Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

Commodity Futures Trading Commission

Office of Public Affairs

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

www.cftc.gov

June 29, 2015

Proposed Rule Regarding the Cross-Border Application of the Margin 

Requirements

The Commodity Futures Trading Commission (“CFTC” or “Commission”) is proposing a rule for the application 

of the Commission’s margin requirements to cross-border transactions (“Proposed Rule”).

Overview of the Proposed Rule; Use of Hybrid, Firm-Wide Approach

In an Advance Notice of Proposed Rulemaking, the Commission sought comment on alternative approaches to the 

cross-border application of margin requirements—a transaction-level approach that is consistent with the 

Commission’s cross-border guidance (“Guidance Approach”); an approach that is consistent with the approach 

proposed by the Prudential Regulators (the “Prudential Regulators’ Approach”); and (3) an Entity-Level Approach 

that would apply margin rules at the entity-level, without exclusion.

The approach taken in the Proposed Rule is a hybrid of the entity- and transaction-level approaches and is closely 

aligned with the Prudential Regulators’ Approach. In general, under the Proposed Rule, margin requirements are 

designed to address the risks to a CFTC-registered swap dealer or major swap participant that does not have a 

Prudential Regulator (referred to as a “Covered Swap Entity” or “CSE”), as an entity, associated with its uncleared 

swaps (entity-level). Nevertheless, certain uncleared swaps would be eligible for substituted compliance or excluded 

from the Commission’s margin rules based on the counterparties’ nexus to the United States relative to other 

jurisdictions (transaction-level). The Proposed Rule is designed to effectively address the risk posed to the safety 

and soundness of CSEs, while reducing the potential for conflicts with the relevant foreign jurisdiction’s margin 

requirements.

Application of the Commission’s Margin Rules to U.S. CSEs

Under the Proposed Rule, the Commission’s margin rules would apply to all uncleared swaps of a U.S. CSE, with 

no exclusions. However, substituted compliance would be available with respect to initial margin posted to (but not 

collected from) any non-U.S. counterparty (including a non-U.S. CSE) whose obligations under the uncleared swap 

are not guaranteed by a U.S. person. The Commission proposes to provide substituted compliance in this situation 

(assuming that the non-U.S. counterparty is subject to comparable margin requirements in a foreign jurisdiction), 

because the swap counterparty is a non-U.S. person and where its swap obligations are not guaranteed by a U.S. 

person, the foreign regulator may have an equal or greater interest in the collection of margin by the non-U.S. 

counterparty. This approach differs from the Guidance Approach, where a U.S. CSE would not be eligible for 

substituted compliance under any circumstances.

Application of the Commission’s Margin Rules to Non-U.S. CSEs

The extent to which the Commission’s margin rules would apply to a non-U.S. CSE depends on whether the nonU.S. CSE’s swap obligations are guaranteed by a U.S. person or its financial statements are consolidated with those 

of a U.S. ultimate parent entity in accordance with U.S. generally accepted accounting principles. The term 

“ultimate parent entity” refers to an entity that is not controlled by any other entity in the consolidated group.
Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

Where a non-U.S. CSE’s obligations under the relevant swap are guaranteed by an ultimate U.S. parent entity, such 

swap would be treated the same as an uncleared swap of a U.S. CSE. The Commission believes that this treatment 

is appropriate because the swap of a non-U.S. CSE whose obligations under the swap are guaranteed by a U.S. 

person is identical, in relevant respects, to a swap entered directly by a U.S. person.

A non-U.S. CSE whose obligations under the relevant swap are not guaranteed by a U.S. person, but whose 

financial statements are included in those of a U.S. ultimate parent entity (“Foreign Consolidated Subsidiary” or 

“FSC”) are treated the same as any other non-U.S. CSEs (who are neither guaranteed nor consolidated with a U.S. 

parent entity) and thus are broadly eligible for substituted compliance, except that Foreign Consolidated 

Subsidiaries would not be entitled to an exclusion from the margin rules (the “Exclusion”, as described below). The 

Exclusion would not be available for swaps with a Foreign Consolidated Subsidiary because its swap activities have 

a direct impact on the financial position, risk profile, and market value of the U.S. ultimate parent entity that 

consolidates its financial statements, which could have a potential spill-over effect on the U.S. financial system.

Exclusion of Certain Uncleared Swaps from the Commission’s Margin Rules

Under the Proposed Rule, an uncleared swap entered into by a non-U.S. CSE with a non-U.S. person counterparty 

(including a non-U.S. CSE) would be excluded from the Commission’s margin rules, provided that neither 

counterparty’s obligations under the relevant swap are guaranteed by a U.S. person and neither counterparty is a 

Foreign Consolidated Subsidiary nor a U.S. branch of a non-U.S. CSE.

Substituted Compliance

As discussed, the Commission would permit a U.S. CSE or a non-U.S. CSE, as applicable, to avail itself of 

substituted compliance (to the extent applicable under the Proposed Rule) by complying with the margin 

requirements of the relevant foreign jurisdiction in lieu of compliance with the Commission’s margin requirements, 

provided that the Commission finds that such jurisdiction’s margin requirements are comparable to the 

Commission’s margin requirements.

The Commission is proposing a comparability standard that is outcome-based with a focus on whether the margin 

requirements in the foreign jurisdiction achieve the same regulatory objectives as the margin requirements in the 

Commodity Exchange Act. Under this outcome-based approach, the Commission would not look to whether a 

foreign jurisdiction has implemented specific rules and regulations that are identical to rules and regulations adopted 

by the Commission. Rather, the Commission would evaluate whether a foreign jurisdiction has rules and 

regulations that achieve comparable outcomes. If it does, the Commission believes that a comparability 

determination may be appropriate, even if there may be differences in the specific elements of a particular 

regulatory provision.

The Proposed Rule sets forth the standard of review that will apply to Commission determinations, as well as 

proposed procedures for requests for comparability determinations, including eligibility and submission 

requirements.

Definition of “U.S. Person”

Generally speaking, the Proposed Rule would define the term “U.S. person” to include those individuals or entities 

whose activities have a significant nexus to the U.S. market by virtue of their organization or domicile in the United 

States or the depth of their connection to the U.S. market, even if domiciled or organized outside the United States. 

The proposed definition generally follows the traditional, territorial approach to defining a U.S. person, and the 

Commission believes that this definition provides an objective and clear basis for determining those individuals or 

entities that should be identified as a U.S. person. The Proposed Rule would not include the U.S. majority-
Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

ownership prong that was included in the Guidance (50% U.S. person ownership of a fund or other collective 

investment vehicle). In addition, the proposed definition of “U.S. person” would include certain legal entities

owned by one or more U.S. person(s) and for which such person(s) bear unlimited responsibility for the obligations 

and liabilities of the legal entity.

Definition of “Guarantee”

The Proposed Rule would define the term “guarantee” as an arrangement pursuant to which one party to a swap 

transaction with a non-U.S. counterparty has rights of recourse against a U.S. person guarantor (whether such 

guarantor is affiliated with the non-U.S. counterparty or is an unaffiliated third party) with respect to the non-U.S. 

counterparty’s obligations under the relevant swap transaction. Under the Proposed Rule, the terms of the 

guarantee need not necessarily be included within the swap documentation or even otherwise reduced to writing (so 

long as legally enforceable rights are created under the laws of the relevant jurisdiction), provided that a swap 

counterparty has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments 

from, or otherwise collect from, the U.S. person in connection with the non-U.S. person’s obligations under the 

swap.