefit of the transparency and the measures 
to reduce risk included in Dodd Frank reforms.

Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia

    I respectfully dissent from the Commodity Futures Trading 
Commission's (the ``Commission'' or ``CFTC'') approval of its 
interpretive guidance and policy statement (``Guidance'') regarding 
the cross-border application of the swaps provisions of the 
Commodity Exchange Act (``CEA''), as well as from the Commission's 
approval of a related exemptive order (``Exemptive Order'').
    When I voted in July 2012 to issue for public comment the 
proposed interpretive guidance and policy statement (``Proposed 
Guidance''),\1\ I made clear that if I had been asked to vote on the 
Proposed Guidance as final, my vote would have been no. I then laid 
out my concerns with the Proposed Guidance, all relating to the 
Commission's unsound interpretation of section 2(i) of the CEA,\2\ 
which governs the extraterritorial application of the CEA's swaps 
provisions. Regrettably, the Guidance fails to address these 
concerns and constitutes a regulatory overreach based on a weak 
foundation of thin statutory and legal authority.
---------------------------------------------------------------------------

    \1\ Cross-Border Application of Certain Swaps Provisions of the 
Commodity Exchange Act, 77 FR 41214 (July 12, 2012).
    \2\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------

    Like the Proposed Guidance, the Guidance: (1) Fails to 
articulate a valid statutory foundation for its overbroad scope and 
inconsistently applies the statute to different activities; (2) 
crosses the line between interpretive guidance and rulemaking; and 
(3) gives insufficient consideration to international law and 
comity. These shortcomings are compounded by serious procedural 
flaws in the Commission's treatment of international harmonization 
and substituted compliance, as well as in its issuance of the 
Exemptive Order.

[[Page 45372]]

Lack of Statutory Foundation

    Section 2(i) of the CEA \3\ as amended by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (the ``Dodd-Frank 
Act'') \4\ provides, in part, that the Commission's swap authority 
``shall not apply'' to activities outside the United States unless 
those activities ``have a direct and significant connection with 
activities in, or effect on, commerce of the United States . . . .'' 
\5\ This provision is clearly a limitation on the Commission's 
authority.\6\ It follows that the Commission must properly 
articulate how and when the ``direct and significant'' standard is 
met in order to apply Commission rules to swap activities that take 
place outside of the United States.
---------------------------------------------------------------------------

    \3\ Sec.  2(i).
    \4\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \5\ Sec.  2(i)(1).
    \6\ Stated another way, section 2(i)(1) may be read as the 
following: ``[The CEA's swaps provisions enacted by the Dodd-Frank 
Act] may apply to activities outside the United States only if those 
activities have a direct and significant connection with activities 
in, or effect on, commerce of the United States.''
---------------------------------------------------------------------------

    The Guidance, however, fails to do so. Instead, it treats 
section 2(i) as a ready tool to expand authority rather than as a 
limitation. The statutory analysis section of the Guidance is 
insufficient to support the broad sweep of extraterritorial 
activities that the Guidance contemplates would fall under the 
Commission's jurisdiction, relying heavily on a comparison to 
somewhat similar statutory language whose wholly different context 
renders the comparison unpersuasive. The Guidance makes no mention 
of statutes that may be more analogous to the CEA, such as the 
securities or banking laws.\7\ Because the ``direct and 
significant'' standard is never defined, the Guidance's attempts to 
link certain requirements imposed on market participants to the 
``direct and significant'' standard do not establish the requisite 
jurisdictional nexus.\8\
---------------------------------------------------------------------------

    \7\ For a recent statutory analysis of the extraterritorial 
application of the Securities and Exchange Act of 1934, see Morrison 
v. Nat'l Australia Bank, 561 U.S. ---- (2010).
    \8\ See Appalachian Power Co. v. Envtl. Prot. Agency, 208 F.3d 
1015, 1027 (D.C. Cir. 2000) (vacating agency guidance interpreting 
statutory language with practical binding effect because it did not 
define subparts of the interpreted term and should have been 
promulgated as a legislative rule under the APA).
---------------------------------------------------------------------------

    I would also like to point out that CEA section 2(i) contains a 
second clause, which allows for the limited application of the 
Commission's swap rules to activities outside the United States when 
they violate the Commission's anti-evasion rules.\9\ Pursuant to 
this clause, the Commission promulgated section 1.6 under Part 1 of 
its regulations.\10\ Rather than relying on section 1.6 to address 
its concerns about evasion, the Commission chose simply to reference 
the same concerns in justifying its overbroad reach in the Guidance.
---------------------------------------------------------------------------

    \9\ 7 U.S.C. 2(i)(2) ([The CEA's swaps provisions enacted by the 
Dodd-Frank Act] ``shall not apply to activities outside the United 
States unless those activities . . . contravene such rules or 
regulations as the Commission may prescribe or promulgate as are 
necessary or appropriate to prevent the evasion of any provision of 
[the CEA enacted by the Dodd-Frank Act]'').
    \10\ 17 CFR 1.6.
---------------------------------------------------------------------------

    With such an unsound foundation for the Commission's 
extraterritorial authority under the ``direct and significant'' 
standard, I am not surprised that the Guidance often applies section 
2(i) of the CEA inconsistently and arbitrarily. Examples of 
inconsistency abound.
    For instance, just as with the Proposed Guidance, the Guidance 
does not provide a basis for its reasoning that all Transaction-
Level Requirements described in the Guidance satisfy the ``direct 
and significant'' standard under section 2(i). As I stated in my 
concurrence to the Proposed Guidance, trade execution and real-time 
public reporting requirements, although important for transparency 
purposes, do not raise the same systemic risk concerns that clearing 
and margining for uncleared swaps do. The Guidance acknowledges this 
point, but does not go on to sufficiently explain why they should 
be, and are, treated equally. The Guidance also acknowledges that 
clearing and margining, because of their implications for systemic 
risk, could be classified as Entity-Level Requirements, but it does 
not explain why are they are not. The Guidance's failure to give 
meaning to the ``direct and significant'' standard in its discussion 
of these requirements is glaring.
    Inconsistent application can also be seen within a specific 
Transaction-Level Requirement, for example reporting to swap data 
repositories (``SDRs''). The Guidance allows non-U.S. swap dealers 
(``SDs'') and major swap participants (``MSPs'') to utilize 
substituted compliance for SDR reporting of their swaps with non-
U.S. counterparties, but it does not allow for substituted 
compliance for non-U.S. SD and MSPs' trades with U.S. 
counterparties. Again, the Commission fails here to give real 
meaning to ``direct and significant'' in order to adequately explain 
its reasoning for this distinction. The rationale is even weaker 
given the fact that substituted compliance is available for swaps 
with non-U.S. counterparties only under the condition that the 
Commission has direct access to the relevant data at the foreign 
trade repository. In either case, the Commission will have direct 
access to the relevant data, whether substituted compliance is 
available or not. This raises the question: if the outcome is the 
same, why is the distinction made? If it is different, the Guidance 
does not explain how or why--despite requiring data at foreign trade 
repositories to be essentially the same as data at domestic SDRs, 
before the Commission even contemplates substituted compliance for 
SDR reporting.
    Yet another example of inconsistent application of section 2(i) 
involves the requirement of physical commodity large swaps trader 
reporting (``Large Trader Reporting''). In contrast to SDR 
reporting, the Guidance does not allow substituted compliance for 
Large Trader Reporting, even for swaps between a non-U.S. registrant 
and a non-U.S. counterparty. The Commission's flimsy rationale is 
that Large Trader Reporting involves data conversion to ``futures 
equivalent'' units, and that it would cost too much time and 
resources for the Commission to conduct this conversion on data that 
it could access in a foreign trade repository. Here again, the 
``direct and significant'' standard is nowhere to be found. 
Moreover, the Commission overstates the burden of the ``futures 
equivalent'' conversion and, more generally, the significance of 
Large Trader Reporting in its oversight duties, while understating 
the availability of data collected through SDR reporting, with its 
eligibility for substituted compliance, to achieve the same 
regulatory objectives.

Interpretive Guidance Versus Rulemaking

    The imposition of requirements on market participants raises 
another of my major concerns with the Guidance. I strongly disagree 
with the Commission's decision to issue its position on the cross-
border application of its swaps regulations in the form of 
``interpretive guidance'' instead of promulgating a legislative rule 
under the Administrative Procedure Act (``APA'').\11\
---------------------------------------------------------------------------

    \11\ 5 U.S.C. 551 et seq.
---------------------------------------------------------------------------

    Simply putting the guise of ``guidance'' on this document does 
not change its content or consequences. Where agency action has the 
practical effect of binding parties within its scope, it has the 
force and effect of law, regardless of the name it is given.\12\ 
Legally binding regulations that impose new obligations on affected 
parties--``legislative rules''--must conform to the APA.\13\ On its 
face, the Guidance sets out standards that it contemplates will be 
regularly applied by staff to cross-border activities in the swaps 
markets. Market participants cannot afford to ignore detailed 
regulations imposed upon their activities that may result in 
enforcement or other penalizing action.\14\ This point is underlined 
by the fact that, as I discuss below, Commission staff no-action 
letters have been issued in connection with compliance obligations 
that have essentially been imposed by the Guidance.\15\ All of this 
leads to the logical conclusion that the Guidance has a practical 
binding effect and

[[Page 45373]]

should have been promulgated as a legislative rule under the APA.
---------------------------------------------------------------------------

    \12\ See Gen. Elec. Co. v. Envtl. Prot. Agency, 290 F.3d 377, 
380 (D.C. Cir. 2002) (finding that a guidance document is final 
agency action); Appalachian Power, 208 F.3d at 1020-21.
    \13\ See Chrysler Corp. v. Brown, 441 U.S. 281, 302-03 (1979) 
(agency rulemaking with the force and effect of law must be 
promulgated pursuant to the procedural requirements of the APA).
    \14\ ``A document will have practical binding effect before it 
is actually applied if the affected private parties are reasonably 
led to believe that failure to conform will bring adverse 
consequences . . . .'' Gen. Elec., 290 F.3d at 383 (quoting Anthony, 
Robert A., Interpretive Rules, Policy Statements, Guidances, 
Manuals, and the Like--Should Federal Agencies Use Them to Bind the 
Public?, 41 Duke L.J. 1311 (1992)) (vacating an agency's guidance 
document that the court found to have practical binding effect and 
where procedures under the APA were not followed).
    \15\ A no-action letter is issued by a division of the 
Commission and states that, for the reasons and under the conditions 
described therein, it will not recommend that the Commission 
commence an enforcement action against an entity or group of 
entities for failure to comply with obligations imposed by the 
Commission.
---------------------------------------------------------------------------

    There are important policy and legal considerations that weigh 
strongly in support of rulemaking in accordance with the APA. Not 
only do the safeguards enacted by Congress in the APA ensure fair 
notice and public participation, they help to ensure reasoned 
decision-making and accountability. In addition, the APA requires 
that courts take a ``hard look'' at agency action.\16\
---------------------------------------------------------------------------

    \16\ The ``arbitrary and capricious'' standard of review of 
agency action under the APA is a rationality analysis also known as 
the hard-look doctrine:
    Under the leading formulation of this doctrine, ``the agency 
must examine the relevant data and articulate a satisfactory 
explanation for its action including a `rational connection between 
the facts found and the choices made.' '' The court ``consider[s] 
whether the decision was based on a consideration of the relevant 
factors and whether there has been a clear error of judgment.'' In 
addition, the agency may not ``entirely fail[ ] to consider an 
important aspect of the problem,'' may not ``offer[ ] an explanation 
for its decision that runs counter to the evidence before the 
agency,'' nor offer an explanation that is ``so implausible that it 
could not be ascribed to a difference in view or the product of 
agency expertise.'' The agency must also relate the factual findings 
and expected effects of the regulation to the purposes or goals the 
agency must consider under the statute as well as respond to salient 
criticisms of the agency's reasoning.
    Stack, Kevin M., Interpreting Regulations, 111 Mich. L. Rev. 
355, 378-79 (2012) (internal citations omitted).
---------------------------------------------------------------------------

    By issuing ``interpretive guidance'' instead of rulemaking, the 
Commission has also avoided analyzing the costs and benefits of its 
actions pursuant to section 15(a) of the CEA,\17\ because the CEA 
requires the Commission to consider costs and benefits only in 
connection with its promulgation of regulations and orders. 
Compliance with the Commission's swaps regulations entails 
significant costs for market participants. Avoiding cost-benefit 
analysis by labeling the document as guidance is unacceptable.
---------------------------------------------------------------------------

    \17\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    In my concurrence to the Proposed Guidance, I suggested that the 
Commission should at least prepare a report analyzing the costs 
attributable to the breadth of the Commission's new authority under 
CEA section 2(i). I am disappointed, but not surprised, that the 
Commission has not taken up my suggestion.

Insufficient Consideration of Principles of International Comity

    Also in my concurrence to the Proposed Guidance, I pointed out 
that the Commission's approach gave insufficient consideration to 
principles of international comity. The Guidance suffers from the 
same shortcoming.
    The Commission does describe principles of international comity 
in the Guidance, as it did in the Proposed Guidance. However, mere 
citation is meaningless if unaccompanied by adherence. With an 
interpretation of section 2(i) that essentially views the 
Commission's jurisdiction as boundless, roping in all transactions 
with U.S. persons regardless of the location or the regulations that 
foreign regulators may have in place, the reality is that the 
Commission's approach is unilateral and does not give adequate 
consideration to comity principles.
    These principles are crucial given the global, interconnected 
nature of today's swaps markets. Properly considering these 
principles--in addition to indicating respect for the international 
system and the legitimate interests of other jurisdictions--
strengthens, not weakens, the Commission's ability to effectively 
regulate swaps markets.

On the Path Forward to Harmonization, But a Flawed Process

    In order to implement principles of international comity and 
develop a harmonized global regulatory system that is both effective 
and efficient, I have consistently called for meaningful cooperation 
with foreign regulators. I initially did so in my concurrence to the 
Proposed Guidance, and the necessity of greater collaboration was 
subsequently driven home by the number and tone of comment letters 
on the Proposed Guidance submitted by foreign regulators.\18\ Then, 
when the Commission finalized a cross-border exemptive order last 
December with an expiration date of July 12,\19\ in my concurring 
statement I again urged the Commission and foreign regulators to 
engage in meaningful, substantive discussions.
---------------------------------------------------------------------------

    \18\ The Commission received comment letters from, among others: 
Jonathan Faull, European Commission; Steven Maijoor, European 
Securities and Markets Authority; David Lawton and Stephen Bland, UK 
Financial Services Authority; Pierre Moscovici, France Ministry of 
Economy and Finance, Christian Noyer, Autorite de controle 
prudential, and Jacques Delmas-Marsalet, Autorite des marches 
financiers; Patrick Raaflaub and Mark Branson, Swiss Financial 
Market Supervisory Authority; Masamichi Kono, Japan Financial 
Services Agency, and Hideo Hayakawa, Bank of Japan; K.C. Chan, 
Financial Services and Treasury Bureau of the Hong Kong Special 
Administrative Region; Belinda Gibson, Australian Securities and 
Investments Commission, Malcolm Edey, Reserve Bank of Australia, 
Arthur Yuen, Hong Kong Monetary Authority, Keith Lui, Hong Kong 
Securities and Futures Commission, and Teo Swee Lian, Monetary 
Authority of Singapore. These and all public comment letters on the 
Proposed Guidance are available at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234&ctl00--ctl00--
cphContentMain--MainContent--gvCommentList.
    \19\ Final Exemptive Order Regarding Compliance With Certain 
Swap Regulations, 78 FR 858 (January 7, 2013). The document was 
adopted by the Commission in December 2012 and published in the 
Federal Register in January 2013.
---------------------------------------------------------------------------

    I am pleased that over the past several months, this engagement 
has taken place and progress has been made toward harmonization. 
However, we are not where we need to be: many outstanding issues and 
questions remain, from data privacy concerns, to the implications of 
other jurisdictions still finalizing their regulations, to a lack of 
a clear, consistent and transparent framework for substituted 
compliance. It would have made sense for these issues to be 
addressed in the Guidance--but they are not. The looming July 12 
expiration of the December exemptive order and the resulting time 
crunch cannot reasonably be cited as the reason for this failure, 
because July 12 is an artificial date; it could have been pushed 
back in order to reach the right outcome with the right process.
    Instead, while we are moving toward a workable outcome on 
harmonization, the process by which we are getting there is patently 
unacceptable. The most glaring example of this flawed process is 
this week's publication of a Commission staff no-action letter 
allowing substituted compliance for certain of the Transaction-Level 
Requirements.\20\ It boggles the mind to think that a staff letter 
issued by a single division, with no input from the Commission, 
would be used as the vehicle for addressing such a major issue.\21\ 
Making matters worse, this no-action letter is outside the scope of 
a forthcoming Commission decision regarding the comparability of 
European rules. And the relief is not time-limited, thereby creating 
an effect similar to a rulemaking. Consequently, this indefinite 
exclusion not only preemptively overrides a Commission decision, but 
it also seems to provide relief beyond that contemplated by the 
Guidance, which calls for a re-evaluation of all substituted 
compliance determinations within four years of the initial 
determination.
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    \20\ No-Action Relief for Registered Swap Dealers and Major Swap 
Participants from Certain Requirements under Subpart I of Part 23 of 
Commission Regulations in Connection with Uncleared Swaps Subject to 
Risk Mitigation Techniques under EMIR, CFTC Letter No. 13-45 (July 
11, 2013).
    \21\ I have set forth in note 18 some of the comment letters 
that the Commission has received from foreign supervisors and 
regulators. By allowing substituted compliance to be addressed 
through a no-action letter, is the Commission implying that, e.g., 
the Bank of Japan should accede to, e.g., decisions of the CFTC 
Division of Swap Dealer and Intermediary Oversight? If so, I find 
such implication inappropriate.
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    Unfortunately, this is not the first instance in recent times of 
staff no-action letters being used to issue Commission policy. Not 
only are they an improper tool to get around formal Commission 
action, their prolific use is a reflection of the ad-hoc, last-
minute approach that has been far too prevalent lately at the 
Commission. I cannot emphasize this enough: the Commission must stop 
this approach and get back to issuing policy in a more formal, open 
and transparent manner.

Substituted Compliance

    In my discussions with fellow regulators abroad and 
international regulatory bodies, it is clear that there are varying 
degrees of reforms being developed and implemented in respective 
jurisdictions: some are comparable to U.S. regulations and some are 
less stringent, but there are some that exceed the Commission's own 
requirements. I would have preferred the Commission to take the past 
year following the release of the Proposed Guidance to engage our 
international colleagues and to involve the International 
Organization of Securities Commissions (``IOSCO'') in order to 
resolve the issue of harmonizing our rules. Under this approach, we 
could finalize our guidance upon completion of the international 
harmonization process, allowing us to take into account any 
shortcomings in that process. Instead, we

[[Page 45374]]

have chosen the reverse order: to impose statutorily weak guidance, 
with all its no-action riders and exemptions, with only the promise 
of further negotiations with our foreign counterparts.
    Given the way the Commission has proceeded up to this point, it 
is my hope that the harmonization work lying ahead will be 
undertaken in a more transparent manner and not done through the 
abused no-action process that lacks any formal Commission process or 
oversight. Further, I hope that the process of substituted 
compliance will offer the opportunity for other regulatory bodies to 
engage directly with the full Commission, so that we can better 
understand how our rules and theirs will work and can minimize the 
likelihood of regulatory retaliation and inconsistent, duplicative, 
or conflicting rules. I believe the Commission has worked too hard 
to develop principles and standards that will encourage greater 
transparency, open access to clearing and trading and improved 
market data to let them go to waste due to a lack of global 
regulatory harmonization.
    I want to work with other home country regulators to ensure 
there is not an opportunity for entities to exploit regulatory 
loopholes. The stark reality is that this Commission is not the 
global regulatory authority and does not have the resources to 
support such a mission. Therefore, our best and most effective 
solution is to engage in a fully transparent discussion on 
substituted compliance and to do so immediately.

Exemptive Order

    In an effort to mitigate the broad reach of the Guidance and 
accommodate its last-minute finalization, and in a moment of 
humility, the Commission has agreed to delay the application of 
certain elements of the Commission's swaps regulations with its 
approval of the Exemptive Order. The Exemptive Order provides relief 
ranging from 75 days (for application of the expanded U.S. person 
definition, for example) to December 21, 2013 (for Entity-Level and 
Transaction-Level Requirements for non-U.S. SDs and MSPs in certain 
jurisdictions). The Commission is issuing the Exemptive Order 
pursuant to section 4(c) of the CEA.\22\
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    \22\ Section 4(c) of the CEA grants the Commission the authority 
to ``exempt any agreement, contract, or transaction (or class 
thereof) that is otherwise subject to subsection (a) (including any 
person or class of persons offering, entering into, rendering advice 
or rendering other services with respect to, the agreement, 
contract, or transaction). . . .'' 7 U.S.C. 6(c). Section 4(a) 
applies to ``any person to offer to enter into, to enter into, to 
execute, to confirm the execution of, or to conduct any office or 
business anywhere in the United States, its territories or 
possessions, for the purpose of soliciting, or accepting any order 
for, or otherwise dealing in, any transaction in, or in connection 
with, a contract for the purchase or sale of a commodity for future 
delivery (other than a contract which is made on or subject to the 
rules of a board of trade, exchange, or market located outside the 
United States, its territories or possessions). . . .'' 7 U.S.C. 
6(a).
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    Even though the Exemptive Order goes into effect immediately, 
the Commission has included a post hoc 30-day comment period. I 
support the additional time that the Exemptive Order provides for 
market participants to comply with the Commission's last-minute 
Guidance, but I cannot support a final order that blatantly ignores 
the APA-mandated comment periods for Commission action, especially 
when I advocated for a relief package that would have provided for 
public comment over a month ago.\23\
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    \23\ The Exemptive Order claims, unconvincingly, that it falls 
under a good-cause exception to notice-and-comment requirements 
provided for by the APA under section 553(b)(B): ``Except when 
notice and hearing is required by statute, this subsection does not 
apply . . . (B) when the agency for good cause finds (and 
incorporates the finding and a brief statement of reasons therefore 
in the rules issued) that notice and public procedure thereon are 
impracticable, unnecessary, or contrary to the public interest.'' 5 
U.S.C. 553(b)(B) (emphasis added). However, section 4(c) of the CEA 
clearly provides that the Commission may grant exemptive relief only 
by ``rule, regulation, or order after notice and opportunity for 
hearing'' (emphasis added). 7 U.S.C. 6(c). The APA further provides 
under section 559 that it does not ``limit or repeal additional 
requirements imposed by statute or otherwise recognized by law.'' 5 
U.S.C. 559. The CEA also grants emergency powers to the Commission 
under exigent circumstances. See, e.g., 7 U.S.C. 12a(9). In 
addition, courts have narrowly construed the good-cause exception 
and placed the burden of proof on the agency. See Tenn. Gas Pipeline 
Co. v. Fed. Energy Regulatory Comm'n, 969 F.2d 1141 (D.C. Cir. 
1992); Guardian Fed. Sav. & Loan Ass'n v. Fed. Sav. & Loan Ins. 
Corp., 589 F.2d 658, 663 (D.C. Cir. 1978).
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Additional Concerns

    In addition to the above, the Guidance leaves me concerned in a 
number of other areas. I am concerned about whether the definition 
of U.S. person contained herein provides the necessary clarity for 
market participants, particularly as its enumerated prongs are 
explicitly deemed to form a non-exhaustive list. I question whether 
the Commission has done enough to harmonize its cross-border 
approach with that of the Securities and Exchange Commission (which 
is being issued through notice-and-comment rulemaking instead of 
interpretive guidance, I should note), in particular with regard to 
the definitions of U.S. person and foreign branches. I also am 
concerned about whether the Guidance creates an uneven playing field 
for U.S. firms, which would be a plainly unacceptable outcome to me. 
I am concerned that the Guidance is overlapping, duplicative, and 
perhaps even contradictory with other provisions in the Dodd-Frank 
Act that mitigate systemic risk and allocate responsibility for 
administering its complex and comprehensive regulatory regime to 
multiple agencies under Title I, Title II, and even within Title 
VII.\24\ In addition, I am concerned that the Guidance practically 
ignores the hugely important matter of protecting customer funds, 
specifically in connection with bankruptcies, which has critical 
cross-border implications as vividly demonstrated by the recent 
collapse of MF Global.\25\ Finally, I am concerned about whether in 
overreaching to rope in entities into U.S. jurisdiction that would 
more appropriately be regulated elsewhere pursuant to an effective 
system of substituted compliance, the Guidance will have the 
perverse effect of creating more risk to the U.S. system and more 
risk to U.S. taxpayers.
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    \24\ See, e.g., 7 U.S.C. 6s(d)(2) (``The Commission may not 
prescribe rules imposing prudential requirements on swap dealers or 
major swap participants for which there is a prudential 
regulator.''); 7 U.S.C. 6b-1(b) (``The prudential regulators shall 
have exclusive authority to enforce the provisions of section 4s(e) 
with respect to swap dealers or major swap participants for which 
they are the prudential regulator.'')
    \25\ In a recent op-ed article James Giddens, the bankruptcy 
trustee for MF Global's U.S.-registered entities, points out that 
serious concerns regarding the harmonization, or lack thereof, of 
bankruptcy regimes were identified during the resolution of Lehman 
Brothers in 2008 (he was then the liquidation trustee for Lehman 
Brothers's U.S. broker-dealer), only for similar failings to appear 
with MF Global. He urges clearer and more consistent cross-border 
rules regarding the protection of customer money in advance of any 
future multinational financial company meltdown. Giddens, James, How 
to Avoid the Next MF Global Surprise: Change Cross-Border Rules to 
Stop Raids on U.S. Customer Accounts, Wall St. J., July 9, 2013.
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Conclusion

    For an administrative agency, good government combines good 
substance--based on a faithful, appropriate reading of the guiding 
statute--and good process. The Guidance falls woefully short on both 
counts. Therefore, I respectfully dissent from the decision of the 
Commission to approve the Guidance and Exemptive Order for 
publication in the Federal Register.

[FR Doc. 2013-17958 Filed 7-25-13; 8:45 am]
BILLING CODE 6351-01-P
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