Vol. 77 Thursday, 

No. 134 July 12, 2012 

Part II 

Commodities Futures Trading Commission 

17 CFR Part 1 

Cross-Border Application of Certain Swaps Provisions of the Commodity 

Exchange Act; Proposed Rule 


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41214 Federal Register / Vol. 77, No. 134 / Thursday, July 12, 2012 / Proposed Rules 

1 17 CFR 145.9. 

2 5 U.S.C. 551, et seq. 

3 5 U.S.C. 552. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Chapter I 

RIN 3038–AD57 

Cross-Border Application of Certain 

Swaps Provisions of the Commodity 

Exchange Act 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Proposed interpretive guidance 

and policy statement. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC) is publishing for public 

comment this proposed interpretive 

guidance and policy statement regarding 

the cross-border application of the 

swaps provisions of the Commodity 

Exchange Act (‘‘CEA’’) that were 

enacted by Title VII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act, and the Commission’s 

regulations promulgated thereunder. 

Specifically, this proposed interpretive 

guidance and policy statement describes 

the following: The general manner in 

which the Commission will consider 

whether a person’s swap dealing 

activities or swap positions may require 

registration as a swap dealer or major 

swap participant, respectively, and the 

application of the related requirements 

under the CEA to swaps involving such 

persons; and the application of the 

clearing, trade execution, and certain 

reporting and recordkeeping provisions 

under the CEA, to cross-border swaps 

involving one or more counterparties 

that are not swap dealers or major swap 

participants. This proposed interpretive 

guidance and policy statement also 

generally describes the policy and 

procedural framework under which the 

Commission may permit compliance 

with a comparable regulatory 

requirement of a foreign jurisdiction to 

substitute for compliance with the 

requirements of the CEA. 

DATES: Comments must be received on 

or before August 27, 2012. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD57, 

by any of the following methods: 

• The agency’s Web site: at http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to www.cftc.gov. You 

should submit only information that 

you wish to make available publicly. If 

you wish the Commodity Futures 

Trading Commission to consider 

information that you believe is exempt 

from disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the Commission’s regulations.1

Throughout this proposed interpretive 

guidance, the Commission requests 

comment in response to specific 

questions set out herein. For 

convenience, the Commission has 

numbered each of these requests for 

comment. The Commission asks that, in 

submitting responses to these requests 

for comment, commenters kindly 

identify the specific number of each 

request to which their comments are 

responsive. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

proposal will be retained in the public 

comment file and will be considered as 

required under the Administrative 

Procedure Act 2 and other applicable 

laws, and may be accessible under the 

Freedom of Information Act.3

FOR FURTHER INFORMATION CONTACT: 

Carlene S. Kim, Assistant General 

Counsel, Office of General Counsel, 

(202) 418–5613, ckim@cftc.gov; Gary 

Barnett, Director, Division of Swap 

Dealer and Intermediary Oversight, 

(202) 418–5977, gbarnett@cftc.gov; 

Jacqueline H. Mesa, Director, Office of 

International Affairs, (202) 418–5386, 

jmesa@cftc.gov; Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION:

Table of Contents 

I. Background 

A. The Dodd-Frank Wall Street Reform and 

Consumer Protection Act 

B. Scope of the Proposed Interpretive 

Guidance and Policy Statement 

II. Consideration of Whether a Non-U.S. 

Person Is a Swap Dealer or Major Swap 

Participant 

A. Analysis of Section 2(i) 

B. Interpretation of the Term ‘‘U.S. Person’’ 

C. Definitions and Registration Thresholds 

1. Background 

2. Swap Dealer 

i. Aggregation of Swaps 

ii. Regular Business 

3. Major Swap Participant 

i. Aggregation of Positions 

4. Relevance of Guarantees 

5. Summary 

D. Branches, Agencies, Affiliates and 

Subsidiaries of U.S. Swap Dealers and 

U.S. Branches, Agencies, Affiliates, and 

Subsidiaries of Non-U.S. Swap Dealers 

III. Cross-Border Application of the CEA’s 

Swap Provisions 

A. Principles of International Comity 

B. Application of Swap Provisions to NonU.S. Swap Dealers and Foreign Branches, 

Agencies, Subsidiaries and Affiliates of 

U.S. Swap Dealers 

1. Regulatory Categories 

2. Entity-Level Requirements 

i. Capital Requirements 

ii. Chief Compliance Officer 

iii. Risk Management 

iv. Swap Data Recordkeeping 

v. Swap Data Reporting 

vi. Physical Commodity Swaps Reporting 

3. Transaction-Level Requirements 

i. Clearing and Swap Processing 

ii. Margin and Segregation Requirements 

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 

ix. External Business Conduct Standards 

4. Application of the Entity-Level 

Requirements 

5. Application of the Transaction-Level 

Requirements 

i. Clearing and Swap Processing, Margin 

(and Segregation), Trade Execution, 

Swap Trading Relationship 

Documentation, Portfolio Reconciliation 

and Compression, Real-Time Public 

Reporting, Trade Confirmation, and 

Daily Trading Records 

ii. External Business Conduct Standards 

C. Substituted Compliance 

1. Entity-Level Requirements 

2. Transaction-Level Requirements 

D. Application of Entity-Level and 

Transaction-Level Requirements to 

Branches, Agencies, Affiliates, and 

Subsidiaries of U.S. Swap Dealers 

1. Foreign Branches and Agencies of U.S. 

Swap Dealers 

2. Foreign Affiliates and Subsidiaries of 

U.S. Swap Dealers 

IV. Process for Comparability Determinations 

A. Overview 

1. Scope of Review 


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4On 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). 

5See 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,’’ Jan. 2011, at xxvii, available at http:// 

www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf. 

6See, e.g., Gretchen Morgenson, ‘‘Behind 

Insurer’s Crisis, Blind Eye to a Web of Risk,’’ N.Y. 

Times, Sept. 27, 2008. Corrected version published 

Sept. 30, 2008, available at http:// 

www.nytimes.com/2008/09/28/business/ 

28melt.html?pagewanted=all. 

7 ‘‘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 at September 15 2008.’’ See 

Lehman Brothers International (Europe) in 

Administration, Joint Administrators’ Progress 

Report for the Period 15 September 2008 to 14 

March 2009, available at: http://www.pwc.co.uk/ 

assets/pdf/Ibie-progress-report-14049.pdf. 

8 Id. 

9See, e.g., Andrew Bary, ‘‘Of Citi and SIVs: Can 

Banks Plug the Leak?,’’ Barron’s, Oct. 22, 2007, 

available at http://online.barrons.com/article/ 

SB119284238641065650.html. 

10See, e.g., Financial Times, Citi launches $49bn 

SIV rescue (Dec. 14, 2007), available at http:// 

www.ft.com/intl/cms/s/0/6626b45e-a9dd-11dcaa8b-0000779fd2ac.html#axzz1yMOOB81b 

MarketWatch. Citigroup says it will absorb SIV 

assets (Dec. 14, 2007), available at http:// 

articles.marketwatch.com/2007-12-14/news/ 

30679845_1_sivs-citigroup-ceo-vikram-pandit. 

11See In Re: Bear Sterns High-Grade Structured 

Credit Strategies Master Funds, LTC, 374 B.R. 122 

(Bankr. S.D.N.Y. 2007), available at http:// 

www.nysb.uscourts.gov/opinions/brl/ 

158971_25_opinion.pdf. 

12See ‘‘Lehman Brothers International (Europe) 

in Administration, Joint Administrators’ Progress 

Report for the Period 15 September 2008 to 14 

March 2009,’’ available at: http://www.pwc.co.uk/ 

assets/pdf/Ibie-progress-report-14049.pdf. 

2. Process 

3. Clearing 

V. Cross-Border Application of the CEA’s 

Swap Provisions to Transactions 

Involving Other (Non-Swap Dealer and 

Non-MSP) Market Participants 

A. Cross-Border Transactions With U.S. 

Persons 

B. Clearing, Trade Execution, Real-Time 

Public Reporting, Large-Trader 

Reporting, SDR Reporting, and Swap 

Data Recordkeeping 

I. Background 

A. The Dodd-Frank Wall Street Reform 

and Consumer Protection Act 

In the fall of 2008 a series of large 

financial institution failures triggered a 

financial and economic crisis that 

threatened to freeze U.S. and global 

credit markets. As a result, 

unprecedented governmental 

intervention was required to ensure the 

stability of the U.S. financial system.4

These failures revealed the vulnerability 

of the U.S. financial system and 

economy to wide-spread systemic risk 

resulting from, among other things, poor 

risk management practices of financial 

firms, the lack of supervisory oversight 

for certain financial institutions as a 

whole, and the interconnectedness of 

the global swap business.5

American International Group 

(‘‘AIG’’) is a prime example of how the 

stability of a large financial institution 

could be undermined by its activities 

abroad and how the entire U.S. financial 

system could be threatened as a result.6

AIG was a regulated U.S. insurance 

company nearly undone by its collateral 

posting obligations under swaps entered 

into by its subsidiary, AIG Financial 

Products (‘‘AIGFP’’). AIGFP was 

headquartered in Connecticut and had 

major operations in London, with trades 

routed through Banque AIG, a French 

bank. AIGFP suffered enormous losses 

from credit default swaps that it issued 

on certain underlying securities, which, 

because AIGFP’s performance on such 

credit default swaps had been 

guaranteed by its parent, caused credit 

agencies to downgrade the credit rating 

of the entire AIG corporation. The 

downgrade triggered collateral calls and 

resulted in a liquidity crisis at AIG, 

which ultimately necessitated over $85 

billion of indirect assistance from the 

Federal Reserve Bank of New York to 

prevent AIG’s default. 

The Lehman Brothers Holding Inc. 

(‘‘LBHI’’) bankruptcy offers another 

stark lesson on how risks can spread 

quickly across the affiliated entities of a 

multinational financial institution, 

ultimately causing the collapse of the 

entire financial institution. LBHI was a 

U.S.-based multinational corporation, 

with various affiliates and subsidiaries 

operating globally, including Lehman 

Brothers International (Europe) 

(‘‘LBIE’’). 

The Lehman global business and 

operations relied on ‘‘highly integrated, 

trading and non-trading relationships 

across the group.’’ 7 The affiliates and 

subsidiaries within the group provided 

each other with more than equity 

investments and capital. They provided 

each other with treasury functions, 

custodial arrangements, depository 

functions, trading facilitation, swaps, 

funding, management, information 

technology and other operational 

services. Most notably, many of LBIE’s 

obligations under its swaps with certain 

counterparties were guaranteed by the 

ultimate holding company, LBHI. In 

fact, at the time of default, LBIE had an 

estimated 130,000 OTC derivatives 

trades outstanding, most of which were 

guaranteed by LBHI.8

There are other parallels. In the many 

events leading up to the 2008 crisis, 

Citigroup, like many other financial 

institutions, utilized numerous 

structured investment vehicles (‘‘SIVs’’) 

to shift certain activities off balance 

sheets and manage both capital 

requirements and reported accounting.9

Citigroup stood behind these vehicles 

through liquidity puts, a form of a 

guarantee. When the SIVs’ funding was 

exhausted, Citigroup ultimately 

assumed approximately $49 billion of 

debt directly onto its balance sheet.10

Similarly, in 2007, Bear Stearns found 

itself exposed to the failings of two 

overseas hedge funds, Bear Stearns 

High-Grade Structured Credit Strategies 

Master Fund, Ltd. and Bear Stearns 

High-Grade Structured Credit Strategies 

Enhanced Leverage Master Fund, Ltd.11

The funds were incorporated in the 

Cayman Islands as exempted liability 

companies, with registered offices in the 

Cayman Islands. However, when the 

funds collapsed under the weight of 

their significant investments in 

subprime mortgages, Bear Stearns bailed 

out the funds. 

A decade before the AIG and Lehman 

collapses, a hedge fund advised by 

Long-Term Capital Management L.P. 

(‘‘LTCM’’) nearly failed, leading a 

number of creditors to provide LTCM 

substantial financial assistance under 

the supervision of the Federal Reserve 

Bank of New York. LTCM was based in 

Greenwich, Connecticut but managed 

trades in Long-Term Capital Portfolio 

LP, a partnership registered in the 

Cayman Islands. 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. More recently, J.P. Morgan 

Chase & Co. (‘‘J.P. Morgan’’), the largest 

U.S. bank, has disclosed a multi-billion 

dollar trading loss stemming from its 

Chief Investment Office located in 

London.12 The significant reported 

losses at J.P. Morgan are a reminder of 

a key lesson from the failures of AIG 

and Lehman: A regulatory gap or lapse 

within any part of a financial institution 

can lead to the failure of the entire 

institution. 

As these examples illustrate, 

corporate structures and inter-affiliate 

obligations may cause the activity, 

regardless of where that activity takes 

place, to have a direct and significant 

connection with activities in, or effect 


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13Typically, the various business lines and 

services—while conducted out of separate legal 

entities—are highly integrated and inter-dependent. 

Key strategic and operational decisions are 

centralized and informed by the firm’s global, 

group-wide perspective. The individual legal 

entities affiliates and subsidiaries share common 

corporate support functions, such as treasury, 

custodial, brokerage and depository services and 

related infrastructures. The affiliated entities within 

the corporate group may also provide funding or 

credit support for each other and enter into trades 

with each other. In large part, this consolidated 

structure is necessary to allow the firm to address 

and manage customer needs, funding opportunities, 

capital and other regulatory requirements, financial 

accounting and tax planning, among other things. 

14Public Law 111–203, 124 Stat. 1376 (2010). The 

text of the Dodd-Frank Act may be accessed at 

http://www.cftc.gov/ucm/groups/public/@swaps/ 

documents/file/hr4173_enrolledbill.pdf. 

15 7 U.S.C. 1, et seq. 

16 In this proposed interpretative guidance and 

policy statement, the provisions of the CEA relating 

to swaps that were enacted by Title VII of the DoddFrank Act are also referred to herein as ‘‘the DoddFrank requirements.’’ 

17Legislatures 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, Jan. 31, 2012, at 23, 

available at http://www.cftc.gov/ucm/groups/ 

public/@swaps/documents/file/ 

dfstudy_isr_013112.pdf. 

For example, the European Parliament adopted 

the substance of the European Market Infrastructure 

Regulation (‘‘EMIR’’) on March 29, 2012. See 

Proposal for a Regulation of the European 

Parliament and of the Council on OTC derivatives, 

central counterparties and trade repositories— 

Outcome of the European Parliament’s first reading 

(Brussels, 28 to 29 March 2012), available at 

http://register.consilium.europa.eu/pdf/en/12/st06/ 

st06399.en12.pdf. 

In December 2010, the European Commission 

released a public consultation on revising the 

Markets in Financial Instruments Directive 

(‘‘MiFID’’). 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. 

The Japanese legislature passed the Amendment 

to the Financial Instruments and Exchange Act 

(‘‘FIEA’’) in May 2010. See 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. 18See Bank of International Settlements (BIS), 

Committee on the Global Financial System, No. 46, 

The macro financial implications of alternative 

configurations for access to central counterparties 

in OTC derivatives markets, Nov. 2011, at 1, 

available at http://www.bis.org/publ/cgfs46.pdf 

(‘‘The configuration of access must take account of 

the globalized nature of the market, in which a 

significant proportion of OTC derivatives trading is 

undertaken across borders.’’). 

19See, e.g., Institute of International Bankers 

(‘‘IIB’’) (Jan. 10, 2011); International Swaps and 

Derivatives Association (‘‘ISDA’’) (Feb. 22, 2011), 

Securities Industry and Financial Markets 

Association (‘‘SIFMA’’) (Feb. 3, 2011), Cleary 

Gottlieb Steen & Hamilton LLP (‘‘Cleary’’) (Sept. 20, 

2011), and 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, Socie ́te ́ Ge ́ne ́rale, The 

Toronto-Dominion Bank, and UBS AG (‘‘Twelve 

Foreign Banks’’) (Feb. 17, 2011). In total, the 

Commission received approximately 120 comment 

letters (submitted in response to various proposed 

rules implementing the Dodd-Frank Act) that 

addressed or raised issues related to cross-border 

swap activities. These letters, received by the 

Commission in response to various Commission 

rulemakings, may be found on the Commission’s 

Web site at http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/Rulemakings/index.htm. 

In addition, the Commission and the Securities 

and Exchange Commission (‘‘SEC’’) held a joint 

public roundtable on August 1, 2011 on 

international issues relating to the implementation 

of Title VII of the Dodd-Frank Act (‘‘Roundtable’’). 

During the Roundtable, commenters discussed the 

impact of the various requirements on their crossborder activities. A copy of the transcript from the 

Roundtable can be found on the Commission’s Web 

site at http://www.cftc.gov/ucm/groups/public/ 

@swaps/documents/dfsubmission/ 

dfsubmission21_080111-trans.pdf. 

on, commerce in the U.S. In many of the 

largest financial institutions, the overall 

business operates as a tightly integrated 

network of business lines and services 

conducted through various branches or 

affiliated legal entities which are under 

the unified management of the parent 

entity.13 These large financial 

institutions effectively operate their 

businesses as a single business, by 

virtue of the relationship with the 

parent company and to each other, with 

the constituent parts inextricably linked 

to each other. The interconnected nature 

of the relationships among the affiliated 

entities within a corporate group means 

that a risk in any part of this group, 

whether in the United States or abroad, 

can quickly spread throughout the 

organization and jeopardize the 

financial integrity of the entire group. 

Congress sought to address the 

deficiencies in the regulatory system 

that contributed to the financial crisis 

through the enactment of the DoddFrank Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’), 

which was signed by President Obama 

on July 21, 2010.14 Title VII of the DoddFrank Act amended the CEA 15 to 

overhaul the structure and oversight of 

the over-the-counter derivatives market 

that previously had been subject to little 

or no oversight. One of the cornerstones 

of this legislation is the establishment of 

a new statutory framework for 

comprehensive regulation of financial 

institutions that participate in the swaps 

market as swap dealers or major swap 

participants (‘‘MSPs’’), which must 

register and are subject to greater 

oversight and regulation.16 A key goal of 

this new framework for swap dealers 

and MSPs is to minimize the potential 

for the recurrence of the type of 

financial and operational stresses that 

contributed to the 2008 financial crisis. 

Efforts to regulate the swaps market 

are underway not only in the United 

States, but also abroad in the wake of 

the 2008 financial crisis. 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.17

B. The Scope of the Proposed 

Interpretative Guidance and Policy 

Statement 

In light of the global nature of the 

swap market, the extent to which the 

Dodd-Frank Act’s requirements will 

apply to cross-border activities is 

critically important. U.S. market 

participants regularly enter into swaps 

with other market participants that are 

domiciled outside of the U.S. or 

incorporated in non-U.S. jurisdictions.18

Many U.S. and non-U.S. domiciled or 

incorporated financial institutions 

conduct their swaps business across 

multiple jurisdictions, with swaps that 

are negotiated and executed by a branch 

or affiliate in one jurisdiction while the 

actual counterparty to the swap is an 

entity in another jurisdiction. 

The Commission received numerous 

comments during the Dodd-Frank Act 

rulemaking process from interested 

parties concerning the application of 

Title VII of the Dodd-Frank Act and the 

Commission’s implementing regulations 

thereunder to the cross-border activities 

of non-U.S. and U.S. market 

participants.19 The key issues raised by 


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20Commenters agreed generally that non-U.S. 

persons engaged in swap dealing activity directly 

with U.S. counterparties should be registered with 

the Commission as swap dealers. See, e.g., Cleary 

(Sept. 20, 2011). On the other hand, according to 

commenters, swap dealing conducted outside of the 

U.S. between non-U.S. persons is not sufficiently 

connected to the U.S. to warrant swap dealer 

registration. See, e.g., Twelve Foreign Banks (Feb. 

17, 2011); SIFMA (Feb. 3, 2011). Commenters also 

said that a non-U.S. person that limits its U.S. swap 

activity to U.S. persons that are registered as swap 

dealers should not have to register, because 

regulation of the U.S. registered swap dealer is 

sufficient. See Bank of Tokyo-Mitsubishi UFJ Ltd., 

Mizuho Corporate Bank Ltd., Sumitomo Mitsui 

Banking Corporation (‘‘Japanese Banks’’) (May 5, 

2011) and Twelve Foreign Banks (Feb. 17, 2011). 

21See, e.g., Cleary (Sept. 20, 2011) IIB (Jan. 10, 

2011) and SIFMA (Feb. 3, 2011). Generally 

speaking, these commenters urged that the 

Commission adopt a framework that preserves the 

strengths of existing market practices and home 

country supervision, while avoiding regulatory 

duplication, unrealistic extraterritorial supervisory 

responsibilities, and fragmentation of the swap 

markets. See, e.g., IIB (Jan. 10, 2011) and SIFMA 

(Feb. 3, 2011). According to these commenters, 

entities outside the United States should comply 

with rules adopted under the Dodd-Frank Act with 

respect to requirements applicable to specific 

swaps, but should be subject to home country 

supervision by their home country regulators with 

respect to requirements applicable at the entity 

level. On the other hand, other commenters said 

that a U.S. entity must not be able to conduct swap 

business with non-U.S. persons free from regulation 

under the Dodd-Frank Act by establishing a nonU.S. affiliate and conducting the swap business 

through the affiliate. See Better Markets, Inc. (Jan. 

24, 2011). 

22See, e.g., Seven Foreign Banks (Jan. 11, 2011) 

and Hess (Jan. 24, 2011). Commenters stated that 

deference to comparable home country regulation 

accords with principles of international comity and 

is consistent with the approach taken by U.S. 

banking regulators with respect to non-U.S. banks. 

See, e.g., FSR (Feb. 22, 2011), IIB (April 11, 2011), 

Cleary (Sept. 20, 2011). Numerous commenters also 

recommended that comparability should be 

determined based on whether the home country 

entity-level requirements are reasonably designed to 

achieve the same policy objectives as the 

corresponding requirements under the Dodd-Frank 

Act. See Cleary (Sept. 20, 2011). Commenters said 

that the Commission should defer to the home 

country, entity-level requirements only when they 

are comparable. Commenters also discussed DoddFrank Act requirements that potentially apply to all 

swap market participants, not just registered swap 

dealers and MSPs. For instance, commenters said 

that when a non-U.S. person executes or clears a 

swap on a U.S.-registered facility, the non-U.S. 

person should be subject to the Commission’s swap 

position limit requirements. See US Banks (Feb. 22, 

2011). Commenters said that clearing requirements 

should not apply to swaps between two non-U.S. 

persons, and that the regulators in various countries 

should work together to recognize comparablyregulated clearinghouses. See SIFMA (Feb. 3, 2011) 

and Seven Foreign Banks (Jan. 11, 2011). 

23 7 U.S.C. 2(i). 

24See Further Definition of ‘‘Swap Dealer,’’ 

‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap 

Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant’’; 

Final Rule, 77 FR 30596, May 23, 2012. 

25This proposed interpretative release does not 

address the scope of the Commission’s authority 

under CEA section 2(i) over non-swap agreements, 

contracts, transactions or markets within the 

Commission’s jurisdiction or persons who 

participate in or operate those markets. 

26 7 U.S.C. 2. 

27 7 U.S.C. 2(i). 

the commenters include (i) the nature of 

the connections to the United States that 

would require a non-U.S. person to 

register as a swap dealer or MSP under 

the CEA and the Commission’s 

regulations; 20 (ii) which Dodd-Frank 

Act requirements apply to the swap 

activities of non-U.S. persons, U.S. 

persons, and their branches, agencies, 

subsidiaries and affiliates outside of the 

United States; 21 and (iii) to the extent 

that Title VII of the Dodd-Frank 

requirements would apply, the 

circumstances under which the 

Commission would consider permitting 

a non-U.S. person to comply with the 

regulatory regime of its foreign 

jurisdiction instead of complying with 

the Dodd-Frank Act and the 

Commission’s regulations promulgated 

thereunder.22

In this proposed interpretive guidance 

and policy statement (‘‘proposed 

interpretive guidance’’), the 

Commission addresses the key issues 

raised by the commenters with respect 

to the application of Title VII of the 

Dodd-Frank Act and the Commission’s 

rules promulgated thereunder to crossborder swaps and activities. Following 

the background discussion in Section I, 

the Commission sets out its proposed 

interpretive guidance in the subsequent 

three sections. Section II sets forth the 

Commission’s proposed interpretation 

of its authority to apply the Dodd-Frank 

Act and its regulations extraterritorially 

under section 2(i) of the CEA.23 Section 

II also describes the general manner in 

which the Commission proposes to 

consider the following: (i) Whether a 

non-U.S. person’s swap dealing 

activities are sufficient to require 

registration as a ‘‘swap dealer,’’ as 

further defined in a joint release 

adopted by the Commission and the 

SEC (collectively, the ‘‘Commissions’’); 

(ii) whether a non-U.S. person’s swap 

positions are sufficient to require 

registration as a ‘‘major swap 

participant,’’ as further defined in a 

joint release adopted by the 

Commissions; and (iii) the treatment for 

registration purposes of foreign 

branches, agencies, affiliates, and 

subsidiaries of U.S. swap dealers and of 

U.S. branches of non-U.S. swap 

dealers.24

Section III sets forth the manner in 

which the Commission proposes to 

interpret section 2(i) of the CEA as it 

applies to the requirements under Title 

VII of the Dodd-Frank Act and the 

Commission’s regulations promulgated 

thereunder to swaps and activities of 

non-U.S. swap dealers, non-U.S. MSPs 

and foreign branches, agencies, 

affiliates, and subsidiaries of U.S. swap 

dealers. In section III, the Commission 

also proposes to permit a non-U.S. swap 

dealer or non-U.S. MSP to comply with 

comparable foreign regulatory 

requirements in order to satisfy 

applicable statutory and regulatory 

requirements under Title VII of the 

Dodd-Frank Act.25 In section IV, the 

Commission generally describes a 

process by which a non-U.S. applicant 

for swap dealer or MSP registration may 

seek the Commission’s recognition of 

substituted compliance with a 

comparable foreign regulatory 

requirement and the general scope of 

Commission review in making the 

requisite comparability finding. Section 

V sets forth the manner in which the 

Commission proposes to interpret 

section 2(i) of the CEA as it applies to 

the clearing, trading, and certain 

reporting requirements under the DoddFrank Act with respect to swaps 

between counterparties that are not 

swap dealers or MSPs. 

The Commission clarifies that this 

proposed interpretive guidance does not 

establish or modify any person’s rights 

and obligations under the CEA or the 

Commission’s regulations promulgated 

thereunder. The Commission notes that 

the proposed interpretive guidance does 

not limit the applicability of any CEA 

provision or Commission regulation to 

any person, entity or transaction except 

as provided herein. 

II. Consideration of Whether a Non-U.S. 

Person Is a Swap Dealer or Major Swap 

Participant 

A. Section 2(i) of the CEA 

Section 722(d) of the Dodd-Frank Act 

amends section 2 of the CEA 26 to add 

a new paragraph (i) entitled 

‘‘Applicability,’’ which consists of two 

subsections. Specifically, section 2(i) 

states that the provisions added to the 

CEA by Title VII of the Dodd-Frank Act 

shall not apply to activities outside the 

United States unless those activities— 

(1) have a direct and significant 

connection with activities in, or effect 

on, commerce of the United States; or 

(2) contravene such rules or 

regulations as the Commission may 

prescribe or promulgate as are necessary 

or appropriate to prevent the evasion of 

any provision of this Act that was 

enacted by the Wall Street Transparency 

and Accountability Act of 2010.27

Section 2(i) provides the Commission 

with express authority over activities 

outside the United States when such 

swaps and activities have a ‘‘direct and 

significant’’ connection with activities 


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41218 Federal Register / Vol. 77, No. 134 / Thursday, July 12, 2012 / Proposed Rules 

28A primary purpose of Title VII of the DoddFrank Act is to address risk to the U.S. financial 

system created by interconnections in the swaps 

market. Senator Blanche Lincoln, then Chairman of 

the Senate Agriculture Committee, noted: ‘‘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.’’ Congressional Record 

S5818, July 14, 2010, available at http:// 

www.gpo.gov/fdsys/pkg/CREC-2010-07-14/pdf/ 

CREC-2010-07-14.pdf. Senator Jeanne Shaheen 

stated: ‘‘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.’’ Congressional Record S5888, July 15, 

2010, available at http://www.gpo.gov/fdsys/pkg/ 

CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf. 

Senator Debbie Stabenow opined: ‘‘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.’’ Congressional 

Record S5905, July 15, 2010, available at http:// 

www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/ 

CREC-2010-07-15-senate.pdf. As these legislative 

records indicate, Congress sought to ensure that the 

Commission would be able to effectively regulate 

activities in the swaps marketplace, wherever those 

activities may occur, that are significantly 

connected with or affect the U.S. financial system. 

29The term ‘‘United States’’ means 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, its agencies or instrumentalities. 

30See 17 CFR 230.902(k); SEC Release No. 33– 

6863, 55 FR 18306, May 2, 1990. 

31Further Definition of ‘‘Swap Dealer,’’ 

‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap 

Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant;’’ 

Final Rule, 77 FR 30596, May 23, 2012. 

32 7 U.S.C. 1a(49) and 1a(33). 

in, or effect on, commerce of the United 

States or when they contravene such 

rules as the Commission may 

promulgate to prevent evasion of the 

provisions of Title VII of the DoddFrank Act.28 Section 2(i) does not, 

however, 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 

consideration of international comity 

principles. The subsections that follow 

address the general manner in which 

the Commission will determine the 

cross-border application of the CEA’s 

swap provisions, consistent with section 

2(i) of the CEA. 

B. Proposed Interpretation of the Term 

‘‘U.S. Person’’ 

For purposes of this interpretive 

guidance, the Commission proposes to 

interpret the term ‘‘U.S. person’’ by 

reference to the extent to which swap 

activities or transactions involving one 

or more such person have the relevant 

effect on U.S. commerce. 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 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. 

Specifically, as proposed, the term 

‘‘U.S. person’’ would 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 29 (‘‘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 

United States income tax regardless of 

source. 

Under this interpretation, the term 

‘‘U.S. person’’ generally means that a 

foreign branch or agency 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. 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 its swaprelated obligations guaranteed by the 

U.S. person. 

Request for Comment 

Q1. Please provide specific comments 

regarding the Commission’s proposed 

interpretation of the term ‘‘U.S. person.’’ 

Q1a. In the Commission’s view, the 

concerns regarding risks associated with 

the affiliate group structure are 

heightened where a U.S. person 

guarantees (or provides similar support) 

to a foreign affiliate or subsidiary. In 

such situations, the risk of the swaps 

executed abroad are effectively 

transferred to or incurred by the U.S. 

person. Or stated differently, the risk of 

the affiliate’s swap transactions have a 

direct and significant connection to, or 

effect on, the U.S. person that is the 

guarantor. Under these circumstances, 

notwithstanding that the U.S. person 

may be subject to a robust regulatory 

regime, its financial stability may be put 

at risk by activities outside the firm. 

Accordingly, the Commission is 

considering, and seeks comments on, 

whether the term ‘‘U.S. person’’ should 

be interpreted to include a foreign 

affiliate or subsidiary guaranteed by a 

U.S. person. 

Q1b.Several commenters have 

suggested that the Commission adopt 

the definition of ‘‘U.S. person’’ in the 

SEC’s Regulation S.30 Should the 

Commission interpret the term ‘‘U.S. 

person’’ in a similar manner 

notwithstanding that Regulation S has a 

different focus? 

Q1c. As an alternative to the proposed 

interpretation of the term ‘‘U.S. person,’’ 

should the Commission interpret the 

term to include a concept of control 

under which a non-U.S. person who is 

controlled by or under common control 

with a U.S. person would also be 

considered a U.S. person? If so, how 

should the Commission define the term 

‘‘controlled by or under common 

control?’’ 

Q1d. Are there other examples of 

persons or interests that should be 

specifically identified as a ‘‘U.S. 

person’’ in the final interpretive 

guidance? 

C. The Definitions and Registration 

Thresholds 

1. Background 

The Commission adopted its final 

rulemaking further defining the terms 

‘‘swap dealer’’ and ‘‘major swap 

participant’’ jointly with the SEC on 

April 18, 2012 (‘‘Final Entities 

Rulemaking’’).31 In the Final Entities 

Rulemaking, the Commissions, among 

other things, adopted final rules and 

interpretive guidance implementing the 

statutory definitions of the terms ‘‘swap 

dealer’’ and ‘‘major swap participant’’ in 

CEA sections 1a(49) and 1a(33).32 The 

final rules and interpretive guidance 

delineate the activities that cause a 

person to be a swap dealer and the level 

of swap positions that cause a person to 

be an MSP. In addition, the 


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Federal Register / Vol. 77, No. 134 / Thursday, July 12, 2012 / Proposed Rules 41219 

33Section 1a(49)(D) of the CEA (7 U.S.C. 

1a(49)(D)) provides that ‘‘[t]he Commission shall 

exempt from designation as a swap dealer an entity 

that engages in a de minimis quantity of swap 

dealing in connection with transactions with or on 

behalf of its customers. The Commission shall 

promulgate regulations to establish factors with 

respect to the making of this determination to 

exempt.’’ This provision is implemented in section 

1.3(ggg)(4) of the Commission’s regulations. 

34The limitations associated with the de minimis 

exception apply only in connection with a person’s 

dealing activities. See Final Entities Rulemaking at 

Part II.D. As used in this release, the meaning of the 

term ‘‘swap dealing’’ is consistent with that used in 

the Final Entities Rulemaking. 

35 7 U.S.C. 1a(49). 

36 7 U.S.C. 6s(b). See also Registration of Swap 

Dealers and Major Swap Participants, Final Rule 77 

FR 2613, 2616, Jan. 19, 2012 (‘‘Final Registration 

Rule’’). 

37See Final Entities Rulemaking at Parts IV.B. 

and IV.E. 

38 7 U.S.C. 1a(33). 

39 7 U.S.C. 6s(b). See also Final Registration Rule 

at 2616, Jan. 19, 2012, available at http:// 

www.cftc.gov/ucm/groups/public/ 

@lrfederalregister/documents/file/2012-792a.pdf. 

40 7 U.S.C. 2(a)(13), 6r, and 6s. 

41The statutory definition of MSP in CEA section 

1a(33)(B) (7 U.S.C. 1a(33)(B)) does state, however, 

that the Commission should consider the impact on 

‘‘the financial system of the United States’’ in 

defining what constitutes a ‘‘substantial position’’ 

for purposes of the definition. The Commission 

believes that this proposed interpretative guidance, 

which focuses on a non-U.S. person’s swap 

positions with U.S. persons, is consistent with this 

statutory directive. 

42The Commission does not believe it is 

necessary for purposes of this proposed interpretive 

guidance to determine whether such swaps or 

activities between a non-U.S. person and a U.S. 

person are located within or outside of the United 

States. Regardless of whether the location of any 

particular swap or activity is within or outside the 

United States, the Commission proposes that it is 

the aggregate notional amount of such swap dealing 

activities that is relevant for registration. 

Accordingly, the consideration of such swaps 

within the meaning of CEA section 2(i) for the 

purposes of this proposed guidance does not 

necessarily mean that the Commission considers 

such activities to be outside of the United States. 

See Final Entities Rulemaking at Part II.B.4. for 

what constitutes ‘‘swap dealing activities.’’ 

43 In the Final Entities Rulemaking, the 

Commissions codified exclusions from the dealer 

definition for swaps and security-based swaps 

between majority-owned affiliates. The Commission 

construes section 2(i) to apply such inter-affiliates 

exclusion to swaps between a non-U.S. person and 

its U.S. affiliate or between two affiliated non-U.S. 

persons. See section 1.3(ggg)(6)(i) of the 

Commission’s regulations. 

Commissions adopted rules concerning 

the statutory exceptions from the 

definition of swap dealer, including a de 

minimis exception.33

Section 1.3(ggg)(4) of the 

Commission’s regulations sets forth a de 

minimis threshold of swap dealing, 

which takes into account the notional 

amount of a person’s swap dealing 

activity over the prior 12 months.34

When a person engages in swap dealing 

transactions above that threshold, such 

person meets the definition of a swap 

dealer under section 1a(49) of the 

CEA,35 and is required to register as a 

swap dealer with the Commission under 

CEA section 4s(b).36 Sections 1.3(jjj)(1) 

and 1.3(lll)(1) of the Commission’s 

regulations set forth swap position 

thresholds for the MSP definition.37

When a person holds swap positions 

above those thresholds, such person 

meets the definition of an MSP under 

section 1a(33) of the CEA,38 and is 

required to register as an MSP with the 

Commission under CEA section 4s(b).39

Once required to register as a swap 

dealer or MSP, the person becomes 

subject to all of the requirements 

imposed on swap dealers or MSPs 

under Title VII, respectively, including 

but not limited to sections 2(a)(13), 4r, 

and 4s of the CEA,40 which require 

swap dealers and MSPs to comply with 

various prudential, business conduct, 

reporting, clearing, and trading 

requirements. Unless a swap dealer or 

MSP applies for and is granted a limited 

designation, all of the swap dealer’s or 

MSP’s swap activities are subject to 

such requirements, not only the swap 

activities that trigger the registration 

requirement. 

The statutory definitions of swap 

dealer and MSP do not contain any 

geographic limitations and do not 

distinguish between U.S. and non-U.S. 

swap dealers or non-U.S. MSPs.41

Similarly, the Final Entities Rulemaking 

does not contain any such limitations or 

distinctions. In this proposed 

interpretive guidance, the Commission 

interprets section 2(i) of the CEA as it 

applies to the provisions in the CEA 

related to swap dealers and MSPs and, 

accordingly, proposes the general 

manner in which the swap dealer and 

MSP registration and related 

requirements apply to the activities of 

non-U.S. persons, and to the foreign 

branches, agencies, subsidiaries and 

affiliates of U.S. persons and U.S. 

branches of non-U.S. persons. 

2. Swap Dealer 

In enacting the swap dealer definition 

and the associated requirements for 

swap dealers Congress sought to ensure 

that those entities that engage in more 

than a de minimis level of swap dealing 

be considered swap dealers, register, 

and be regulated as swap dealers.42 In 

the Final Entities Rulemaking, the 

Commission established a notional 

threshold for determining whether a 

person engages in more than a de 

minimis level of swap dealing and 

therefore must register as a swap dealer. 

The Commission proposes that the level 

of swap dealing that is substantial 

enough to require a person to register as 

a swap dealer when conducted by a U.S. 

person also constitutes a ‘‘direct and 

significant connection’’ within the 

meaning of section 2(i)(1) of the CEA 

when such dealing activities are 

conducted by a non-U.S. person with 

U.S. persons as counterparties. 

Accordingly, consistent with this 

interpretation and the Commission’s 

Final Entities Rulemaking, the 

Commission proposes that non-U.S. 

persons who engage in more than a de 

minimis level of swap dealing with U.S. 

persons would be required to register as 

swap dealers.43

The Commission does not propose, 

however, that a non-U.S. person should 

include, in determining whether the de 

minimis threshold is met, the notional 

value of dealing transactions with 

foreign branches of registered U.S. swap 

dealers. This is intended to address the 

concerns of non-U.S. persons who may 

be required to register as a swap dealer, 

notwithstanding the fact that their 

dealing activities with U.S. persons as 

counterparties are limited to foreign 

branches of registered U.S. swap 

dealers. In such cases, the Dodd-Frank 

Act transactional requirements (or 

comparable requirement) would 

nevertheless apply to swaps with those 

foreign branches and, thus, there is little 

concern that this exclusion could be 

used to engage in swap activities 

outside of the Dodd-Frank Act 

(comparable) requirements. 

Accordingly, the Commission believes 

that it would be appropriate and 

consistent with section 2(i) to allow 

non-U.S. persons to conduct swap 

dealing activities with registered U.S. 

swap dealers outside the United States 

(through their foreign branches), 

without triggering registration as a swap 

dealer as a result. 

i. Aggregation of Swaps 

The Commission notes that section 

1.3(ggg)(4) of the Commission’s 

regulations 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 into by its affiliates 

under common control. It is the 

Commission’s view that this provision 

would require that a non-U.S. person, in 

determining whether its swap dealing 

transactions exceed the de minimis 

threshold, include the aggregate 

notional value of any swap dealing 

transactions between U.S. persons and 

any of its non-U.S. affiliates under 

common control, and any swap dealing 

transactions of any of its non-U.S. 

affiliates under common control where 


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44See Final Entities Rulemaking at Part II.D.4. 

45See also 77 FR at 2616. 

46CEA section 1a(33)(B), 7 U.S.C. 1a(33)(B). As is 

the case with respect to swap dealers, the 

Commission does not believe it is necessary, for 

purposes of this proposed interpretative guidance, 

to determine whether such swaps or activities 

between a non-U.S. person and a U.S. person are 

located within or outside of the United States. 

the obligations of such non-U.S. 

affiliates are guaranteed by U.S. 

persons.44

The Commission is not proposing, 

however, that a non-U.S. person should 

include, in this determination, the 

notional value of dealing transactions in 

which its U.S. affiliates engage. Again, 

the Commission’s proposed 

interpretation is that a direct and 

significant connection with activities in, 

or effect on, U.S. commerce, in these 

circumstances, exists when non-U.S. 

persons conduct more than a de 

minimis level of swap dealing activities 

with U.S. persons. In the case of an 

affiliated group of non-U.S. persons 

under common control, the Commission 

believes that all of the affiliated nonU.S. persons should aggregate the 

notional value of their swap dealing 

transactions with U.S. persons (and 

their swap dealing transactions with 

non-U.S. persons in which such 

person’s obligations are guaranteed by 

U.S. persons), in order to determine, in 

effect, the level of swap dealing 

activities conducted by the affiliated 

group of non-U.S. persons in the 

aggregate. However, since the focus is 

on the level of activity conducted by 

non-U.S. persons, swap dealing 

transactions of affiliated U.S. persons 

should not be included.45

ii. Regular Business 

As stated in the Final Entities 

Rulemaking, a person is required to 

apply the de minimis test only if it 

determines it is engaged in swap dealing 

activity under the rule further defining 

the term ‘‘swap dealer,’’ which excludes 

swap activities that are not part of ‘‘a 

regular business.’’ A person that is not 

engaged in swap dealing as part of ‘‘a 

regular business’’ is not required to 

apply the de minimis test and is not a 

swap dealer under the CEA. 

The Commission proposes that a nonU.S. person without a guarantee from a 

U.S. person applying the swap dealer 

definition should determine first 

whether its swap activities with respect 

to U.S. persons as counterparties qualify 

as swap dealing activity under the rule 

further defining the term ‘‘swap dealer’’ 

and the exclusion of swap activities that 

are not part of ‘‘a regular business.’’ 

Thus, for example, a non-U.S. person 

without a guarantee that determines it is 

not engaged in swap dealing as part of 

‘‘a regular business’’ with respect to U.S. 

persons as counterparties is not required 

to apply the de minimis test or to 

register as a swap dealer. This would be 

true even if the non-U.S. person were 

engaged in swap dealing as part of ‘‘a 

regular business’’ with respect to nonU.S. persons as counterparties. 

The determination of whether a 

person is engaged in swap dealing 

activity involves application of the 

interpretive guidance in Part II.A.4. of 

the Final Entities Rulemaking, which 

provides for consideration of the 

relevant facts and circumstances. 

Similarly, the Commission proposes 

that the determination by a non-U.S. 

person without a guarantee of whether 

it is engaged in swap dealing as part of 

‘‘a regular business’’ with respect to U.S. 

persons as counterparties (as opposed to 

its swap dealing activity with respect to 

non-U.S. persons as counterparties) will 

depend on consideration of the relevant 

facts and circumstances in light of the 

interpretive guidance in the Final 

Entities Rulemaking. 

Request for Comment 

Q2. Do commenters agree that in 

determining whether it is a swap dealer, 

a non-U.S. person without a guarantee 

from a U.S. person should consider 

whether it is engaged in swap dealing as 

part of ‘‘a regular business’’ only with 

respect to U.S. persons (as opposed to 

non-U.S. persons)? Why or why not? In 

such an analysis, would it generally be 

feasible for the non-U.S. person to 

distinguish swap dealing activities with 

U.S. persons from swap dealing 

activities with non-U.S. persons and are 

there any practical difficulties in this 

approach? 

3. Major Swap Participant 

The MSP definition and associated 

requirements for MSPs reflect Congress’ 

direction that any entity that holds swap 

positions above a level that could, 

among other things, ‘‘significantly 

impact the financial system of the 

United States,’’ be considered an MSP 

and register and be regulated as an 

MSP.46 In the Final Entities 

Rulemaking, the Commission further 

defined MSP to clarify when a person 

must register. The Commission believes 

that the level of swap positions that is 

substantial enough to require a person 

to register as an MSP when held by a 

U.S. person, also constitutes a ‘‘direct 

and significant connection’’ within the 

meaning of section 2(i) of the CEA when 

such positions reflect swaps between a 

non-U.S. person and U.S. persons. 

Consistent with this interpretation and 

the Commission’s Final Entities 

Rulemaking, a non-U.S. person who 

holds swap positions where a U.S. 

person is a counterparty above the 

specified MSP thresholds would qualify 

and register as an MSP. 

i. Aggregation of Positions 

In determining whether it is an MSP, 

a non-U.S. person would ‘‘count’’ all of 

its swap positions where its 

counterparty is a U.S. person, but would 

not ‘‘count’’ any swap position where its 

counterparty is a non-U.S. person. As 

with swap dealing transactions, a swap 

between a non-U.S. person and a U.S. 

person, or a swap between a non-U.S. 

person and another non-U.S. person 

under which the first non-U.S. person’s 

obligations are guaranteed by a U.S. 

person, in and of itself may have a 

direct and significant connection with 

activities in, or effect on, commerce of 

the United States within the meaning of 

section 2(i) of the CEA. Similarly, for 

purposes of applying section 2(i) of the 

CEA to the MSP definition and 

associated requirements, the 

Commission believes the appropriate 

focus is on whether in the aggregate 

such swaps have a direct and significant 

connection with activities in, or effect 

on, U.S. commerce, rather than whether 

each particular swap has such a 

connection or effect. 

4. Relevance of Guarantees 

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 

swap 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 

risks of a widespread disruption to the 

financial system in the United States. 

For that reason, the Commission has a 

significant regulatory interest in 

ensuring that the swap dealer or MSP is 

managing the risks of such swaps 

appropriately and ensuring that its U.S. 

counterparties receive the appropriate 

protections under the CEA. 

Similar effects on U.S. persons and on 

the U.S. financial system may occur in 

the event of a default or insolvency of 

a non-U.S. person with respect to a nonde minimis level of swap dealing 

transactions, or swap positions above 

the MSP threshold, of the non-U.S. 

person that are guaranteed by a U.S. 

person. In these circumstances, and 

regardless of whether the non-U.S. 

person’s counterparty is a U.S. person or 


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47For purposes of this interpretive guidance, 

references to a guarantee are intended to refer not 

only to traditional guarantee of payment or 

performance of the related swaps, but would also 

include other formal arrangements to support the 

non-U.S. person’s ability to pay or perform its 

obligations, including without limitation, liquidity 

puts and keepwell agreements. 

48See Final Entities Rulemaking at part IV.H. 

49 In this release, the term ‘‘foreign’’ is used 

interchangeably with the term ‘‘non-U.S.’’ 

50See, e.g., Federal Reserve Bank of New York, 

Foreign Banks and the Federal Reserve, at http:// 

www.ny.frb.org/aboutthefed/fedpoint/fed26.html 

(last visited Feb. 26, 2012). See also Federal Reserve 

Board, ‘‘Policy Statement on the Supervision and 

Regulation of Foreign Banking Organizations,’’ Feb. 

23, 1979, Federal Reserve Regulatory Service 4–835; 

Federal Reserve Board Supervisory Letter SR 08–09 

re: Consolidated Supervision of Bank Holding 

Companies and the Combined U.S. Operations of 

Foreign Banking Organizations, Oct. 16, 2008. See 

also Institute of International Bankers, Comment 

Letter at 15–16, Jan. 10, 2011 (acknowledging the 

principal-agency relationship and advocating for 

the Commission to adopt a registration regime 

predicated on the intermediating activities of U.S. 

branches and agencies). 

51The Commission notes that the supervisory 

authority of the Office of the Comptroller of the 

Currency extends to foreign branch offices of 

national banks under its jurisdiction. 

52Under this model, the foreign branch or agency 

of the U.S. person would not register separately as 

a swap dealer. 

53See Seven Foreign Banks (‘‘Many foreign banks 

operate and manage their global swaps businesses 

out of a single entity * * *. [T]his entity is the 

central booking vehicle, acting as principal to 

counterparties in the U.S. and other jurisdictions.’’) 

(Jan. 11, 2011); IIB (Jan. 10, 2011). These comment 

letters are available on the Commission’s Web site 

at http://comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=903. 

a non-U.S. person, the risk of default by 

the non-U.S. person with respect to its 

guaranteed swaps ultimately rests with 

a U.S. person. If there is a default by the 

non-U.S. person, the U.S. person would 

be held responsible to settle those 

obligations. However, the Commission’s 

interpretive guidance with respect to 

guarantees differs slightly for swap 

dealers and MSPs.47 We therefore 

discuss the two cases separately here. 

Accordingly, the Commission 

proposes to interpret CEA section 2(i) as 

requiring a non-U.S. person to register 

with the Commission as a swap dealer 

when the aggregate notional value of its 

swap dealing activities with U.S. 

persons, or of its swap dealing activities 

with non-U.S. persons where the 

dealing non-U.S. person’s obligations 

are guaranteed, or its ability to pay or 

perform its obligations thereunder are 

otherwise formally supported, by a U.S. 

person, exceed the de minimis level of 

swap dealing as set forth in section 

1.3(ggg)(4) of the Commission’s 

regulations. The Commission believes 

that when the aggregate level of swap 

dealing by a non-U.S. person, 

considering both swaps directly with 

U.S. persons and swaps with non-U.S. 

persons under which the dealing nonU.S. person’s obligations are guaranteed 

by a U.S. person, exceeds the de 

minimis level of swap dealing, the 

dealing non-U.S. person’s activities 

have the requisite ‘‘direct and 

significant connection with activities in, 

or effect on, commerce of the United 

States.’’ 

With respect to whether a person is an 

MSP, the Commission’s interpretive 

guidance in the Final Entities 

Rulemaking provides that a person’s 

swap positions are attributed to a 

parent, other affiliate or guarantor to the 

extent that the counterparties to those 

positions would have recourse to the 

other entity in connection with the 

position unless the first person is itself 

subject to capital regulation by the 

CFTC or SEC (e.g., including where the 

first person is a swap dealer or MSP) or 

is a U.S. entity regulated as a bank in 

the United States.48 In accordance with 

this guidance, the Commission proposes 

that swap positions between a non-U.S. 

person, where the obligations of such 

non-U.S. person thereunder are 

guaranteed by a U.S. person, should be 

attributed to the U.S. person (and not 

the non-U.S. person) in determining 

whether either person is an MSP. In 

other words, the Commission proposes 

to interpret CEA section 2(i) as requiring 

non-U.S. persons to register with the 

Commission as MSPs when their swaps 

with U.S. persons, disregarding any 

such positions where their obligations 

thereunder are guaranteed by U.S. 

persons, exceed a relevant MSP 

threshold as set forth in the Final 

Entities Rulemaking. 

5. Summary 

This proposed interpretation may be 

summarized as follows. In determining 

whether a non-U.S. person is engaged in 

more than a de minimis level of swap 

dealing, the person should consider the 

aggregate notional value of: 

• Swap dealing transactions between 

it (or any of its non-U.S. affiliates under 

common control) and a U.S. person 

(other than foreign branches of U.S. 

persons that are registered swap 

dealers); and 

• Swap dealing transactions (or any 

swap dealing transactions of its nonU.S. affiliates under common control) 

where its obligations or its non-U.S. 

affiliates’ obligations thereunder are 

guaranteed by U.S. persons. 

In determining whether a non-U.S. 

person holds swap positions above the 

MSP thresholds, the person should 

consider the aggregate notional value of: 

• Any swap position between it and 

a U.S. person (but its swap positions 

where its obligations thereunder are 

guaranteed by a U.S. person generally 

should be attributed to that U.S. person 

and not included in the non-U.S. 

person’s determination); and 

• Any swap between another nonU.S. person and a U.S. person, where it 

guarantees the obligations of the nonU.S. person thereunder. 

D. Foreign Branches, Agencies, 

Affiliates, and Subsidiaries of U.S. Swap 

Dealers and U.S. Branches, Agencies, 

Affiliates, and Subsidiaries of Non-U.S. 

Swap Dealers 

1. Foreign 49 Branches and Agencies of 

U.S. Swap Dealers 

The Commission understands that 

branches and agencies are not separate 

legal entities; rather, a branch or agency 

is a corporate extension of its principal 

entity.50 Given that a foreign branch or 

agency has no legal existence separate 

from a U.S. principal entity that is the 

legal counterparty to swaps, the 

Commission would apply the DoddFrank Act registration requirements to a 

U.S. person and its foreign branches and 

agencies on an entity-wide basis.51

Under this approach, the Commission 

would require the U.S. person (principal 

entity) to register as the swap dealer. 

Although certain duties and obligations 

may be performed by the foreign 

branches and agencies, the U.S. person 

(principal entity) would remain 

responsible for compliance with all of 

the applicable responsibilities.52

2. Foreign Affiliates or Subsidiaries of 

U.S. Persons 

A number of large financial 

institutions operate a ‘‘central booking’’ 

model under which swaps are solicited 

or negotiated through their branches, 

agencies, affiliates or subsidiaries but 

are booked, directly or indirectly, in a 

single legal entity (typically the parent 

company) for balance sheet and 

financial reporting purposes.53 In some 

cases, the affiliate which has negotiated 

the swap may be acting as a principal 

and may transfer the exposure to the 

central booking entity by back-to-back 

transactions or other arrangements. In 

other cases, the affiliate that has 

arranged or negotiated the trade may be 

acting as an agent for the central 

booking entity, in which case the central 

booking entity may enter into the swap 

transaction so that the central booking 

entity is, as a contractual matter, 

directly facing the third-party 

counterparty in the swap transaction. 

Given these various ways of 

implementing a central booking 

arrangement, the question arises as to 

how the Dodd-Frank Act registration 


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54As further described below (in subsection E), a 

number of commenters urge the Commission to 

treat a branch of a non-U.S. bank as a separate legal 

entity. Extending this logic to the registration 

context, these commenters support the registration 

and regulation of the branch. The Commission 

notes CEA section 1a(39) (7 U.S.C. 1a(39)) states 

that the term ‘‘prudential regulator’’ shall mean the 

Board of Governors of the Federal Reserve System 

in the case of a swap dealer, MSP, security-based 

swap dealer, or major security-based swap 

participant that is— 

(v) any bank holding company [citation omitted], 

any foreign bank (as defined in section 1(b)(7) of the 

International Banking Act of 1978 (12 U.S.C. 

3101(b)(7)) that is treated as a bank holding 

company under section 8(a) of the International 

Banking Act of 1978 (12 U.S.C. 3106(a)), and any 

subsidiary of such a company or foreign bank (other 

than a subsidiary that is described in subparagraph 

(A) or (B) or that is required to be registered with 

the Commission as a swap dealer or major swap 

participant under this Act or with the [SEC] as a 

security-based swap dealer or major security-based 

swap participant). 

Clearly, Congress contemplated that foreign banks 

that become bank holding companies by virtue of 

the presence of a branch or a subsidiary in the 

United States may be regulated as swap dealers. 

55Thus, within an affiliated group of firms, the 

dealing activities of any affiliates that are registered 

with the Commission as swap dealers would not be 

included in considering whether any of the other 

affiliates are required to register as a swap dealer. 

However, all non-U.S. affiliates under common 

control that are not so registered would have to 

aggregate the notional value of any swap dealing 

transactions with U.S. persons (or where the 

obligations of such non-U.S. affiliates are 

guaranteed by U.S. persons) to determine if such 

swap dealing transactions exceed the de minimis 

threshold of swap dealing activity. 

requirement would apply to the affiliate 

facing the third party counterparty and 

the central booking entity or guarantor. 

The following subsection addresses 

which entity must register as a swap 

dealer in such central ‘‘booking’’ model. 

The Commission proposes to interpret 

section 2(i) of CEA so that the U.S. 

person who books the swaps would be 

required to register as a swap dealer, 

regardless of whether the swaps were 

directly booked by the U.S. person (by 

such person becoming a party to the 

swap) or indirectly transferred to the 

U.S. person (by way of a back-to-back 

swap or other arrangement). In either 

case, the affiliate may also be required 

to register as a swap dealer if by its 

activities it independently meets the 

definition of swap dealer. 

3. U.S. Branches, Agents, Affiliates, or 

Subsidiaries of Non-U.S. Persons 

A similar analysis applies when a 

non-U.S. person is the booking entity 

(i.e., the legal counterparty) to swaps.54

Under these circumstances, even if the 

U.S. branch, agency, affiliate, or 

subsidiary of a non-U.S. person engages 

in solicitation or negotiation in 

connection with the swap entered into 

by the non-U.S. person, the Commission 

proposes to interpret section 2(i) of CEA 

such that the Dodd-Frank Act 

requirements, including the registration 

requirement, applicable to swap dealers 

also apply to the non-U.S. person. 

Request for Comment 

Q3. Please provide comments 

regarding all aspects of the 

Commission’s proposed interpretation, 

including particular alternative 

interpretations the Commission should 

consider in assessing whether a nonU.S. person should be required to 

register as a swap dealer or MSP. 

Q3a. Do commenters agree that the 

Commission should determine whether 

a non-U.S. person, without a guarantee 

from a U.S. affiliate, is a swap dealer 

based solely upon the aggregate notional 

amount of swap dealing activities with 

U.S. persons as counterparties? Why or 

why not? 

Q3b. Do commenters agree that the 

Commission should determine whether 

a non-U.S. person is a swap dealer 

based on the aggregate notional amount 

of swap dealing activities when the 

swap dealing obligations of such nonU.S. person are guaranteed by a U.S. 

person? Why or why not? 

Q3c. Do commenters agree that in 

determining whether a non-U.S. person 

is a swap dealer, the notional amount of 

swap dealing activities conducted by it 

and all of its non-U.S. affiliates under 

common control should be aggregated 

together? Why or why not? Should the 

Commission further interpret the phrase 

‘‘under common control’’ and, if so, 

how should the Commission define 

‘‘common control’’ for aggregation 

purposes? Should the notional amount 

of swap dealing activities conducted by 

its U.S. affiliates also be included? 

Q3d. Are any other aspects of a 

swap—such as, for example, the place of 

execution or clearing—relevant to the 

determination of whether a non-U.S. 

person is a swap dealer? 

Q3e. Do commenters agree that the 

Commission should determine whether 

a non-U.S. person is an MSP based 

solely on its swap positions with U.S. 

persons as counterparties? If not, why? 

Q3f. Do commenters agree that, in 

determining whether a non-U.S. person 

is an MSP, its swap positions 

guaranteed by a U.S. person should be 

attributed to such U.S. person and not 

the non-U.S. person? If not, why? How 

should the Commission’s determination 

change when some but not all of the 

non-U.S. person’s swap obligations are 

guaranteed by a U.S. person? 

Q3g. Are any other aspects of a 

swap—such as the place of execution or 

clearing—relevant to the determination 

of whether a non-U.S. person is an 

MSP? 

Q4. As noted above, the Commission 

does not propose that a non-U.S. person 

should include, in determining whether 

the swap dealer de minimis threshold is 

met, the notional value of swap dealing 

transactions with foreign branches of 

U.S. swap dealers. Noting the riskbased, as opposed to activities-based, 

nature of the MSP registration category 

and related calculations, the 

Commission seeks comment on whether 

a non-U.S. person should include, in 

determining whether it is required to 

register as an MSP, its swap positions 

with foreign branches of U.S. swap 

dealers. 

Q5. Under the aggregation description 

above, a non-U.S. person, in 

determining whether the de minimis 

threshold is met, must include the 

notional value of dealing swaps by its 

non-U.S. affiliates under common 

control. The Commission requests 

comments on whether, to the extent that 

any such non-U.S. affiliate is registered 

with the Commission as a swap dealer, 

the notional value of dealing swaps 

entered into by such registered swap 

dealer should not be aggregated with the 

notional value of dealing swaps entered 

into by the other non-U.S. affiliates 

under common control.55

Q7. Should the Commission consider 

any other types of swap dealing 

transactions by non-U.S. persons to 

determine whether a non-U.S. person is 

a swap dealer? If so, which ones? 

Q8. Do commenters agree that the 

Commission should exclude the swap 

dealing transactions of a non-U.S. 

person from the determination of 

whether such non-U.S. person qualifies 

as a swap dealer, where the 

counterparty to such dealing swaps are 

non-U.S. persons (guaranteed or not)? 

Should the Commission exclude swap 

obligations in excess of a capped 

guaranty provided by a U.S. person (i.e., 

a guaranty that limits the U.S. person’s 

liability to a capped or maximum 

amount)? How should the Commission 

account for the reduced risks assumed 

by a U.S. person guaranteeing certain or 

all swaps of a particular non-U.S. 

person under that non-U.S. person’s 

master agreements with non-U.S. 

counterparties, where the U.S. person’s 

liability under the guarantee is limited? 

Q9. Can a limited designation 

registration as provided for in the 

statutory definitions of the terms ‘‘swap 

dealer’’ and ‘‘major swap participant’’ 

be used to address the Commission’s 

regulatory interests under the DoddFrank Act with respect to cross-border 

swap activities? If so, how? 


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56See 7 U.S.C. 6s(b)(1). See also 77 FR 2613, 

2616, Jan. 19, 2012. 

57Hartford Fire Ins. Co. et al., 509 U.S. 764, 817 

(1993); F. Hoffmann-La Roche, Ltd., 542 U.S. 155, 

164 (2004). 

58 F. Hoffmann-La Roche, Ltd., 542 U.S. at 164. 

59See notes 82–84, supra. 

60 F. Hoffmann-La Roche, Ltd., 542 U.S. at 164– 

65. Specifically, section 403 of the Restatement 

(Third) of Foreign Relations Law states, in relevant 

part: 

Whether exercise of jurisdiction over a person or 

activity is unreasonable is determined by evaluating 

all relevant factors, including, where appropriate: 

(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 person 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. 

61For a similar consideration of the application 

of principles of international comity by federal 

agencies in the enforcement of the antitrust laws, 

see U.S. Department of Justice and the Federal 

Trade Commission, Antitrust Enforcement 

Guidelines for International Operations, Apr. 1995, 

which is available at http://www.justice.gov/atr/ 

public/guidelines/internat.htm. 

62The Commission has a longstanding policy of 

considering principles of international comity in its 

rulemakings and interpretations. For example, the 

Commission adopted regulatory amendments that 

codify its longstanding policy towards foreign 

brokers. See Exemption from Registration for 

Certain Foreign Persons, 72 FR 63976, 63978–79, 

Nov. 14, 2007. The amendments codified a 

registration exemption for any foreign person 

functioning as an introducing broker, commodity 

pool operator or commodity trading advisor solely 

on behalf of customers located outside the United 

States, if all commodity interest transactions are 

submitted for clearing to a registered FCM. See id. 

at 63978–79. In addition, the Commission amended 

§ 3.12 of the Commission’s regulations to codify a 

registration exemption for any individual located in 

the branch office of a Commission registrant that 

does not solicit or accept orders from customers 

located in the United States. 

63S. Rep. No. 111–176, at 228 (2010), available at 

http://www.gpo.gov/fdsys/pkg/CRPT-111srpt176/

pdf/CRPT-111srpt176.pdf. 

64See, e.g., SIFMA (Feb. 3, 2011), ISDA (Jan. 24, 

2011), Cleary (Sept. 20, 2011), Seven Foreign Banks 

(Jan. 11, 2011), and Twelve Foreign Banks (Feb. 17, 

2011). 

65See SIFMA (Feb. 3, 2011). 

III. Cross-Border Application of the 

CEA’s Swap Provisions and 

Implementing Regulations 

A non-U.S. person who meets or 

exceeds the de minimis threshold for 

swap dealers or the position thresholds 

for MSPs would be required to register 

with the Commission as a swap dealer 

or MSP, respectively, pursuant to the 

procedures prescribed in Part 3 of the 

Commission’s regulations.56 Once 

registered, the 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, including but not limited to 

sections 2(a)(13), 4r, and 4s of the CEA, 

with respect to all of their swap 

activities. 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 

such dealer or MSP is based. In 

exercising its authority over non-U.S. 

swap dealers, non-U.S. MSPs, or crossborder activities, however, the 

Commission will be informed by canons 

of statutory construction regarding the 

application of its authority in a manner 

consistent with principles of 

international comity. A brief discussion 

of these principles follows. 

A. Principles of International Comity 

The Supreme Court has held that ‘‘an 

act of Congress ought never to be 

construed to violate the law of nations 

if any other possible construction 

remains.’’ 57 Jurisdiction is generally 

construed, ‘‘to avoid unreasonable 

interference with the sovereign 

authority of other nations.’’ 58 The most 

relevant Supreme Court precedents 

addressing the application of 

international comity concepts in 

determining the extraterritorial 

applicability of federal statutes come 

from antitrust.59 In these cases, the 

Supreme Court has noted that the 

principles in the Third Restatement of 

Foreign Relations Law are relevant to 

the interpretation of U.S. law: 

This rule of construction reflects principles 

of customary international law—law that (we 

must assume) Congress ordinarily seeks to 

follow. See Restatement (Third) of Foreign 

Relations Law of the United States §§ 403(1), 

403(2) (1986). * * * 

This rule of statutory construction cautions 

courts to assume that legislators take account 

of the legitimate sovereign interests of other 

nations when they write American laws. It 

thereby helps the potentially conflicting laws 

of different nations work together in 

harmony—a harmony particularly needed in 

today’s highly interdependent commercial 

world.60

In accordance with judicial and 

executive branch precedent and 

guidance in interpreting statutes with 

cross-border application, the 

Commission proposes that it should 

exercise its regulatory authority over 

cross-border activities in a manner 

consistent with these principles of 

statutory construction and international 

comity.61 The Commission is therefore 

guided by these principles as discussed 

in these precedents.62

B. Proposed Application of the CEA’s 

Swap Provisions to Non-U.S. Swap 

Dealers and Foreign Branches, 

Agencies, Affiliates, and Subsidiaries of 

U.S. Swap Dealers 

1. Categories of Regulatory 

Requirements 

Title VII of the Dodd-Frank Act 

establishes a comprehensive new 

regulatory framework for swap dealers 

and MSPs. This framework is an 

important element of the ‘‘improve[d] 

financial architecture’’ that Congress 

intended in enacting the Dodd-Frank 

Act and its goal of reducing systemic 

risk and enhancing market 

transparency.63 Among other things, a 

registered swap dealer or MSP must 

comport with certain standards (and 

regulations as the Commission may 

promulgate) governing risk 

management, internal and external 

business conducts, and reporting. 

Further, U.S. swap dealers and MSPs, 

once registered, 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. 

A number of commenters 

recommended that the Commission, in 

interpreting the cross-border 

applicability of the Dodd-Frank Act 

swap provisions to a registered swap 

dealer or MSP, should distinguish 

between requirements that: (i) Apply at 

an entity level (i.e., to the firm as a 

whole); or (ii) apply at a transactional 

level (i.e., to the individual transaction 

or trading relationship).64 These 

commenters believed that requirements 

that relate to the core operations of a 

firm should be applied on an entitylevel basis and 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-bytransaction basis and only to swaps with 

U.S. counterparties.65

The Commission agrees with the 

commenters that the various DoddFrank Act swap provisions can be 

conceptually divided into the following 


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66By 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. 

67See 7 U.S.C. 6s(e)(3)(A). 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 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 futures commission merchants 

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-futures commission 

merchant) 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). 

68See 7 U.S.C. 6s(e)(3)(A). 

69See 7 U.S.C. 6s(e). See also Capital 

Requirements of Swap Dealers and Major Swap 

Participants, 76 FR 27802, May 12, 2011. ‘‘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.’’ See id. at 27817. 

70See 7 U.S.C. 6s(k). 

71See 17 CFR 3.3. 

two categories: (i) Entity-Level 

Requirements, which apply to a swap 

dealer or MSP to the firm as a whole; 

and (ii) Transactional-Level 

Requirements, which apply to the 

individual swap. A discussion of the 

Entity-Level Requirements is set out in 

the section immediately below, 

followed by discussions of the 

Transaction-Level Requirements. 

2. 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 reporting 

(‘‘SDR Reporting’’); and (vi) physical 

commodity swaps 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. 

The first subcategory of Entity-Level 

Requirements relating to capital 

adequacy, chief compliance officer, risk 

management, and swap data 

recordkeeping relate to risks to a firm as 

a whole. These requirements address 

and manage risks that arise from a firm’s 

operation as a swap dealer or MSP. 

Individually, they represent a key 

component of a firm’s internal risk 

controls. Collectively, they constitute a 

firm’s first line of defense against 

financial, operational, and compliance 

risks that could lead to a firm’s default 

or failure. 

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.66 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 

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, 

this subcategory of Entity-Level 

Requirements must be applied on a 

firm-wide basis to effectively address 

risks to the swap dealer or MSP as a 

whole. 

The second subcategory of EntityLevel Requirements, namely, SDR 

Reporting and Large Trader Reporting, 

relates more closely to the 

Commission’s market surveillance 

program. Among other things, data 

reported to swap data repositories 

(‘‘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 the futures 

market and their economically 

equivalent swaps. Given the functions 

of these reporting requirements, each 

must 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 benefits of these Entity-Level 

Requirements would be significantly 

compromised, if not undermined. Each 

of the Entity-Level Requirements is 

discussed in the subsections that follow. 

i. Capital Requirements 

Section 4s(e)(3)(A) 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 prudential 

regulators (hereinafter referred to as 

‘‘non-bank swap dealers or MSPs’’).67

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.’’ 68 Pursuant to section 

4s(e)(3), the Commission proposed 

regulations, which would require nonbank 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 futures commission 

merchant (‘‘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.69 The 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. 

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.70 Pursuant to section 4s(k), the 

Commission recently adopted § 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.71

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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72 7 U.S.C. 6s(j). 

73 7 CFR 23.600, 23.601, 23.602, 23.603, 23.605, 

23.606, and 23.607; see also Swap Dealer and Major 

Swap Participant Recordkeeping, Reporting, and 

Duties Rule, Futures Commission Merchant and 

Introducing Broker Conflicts of Interest Rule, and 

Chief Compliance Officer Rules for Swap Dealers, 

Major Swap Participants, and Futures Commission 

Merchants, 77 FR 20128, Apr. 3, 2012 (relating to 

risk management program, monitoring of position 

limits, business continuity and disaster recovery, 

conflicts of interest policies and procedures, general 

information availability, and antitrust 

considerations, respectively). 

74 17 CFR 23.609, see also Customer Clearing 

Documentation, Timing of Acceptance for Clearing, 

and Clearing Member Risk Management, 77 FR 

21278, Apr. 9, 2012. Also, swap dealers must 

comply with § 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. 

75 7 U.S.C. 6s(f)(1)(B). 

76 7 U.S.C. 6s(g)(1). 

77 17 CFR 23.201 and 23.203; see also 77 FR 

20128, Apr. 3, 2012. These requirements also 

require a swap dealer to provide the Commission 

with regular updates concerning its financial status, 

as well as information concerning internal 

corporate procedures. 

78 17 CFR 46.1 et seq.; Swap Data Recordkeeping 

and Reporting Requirements: Pre-Enactment and 

Transition Swaps, 76 FR 22833, Apr. 25, 2011. 

79 7 U.S.C. 2(a)(13)(G). 

80 7 U.S.C. 24a. 

81 7 U.S.C. 6t. 

82 7 U.S.C. 6a. 

83Large Trader Reporting for Physical 

Commodity Swaps, 76 FR 43851, July 22, 2011. The 

rules require regular position reporting and 

recordkeeping by clearing organizations, clearing 

members, and swap dealers for any principal or 

counterparty accounts with reportable position in 

physical commodity swaps. In general, the rules 

apply to swaps that are linked to either the price 

of any of the 46 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. 

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.72 The 

Commission recently adopted 

implementing sections 23.600, 23.601, 

23.602, 23.603, 23.605, 23.606, and 

23.607 of its regulations.73 The 

Commission also recently adopted 

section 23.609 of its regulations, which 

requires certain risk management 

procedures for swap dealers or MSPs 

that are clearing members of a 

derivatives clearing organization 

(‘‘DCO’’).74 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. 

iv. Swap Data Recordkeeping 

CEA section 4s(f)(1)(B) requires swap 

dealers and MSPs to keep books and 

records for all activities related to their 

business.75 Section 4s(g)(1) requires 

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.76 Pursuant to these 

provisions, the Commission adopted 

§§ 23.201 and 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.77 Swap dealers and MSPs also 

must comply with Part 46 of the 

Commission’s regulations, which 

addresses the recordkeeping 

requirements for swaps entered into 

before the date of enactment of the 

Dodd-Frank Act (‘‘pre-enactment 

swaps’’) and data relating to swaps 

entered into on or after the date of 

enactment but prior to the compliance 

date of the swap data reporting rules 

(‘‘transition swaps’’).78

v. Swap Data Reporting 

CEA section 2(a)(13)(G) requires all 

swaps, whether cleared or uncleared, to 

be reported to a registered SDR.79 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 regulators.80 Swap dealers and MSPs 

would be required to comply with Part 

45 of the Commission’s regulations, 

which sets forth the specific transaction 

data that reporting counterparties and 

registered entities must report to a 

registered SDR; and Part 46, which 

addresses the recordkeeping 

requirements for pre-enactment swaps 

and data relating to transition swaps. 

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 transactional 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 swap market 

positions. 

vi. Physical Commodity Swaps 

Reporting (Large Trader Reporting) 

CEA section 4t 81 authorizes the 

Commission to establish a large trader 

reporting system for significant price 

discovery swaps (of which economically 

equivalent swaps subject to part 20 

reporting are a subset) in order to 

implement the statutory mandate in 

CEA section 4a 82 for the Commission to 

establish and monitor position limits, as 

appropriate, for physical commodity 

swaps. Pursuant thereto, the 

Commission adopted part 20 rules 

requiring swap dealers, among other 

entities, to submit routine position 

reports on certain physical commodity 

swaps and swaptions.83 Additionally, 

part 20 rules require that swap dealers, 

among other entities, comply with 

certain recordkeeping obligations. 

3. Transaction-Level Requirements 

The Transaction-Level Requirements 

under Title VII of the Dodd-Frank Act 

and the Commission’s regulations 

(proposed or adopted) include: (i) 

Clearing and swap processing; (ii) 

margining and segregation 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; 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 


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84 7 U.S.C. 2(h)(1), (7). 

85 17 CFR 23.506, 23.610 and Customer Clearing 

Documentation, Timing of Acceptance for Clearing, 

and Clearing Member Risk Management, 77 FR 

21278, Apr. 9, 2012. 

86See 7 U.S.C. 6s(e). See also Margin 

Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants, 76 FR 23732, 

23733–40, Apr. 28, 2011. 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. 87See 7 U.S.C. 2(h)(8). 88See Swap Trading Relationship documentation 

Requirements for Swap Dealers and Major Swap 

Participants, 76 FR 6715, Feb. 8, 2011. 

89The requirements under section 4s(i) relating to 

trade confirmations is a Transaction-Level 

Requirement. Accordingly, proposed section 

23.504(b)(2), which 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. 

90See Confirmation, Portfolio Reconciliation, and 

Portfolio Compression Requirements for Swap 

Dealers and Major Swap Participants, 75 FR 81519, 

Dec. 28, 2010. 

91For example, the reduced transaction count 

may decrease operational risk as there are fewer 

trades to maintain, process and settle. 

92See 17 CFR 23.503(c), 75 FR 81519, Dec. 28, 

2010. 

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 DoddFrank Act, as opposed to addressing the 

risk of a firm’s failure. 

As a result, 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 Commission to 

exercise some degree of judgment, 

including considerations of 

international comity. Each of the 

Transaction-Level Requirements is 

discussed below. 

i. Clearing and Swap Processing 

Section 2(h) 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.84 Clearing via a DCO 

eliminates the risk of settlement for 

swap dealers or MSPs and their 

counterparties. Closely interlocked with 

the clearing requirement are the 

following swap processing 

requirements: (i) The recently finalized 

§ 23.506, which requires swap dealers 

and MSPs to submit swaps promptly for 

clearing; and (ii) § 23.610, which 

establishes certain standards for swap 

processing by swap dealers and MSPs 

that are clearing members of a DCO.85

Together, the clearing and swap 

processing requirements promote safety 

and soundness of swap dealers and 

MSPs, and aim to protect their 

counterparties from the risk of a default. 

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.86 The 

margin requirements aim to reduce the 

risk of swap dealers, MSPs, and their 

counterparties taking on excessive risks 

posed by uncleared swaps without 

having adequate financial backing to 

fulfill their obligations under the 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 

require segregation of funds provided as 

margin, 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 

safety of margin and thereby provides 

additional financial protection to 

counterparties. 

iii. Trade Execution Requirement 

Integrally linked to the clearing 

requirement is the trade execution 

requirement, which is intended to bring 

the trading of mandatorily cleared 

swaps onto regulated exchanges. 

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 designated 

contract market (‘‘DCM’’) or swap 

execution facility (‘‘SEF’’), unless no 

such DCM or SEF makes the swap 

available to trade.87 By requiring the 

trades of mandatorily cleared swaps to 

be executed on an exchange—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. 

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, the 

Commission has proposed § 23.504(a) of 

its regulations, which would require 

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.88

Under proposed §§ 23.505(b)(1), 23.504 

(b)(3), and 23.504(b)(4) of the 

Commission’s regulations, 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 rehypothecation terms for assets used as 

margin for uncleared swaps, and 

custodial arrangements.89 Further, the 

swap trading relationship 

documentation requirement applies to 

all swaps with registered swap dealers 

and MSPs. 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. 

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 

proposed §§ 23.502 and 23.503 of its 

regulations, which would require swap 

dealers and MSPs to perform portfolio 

reconciliation and compression, 

respectively, for all swaps.90 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.91 Proposed 

§ 23.503(c) would require all swap 

dealers and MSPs to participate in 

bilateral compression exercises and/or 

multilateral portfolio compression 

exercises conducted by their selfregulatory organizations (‘‘SROs’’) or 

DCOs of which they are members.92

Further, participation in multilateral 


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93See 7 U.S.C. 2(a)(13). See also Real-Time Public 

Reporting of Swap Transaction Data, 77 FR 1182, 

1183, Jan. 9, 2012. 

94Part 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 77 FR 1182, Jan. 9, 2012. 

95See 77 FR 1182, 1183. 

96 7 U.S.C. 6s(i). 

97See 17 CFR 23.501; see also 75 FR 81519, Dec. 

28, 2010. 

98 In addition, the Commission notes that 

proposed § 23.504(b)(2) requires a swap dealer’s 

and MSP’s swap trading relationship to include all 

confirmations of swaps. 

99See 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. 100See 7 U.S.C. 6s(h). See also Business Conduct 

Standards for Swap Dealers and Major Swap 

Participants With Counterparties, 77 FR 9734, 

9822–29, Feb. 17, 2012. 101Appendix A in this release provides a chart 

describing the application of the Entity-Level 

Requirements to U.S. and non-U.S. swap dealers 

and MSPs. 

102As discussed above in Section II.D of this 

proposed interpretive guidance, the Commission 

considers foreign branches and agencies of U.S. 

swap dealers to be the agents of their U.S. person. 

Thus, in all instances, the U.S. swap dealer would 

be responsible for complying with all Entity-Level 

Requirements. 

103See 7 U.S.C. 2(a)(13)(G). See also 77 FR at 

2197–2211. 

portfolio compression exercises is 

mandatory for dealer-to-dealer trades. 

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 data on a real time 

basis.93 In accordance with this 

mandate, the Commission promulgated 

part 43 of its rules on December 20, 

2011, which provide that all ‘‘publicly 

reportable swap transactions’’ must be 

reported and publicly disseminated.94

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).95

vii. Trade Confirmation 

Section 4s(i) of the CEA 96 requires 

that each swap dealer and MSP must 

comply with the Commission’s 

regulations prescribing timely and 

accurate confirmation of swaps. The 

Commission has proposed § 23.501, 

which requires, among other things, a 

timely and accurate confirmation of all 

swaps and life cycle events for existing 

swaps.97 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.98

viii. Daily Trading Records 

Pursuant to section CEA 4s(g)(1), the 

Commission adopted § 23.202 of its 

regulations, which requires swap 

dealers and MSPs to maintain daily 

trading records, including records of 

trade information related to preexecution, execution, and postexecution 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.99

Accurate and timely recordkeeping 

regarding all phases of a swap can serve 

to greatly enhance a firm’s internal 

supervision, as well as the 

Commission’s ability to detect and 

address market abuses. 

ix. 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.100 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. 

4. Application of the Entity-Level 

Requirements 101

The Dodd-Frank Act takes a 

comprehensive and integrated approach 

to the regulation of the swaps market. 

The first subcategory of Entity-Level 

Requirements, relating to capital 

adequacy, chief compliance officer, risk 

management, and swap data 

recordkeeping are at the heart of such 

framework. Specifically, these EntityLevel 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 

standards, to non-U.S. swap dealers and 

non-U.S. MSPs whose swaps 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-today businesses would lower the 

registrants’ risk of default—and 

ultimately protect the public and the 

financial system. 

Therefore, the Commission proposes 

to interpret CEA section 2(i) so as to 

require that registered non-U.S. swap 

dealers and non-U.S. MSPs comply with 

all of the first subcategory of EntityLevel Requirements.102 In consideration 

of principles of international comity, the 

Commission further proposes to 

interpret CEA section 2(i) so as to 

permit substituted compliance with 

foreign regulations for these EntityLevel Requirements in certain 

circumstances. The circumstances in 

which the Commission proposes to 

consider permitting substituted 

compliance are explained below in the 

Section III.C. of this proposed 

interpretative guidance. 

With respect to SDR Reporting, the 

Commission believes that direct access 

to data concerning all swaps in which 

a registered swap dealer or MSP enters 

is essential in order for the Commission 

to carry out its supervisory mandates 

concerning, among other things, 

increased transparency, systemic risk 

mitigation, market monitoring, and 

market abuse prevention. For example, 

data reported to SDRs would be 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. Similarly, swap data 

reported by swap dealers to the 

Commission under Large Trader 

Reporting is critical to the Commission’s 

ability to effectively monitor and 

oversee the swaps market. 

For these reasons, the Commission 

proposes to interpret CEA section 2(i) so 

as to require non-U.S. swap dealers and 

non-U.S. MSPs to report all of their 

swaps to a registered SDR 103 and to 

require non-U.S. swap dealers to report 


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104Appendix B in this release provides charts 

describing the application of the Transaction-Level 

Requirements to U.S. and non-U.S. swap dealers 

and MSPs. 

105Moreover, the U.S. counterparties, as well as 

the non-U.S. swap dealers and non-U.S. MSPs, may 

have an expectation that the Dodd-Frank Act will 

extend to them and their swaps. 

106Section III.D. (below) addresses the 

application of the Entity and Transaction-Level 

Requirements to branches, agencies, subsidiaries, 

and affiliates of U.S. swap dealers. 

107As noted above in Section II.B of this 

proposed interpretive guidance, risk may be 

imported into the U.S. In these circumstances, and 

regardless of whether the non-U.S. swap dealer’s 

counterparty is a U.S. person or a non-U.S. person, 

the risk of default by the non-U.S. swap dealer with 

respect to its swap dealing transactions ultimately 

rests with a U.S. person. 

108Below (in Section IV), the Commission 

describes the specific circumstances under which it 

proposes to permit compliance with a foreign 

regulatory regime’s clearing requirement for swaps 

entered into by non-U.S. swap dealers, non-U.S. 

MSPs, and other non-U.S. market participants in 

lieu of compliance with a Commission-issued 

clearing requirement. 

109As noted above, the portfolio compression and 

swap trading relationship documentation 

requirements apply to all swaps between registered 

swap dealers. Thus, where the non-U.S. 

counterparty is another U.S.-registered swap dealer, 

these Transaction-Level Requirements apply. The 

Commission believes that this inclusive approach is 

necessary given the significant role registered swap 

dealers play in the swaps market. 

all of their reportable positions under 

part 20. At the same time, the 

Commission recognizes 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 and therefore, further 

interprets CEA section 2(i) so as to 

permit substituted compliance with 

comparable foreign regimes for SDR 

Reporting and Large Trader Reporting. 

5. Application of the Transaction-Level 

Requirements 104

As discussed above, TransactionLevel Requirements serve to mitigate 

risks to swap dealers and MSPs and 

their counterparties, to promote greater 

market transparency and efficiency in 

the U.S. swaps market, and to provide 

counterparty protections. The 

Commission has a strong supervisory 

interest in ensuring that these DoddFrank Act requirements apply to swaps 

between a registered swap dealer or 

MSP (regardless of whether they are a 

U.S. person or non-U.S. person) and 

U.S. persons as counterparties, with a 

limited exception. Accordingly, the 

Commission proposes to interpret 

section 2(i) in a manner so as to require 

non-U.S. swap dealers and non-U.S. 

MSPs to comply with Transaction-Level 

Requirements for all of their swaps with 

U.S. persons, other than foreign 

branches of U.S. persons, as 

counterparties.105 Consistent with the 

foregoing rationale, in most cases, the 

Commission does not intend to permit 

substituted compliance for the 

Transaction-Level Requirements for 

swaps between non-U.S. swap dealers 

or non-U.S. MSPs and U.S. persons.106

The following discussion provides 

proposed guidance on the application of 

the Transaction-Level Requirements to 

swaps by non-U.S. swap dealers and 

non-U.S. MSPs with non-U.S. 

counterparties. 

i. Clearing and Swap Processing, Margin 

(and Segregation), Trade Execution, 

Swap Trading Relationship 

Documentation, Portfolio Reconciliation 

and Compression, Real-Time Public 

Reporting, Trade Confirmation, and 

Daily Trading Records 

With respect to swaps between nonU.S. swap dealers or non-U.S. MSPs and 

non-U.S. counterparties, the 

Commission proposes to interpret 

section 2(i) so as to require non-U.S. 

swap dealers and non-U.S. MSPs to 

comply with the clearing and swap 

processing and margin (and segregation) 

requirements for swaps where the nonU.S. counterparty’s performance is 

guaranteed by (or otherwise supported 

by) a U.S. person.107 The Commission 

interprets section 2(i) in this manner 

because where a non-U.S. 

counterparty’s swap obligations are 

guaranteed by a U.S. person, the risk of 

non-performance by the counterparty 

rests with the U.S. person. If the nonU.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 has a 

strong regulatory interest in the 

performance of the swap by both parties 

to the swap, and hence the application 

of these Transaction-Level 

Requirements with respect to such 

swaps is warranted. In consideration of 

international comity principles, the 

Commission further interprets CEA 

section 2(i) so as to permit substituted 

compliance for these Transaction-Level 

Requirements.108

Similarly, the requirements relating to 

portfolio reconciliation and 

compression can serve to significantly 

mitigate risks to the counterparties, and 

by extension, the U.S. person 

guaranteeing the non-U.S. 

counterparty’s obligations under the 

swap. Specifically, portfolio 

reconciliation serves to diminish the 

risk of disputes for the counterparties. 

Portfolio compression also has the effect 

of lowering the risk for the 

counterparties by diminishing 

operational risks. Other TransactionLevel Requirements—trade 

confirmation, swap trading relationship 

documentation, and daily trading 

records—by ensuring that swaps are 

properly documented and recorded, 

serve to protect the counterparties, as 

well as the U.S. person that is the 

guarantor.109

The Commission also proposes to 

interpret section 2(i) so as to require 

non-U.S. swap dealers and non-U.S. 

MSPs to comply with the trade 

execution requirement for swaps where 

the non-U.S. counterparty’s 

performance is guaranteed by a U.S. 

person. 

The trade execution requirement is 

linked to the clearing requirement and 

for that reason, should be treated in 

same manner as the clearing 

requirement for regulatory purposes, 

which better ensures the effectiveness of 

the clearing and trading mandates. 

Requiring swaps to be traded on a 

regulated exchange provides market 

participants with greater pre- and posttrade transparency. Similarly, real-time 

public reporting improves price 

discovery by requiring that swap 

transaction and pricing data be made 

publicly available. Together, trade 

execution and real-time reporting 

requirements provide important 

information for risk management 

purposes and bring greater efficiency to 

the marketplace—to the benefit of the 

individual counterparties. As with the 

other Transaction-Level Requirements, 

the Commission further interprets CEA 

section 2(i), consistent with comity 

principles, so as to permit substituted 

compliance with respect to these 

transactions. 

Similar concerns regarding the flow of 

risk to the United States are raised by an 

entity that effectively operates as a 

‘‘conduit’’ for a U.S. person to execute 

swaps outside the Dodd-Frank Act 

regime. The Commission recognizes that 

such conduits may be used legitimately 

to move economic risks from one person 

within a corporate group to another in 

order to manage the group’s overall 

swap portfolio. The Commission also 

recognizes that, in many cases, the 


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110That is to say, 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. 

111See section 752 of the Dodd-Frank Act. As the 

Supreme Court observed in Hoffmann-LaRoche, 

principles of international comity ‘‘help[ ] the 

potentially conflicting laws of different nations 

work together in harmony—a harmony particularly 

needed in today’s highly interdependent 

commercial world.’’ See Hoffmann-LaRoche, 542 

U.S. at 164–165. 

112For 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 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., 67 FR 30785 (Apr. 

29, 2002); 71 FR 6759 (Feb. 9, 2001). 

113The details concerning the Commission’s 

comparability determinations will be discussed 

below in Section IV. 

conduits could be subject to prudential 

and risk management requirements and 

may lay off the risk of its dealing 

activities on an individual or portfolio 

basis through transactions that would be 

subject to and reported under the DoddFrank Act. 

Nevertheless, the Commission is 

concerned that 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 conduit. The 

Commission is further concerned that 

rather than execute a swap opposite a 

U.S. counterparty, which would be 

subject to the Dodd-Frank transactional 

requirements, a U.S. swap dealer or 

MSP could execute a swap with its 

foreign affiliate or subsidiary, which 

could then execute a swap with a nonU.S. third-party in a jurisdiction that is 

unregulated or lack comparable 

transactional requirements. 

Accordingly, the Commission proposes 

to apply these Transaction-Level 

Requirements to swaps in which: (i) A 

non-U.S. counterparty is majorityowned, directly or indirectly, by a U.S. 

person; (ii) the non-U.S. counterparty 

regularly enters into swaps with one or 

more other U.S. affiliates or subsidiaries 

of the U.S. person; and (iii) the 

financials of such non-U.S. counterparty 

are included in the consolidated 

financial statements of the U.S. person. 

Further, the Commission interprets CEA 

section 2(i), consistent with comity 

principles, so as to permit substituted 

compliance for these Transaction-Level 

Requirements with respect to swaps 

between a non-U.S. swap dealer or nonU.S. MSP and such affiliate conduit. 

Conversely, and consistent with the 

foregoing rationale, the Commission 

proposes to interpret section 2(i) so as 

to not require the application of any of 

these Transaction-Level Requirements 

to swaps between a non-U.S. swap 

dealer or non-U.S. MSP with a non-U.S. 

counterparty that is not guaranteed by a 

U.S. person. In such instances, the 

Commission recognizes that foreign 

regulators have a strong supervisory 

interest in swaps occurring within their 

territories involving their domiciles. 

ii. External Business Conduct Standards 

With respect to the external business 

conduct standards, the Commission 

proposes to interpret section 2(i) to not 

require non-U.S. swap dealers and nonU.S. MSPs to comply with these 

requirements for swaps with a non-U.S. 

counterparty (whether or not guaranteed 

by a U.S. person). The Commission 

believes that sales practice concerns 

related to swaps between non-U.S. 

persons taking place outside the United 

States implicate fewer U.S. supervisory 

concerns and, when weighed together 

with the supervisory interests of foreign 

regulatory regimes, may not warrant 

application of these requirements.110

C. Substituted Compliance With Respect 

to Particular Requirements 

The Commission believes that a crossborder 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 potentially conflicting 

regulations is consistent with principles 

of international comity. It would also 

advance the congressional directive that 

the Commission act in order to 

‘‘promote effective and consistent global 

regulation of swaps * * * as 

appropriate, shall consult and 

coordinate with foreign regulatory 

authorities on the establishment of 

consistent international standards with 

respect to regulation (including fees) of 

swaps * * *.’’ 111 Practical 

considerations—namely, the limitations 

in the Commission’s supervisory 

resources and its ability to effectively 

oversee and enforce application of the 

CEA to cross-border transactions and 

activities—also support the Commission 

applying its regulations in a manner that 

is focused on the primary objectives of 

the CEA. 

In light of the foregoing 

considerations, the Commission 

proposes to permit a non-U.S. swap 

dealer or non-U.S. MSP, once registered 

with the Commission, to comply with a 

substituted compliance regime under 

certain circumstances. Substituted 

compliance means that a non-U.S. swap 

dealer or non-U.S. MSP is permitted to 

conduct business by complying with its 

home regulations, without additional 

requirements under the CEA. 

Specifically, the Commission proposes 

to permit non-U.S. swap dealers and 

non-U.S. MSPs to substitute compliance 

with the requirements of the relevant 

home jurisdiction’s law and regulations, 

in lieu of compliance with the CEA and 

Commission’s regulations, if the 

Commission finds that such 

requirements are comparable to cognate 

requirements under the CEA and 

Commission regulations. As discussed 

below, this approach would build 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).112

The Commission proposes that it 

would make comparability 

determinations on an individual 

requirement basis, rather than the 

foreign regime as a whole. In the 

Commission’s view, this would allow 

for a more flexible registration process 

as it would permit a non-U.S. person to 

become registered as a swap dealer or 

MSP even in the absence of 

comparability with respect to all of the 

Dodd-Frank Act requirements. Rather, a 

non-U.S. swap dealer or non-U.S. MSP 

may be permitted to comply with 

regulations in its home jurisdiction to 

the extent that the comparability 

standard is met but also may be required 

to comply with certain of the DoddFrank Act requirements where 

comparable home regulation(s) are 

lacking.113

In this section, the Commission 

broadly outlines the circumstances 

under which the Commission would 

permit a non-U.S. swap dealer or nonU.S. MSP to rely on foreign regulation 

and supervision as a substitute for 

compliance by that swap dealer or MSP 

with some or all of the requirements 

that would otherwise be applicable to it 

under Title VII of the Dodd-Frank Act. 

1. Entity-Level Requirements 

The Commission anticipates that nonU.S. persons that will register as swap 

dealers or MSPs with the Commission 

will likely have their principal swap 

business in their home jurisdiction. The 

Commission believes that it would be 

appropriate to permit substituted 

compliance with respect to the 

previously-described Entity-Level 

Requirements where the non-U.S. swap 

dealers or non-U.S. MSPs are subject to 

comparable regulation in their home 

jurisdiction. In these circumstances, the 

Commission notes that the home 


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114The Commission, however, would continue to 

permit substituted compliance with comparable 

home country regulations with respect to EntityLevel Reqirements in this instance. Transactions 

with a foreign branch or agency of a U.S. swap 

dealer are discussed below. 

115As noted above, swaps with non-U.S. persons 

satisfying each prong of the conduit test would be 

similarly subject to the Transaction-Level 

Requirements, provided, however, that the non-U.S. 

swap dealer or non-U.S. MSP executing such swaps 

may substitute compliance with a comparable 

foreign regulatory regime in appropriate cases. 

116For reasons stated above, with respect to 

external business conduct standards, the 

Commission would apply such requirements only 

for swaps where the counterparty is a U.S. person. 

117As noted above, the proposed interpretive 

guidance does not limit the applicability of any 

CEA provision or Commission regulation to any 

person, entity or transaction except as provided 

herein. 

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 permitting substituted 

compliance. 

With respect to SDR Reporting, the 

Commission proposes to permit 

substituted compliance with respect to 

swaps by non-U.S. swap dealers and 

non-U.S. MSPs with non-U.S. 

counterparties (whether or not such 

non-U.S. swap dealers or such non-U.S. 

MSPs are guaranteed by U.S. persons), 

provided that the Commission has 

direct access to the swap data for such 

non-U.S. swap dealers or non-U.S. 

MSPs that is stored at the foreign trade 

repository. The Commission believes 

that this approach would minimize 

burdens on non-U.S. swap dealers and 

non-U.S. MSPs that report their swaps 

data to a foreign trade repository, while 

ensuring that the Commission has 

access to information that is critical to 

its oversight of these entities. 

2. Transaction-Level Requirements 

As discussed above, the Commission 

proposes to interpret section 2(i) so as 

to require non-U.S. swap dealers and 

non-U.S. MSPs to comply with the 

clearing and swap processing, 

margining (and segregation), trade 

execution, swap trading relationship 

documentation, portfolio reconciliation 

and compression, real-time public 

reporting, trade confirmation, and daily 

trading records requirements for all 

transactions with a counterparty that is 

a U.S. person or is a non-U.S. person 

whose swap obligations are guaranteed 

by a U.S. person. 

The Commission would not permit 

substituted compliance with respect to 

these Transaction-Level Requirements 

for a non-U.S. swap dealer’s or non-U.S. 

MSP’s transactions with a counterparty 

that is a U.S. person, with a limited 

exception.114 Generally, where swaps 

are executed with U.S. persons, the 

Commission’s supervisory interests in 

such transactions, which have a direct 

and significant connection with 

activities in, or effect on, U.S. 

commerce, and in ensuring the 

protection of U.S. counterparties weighs 

in favor of applying the requirements of 

the CEA, rather than permitting 

substituted compliance. 

On the other hand, it may be more 

appropriate for the Commission to 

permit substituted compliance for 

transactions between a non-U.S. swap 

dealer or non-U.S. MSP and a non-U.S. 

person whose swap obligations are 

guaranteed by a U.S. person. In such 

circumstances, the foreign jurisdiction 

has a strong supervisory interest in 

regulating the activities of its domiciles 

occurring within its territory. At the 

same time, given that such transactions 

are guaranteed by a U.S. person, the 

Commission also has a strong 

supervisory interest in ensuring that the 

protections of the Dodd-Frank Act are 

extended to the U.S. guarantor. In 

consideration of these factors, the 

Commission would permit substituted 

compliance with respect to these 

Transaction-Level Requirements for 

swaps between a non-U.S. swap dealer 

or non-U.S. MSP with a non-U.S. person 

guaranteed by a U.S. person, as well as 

swaps with non-U.S. affiliate conduits. 

Substituted compliance, the 

Commission believes, would address its 

supervisory concerns while, at the same 

time, minimizing the potential for 

conflicts with the requirements under 

foreign jurisdictions.115

D. Application of Entity-Level and 

Transaction-Level Requirements to 

Branches, Agencies, Affiliates, and 

Subsidiaries of U.S. Swap Dealers 

1. Foreign Branches and Agencies of 

U.S. Swap Dealers 

As discussed above, the Commission 

considers foreign branches and agencies 

of a U.S. person to be a part of the U.S. 

person. Thus, the Commission proposes 

that the U.S. person would be legally 

responsible for complying with all 

applicable Entity-Level Requirements. 

Further, the Commission proposes to 

require compliance with most of the 

Transaction-Level Requirements (i.e., 

clearing and swap processing, margin 

(and segregation) for uncleared swaps, 

trade execution, real-time reporting, 

trade confirmation, swap trading 

relationship documentation, daily 

trading records, and portfolio 

reconciliation and compression), 

irrespective of whether the counterparty 

is a U.S. person or non-U.S. person.116

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.-based swap dealer. 

The Commission further interprets 

section 2(i) to permit substituted 

compliance with respect to the 

Transaction-Level Requirements for 

swaps with certain counterparties. 

Specifically, the Commission proposes 

to permit substituted compliance for 

swaps between a foreign branch of a 

U.S. person and a non-U.S. person 

counterparty (both whose obligations 

under the swap are guaranteed by a U.S. 

person and those that are not). Given 

that the counterparty is a non-U.S. 

person, coupled with the supervisory 

interest of the foreign jurisdiction in the 

execution and clearing of trades 

occurring in that jurisdiction, the 

Commission believes that it would be 

appropriate to permit the parties to 

comply with comparable foreign 

requirements. In doing so, the 

Commission notes that, as discussed in 

further detail below, its 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 limited circumstances where 

foreign regulations are not comparable, 

the Commission believes that it could be 

appropriate to permit foreign branches 

and agencies of U.S. swap dealers to 

comply with the transaction-level 

requirements applicable to entities 

domiciled or doing business in the 

foreign jurisdiction, rather than the 

Transaction-Level Requirements that 

would otherwise be applicable to the 

U.S. person’s activities.117 Specifically, 

the Commission understands that U.S. 

swap dealers’ swap dealing activities 

through branches or agencies in 

emerging markets in many cases may 

not be significant but may be 

nevertheless an integral element of their 

global business. Under the 

circumstances, the Commission 

proposes that section 2(i) should be 

interpreted to permit foreign branches 

and agencies of U.S. swap dealers to 


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118The Commission solicits comments on all 

aspects of the proposed exception, including the 

conditions for eligibility. In particular, the 

Commission is interested in the types of riskmitigating measure(s) that should be imposed on a 

firm as a condition to the exception. 

119As noted earlier, the booking entity itself also 

would be required to register as a swap dealer and 

satisfy the Dodd-Frank Act requirements applicable 

to swap dealers, even though the affiliate facing the 

third party counterparty also was required to 

register as a swap dealer. 

120Accordingly, the Commission would apply the 

clearing and swap processing, margining (and 

segregation), trade execution, swap trading 

relationship documentation, portfolio reconciliation 

and compression, real-time public reporting, trade 

confirmation, and daily trading records 

requirements to transactions with a non-U.S. person 

guaranteed by a U.S. person. The Commission 

further believes that it is appropriate to permit a 

foreign affiliate or subsidiary to comply with 

comparable and comprehensive regulatory 

requirement(s). Substituted compliance would 

mitigate any burden associated with potentially 

duplicative or conflicting foreign regulations and is 

appropriate in light of the foreign regulator’s 

supervisory interests in entities domiciled and 

operating in its jurisdiction. Similar concerns 

regarding the risk of non-performance is not present 

where the non-U.S. counterparty is not guaranteed 

or similarly supported by a U.S. person, and 

therefore, the Commission proposes to not apply 

the Transaction-Level Requirements with respect to 

such swaps. 

participate in the swap markets in such 

countries on a limited basis. To be 

eligible for this exception, the aggregate 

notional value (expressed in U.S. dollars 

and measured on a quarterly basis) of 

the swaps of all foreign branches and 

agencies in such countries may 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. 

However, the U.S. person relying on this 

exception would be required to 

maintain records with supporting 

information to verify its eligibility for 

the exception, as well as identify, 

define, and address any significant risk 

that may arise from the non-application 

of the Transaction-Level 

Requirements.118

Further, as discussed above, the 

Commission proposes that the U.S. 

person may task its foreign branch or 

agency to fulfill its regulatory 

obligations with respect to the 

Transaction-Level Requirements. The 

Commission would consider 

compliance by the foreign branch or 

agency to constitute compliance with 

the Transaction-Level Requirements. 

The Commission proposes, however, 

that the U.S. person remains responsible 

for compliance with the TransactionLevel Requirements. 

2. Foreign Affiliates and Subsidiaries of 

U.S. Swap Dealers 

With respect to foreign affiliates or 

subsidiaries of U.S. swap dealers, the 

Commission proposes that the 

regulatory requirements that may apply 

to such affiliate or subsidiary would 

depend on where their swaps are 

booked and whether the affiliate or 

subsidiary engages in activities that 

trigger swap dealer registration. Where 

the swaps are directly booked in the 

U.S. swap dealer but the foreign affiliate 

or subsidiary facing the counterparty 

engages in swap dealing and 

independently meets the definition of a 

swap dealer, the U.S. swap dealer must 

comply with all of the swap dealer 

duties and obligations, including 

capital-related prudential requirements. 

The foreign affiliate or subsidiary would 

be required to separately register as a 

swap dealer and comply with any 

Entity-Level and Transaction-Level 

Requirements applicable to its swap 

dealing activities. 

Thus, if the counterparty facing 

affiliate or subsidiary was acting merely 

as a disclosed agent and did not meet 

the definition of a swap dealer, then the 

Dodd-Frank Act requirements 

applicable to swap dealers would not be 

applicable to the affiliate or subsidiary, 

provided that the agency relationship 

was properly documented and the 

principal remained primarily 

responsible for the actions of the 

affiliate. On the other hand, if the 

counterparty facing affiliate or 

subsidiary independently met the 

definition of a swap dealer, then it 

would be required to register as a swap 

dealer and satisfy the Dodd-Frank Act 

requirements applicable to swap 

dealers, even though all exposure to the 

swaps it entered into were transferred to 

a central booking entity, regardless of 

how those transfers were 

accomplished.119 In this scenario, the 

Commission interprets section 2(i), 

consistent with the principles of 

international comity, so as to permit 

substituted compliance by the foreign 

affiliate or subsidiary. 

Where the counterparty-facing 

affiliate or subsidiary and the central 

booking entity are both required to 

comply with Dodd-Frank Act 

requirements with respect to swap 

dealers, the question may arise as to the 

allocation of responsibilities between 

the two entities for obligations owed to 

the third-party counterparty. In such 

cases, the Commission is of the view 

that both entities are responsible for 

satisfying the Dodd-Frank Act 

requirements applicable to swap dealers 

and with respect to the performance of 

an obligation owed to a third party; 

satisfactory performance by one may 

satisfy the obligations of both, but an 

unsatisfactory performance of an 

obligation owed to a counterparty is a 

responsibility that will be borne by both 

entities. 

In the case where non-U.S. affiliates 

or subsidiaries enter into swaps that are 

not directly booked in a U.S. person, the 

Commission proposes to interpret 

section 2(i) so as to require any such 

foreign affiliates or subsidiaries to 

register as a swap dealer, assuming that 

they individually or in the aggregate 

meet the definition of a swap dealer. 

Because these affiliates or subsidiaries 

are domiciled in a foreign jurisdiction 

and the swaps are not booked in the 

U.S. swap dealer, these affiliates or 

subsidiaries would be treated in a 

manner consistent with respect to nonU.S. swap dealers.120

With respect to SDR Reporting, the 

Commission proposes to interpret 

section 2(i) so as to require foreign 

affiliates or subsidiaries of a U.S. swap 

dealer to comply with the SDR 

Reporting requirement but would 

permit substituted compliance, 

provided that the Commission has 

direct access to the swap data for these 

swaps that is stored at the foreign trade 

repository. As noted above, the 

Commission believes that this approach 

would best minimize burdens on 

counterparties that report their swaps 

data to a foreign trade repository, while 

ensuring that the Commission has direct 

access to the information critical to its 

oversight of the swaps market. 

Request for Comment 

Q10. Please provide comments 

regarding all aspects of the 

Commission’s proposed grouping of 

requirements into Entity-Level and 

Transaction-Level Requirements and 

application of the same to U.S. and nonU.S. persons as discussed above. 

Q11. Are there any Entity-Level 

Requirements that should be reclassified 

as Transaction-Level Requirements, or 

vice versa? In particular, the 

Commission is interested in comments 

on whether portfolio reconciliation and 

compression requirements, as central 

risk mitigation and back-office 

functions, could or should be 

categorized as entity-level requirements. 

Similarly, the Commission is interested 

in comments on whether clearing and 

margin and segregation for uncleared 

swaps should be categorized as EntityLevel requirements. 

Q11a. Should the Commission group 

the Entity-Level Requirements and 

Transaction-Level Requirements 

differently for swap dealers and MSPs? 

If so, how and why? 


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121See Further Definition of ‘‘Swap,’’ ‘‘SecurityBased Swap,’’ and ‘‘Security-Based Swap 

Agreement’’; Mixed Swaps; Security-Based Swap 

Agreement Recordkeeping, 76 FR 29818, May 23, 

2011. 

Q11b. Should the real-time reporting 

and trade execution requirements be 

treated in the same manner as the 

external business conduct standards? 

Q12. Please provide specific 

comments regarding the proposed 

application of the Transaction-Level 

Requirements to swaps with 

counterparties that are U.S. persons. 

Should the Commission permit 

substituted compliance for swaps 

between a non-U.S. swap dealer or nonU.S. MSP with a U.S. person? 

Q13. Please provide specific 

comments regarding the proposed 

application of the Transaction-Level 

Requirements to swaps with 

counterparties that are non-U.S. 

persons. 

Q14. Market participants may not be 

able to determine, in certain cases, 

whether their counterparties are U.S. 

persons, non-U.S. persons with a 

guarantee from U.S. persons, or nonU.S. persons without guarantees. How 

should the Commission address this 

issue? 

Q15. Please provide comments 

regarding the Commission’s proposed 

interpretation with respect to non-U.S. 

swap counterparties whose swap 

obligations are guaranteed by U.S. 

persons. Should the interpretation for 

swaps between non-U.S. swap dealers 

or non-U.S. MSPs and non-U.S. 

counterparties whose swap obligations 

are guaranteed by U.S. persons be 

different than with respect to swaps 

between non-U.S. swap dealers or nonU.S. MSPs and U.S. persons (e.g., 

should fewer Transaction-Level 

Requirements apply)? If so, how (e.g., 

which Transaction-Level Requirements 

should apply)? Should the Commission 

not permit substituted compliance with 

respect to the Entity-Level and 

Transaction-Level Requirements in 

connection with transactions with nonU.S. persons? 

Q15a. Should the Commission permit 

substituted compliance for some 

requirements but not others? If so, 

which ones? Should the applicable 

requirements be different for non-U.S. 

swap dealers as compared to non-U.S. 

MSPs? 

Q16. For Entity-Level Requirements, 

should the Commission not permit 

substituted compliance for U.S. 

persons? 

Q17. The Commission is aware that 

some non-U.S. swap dealers or MSPs 

may be prohibited from reporting swap 

transaction data to an SDR as a result of 

their home country’s privacy laws, 

especially with respect to such swap 

dealer’s or MSP’s swaps with non-U.S. 

persons. How should the Commission 

address the application of the SDR 

Reporting requirement with respect to 

these swaps? Should the Commission 

address the application of such 

requirements differently with respect to 

non-U.S. swap dealers and non-U.S. 

MSPs? 

Q18. The Commission seeks 

comments concerning the proposed 

disapplication of the external business 

conduct standards to swaps involving 

non-U.S. persons. Would it be 

consistent with the expectations of nonU.S. persons to not apply these 

requirements to swaps with their local 

swap dealer, irrespective of whether 

such dealer is a foreign- or U.S.-based 

person? Should such requirements 

apply only to swaps involving the 

foreign branches or affiliates of a U.S.- 

based swap dealer? 

Q19. Should the Commission 

interpret section 2(i) so as to not apply 

the Transaction-Level requirements to 

the foreign branches of U.S.-swap 

dealers operating in the emerging 

markets? If so, is it appropriate to 

condition eligibility for such an 

exception in the manner discussed 

above? Should the Commission permit a 

higher or lower percentage of swaps to 

be executed through foreign branches of 

U.S. registrants in emerging market 

jurisdictions without comparable 

regulation? If so, why and what 

percentage would be appropriate? 

Q20. With respect to the exception for 

foreign branches of a U.S. swap dealer 

operating in the emerging markets with 

respect to swaps with a non-U.S. person 

guaranteed by a U.S. person, should the 

Commission change the baseline from 

the aggregate notional value of a firm’s 

swap activities to $8 billion (or certain 

fixed numerical threshold) so as to not 

disadvantage small swap dealers? 

Q21. The Commission requests 

comment on its proposed approach of 

applying the Transaction-Level 

Requirements to a conduit’s swaps as if 

counterparty were a non-U.S. person 

that is guaranteed by a U.S. person (i.e., 

Transaction-Level Requirements will 

apply, with substituted compliance 

permitted). 

Q22. The Commission requests 

comment on its proposed definition of 

‘‘conduit.’’ Are the three prongs of that 

definition appropriate? If not, how 

should they be modified? Should the 

second prong include language that 

limits application of the conduit test to 

‘‘regular’’ inter-affiliate transactions 

moving economic risk, in whole or in 

part, to the United States. Should the 

definition of conduit distinguish 

between different types of 

counterparties or registration status of 

such counterparties? 

Q23. The Commission requests 

comment on: (i) The prevalence of 

cross-border inter-affiliate swaps and 

the mechanics of moving swap-related 

risks between U.S. and non-U.S. 

affiliated entities for risk management 

and other purposes; (ii) risk 

implications of cross border interaffiliate conduit swaps for the U.S. 

markets; and (iii) specific means to 

address the risk issues potentially 

presented by cross-border conduit 

arrangements. 

Q24. The Commission proposed antievasion provisions in proposed rule 1.6 

of the product definitions joint 

rulemaking with the SEC.121 To what 

extent would inter affiliate conduit 

transactions be undertaken for purposes 

of evasion as described in proposed rule 

1.6? 

Q25. The Commission requests 

comments on whether substituted 

compliance should be permitted for 

swaps entered between a foreign branch 

of a U.S. person with another foreign 

branch of a U.S. person. 

IV. Substituted Compliance: Process for 

Comparability Determination 

A. Overview 

As noted above, the Commission will 

use its experience exempting foreign 

brokers from registration as FCMs under 

its rule 30.10 ‘‘comparability’’ findings 

in developing an approach for swaps. 

However, the Commission contemplates 

that it will calibrate its approach to 

reflect the heightened requirements and 

expectations under the Dodd-Frank Act. 

Accordingly, the Commission will 

examine the regulatory requirements to 

which non-U.S. swap dealers and nonU.S. MSPs are subject. The Commission 

will use an outcomes based approach to 

determine whether these requirements 

are designed to meet the same 

regulatory objectives of the Dodd-Frank 

Act. The Commission contemplates that 

its approach also will require a more 

robust and ongoing process of 

cooperation and coordination between 

the Commission and the relevant foreign 

regulatory authority regarding ongoing 

compliance efforts. 

1. Scope of Review 

As noted above, the Commission 

would determine comparability and 

comprehensiveness by reviewing the 

foreign jurisdiction’s laws and 

regulations. In making this 

determination, the Commission may 


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122The Commission anticipates that it would 

review comparability in the areas described above: 

(i) Capital requirements; (ii) chief compliance 

officer (iii) clearing and swap processing; (iv) daily 

trading records; (v) margin (and segregation) 

requirements for uncleared swap transactions; (vi) 

physical commodity swaps reporting; (vii) portfolio 

reconciliation and compression; (viii) real-time 

public reporting; (ix) SDR Reporting; (x) risk 

management; (xi) swap data recordkeeping; (xii) 

swap trading relationship documentation; (xiii) 

trade confirmation (xiv) trade execution. 

123The Commission would retain broad 

enforcement authority, including anti-fraud and 

anti-manipulation authority, with respect to the 

subject cross-border swap activities. 

124The procedures described in this subsection, 

which are not all-inclusive, are contemplated for 

applicants for substituted compliance. The 

Commission further notes that non-compliance 

with the comparable home country regulations 

would constitute a breach of the terms and 

conditions of the registration with the Commission 

and potentially would serve as a basis for deregistration of the non-U.S. swap dealer or non-U.S. 

MSP and/or the commencement of an enforcement 

action. 

125After it completes its evaluation, the 

Commission intends to post a finding of 

comparability on its Web site. 

126The 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. For certain matters, the 

Commission may request an opinion of counsel. 

127The Commission notes that under 

Commission’s regulation § 23.603(i), a registered 

swap dealer or MSP must make all records required 

to be maintained in accordance with Commission 

regulation 1.31 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. 

128 In this regard, the Commission has started 

working with foreign regulators to prepare for such 

arrangements. 

129Prior determinations of comparability under 

part 30.10 of the Commission’s regulations will not 

be determinative for those purposes. 

find that a jurisdiction has comparable 

law(s) and regulation(s) in some, but not 

all, of the applicable Dodd-Frank Act 

provisions (and related Commission 

regulations).122 Similar to its policy 

under rule 30.10, the Commission 

would retain broad discretion to 

determine that the objectives of any 

program elements are met, 

notwithstanding the fact that the foreign 

requirement(s) may not be identical to 

that of the Commission.123 However, in 

cases where the foreign regulatory 

regime does not achieve the objectives 

of the Dodd-Frank Act, the Commission 

proposes to recognize substituted 

compliance in only those areas that are 

determined to be comparable and 

comprehensive to the CEA and 

Commission regulations. 

In evaluating whether a particular 

foreign regulatory requirement(s) is 

comparable and comprehensive to the 

applicable requirement(s) under the 

CEA and Commission regulations, the 

Commission would take into 

consideration all relevant factors, 

including but not limited to, the scope 

and objectives of the relevant regulatory 

requirement(s), and the 

comprehensiveness of those 

requirement(s), the comprehensiveness 

of the foreign regulator’s supervisory 

compliance program, as well as the 

authority to support and enforce its 

oversight of the non-U.S. swap dealer or 

non-U.S. MSP applicant. In this context, 

comparable does not necessarily mean 

identical. Rather, the Commission 

would evaluate whether the home 

jurisdiction’s regulatory requirement is 

comparable to the regulatory 

requirement(s) supported and enforced 

by the Commission. 

2. Process 

The Commission may recognize the 

comparability of a foreign regime and 

permit substituted compliance subject 

to such terms and conditions as the 

Commission finds appropriate.124

Further, similar to its policy under rule 

30.10, the Commission would retain 

broad discretion to determine that the 

objectives of any program elements are 

met, notwithstanding the fact that the 

foreign regulations(s) may not be 

identical to that of the Commission. 

A non-U.S. person may request the 

Commission’s permission to comply 

with comparable requirements of its 

home jurisdiction, in lieu of the 

applicable Dodd-Frank Act 

requirements, as described above. In 

lieu of a non-U.S. person requesting 

substituted compliance, a group of nonU.S. persons from the same jurisdiction, 

or a foreign regulator, may submit an 

application for substituted compliance 

on behalf of non-U.S. persons subject to 

a foreign supervisory regime. 

Such request would be made directly 

to the Commission in connection with 

its application to register as a swap 

dealer or MSP.125 The Commission 

anticipates that it would work closely 

with the National Futures Association to 

develop the necessary procedural 

framework. 

The Commission would expect that 

the applicant, at minimum, state with 

specificity the factual basis for 

requesting that the Commission 

recognize comparability with respect to 

a particular Dodd-Frank Act 

requirement as described above and 

include with specificity all applicable 

legislation, rules and policies. 126

An applicant would be expected to 

state that it is licensed and in good 

standing with the applicant’s 

supervisor(s) in its home country. 

Further, the Commission expects that, 

in a substituted compliance situation, it 

would enter into an appropriate 

memorandum of understanding 

(‘‘MOU’’) or similar arrangement 

between the Commission and the 

relevant foreign supervisor(s). Existing 

information-sharing and/or enforcement 

arrangements would be indicative of a 

foreign supervisor’s ability to cooperate 

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 

ongoing coordination activities that 

would continue on an ongoing basis 

between the Commission and the 

foreign supervisor(s), including topics 

such as, but not limited to, procedures 

for confirming continuing oversight 

activities, access to information,127 onsite visits, and notification and 

procedures in certain situations.128

It is expected that the Commission 

generally may rely on prior 

comparability determinations with 

respect to a particular jurisdiction to 

facilitate its review of a subsequent 

applicant’s request for recognition of 

substituted compliance.129 Subsequent 

to registration with the Commission, the 

Commission expects that a non-U.S 

swap dealer or non-U.S. MSP would 

notify the Commission of any material 

changes to information submitted in 

support of a comparability finding 

(including, but not limited to, changes 

in the relevant supervisory or regulatory 

regime) as the Commission’s 

comparability determination may no 

longer be valid. In order to avoid an 

unduly burdensome notification 

process, the Commission contemplates 

that it would enumerate the specific 

foreign requirements or category of 

requirements which, if changed, would 

trigger a notification requirement. 

Where the Commission proposes a 

change to its regulations governing 

swaps, the Commission will evaluate 

whether the proposed regulatory change 

would affect the basis upon which a 

prior comparability finding was made. 

The Commission would initiate 

discussions with the affected swap 

dealers and MSPs and their regulator(s) 

to determine how to address any 

possible discrepancy in requirements. 

3. Clearing 

In response to a number of inquiries, 

with regard to swaps covered by a 


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41234 Federal Register / Vol. 77, No. 134 / Thursday, July 12, 2012 / Proposed Rules 

130Appendix C in this release provides a chart 

describing the application of the specified DoddFrank provisions to transactions between 

counterparties that are neither a swap dealer or 

MSP. 

131See Section III.B.3.i., supra. 

132See Section III.B.3.iii. supra. 

133See Section III.B.3.vi. supra. 

134See Section III.B.2.vi. supra. 

135See Section III.B.2.v. supra. 

136The Commission’s part 45 rules require nonswap dealers and non-MSPs to keep ‘‘full, complete 

and systematic records’’ with respect to each swap 

to which they are a counterparty. See 17 CFR 45.2. 

Such records must include those demonstrating that 

the parties to a swap are entitled to make use of the 

clearing exception in CEA section 2(h)(7). Nonswap dealers and non-MSPs must also comply with 

the Commission’s regulations in part 46, which 

address the reporting of data relating to preenactment swaps and data relating to transition 

swaps. 

137Nothing in this interpretive guidance should 

be construed to affect the ability of a foreign board 

of trade to offer swaps to U.S. persons pursuant to 

part 48 of the Commission’s regulations. 

138 In further support of this interpretation, the 

Commission notes that the risks to U.S. persons and 

the U.S. financial system from swap activities of 

U.S. persons does not depend on the location of 

such swap activities of U.S. persons. Moreover, the 

Commission 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 F. 

Hoffmann-La Roche, Ltd., 542 U.S. at 164 (in 

response to respondents’ argument that the court 

can take account of comity considerations on a case 

by case basis, the Court held that such approach is 

‘‘too complex to be prove workable.’’). 

139The exception involves Large Trader 

Reporting, as further discussed below. 

Commission-issued clearing 

requirement, the Commission notes that 

it expects to find comparability with 

foreign regulatory regimes when (i) the 

swap is subject to a mandate issued by 

appropriate government authorities in 

the home country of the counterparties 

to the swap, provided that the foreign 

mandate is comparable and 

comprehensive to the Commission’s 

mandate; and (ii) the swap is cleared 

through a DCO that is exempted from 

registration under the CEA. 

Request for Comment 

Q26. Please provide comments 

regarding the Commission’s substituted 

compliance proposal, including the 

appropriate standard and degree of 

comparability and comprehensiveness 

that should be applied to make such 

determination. 

Q27. What are some of the factors or 

elements of a supervisory program that 

the Commission should consider in 

making a comparability finding? 

Q27a. Should the Commission take a 

different approach with respect to swap 

dealers as compared to MSPs? 

Q28. How should the Commission 

address potential inconsistencies or 

conflicts between U.S. and non-U.S. 

requirements with respect to the 

oversight of non-U.S. swap dealers and 

non-U.S. MSPs? 

Q29. Many foreign jurisdictions are in 

the process of implementing major 

changes to their oversight of the swaps 

market. Assuming that a foreign 

jurisdiction has adopted swaps 

legislation but has yet to finalize 

implementing regulations, should the 

Commission develop an interim process 

that takes into account the development 

of ‘‘comparable’’ legislation and 

proposed regulations? 

Q30. How should the Commission 

ensure that prior comparability 

determinations remain appropriate over 

time? 

V. Cross-Border Application of the 

CEA’s Swap Provisions to Transactions 

Involving Other (Non-Swap Dealer and 

MSP) Market Participants 

A. Cross-Border Transactions With U.S. 

Persons 130

Several of the CEA’s swap 

provisions—namely, those relating to 

clearing,131 trade execution,132 real-time 

public reporting,133 Large Trader 

Reporting,134 and SDR Reporting,135

and recordkeeping 136—also apply to 

persons or counterparties other than a 

swap dealer or MSP. As a result, 

questions arise as to whether, and the 

extent to which, these requirements 

apply to transactions outside the United 

States involving U.S. and non-U.S. 

persons. In this section, the Commission 

provides interpretive guidance 

concerning the application of these 

Dodd-Frank Act provisions to crossborder transactions 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)).137

The Commission believes that U.S. 

persons’ swap activities outside the 

United States have a direct and 

significant connection with activities in, 

or effect on, U.S. commerce. The swaps 

market today is global in nature. To 

manage risks in a global economy, U.S. 

persons may need to—and often do— 

transact swaps with both U.S. and nonU.S. persons. Many such swap activities 

of U.S. persons, particularly those with 

global operations, may be located 

outside the United States. In light of the 

significant extent of U.S. persons’ swap 

activities outside the United States in 

today’s global marketplace, and the risks 

to U.S. persons and the financial system 

presented by such swaps activities 

outside the United States with U.S. 

persons as counterparties, the 

Commission believes that U.S. persons’ 

swap activities outside the United States 

have the requisite connection with or 

effect on U.S. commerce under section 

2(i) to apply the swaps provisions of the 

CEA to such activities.138

Accordingly, with respect to swaps 

where one (or both) of the 

counterparties to the swap is a U.S. 

person, the Commission proposes to 

interpret section 2(i) in a manner so that 

the Dodd-Frank Act requirements 

relating to clearing, trade-execution, 

real-time public reporting, Large Trader 

Reporting, and SDR Reporting, and 

recordkeeping apply to such swaps. 

Conversely, where a non-U.S. person 

enters into a swap with another nonU.S. person outside the United States, 

and where neither counterparty is 

required to register as a swap dealer or 

MSP, the Commission would not apply 

the Dodd-Frank Act requirements to 

such swaps.139

As discussed above, the Commission 

is concerned that a non-U.S. affiliate or 

subsidiary could effectively operate as a 

‘‘conduit’’ for the U.S. person. More 

specifically, the Commission is 

concerned that the non-U.S. affiliate or 

subsidiary of a U.S. person could be 

used to execute swaps with 

counterparties in foreign jurisdictions, 

outside the Dodd-Frank Act regulatory 

regime. The Commission is considering 

whether to propose measures to address 

this situation. However, at this time, the 

Commission makes clear that such nonU.S. affiliate or subsidiary would not be 

subject to the Dodd-Frank swap 

provisions, except pursuant to specific 

Dodd-Frank Act provisions (or 

Commission regulation adopted 

thereunder) or Commission orders. 

B. Clearing, Trade Execution, Real-Time 

Public Reporting, Large Trader 

Reporting, and SDR Reporting, and 

Swap Data Recordkeeping 

As described in greater detail above, 

the Dodd-Frank Act’s clearing 

requirement mitigates counterparty risks 

and, in turn, fosters protection against 

systemic risk. In a similar vein, the trade 

execution and real-time public reporting 

requirements serve to promote both preand post-trade transparency which, in 

turn, enhance price discovery and 

decrease risk. Together, these 

requirements serve an important role in 

protecting U.S. market participants and 

the general market against financial 

losses. Accordingly, the Commission 

interprets section 2(i) to apply the 

Dodd-Frank Act’s clearing, trade 


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140SIFIs 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. 

execution, and real-time public 

reporting requirements to any swaps 

where one of the counterparties is a U.S. 

person (irrespective of the location of 

the transaction), without permitting 

substituted compliance with a foreign 

regulatory regime. 

The Commission’s part 20 rules 

regarding Large Trader Reporting 

require routine reports from clearing 

members, in addition to swap dealers 

and clearing organizations, with 

reportable positions in specified 

physical commodity swaps or 

swaptions. The Commission believes 

that such data is essential in order for 

the Commission to carry out its 

supervisory mandates concerning, 

among other things, increased 

transparency, market monitoring, and 

market abuse prevention. Therefore, the 

Commission proposes to interpret CEA 

section 2(i) to require non-U.S. clearing 

members to report all reportable 

positions under part 20. The part 20 

rules also impose recordkeeping 

obligations on traders with reportable 

positions. The Commission proposes to 

interpret CEA section 2(i) so as to 

require non-U.S. persons with 

reportable positions under part 20 to 

comply with such obligations. Given the 

significance of these rules to the 

Commission’s oversight of swaps and 

swaptions that are closely linked to the 

U.S. futures markets, the Commission 

would not allow substituted 

compliance. 

With respect to transactions that are 

subject to the SDR Reporting and swap 

data recordkeeping requirements, the 

Commission proposes to interpret 

section 2(i) so as to permit substituted 

compliance, provided that the 

Commission has direct access to the 

swap data for these transactions that is 

stored at the foreign trade repository. 

The Commission has a strong 

supervisory interest in applying the SDR 

reporting and recordkeeping 

requirements to any transactions 

involving a U.S. counterparty in order to 

effectively monitor the swap activities 

of U.S. persons. Nevertheless, the 

Commission believes that substituted 

compliance is warranted where it would 

ease the burden on the counterparties 

that report their swaps data to a foreign 

trade repository and the Commission is 

assured of prompt access to the 

information critical to its oversight of 

the swaps market. 

The Commission recognizes that 

applying the Dodd-Frank Act 

requirements to swaps conducted 

outside the United States involving a 

U.S. counterparty may result in two or 

more jurisdictions asserting authority 

over these swaps—with the 

counterparties potentially facing 

conflicting or duplicative regulatory 

requirements. The Commission will 

continue its efforts to address these 

issues through close coordination and 

consultation with its regulatory 

counterparts in other jurisdictions. The 

Commission also anticipates that 

cooperative efforts would be reflected in 

the MOU or similar arrangement 

(whether bilateral and/or multilateral) 

discussed above which would provide a 

framework for regulatory coordination 

where two or more jurisdictions have 

authority over a swap. 

Request for Comment 

Q31. Please provide comments 

regarding all aspects of the 

Commission’s interpretation of CEA 

section 2(i) with respect to the proposed 

application of the Transaction-Level 

Requirements. The Commission is 

particularly interested in commenters’ 

views on the impact on U.S. persons as 

a result of the proposed application of 

the Dodd-Frank Act’s trading 

requirements. 

Q32. What, if any, competitive or 

economic effects on U.S. commerce, 

including U.S. persons, should the 

Commission consider when interpreting 

CEA section 2(i)? What, if any, 

competitive or economic effects on nonU.S. persons should the Commission 

consider when interpreting CEA section 

2(i)? 

Appendix A—Entity-Level 

Requirements 

The Entity-Level Requirements relate to the 

management of risks to a swap dealer or MSP 

as a whole. Accordingly, these requirements 

apply on a firm-wide basis, inclusive of all 

swaps and irrespective of whether the 

counterparty is a U.S. person (or not) or 

where the transactions are executed. 

Capital: CEA section 4s(e) directs the 

Commission to set capital requirements for 

swap dealers and MSPs that are not subject 

to the capital requirements of prudential 

regulators (i.e., non-bank swap entities). The 

Commission has proposed rule, § 23.101, 

which would apply FCM capital 

requirements if the nonbank swap dealer or 

MSP is also registered as an FCM, and would 

apply other capital requirements for those 

that are not also FCMs. Certain of these nonFCM, nonbank swap entities would be 

required to meet capital requirements 

established by the Federal Reserve Board; 

specifically, SIFIs and nonbank subsidiaries 

of U.S. bank holding companies.140

Chief Compliance Officer: CEA Section 

4s(k) requires that each swap dealer and MSP 

to designate a chief compliance officer 

(‘‘CCO’’) and specify certain duties by the 

CCO. Pursuant to section 4s(k), the 

Commission adopted § 3.3, which requires 

swap dealers and MSPs to designate a CCO 

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, as well 

as preparing and filing (with the 

Commission) a certified report of compliance 

with the CEA. 

Risk Management: CEA Section 4s(j) 

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. The Commission adopted 

implementing regulations (§§ 23.600, 23.601, 

23.602, 23.603, 23.605, 23.606, and 23.607). 

The Commission also adopted: (A) § 23.609, 

which requires certain risk management 

procedures for swap dealers or MSPs that are 

clearing members of a DCO; and (B) § 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. 

Swap Data Recordkeeping: CEA section 

4s(f)(1)(B) requires swap dealers and MSPs to 

keep books and records for all activities 

related to their business. Section 4s(g)(1) 

requires swap dealers and MSPs to maintain 

trading records for each swap transaction and 

all related records, as well as a complete 

audit trail for comprehensive trade 

reconstructions. Pursuant to these provisions, 

the Commission adopted §§ 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. Swap dealers and MSPs also have 

to comply with Part 46 of the Commission’s 

regulations, which addresses the 

recordkeeping requirements for swaps 

entered into before the date of enactment of 

the Dodd-Frank Act (‘‘pre-enactment swaps’’) 

and data relating to swaps entered into on or 

after the date of enactment but prior to the 

part 45 compliance date (‘‘transition swaps’’). 

SDR Reporting: CEA section 2(a)(13)(G) 

requires all swaps, whether cleared or 

uncleared, to be reported to a registered swap 

data repository (‘‘SDR’’). CEA section 21 

requires SDRs to collect and maintain data 

related to swap transactions as prescribed by 

the Commission, and to make such data 


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141The requirements under section 4s(i) relating 

to trade confirmations is a Transaction-Level 

Requirement. Accordingly, proposed 17 CFR 

23.504(b)(2), which requires a swap dealer’s and 

MSP’s swap trading relationship documentation to 

include all confirmations of swap transactions, will 

apply on a transaction-by-transaction basis. 

electronically available to regulators. Swap 

dealers and MSPs would be required to 

comply with Part 45 of the Commission’s 

regulations, which set forth the specific 

transaction data that reporting counterparties 

and registered entities must report to a 

registered SDR; and Part 46, which addresses 

the recordkeeping requirements for preenactment swaps and data relating to 

transition swaps. 

Physical Commodity Swaps 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 reporting are a subset, and in order 

to implement the statutory mandate in CEA 

section 4a for the Commission to establish 

position limits, as appropriate, for physical 

commodity swaps. The Commission 

published part 20 rules requiring swap 

dealers, among other entities, to submit 

routine position reports on certain physical 

commodity swaps and swaptions. 

ENTITY-LEVEL REQUIREMENTS

U.S.-Based Swap Dealer .............................................................................................................................................. Apply. 

Foreign Branches/Agencies of U.S.-Based Swap Dealer** ......................................................................................... Apply. 

Foreign Affiliates of U.S. Person: 

—Swaps Booked in U.S. ....................................................................................................................................... Apply.* 

Foreign Affiliate of U.S. Person: 

—The Affiliate is the Legal Counterparty But All Swaps Guaranteed by U.S. Person ........................................ Substituted Compliance.*** 

Foreign Affiliate of U.S. Person: 

—Swaps Not Booked in U.S. (i.e., Affiliate is Legal Counterparty); and Swaps Not Guaranteed by U.S. Person.Substituted Compliance. 

Non-U.S.-Based Swap Dealer: 

—Swaps neither Booked in U.S. nor Guaranteed by U.S. Person ...................................................................... Substituted Compliance. 

* Where swaps are solicited or negotiated by a foreign affiliate of a U.S. person but directly booked in the U.S. person, the U.S. person must 

comply with all of the swap dealer duties and obligations related to the swaps, including registration, capital and related prudential requirements. 

** Both Entity-Level and Transaction-Level Requirements are the ultimate responsibilities of the U.S.-based swap dealer. 

*** With respect to the SDR reporting requirement, the Commission may permit substituted compliance only if direct access to swap data is 

provided to the Commission. 

Appendix B—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 swap 

transactions 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. 

Category A: Risk Mitigation and 

Transparency 

Clearing and Swap Processing: CEA 

section 2(h)(1) requires a swap to be 

submitted for clearing to a derivatives 

clearing organization (‘‘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 under section 2(h)(7) from the 

clearing requirement and elects not to clear 

the swap. Finally, the Commission adopted 

§ 23.506, which requires swap dealers and 

MSPs to submit swaps promptly for clearing 

and comply with § 23.610, which establishes 

certain standards for swap processing by 

swap dealers and MSPs that are clearing 

members of a DCO. 

Margin (and Segregation) Requirement for 

Uncleared Swap Transactions: 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 

Commission’s margin regulations. In 

contrast, the ‘‘segregation’’ requirements in 

4s(1) don’t use a bifurcated approach—all 

swap dealers and MSPs are subject to the 

Commission’s rule regarding notice and third 

party custodians for margin collected for 

uncleared swaps. 

Mandatory Trade Execution: CEA section 

2(h)(8) provides that unless a non-financial 

end-user exemption applies, a swap that is 

subject to clearing requirement and made 

available to trade must be traded on a DCM 

or SEF. 

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 the Commission has 

proposed § 23.504(a), which would require 

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. Under proposed 

§§ 23.505(b(1), 23.504 (b)(3), and 

23.504(b)(4), the swap trading relationship 

documentation must include, among other 

things: all terms governing the trading 

relationship between the swap dealer and its 

counterparty; credit support arrangements; 

investment and rehypothecation terms for 

assets used as margin for uncleared swaps 

and custodial arrangements.141 Further, the 

swap trading relationship documentation 

requirement applies to all transactions with 

registered swap dealers and MSPs. 

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 proposed regulations (§§ 23.502 

and 23.503), which would require swap 

dealers and MSPs to perform portfolio 

reconciliation and compression, respectively, 

for all swap transactions. 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. 

Proposed § 23.503(c) would require all swap 

dealers and MSPs to participate in bilateral 

compression exercises and/or multilateral 

portfolio compression exercises conducted 

by their SROs or DCOs of which they are 

members. Further, participation in 

multilateral portfolio compression exercises 

is mandatory for dealer to dealer trades. 

Real-Time Public Reporting: CEA section 

2(a)(13) directs the Commission to 

promulgate rules providing for the public 

availability of swap transaction data in real 

time basis. The Commission promulgated 

part 43 rules, which provides that all 

‘‘publicly reportable swap transactions’’ must 

be reported and publicly disseminated. 

Trade Confirmation: CEA section 4s(i) 

requires that each swap dealer and MSP must 

comply with the Commission’s regulations 

prescribing timely and accurate confirmation 

of transactions. The Commission has 

proposed § 23.501, which requires, among 

other things, a timely and accurate 

confirmation of all swaps and life cycle 


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events for existing swaps. In addition, 

proposed § 23.504(b)(2) requires a swap 

dealer’s and MSP’s swap trading relationship 

documentation to include all confirmations 

of swap transactions. 

Daily Trading Records: Pursuant to section 

CEA 4s(g)(1), the Commission adopted 

§ 23.202, which requires swap dealers and 

MSPs to maintain daily trading records, 

including records of trade information 

related to pre-execution, execution, and postexecution 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. 

Category B: Sales Practices 

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. 

CATEGORY A 

U.S. Person Non-U.S. person guaranteed 

by U.S. person ** 

Non-U.S. person not 

guaranteed by U.S. person 

U.S.-Based Swap Dealer ............................................................. Apply ............ Apply ........................................ Apply. 

Foreign Affiliate/Swaps Booked in U.S.* ..................................... Apply ............ Apply ........................................ Apply. 

Foreign Branches/Agencies of U.S.-Based Swap Dealer ........... Apply ............ Substituted Compliance*** ....... Substituted Compliance.*** 

Foreign Affiliate of U.S. Person: 

—The Affiliate is the Legal Counterparty But All Swaps 

Guaranteed by U.S. Person.

Apply ............ Substituted Compliance ........... Do Not Apply. 

Foreign Affiliate of U.S. Person: 

—Swaps Not Booked in U.S. (i.e., Affiliate is Legal 

Counterparty); and Swaps Not Guaranteed by U.S. Person.

Apply ............ Substituted Compliance ........... Do Not Apply. 

Non-U.S.-Based Swap Dealer: 

—Swaps neither Booked in U.S. nor Guaranteed by U.S. 

Person.

Apply ............ Substituted Compliance ........... Do Not Apply. 

* Where swaps are solicited or negotiated by a foreign affiliate but directly booked in the U.S. person, the U.S. person must comply with all of 

the swap dealer duties and obligations, including all Transaction-Level Requirements. The foreign affiliate, if separately required to register as a 

swap dealer, must comply with those requirements applicable to its swap dealing activities. 

** The Transaction-Level Requirements apply to swaps in which: (i) a non-U.S. counterparty is majority-owned, directly or indirectly, by a U.S. 

person; (ii) the non-U.S. counterparty regularly enters into swaps with one or more U.S. affiliates or subsidiaries of the U.S. person; and (iii) the 

financials of such non-U.S. counterparty are included in the consolidated financial statements of the U.S. person. 

*** Under limited circumstances, where there is not a comparable foreign regulatory regime, foreign branches and agencies of U.S. swap dealers may comply with the local transaction-level requirements rather than the Transaction-Level Requirements, subject to specified conditions. 

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. 

CATEGORY B 

U.S. person 

Non-U.S. person 

guaranteed by 

U.S. person ** 

Non-U.S. person 

not guaranteed 

by U.S. person 

U.S.-Based Swap Dealer .................................................................................................... Apply ................ Apply ................ Apply. 

Foreign Affiliate of U.S. Person: 

—Swaps are Booked in U.S.* ..................................................................................... Apply ................ Do Not Apply .... Do Not Apply. 

Foreign Branches/Agencies of U.S.-Based Swap Dealer .................................................. Apply ................ Do Not Apply .... Do Not Apply. 

Foreign Affiliate of U.S. Person: 

—The Affiliate is the Legal Counterparty But All Swaps Guaranteed by U.S. Person Apply ................ Do Not Apply .... Do Not Apply. 

Foreign Affiliate of U.S. Person: 

—Swaps Not Booked in U.S. (i.e., Affiliate is Legal Counterparty); and Swaps Not 

Guaranteed by U.S. Person.

Apply ................ Do Not Apply .... Do Not Apply. 

Non-U.S.-Based Swap Dealer: 

—Swaps neither Booked in U.S. nor Guaranteed by U.S. Person ............................ Apply ................ Do Not Apply .... Do Not Apply. 

* Where swaps are solicited or negotiated by an affiliate of a U.S. person but directly booked in the U.S. person, the U.S. person must comply 

with all of the swap dealer duties and obligations, including all Transaction-Level Requirements. The foreign affiliate, if separately required to register as a swap dealer, must comply with those requirements applicable to its swap dealing activities. 

** The Transaction-Level Requirements apply to swaps in which: (i) A non-U.S. counterparty is majority-owned, directly or indirectly, by a U.S. 

person; (ii) the non-U.S. counterparty regularly enters into swaps with one or more U.S. affiliates or subsidiaries of the U.S. person; and (iii) the 

financials of such non-U.S. counterparty are included in the consolidated financial statements of the U.S. person. 

Appendix C—All Other (Non-Swap 

Dealer/MSP) Market ParticipantS *

U.S. person 

Non-U.S. person 

guaranteed by 

U.S. person 

Non-U.S. person 

not guaranteed 

by U.S. person 

U.S. Person ........................................................................................................................ Apply ................ Apply ................ Apply. 

Non-U.S. Person Guaranteed by U.S. Person ................................................................... Apply ................ Do Not Apply .... Do Not Apply. 


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U.S. person 

Non-U.S. person 

guaranteed by 

U.S. person 

Non-U.S. person 

not guaranteed 

by U.S. person 

Non-U.S. Person Not Guaranteed by U.S. Person ............................................................ Apply ................ Do Not Apply .... Do Not Apply. 

* 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. 

Issued in Washington, DC, on June 29, 

2012, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Cross-Border 

Application of Certain Swaps 

Provisions of the Commodity Exchange 

Act—Commission Voting Summary and 

Statements of Commissioners 

Note: The following appendices will 

not appear in the Code of Federal 

Regulations 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed guidance on the 

cross-border application of the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act (Dodd Frank Act). The Commission is 

not required to solicit public comment on 

interpretive guidance, but we are particularly 

interested in the public’s input and look 

forward to comments on the proposed 

guidance. 

In 2008, swaps, and in particular credit 

default swaps, concentrated risk in financial 

institutions and contributed to the financial 

crisis, the worst economic crisis Americans 

have experienced since the Great Depression. 

Eight million Americans lost their jobs, 

millions of families lost their homes, and 

small businesses across the country folded. 

Congress and the President responded with 

the Dodd-Frank Act, bringing common-sense 

rules of the road to the swaps marketplace. 

Section 722(d) of the Dodd-Frank Act 

states that swaps reforms 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.’’ In 

interpreting Section 722(d), we must not 

forget the lessons of the 2008 crisis and 

earlier. Swaps executed offshore by U.S. 

financial institutions can send risk straight 

back to our shores. It was true with the 

London and Cayman Islands affiliates of AIG, 

Lehman Brothers, Citigroup and Bear 

Stearns. A decade earlier, it was true, as well, 

with Long-Term Capital Management. 

The nature of modern finance is that large 

financial institutions set up hundreds, if not 

thousands of ‘‘legal entities’’ around the 

globe. 

They do so in an effort to respond to 

customer needs, funding opportunities, risk 

management and compliance with local laws. 

They do so as well, though, to lower their 

taxes, manage their reported accounting, and 

to minimize regulatory, capital and other 

requirements, so-called ‘‘regulatory 

arbitrage.’’ Many of these far-flung legal 

entities, however, are still highly connected 

back to their U.S. affiliates. 

During a default or crisis, the risk that 

builds up offshore inevitably comes crashing 

back onto U.S. shores. When an affiliate of 

a large, international financial group has 

problems, the markets accept this will infect 

the rest of the group. This was true with AIG. 

Its subsidiary, AIG Financial Products, 

brought down the company and nearly 

toppled the U.S. economy. It was run out of 

London as a branch of a French-registered 

bank, though technically was organized in 

the United States. 

Lehman Brothers was another example. 

Among its complex web of affiliates was 

Lehman Brothers International (Europe) in 

London. When Lehman failed, the London 

affiliate had more than 130,000 outstanding 

swaps contracts, many of them guaranteed by 

Lehman Brothers Holdings back in the 

United States. 

Yet another example was Citigroup, which 

set up numerous structured investment 

vehicles (SIVs) to move positions off its 

balance sheet for accounting purposes, as 

well as to lower its regulatory capital 

requirements. Yet, Citigroup had guaranteed 

the funding of these SIVs through a 

mechanism called a liquidity put. When the 

SIVs were about to fail, Citigroup in the 

United States assumed the huge debt, and 

taxpayers later bore the brunt with two multibillion dollar infusions. The SIVs were 

launched out of London and incorporated in 

the Cayman Islands. 

Bear Stearns is another case. Bear Stearns’ 

two sinking hedge funds it bailed out in 2007 

were incorporated in the Cayman Islands. Yet 

again, the public assumed part of the burden 

when Bear Stearns itself collapsed nine 

months later. 

A decade earlier, the same was true for 

Long-Term Capital Management. When the 

hedge fund failed in 1998, its swaps book 

totaled in excess of $1.2 trillion notional. The 

vast majority were booked in its affiliated 

partnership in the Cayman Islands. 

The recent events of JPMorgan Chase, 

where it executed swaps through its London 

branch, are a stark reminder of this reality of 

modern finance. 

The proposed guidance interpreting 

Section 722(d),intended to be flexible in 

application, includes the following key 

elements: 

First, it provides the guidance that when a 

foreign entity transacts in more than a de 

minimis level of U.S. facing swap dealing 

activity, the entity would register under the 

Dodd-Frank Act swap dealer registration 

requirements. 

Second, it includes a tiered approach for 

foreign swap dealer requirements. Some 

requirements would be considered entitylevel, such as for capital, chief compliance 

officer, swap data recordkeeping, reporting to 

swap data repositories and large trader 

reporting. Some requirements would be 

considered transaction-level, such as 

clearing, margin, real-time public reporting, 

trade execution, trading documentation and 

sales practices. 

Third, entity-level requirements would 

apply to all registered swap dealers, but in 

certain circumstances, foreign swap dealers 

could meet these requirements by complying 

with comparable and comprehensive foreign 

regulatory requirements, or what we call 

‘‘substituted compliance.’’ 

Fourth, transaction-level requirements 

would apply to all U.S. facing transactions. 

For these requirements, U.S. facing 

transactions would include not only 

transactions with persons or entities 

operating or incorporated in the United 

States, but also transactions with their 

overseas branches. Likewise, this would 

include transactions with foreign affiliates 

that are guaranteed by a U.S. entity, as well 

as the foreign affiliates operating as conduits 

for a U.S. entity’s swap activity. Foreign 

swap dealers, as well as overseas branches of 

U.S. swap dealers, in certain circumstances, 

may rely on substituted compliance when 

transacting with foreign affiliates guaranteed 

by or operating as conduits of U.S. entities. 

Fifth, for certain transactions between a 

foreign swap dealer (including an overseas 

affiliate of a U.S. person) and counterparties 

not guaranteed by or operating as conduits 

for U.S. entities, Dodd-Frank transactionlevel requirements may not apply. For 

example, this would be the case for a 

transaction between a foreign swap dealer 

and a foreign insurance company not 

guaranteed by a U.S. person. There are some 

in the financial community who might want 

the CFTC to ignore the hard lessons of the 

crisis and before. 

They might comment that swap trades 

entered into in London branches of U.S. 

entities do not have a direct and significant 

connection with activities in, or effect on 

U.S. commerce. 

They might comment that affiliates 

guaranteed by a U.S. mother ship do not have 

a direct and significant connection with 

activities in, or effect on U.S. commerce. 

They might comment that affiliates acting 

as conduits for swaps activity back here in 


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142See 7 U.S.C. 1 et seq. 

143See 5 U.S.C. 551 et seq. 

144 7 U.S.C. 2(i) (2012). 

145See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). 

the United States do not have a direct and 

significant connection with activities in, or 

effect on U.S. commerce. 

If we were to follow these comments, 

though, American jobs and markets might 

move offshore, yet the risk associated with 

such overseas swaps activities, particularly 

in times of crisis, would still have a direct 

and significant connection with activities in, 

or effect on U.S. commerce. 

Appendix 3—Statement of 

Commissioner Jill Sommers 

Over a year ago, the Commission finally 

acknowledged that we needed to address the 

growing uncertainty brewing among swap 

market participants who were trying to 

decipher the extraterritorial reach of the 

Dodd-Frank Act. We held a two-day 

roundtable last August and have received 

numerous comments since then from market 

participants and other regulators asking us to 

consider a global approach to the regulation 

of these global markets. We were encouraged 

to coordinate with our foreign and domestic 

partners and urged not to implement our 

regulatory approach in a silo. 

CFTC staff has worked diligently to 

address the challenging issues associated 

with the statutory language of Section 2(i) of 

the Commodity Exchange Act (CEA). 

Unfortunately, when the Proposed 

Interpretive Guidance and Policy Statement 

(‘‘Interpretive Guidance’’) was finally shared 

with the rest of the Commission on June 1, 

2012, we learned that staff had been guided 

by what could only be called the 

‘‘Intergalactic Commerce Clause’’ of the 

United States Constitution, in that every 

single swap a U.S. person enters into, no 

matter what the swap or where it was 

transacted, was stated to have a direct and 

significant connection with activities in, or 

effect on, commerce of the United States. 

This statutory and constitutional analysis of 

the extraterritorial application of U.S. law 

was, in my view, nothing short of extrastatutory and extra-constitutional. 

While the many revisions over the last 

several weeks have tempered the outer limits 

of our initial approach, the Interpretive 

Guidance nonetheless continues to ignore the 

Commission’s successful history of mutual 

recognition of foreign regulatory regimes 

spanning 20-plus years. We have worked for 

decades to establish relationships with our 

foreign counterparts built on respect and 

trust, and should not be so eager and willing 

to disregard their capabilities. All G20 

nations agreed to comprehensive regulation 

of swap markets and we should rely on their 

regional expertise. The current document 

acknowledges the concept of ‘‘substituted 

compliance,’’ but it is extremely vague with 

respect to what the Commission will be 

considering in making these determinations. 

In my view, a very broad and high level 

review of regulatory regimes is appropriate 

versus a word-for-word comparison of rule 

books. 

While the market failures described in the 

‘‘Background’’ section of the Interpretive 

Guidance recount why the G20 nations 

together agreed to a common set of principles 

for regulation of a global marketplace, 

recounting those market failures does not 

justify the expansive view the Commission 

has taken of its jurisdictional reach, and does 

not justify the implication that other nations 

are not capable of effective regulation. 

As Commissioner O’Malia points out in his 

concurrence, not only have we failed to 

coordinate with foreign regulators on a global 

cross-border approach, we have failed to 

coordinate with our fellow domestic 

regulators. As I have said for many months, 

we should be proposing a rule defining the 

cross-border application of Dodd-Frank that 

is harmonized with the SEC’s approach, both 

in substance and in timing. Unfortunately we 

are not doing that. Instead, we are proposing 

Interpretive Guidance that ultimately has the 

effect of a rule. No matter what it is called, 

the Interpretive Guidance is so inextricably 

linked to the entity definitions and the 

registration rules that it is a part of those 

rules themselves. Because it is not titled a 

‘‘Notice of Proposed Rulemaking,’’ we skirt 

the requirements of the Administrative 

Procedure Act and the requirement under 

Section 15(a) of the CEA that the Commission 

conduct a cost-benefit analysis. I believe this 

approach, yet again, needlessly exposes the 

Commission to litigation. 

Over the last two years, while considering 

many proposed and final rules, I have been 

very clear that I cannot support an approach 

that creates an un-level playing field for 

market participants. I am concerned that the 

different compliance dates in the Proposed 

Exemptive Order may unnecessarily 

disadvantage U.S.-based swap dealers and 

MSPs from the moment the document is 

published in the Federal Register. I 

encourage comment on this issue and hope 

that if we determine to harmonize the 

compliance dates for entities in the U.S. and 

abroad, that we can do so before too much 

damage is done to U.S.-based market 

participants. 

As I reviewed the documents currently 

under consideration, it occurred to me that 

two choices are presented. One is that the 

Commission decline to issue the Interpretive 

Guidance and Proposed Exemptive Order 

and leave market participants in a continued 

state of uncertainty. The other is that the 

Commission issue these documents and 

provide market participants with the 

certainty that we are advancing a flawed 

policy. Neither is appealing. 

My decision to support putting these 

proposals out for comment was not easily 

reached. From the beginning I have 

supported a much simpler approach to the 

extraterritorial reach of Dodd-Frank. I am 

hopeful that the comment letters will 

encourage the Commission to adopt a final 

rule that will rely on mutual recognition of 

all global regulatory regimes in a manner that 

avoids costly, burdensome duplicative 

regulations. 

Appendix 4—Statement of 

Commissioner Scott D. O’Malia 

I respectfully concur with the Commodity 

Futures Trading Commission’s (the 

‘‘Commission’’ or ‘‘CFTC’’) approval of its 

proposed interpretive guidance and policy 

statement (‘‘Proposed Guidance’’) regarding 

section 2(i) of the Commodity Exchange Act 

(‘‘CEA’’) 142 and its notice of proposed 

exemptive order (‘‘Proposed Order’’). While I 

have strong reservations about the statutory 

authority and disagree with the 

Commission’s decision to issue interpretive 

guidance instead of a formal rulemaking, I 

believe that the timely release of these 

proposals is critical for firms to have some 

sense of what U.S. standards will apply to 

their cross-border transaction, and how those 

standards will comport with international 

standards. We expect that these proposals 

will improve as a result of input from market 

participants, as well as an open dialogue 

with global regulators. 

These two proposals are complementary in 

that the Commission’s long-awaited Proposed 

Guidance establishes our view of the 

application of the swaps provisions of the 

CEA to cross-border swaps transactions, 

while the Proposed Order will delay 

compliance with certain entity-level and 

transaction-level swaps requirements in the 

CEA pending the final adoption of the 

Proposed Guidance. The Proposed Order also 

borrows definitions and concepts from the 

Proposed Guidance, such as the proposed 

definition of ‘‘U.S. person.’’ While I believe 

that the Commission’s issuance of the 

Proposed Guidance and the Proposed Order 

are overdue, I have a number of general 

concerns with the former. 

I have been assured that the Proposed 

Guidance is a draft and, although it is not 

required, will follow the normal notice-andcomment process under the Administrative 

Procedure Act.143 After the comment period, 

the Commission will review public 

comments and subsequently will incorporate 

those comments into final guidance. I would 

like to make it clear that if I were asked to 

vote on the Proposed Guidance as final, my 

vote would be no. 

The Proposed Guidance 

My concerns with the Proposed Guidance 

relate generally to the Commission’s unsound 

interpretation of section 2(i) of the CEA. In 

particular, I believe that the Commission’s 

analysis: (i) Misconstrues the language of 

section 2(i); (ii) is inconsistently applied to 

different activities; (iii) loosely considers 

international law and comity; (iv) lacks 

meaningful collaboration with foreign and 

domestic regulators; and (v) blurs the lines 

between interpretive guidance and legislative 

or interpretive rulemaking. I discuss each of 

these concerns below. 

i. Statutory Misconstruction 

Section 2(i) of the CEA provides, in part, 

that the Commission’s swap authority does 

not apply to foreign activities unless those 

activities ‘‘have a direct and significant 

connection with activities in, or effect on, 

commerce of the United States * * *.’’ 144

When Congress passed the Dodd-Frank Wall 

Street Reform and Consumer Protection Act 

(the ‘‘Dodd-Frank Act’’),145 it intended that 


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146For example, in the case of non-interdealer 

swap transactions, the Commission could focus its 

analysis on the solicitation activities of swap 

dealers. In the case of other swap transactions, the 

Commission could examine the location of where 

performance of the primary obligations under a 

swap agreement takes place. 

147The Commission’s analysis in the Proposed 

Guidance relies on its analysis in the final entities 

rule. 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). 

148See 77 FR at 30634 (‘‘[T]he Commissions 

believe that the appropriate threshold for the phasein period is an annual gross notional level of swap 

dealing activity of $8 billion or less. In particular, 

the $8 billion level should still lead to the 

regulation of persons responsible for the vast 

majority of dealing activity within the swap 

markets.’’). The Commission ties the direct and 

significant connection analysis to the crude analysis 

in the final entities rule. I voted against the final 

entities rule for several reasons, including its 

flawed reasoning. I expressed my support, however, 

with respect to the positive outcome that resulted 

from the establishment of the $8 billion de minimis 

threshold. 

149See section V of this Proposed Guidance (‘‘In 

light of the significant extent of U.S. persons’ swap 

activities outside of the United States in today’s 

global marketplace, and the risks to U.S. persons 

and the financial system presented by such swaps 

activities outside of the United States with U.S. 

persons as counterparties, the Commission believes 

that U.S. persons’ swap activities outside the 

United States have the requisite connection with or 

effect on U.S. commerce under section 2(i) to apply 

the swaps provisions of the CEA to such 

activities.’’). In a footnote in the Proposed 

Guidance, the Commission then reasons without 

persuasive legal support that the aggregate of 

outside activities and the aggregate connection with 

U.S. commerce warrant the application of the CEA 

swaps provisions to all such foreign activities. 

The Commission’s analysis ignores and 

minimizes two important points. First, it ignores 

the fact that multinational entities also may have 

major operations and business relationships in 

foreign jurisdictions and may be considered persons 

within those jurisdictions. Second, its analysis 

minimizes the fact that there are an appreciable 

number of U.S. persons who engage in a relatively 

small number of swaps transactions. Even if those 

U.S. persons’ transactions were aggregated, it is 

questionable whether their swaps in the aggregate 

would meet the ‘‘significant’’ element in the section 

2(i) analysis. 

150See section III.D.1 of this Proposed Guidance 

(‘‘To be eligible for this exception, the aggregate 

notional value (expressed in U.S. dollars and 

measured on a quarterly basis) of the swaps of all 

foreign branches in such countries may not exceed 

five percent of the aggregate notional value 

(expressed in U.S. dollars and measure on a 

quarterly basis) of all of the swaps of the U.S. swap 

dealer.’’). 

151See, e.g., the MSP discussion in section II.C.2. 

of this Proposed Guidance. 

152The Proposed Guidance correctly cites judicial 

and executive branch precedent and guidance 

addressing the application of international law and 

comity concepts in determining the extraterritorial 

applicability of federal statutes. See section III.A. of 

this Proposed Guidance. These concepts are found 

in sections 403(1) and (2) of the Third Restatement 

of Foreign Relations Law. See Restatement (Third) 

of Foreign Relations Law of the United States 

§§ 403(1), 403(2) (1986). 

section 2(i) act as a limitation on the 

Commission’s authority. Under section 2(i), 

the Commission is required to demonstrate 

how and when its jurisdiction applies to 

activities that take place outside of the 

United States. Instead, the Commission’s 

Proposed Guidance ignores the literal 

statutory construction of section 2(i) and 

prejudicially switches the analysis. In other 

words, the Proposed Guidance now places 

the burden on market participants to explain 

why their foreign swaps activities are outside 

of the Commission’s regulatory oversight. By 

placing the burden on market participants to 

determine whether their swaps activities are 

subject to the swaps provisions of the CEA— 

and without providing more guidance to 

these participants—the Commission 

inappropriately broadens the scope of swaps 

activities that will fall within the 

Commission’s jurisdiction. The Commission 

could more clearly delineate which activities 

it believes will have a direct and significant 

connection with U.S. commerce in order to 

ensure that our regulatory interests are 

preserved.146

ii. Inconsistent Application of CEA Section 

2(i) 

In addition, the Commission’s Proposed 

Guidance inconsistently applies, and 

sometimes ignores, its own section 2(i) 

analysis. For instance, the Commission sets 

forth in detail its belief that ‘‘the level of 

swap dealing that is substantial enough to 

require a person to register as a swap dealer 

when conducted by a U.S. person, also 

constitutes a ‘direct and significant 

connection’ within the meaning of section 

2(i)(1) of the CEA.’’ 147 As a result, a non-U.S. 

person would have a direct and significant 

connection with the United States and 

therefore have to register with the 

Commission as a swap dealer only once it 

engages in more than the de minimis level of 

swap dealing with U.S. persons.148 In 

contrast to this somewhat extensive analysis 

for swap dealers, the Commission provides a 

sparse explanation of why it believes each 

and every swap transaction between one or 

more U.S. persons or counterparties other 

than a swap dealer or major swap participant 

(‘‘MSP’’) satisfies the direct and significant 

connection analysis in section 2(i).149 Swap 

transactions that fall under this analysis 

would be subject to certain transaction-level 

swaps requirements, including clearing, 

exchange trading, reporting to a swap data 

repository under part 45 of the Commission’s 

regulations, real-time public reporting and 

large swaps trader reporting under part 20 of 

the Commission’s regulations. 

Similarly, in another instance, the 

Commission has divined an exception to the 

application of certain Commission 

regulations for situations where a foreign 

branch of a U.S. swap dealer engages in swap 

dealing activities in emerging markets or 

other jurisdictions without comparable 

swaps regimes.150 Although the policy result 

of this exception is well intended, its bare 

analysis pales in comparison to the 

Commission’s section 2(i) analysis in other 

places of the Proposed Guidance.151

In yet another section of the Proposed 

Guidance, the Commission does not 

adequately explain why almost all 

transaction-level requirements (i.e., clearing, 

margining for uncleared swaps, real-time 

public reporting and certain business 

conduct standards) equally satisfy the direct 

and significant connection analysis under 

CEA section 2(i). In my view, two 

transaction-level requirements related to preand post-trade transparency—namely, trade 

execution and real-time public reporting 

requirements—do not raise the same level of 

systemic risk concerns as clearing and 

margining for uncleared swaps. I believe the 

Commission should better explain its 

rationale for requiring foreign swap dealers 

transacting with non-U.S. persons to meet the 

trade execution and real-time public 

reporting requirements under Title VII of the 

Dodd-Frank Act and Commission 

regulations. 

iii. Loose Consideration of Principles of 

International Comity 

Moreover, the Commission’s interpretation 

of CEA section 2(i) is overly broad to the 

point where the extent of the Commission’s 

jurisdiction is virtually endless. The 

Proposed Guidance takes the position that all 

transactions involving a U.S. person fall 

within the Commission’s jurisdiction, 

regardless of the location of the transaction 

or the regulations in effect within the 

relevant jurisdiction. 

While section 2(i) gives the Commission 

jurisdiction to reach activities that take place 

outside of the United States, the 

Commission’s Proposed Guidance loosely 

considers principles of international comity 

that are essential for determining the 

extraterritorial applicability of U.S. law. 

Although the Proposed Guidance expressly 

states that the Commission will exercise its 

regulatory authority over cross-border 

activities in a manner consistent with 

principles of international comity, the 

Commission’s proposed approach could be 

described as unilateral and dismissive of 

foreign law, even when those laws may 

achieve the same results sought by the 

Commission.152

I strongly believe that the Commission 

instead must honor these principles in order 

to respect the legitimate interests of other 

sovereign nations. This approach would 

serve to complement, and not limit, the 

ability of the Commission to effectively 

regulate swaps markets. The Commission 

does not have the resources to register and 

regulate all market participants and swaps 

activities. By relying on comparable foreign 

regulatory regimes to address the trading 

activities of foreign market participants, the 

Commission could better allocate resources 

domestically in a more effective manner. 

iv. The Commission Should Engage in Real 

and Meaningful Cooperation With Foreign 

and Domestic Regulators 

The Proposed Guidance references a series 

of well-known large financial institution 

failures—such as Lehman Brothers and Long 

Term Capital Management—to support the 

Commission’s over-expansive interpretation 

and application of Title VII of the DoddFrank Act. I agree that those failures had a 

detrimental effect on the U.S. economy. We 

must not forget, however, that the swaps 


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153See Capital Requirements of Swap Dealers and 

Major Swap Participants, 76 Fed. Reg. 27802 (May 

12, 2011). 

154On June 18–19, 2012, the leaders of the G20 

convened in Los Cabos, Mexico to reaffirm their 

commitments with respect to the regulation of the 

over-the-counter (‘‘OTC’’) derivatives markets. 

Specifically, the G20 leaders reaffirmed their 

commitment that all standardized OTC derivatives 

be traded on exchanges or electronic platforms and 

be centrally cleared by the end 2012. See the G20 

Declaration (June 2012), para. 39, p. 7, at: http:// 

www.g20.org/images/stories/docs/g20/conclu/ 

G20_Leaders_Declaration_2012.pdf. 

The Commission should follow the spirit of the 

G20’s cooperative efforts by working with foreign 

regulators to determine the applicability of its 

swaps regulations to cross-border swaps. 

155See statement by Commissioner Michel 

Barnier of the European Union, Financial Times, 

June 22, 2012 (‘‘Where the rules of another country 

are comparable and consistent with the objectives 

of U.S. law, it is reasonable to expect U.S. 

authorities to rely on those rules and recognize 

activities regulated under them as compliant. We in 

the EU can do exactly the same * * * This is 

reasonable because it accepts legal boundaries and 

the need for regulators to trust and rely on each 

other. It is effective because it achieves our common 

objective of mandatory clearing, trading and 

reporting of OTC derivatives: no trade will escape 

the regulation. It is efficient because it avoids 

subjecting the same trades and businesses to two 

different sets of rules simultaneously and 

expensively.’’). 

156Some jurisdictions have provisions that are 

similar to CEA section 2(i). For example, Article 13 

of European Market Infrastructure Regulation 

(‘‘EMIR’’) provides that the European Securities and 

Markets Authority must prescribe technical 

standards specifying the contracts that are 

considered to have a direct, substantial and 

foreseeable effect on the European Union, or in 

cases where it is necessary or appropriate to prevent 

the evasion of any general applicability provisions 

in EMIR. See Regulation of the European Parliament 

and of the Council on OTC Derivatives, Central 

Counterparties and Trade Repositories, European 

Market Infrastructure Regulation (Mar. 29. 2012), 

available at: http://ec.europa.eu/internal_market/ 

financial-markets/derivatives/index_en.htm. The 

Commission’s overreaching interpretation of CEA 

section 2(i) may inspire ESMA and other regulators 

to interpret their provisions in a similar manner. 

157See Statement of General Policy on the 

Sequencing of the Compliance Dates for Final Rules 

Applicable to Security-Based Swaps Adopted 

Pursuant to the Securities Exchange Act of 1934 

and the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, to be published under 17 

CFR Part 240 (June 11, 2012), available at: http:// 

www.sec.gov/rules/policy/2012/34-67177.pdf. 

158Section IV.A.2 of this Proposed Guidance. 

159See Registration of Swap Dealers and Major 

Swap Participants, 77 FR 2613 (Jan. 19, 2012). 

160See 5 U.S.C. 551 et seq. 

markets are truly global and the 

Commission’s swaps regulations will not 

operate in a vacuum. For that reason, the 

Commission should consider the interaction 

of its swaps regulations with the regulations 

of other jurisdictions, all of which have 

legitimate regulatory interests in the trading 

of swaps by multinational organizations. 

Thus, the Commission’s swaps regulation 

should be concordant with foreign swaps 

regulations in order to avoid duplication, 

conflict and unnecessary uncertainty. 

In light of today’s highly interdependent, 

global financial markets, the Commission 

needs to engage in real cooperation with 

foreign regulators and to coordinate its swaps 

regulations with the regulations of other 

sovereign nations. Concepts of comparability 

and mutual recognition are essential. 

The Commission should follow the 

example of international cooperation and 

coordination seen in the efforts of the Basel 

Commission on Banking Supervision 

(‘‘BCBS’’) and the International Organization 

of Securities Commissions (‘‘IOSCO’’) in 

developing harmonized international 

standards for the margining of uncleared 

swaps. BCBS and IOSCO plans to publish a 

consultation paper outlining these standards. 

Notwithstanding the Commission’s own 

efforts to propose rules for the margining of 

uncleared swaps for swap dealers and 

MSPs,153 the Commission plans to consider 

the final policy recommendations set forth by 

BCBS and IOSCO when adopting the 

Commission’s final rules for the margining of 

uncleared swaps and may adapt those final 

rules to conform with BCBS and IOSCO’s 

final policy recommendations. The 

Commission should follow the lead of BCBS 

and IOSCO in harmonizing many of its other 

rules. In my view, either the G20 or another 

international body or consortium of nations 

could act as a springboard for the 

coordination of swaps regulation.154

On June 22, 2012, European Union 

Commissioner Michel Barnier echoed this 

position in a statement to the Financial 

Times.155 Mr. Barnier made clear that 

effective international regulation involves 

regulators coordinating their efforts to 

implement mandatory clearing, trading and 

reporting of over-the-counter derivatives. A 

coordinated approach would ensure that 

swaps do not evade regulation. Mr. Barnier 

also made clear that regulatory regimes that 

assert jurisdiction over trading activity 

already within the jurisdiction of another 

competent regulator is both unnecessary and 

costly. I agree with Mr. Barnier’s view that 

our goal as regulators should be to establish 

regulatory regimes that prevent swaps from 

slipping through the cracks without applying 

our laws to activity that is better regulated by 

our trusted colleagues abroad. 

Unfortunately, the Proposed Guidance 

overreaches in many respects and, as a result, 

steps on the toes of other sovereign nations. 

Today’s Proposed Guidance will likely 

provoke these nations to develop strict swaps 

rules in retaliation that unfairly and 

unnecessarily burden U.S. firms.156

Interestingly, we not only fail to harmonize 

internationally, we also fail to harmonize 

domestically. In other words, I believe that 

the Commission should take a page from the 

Securities and Exchange Commission’s 

(‘‘SEC’’) playbook regarding implementation 

and the application of swaps requirements to 

cross-border activities. Recently, the SEC 

issued a statement of general policy (the 

‘‘SEC’s Statement’’) on the sequencing of 

compliance dates for final rules applicable to 

the security-based swaps market.157 The 

SEC’s Statement presents a commonsense 

sequencing of the compliance dates for the 

SEC’s final rules implementing the 

provisions of Title VII of the Dodd-Frank Act 

to domestic and cross-border swaps 

activities. 

In stark contrast, the Commission is 

engaging in what amounts to high-frequency 

regulation. I am very critical of this 

regulatory approach because it generally 

results in regulatory uncertainty and 

unintended, adverse consequences. In my 

view, failure to achieve real and meaningful 

harmonization of the implementation and 

application of swaps and security-based 

swaps rules will result in inconsistencies and 

added compliance challenges and costs for 

market participants who trade in both 

markets. 

v. Interpretive Guidance or an Interpretive 

Rule? 

Several times while reading drafts of the 

Proposed Guidance, I had to stop, put it 

down, and recall that I was reading the 

Commission’s proposed interpretation of 

CEA section 2(i)—not a prescriptive rule. 

Although the Commission has taken great 

pains to clarify that it is publishing guidance 

and a policy statement regarding the crossborder application of the swaps provisions of 

the CEA, certain elements of the Proposed 

Guidance are written similar to legislative or 

interpretive rules instead of interpretive 

guidance. For example, the Proposed 

Guidance states that subsequent to 

registration with the Commission: 

[T]he Commission expects that a non-U.S. 

swap dealer or non-U.S. MSP would notify 

the Commission of any material changes to 

information submitted in support of a 

comparability finding (including, but not 

limited to, changes in the relevant 

supervisory or regulatory regime) as the 

Commission’s comparability determination 

may no longer be valid.158

The Commission’s artful use of the terms 

‘‘expect’’ and ‘‘expectation’’ in the Proposed 

Guidance does not disguise the fact that it is 

requiring applicants to satisfy significant 

ongoing monitoring and compliance 

obligations in order to maintain its 

comparability finding. If the Commission 

wanted to require a non-U.S. swap dealer or 

non-U.S. MSP applicant to submit these 

additional documents in connection with 

such applicant’s ongoing registration-related 

obligations, the Commission should have 

included these requirements in the swap 

dealer and MSP registration rulemaking, 

which the Commission finalized in January 

of this year.159 Instead, the Commission is 

issuing today’s Proposed Guidance in a 

manner that is outside of the requirements 

set forth in the Administrative Procedure 

Act.160

The Proposed Order 

Notwithstanding my general concerns with 

the Proposed Guidance, I believe that the 

Commission’s Proposed Order appropriately 

provides both U.S. and foreign firms with 

transition periods in which to comply with 

the Commission’s interpretation of CEA 

section 2(i). As noted above, the Proposed 

Order would permit foreign swap dealer and 

MSP registrants to delay compliance with 

certain entity-level requirements and 

transaction-level requirements under Title 

VII of the Dodd-Frank Act pending the 

adoption of the Commission’s final 


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161Under the Proposed Order, U.S. swap dealers 

and MSPs will only be required to register with the 

Commission and to meet the requirements under 

parts 20 (large swap trader reporting) and 45 (swap 

data recordkeeping and reporting) until December 

31, 2012 before other entity-level requirements will 

become effective. 

interpretive guidance regarding section 2(i). 

My concurrence today comes after several 

days of negotiations with my fellow 

commissioners. I am relieved that we are 

protecting the competitiveness of U.S. firms 

in the Proposed Order.161 Although I am 

generally supportive of the Proposed Order, 

I do have a couple of more pragmatic 

concerns regarding the manner in which 

foreign swap dealers and MSPs will comply 

with the Commission’s registration 

requirements. 

First, I believe the Commission should tie 

the expiration of this relief to the adoption 

of a final exemptive order. Currently, the 

Proposed Order unjustifiably ties the 

expiration of the relief to the date on which 

the Proposed Order is published in the 

Federal Register. The Proposed Order’s 

current expiration does not make sense in 

light of the fact that potential registrants will 

not know the contours of the final relief until 

the Commission approves a final exemptive 

order. If we do not tie the expiration of relief 

to the publication of the final exemptive 

order, are we truly providing adequate notice 

and a period of time in which registrants can 

comply? 

Second, the Proposed Order should at least 

include questions regarding how the 

Commission proposes to address practical 

considerations regarding the registration of 

foreign swap dealers and MSPs. The 

Commission should set out its preliminary 

thinking regarding how these foreign swap 

dealers and MSPs will register their 

associated persons and principals, in 

addition to addressing concerns regarding the 

transfer of, and withdrawal from, 

Commission registration. 

I have included a few questions at the end 

of my statement to address these practical 

concerns. 

Do Not Ignore the Significant Cost 

Implications 

I would like to make one closing but 

important point regarding the potential costs 

of today’s Proposed Guidance. While I 

understand that the CEA only requires the 

Commission to consider the costs and 

benefits of its regulations and orders—not 

interpretive guidance—the Proposed 

Guidance, once finalized will result in 

significant costs to the swaps industry. The 

implications of the Commission’s adoption of 

interpretive guidance on cross-border swaps 

activities will be nothing at which to laugh. 

Firms will incur significant operational, legal 

and administrative expenses in connection 

with the registration and ongoing compliance 

with the Commission’s swaps regulations. 

Not to mention, many firms that operate 

through branches may feel compelled to 

convert into, and separately capitalize, 

affiliates in order to limit the impact of the 

Commission’s interpretation. 

Accordingly, I encourage the Commission 

to prepare a report separate from its adoption 

of the Proposed Guidance, which analyzes 

the costs attributable to the breadth of the 

Commission’s new authority under CEA 

section 2(i). This report will help inform 

market participants who seek guidance as to 

the potential costs of trading swaps in the 

United States. More importantly, the report 

will help inform the Commission in 

connection with the issuance of future 

rulemakings under Title VII of the DoddFrank Act. 

Conclusion 

I am relieved that the Commission is 

finally issuing today’s proposals. 

Commission staff has spent well over one 

year preparing the proposals before us today. 

The publication of the Commission’s 

interpretation of CEA section 2(i) is crucial. 

I hope that the release of these proposals will 

enable market participants to determine how 

the international rules and expansive 

international oversight of the Dodd-Frank Act 

might impact their activities in the United 

States and internationally. I want to ensure 

that U.S. firms are placed on a fair and 

competitive playing field that offers no 

opportunity for regulatory arbitrage. I am 

mindful that a seamless regulatory net can 

only be achieved through international 

cooperation and coordination. 

In summary, I believe the Commission’s 

final interpretive guidance should reflect: (1) 

Principles of international law and comity; 

(2) a clear understanding of the implications 

of the Proposed Guidance so that the 

Commission can make an informed decision 

regarding the various policy alternatives; and 

(3) parity to ensure that U.S. firms are not 

unfairly disadvantaged vis-a`-vis their foreign 

competitors. I fear that if we adopt the 

Proposed Guidance as final, the Commission 

will take an imperialistic view of the swaps 

market. I also remain concerned regarding 

the Commission’s shaky legal analysis. 

I look forward to reviewing the myriad of 

comments submitted in response to today’s 

proposals. I implore market participants, as 

well as domestic and foreign regulators, to 

share their views and let us know how to 

harmonize our efforts so that we collectively 

can develop an internationally consistent and 

complementary approach to address the 

cross-border regulation of the swaps markets. 

Questions 

1. Please share your views regarding the 

Commission’s proposed effective date for the 

relief set forth in the Proposed Order. Should 

the expiration of the effective date be 

extended or shortened? 

2. Should the Commission permit swap 

dealer and MSP registrants to conditionally 

de-register following the expiration of the 

effective date of the Proposed Order? If so, 

under what conditions should the 

Commission allow de-registration? 

3. Should the Commission permit swap 

dealer and MSP registrants to transfer their 

registration to a majority-owned affiliate or 

subsidiary? If so, under what circumstances 

should the Commission allow such a 

transfer? 

[FR Doc. 2012–16496 Filed 7–11–12; 8:45 am] 

BILLING CODE 6351–01–P 


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