Presentation on theme: "Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices."— Presentation transcript:
Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions. Name Title [telephone] [Month Year] The CFTC's Final Cross-Border Guidance As of October 9, 2013 Joshua Cohn, Partner Curtis Doty, Counsel Mayer Brown LLP Mary Johannes, Senior Director and Head of U.S. Public Policy, ISDA
1 Extraterritoriality of Dodd-Frank Swaps Provisions The Cross-Border Guidance interprets Commodity Exchange Act § 2(i) Swaps provisions of the CEA enacted by Title VII of Dodd-Frank "shall not apply to activities outside the United States unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States or contravene [CFTC anti-evasion rules]." A taxonomic approach Swap dealer (or MSP) category Counterparty category Category of requirement - Entity-Level (1 st and 2 nd ); Transaction- Level (A and B) Matrices! 78 Fed. Reg ,
2 Counterparty Status U.S. person Non-U.S. person that is "guaranteed" by a U.S. person Non-U.S. person that is an "affiliate conduit" of a U.S. person Non-U.S. person not guaranteed by, or affiliate conduit of, a U.S. person Foreign branch of a U.S. bank that is a SD or MSP "Foreign Branch Characteristics" Swaps "with a foreign branch" U.S. branch of a non-U.S. SD or MSP (footnote 513)
3 Establishing Counterparty Status Reasonable reliance on a counterparty's written representations For representations included in SD's or MSP's relationship documentation, reliance requires an agreement from counterparty to timely update for material changes ISDA Cross-Border Swaps Representation Letter ISDA Cross-Border Representation Letter for U.S. Banks
4 U.S. Person Definition – selected issues Eight (8) enumerated prongs, preceded by "generally to include, but not be limited to –" A "legal entity" (e.g., corporation, partnership, limited liability company, fund … or any similar form of enterprise) that (A) is organized or incorporated under US law or (B) has its principal place of business in the United States. Principal place of business – "nerve center"; where the high level officers direct, control and coordinate the entity's activities PPB prong was not applicable to funds and other collective investment vehicles before October 9, 2013 For collective investment vehicles -- location of senior personnel responsible for formation/promotion or implementation of investment strategy, depending on facts and circumstances. "The Commission generally believes that [a non-U.S.] person would not come within the 'U.S. person' interpretation solely because it retains an asset management firm located in the United States …." See 78 FR 45312
5 U.S. Person Definition – selected issues (cont.) Any commodity pool, pooled account, investment fund, or other collective investment vehicle not described in the "legal entity" prong (see previous slide) that is majority- owned by one or more US persons, unless it is publicly offered only to non-U.S. persons and not offered to U.S. persons Majority ownership test (See 78 FR 45313) Majority-ownership is determined by counting direct beneficial owners and "looking-through" the beneficial ownership of any entities controlled by or under common control with the collective investment vehicle. May rely on representations of an unrelated investor entity unless the investee vehicle has reason to believe the investor was formed or is operated principally for the purpose of avoiding looking through to the ultimate beneficial owners Reasonable due diligence, along the lines of the verifications conducted for other regulatory requirements. "Publicly offered" Exception is intended to address comments that ownership verification would be particularly difficult for publicly offered vehicles "Publicly offered" is not defined, but the publicly-offered vehicle "could be a UCITs". 78 FR 45314, fn 224
6 U.S. Person Definition – selected issues (cont.) Legal entity (other than LLC, LLP or similar entity where all of the owners have limited liability) that is directly or indirectly majority-owned by U.S. persons and in which such person(s) bear(s) unlimited responsibility for the obligations and liabilities of the legal entity Other prongs: natural persons, estates of decedents, pension plans, trusts, individual or joint accounts
7 Non-U.S. Persons Guaranteed by a U.S. Person "Guarantee" – not only traditional guarantees of payment, but also other formal arrangements that, in view of all facts and circumstances, support the non-U.S. person's ability to pay or perform its swap obligations Compare to "collateral promise" approach that appeared in final "swap" definition rule
8 Affiliate conduit Majority-owned, directly or indirectly, by a U.S. person Controls, is controlled by, or is under common control with the U.S. person In the regular course of business, engages in swaps with non- U.S. third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates Financial results of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be relevant.
9 Swap Dealer De Minimis Calculation A U.S. person or a guaranteed or conduit affiliate must include all dealing swaps A non-U.S. person not guaranteed by, or an affiliate conduit of, a U.S. person must include all dealing swaps with: U.S. persons (other than foreign branches of SDs) Counterparties that are guaranteed affiliates of a U.S. person, unless the counterparty is a SD, a SD affiliate engaged in de minimis dealing, or is guaranteed by a non-financial entity. A non-U.S. person not guaranteed by, or an affiliate conduit of, a U.S. person may exclude swaps entered into anonymously on a DCM, SEF or FBOT and cleared. A person (U.S. or non-U.S.) must aggregate relevant dealing swaps of all commonly controlled affiliates (U.S. and non-U.S.), except those of any affiliates that are registered SDs.
10 Extraterritorial application to CFTC requirements to SDs and MSPs In determining how Title VII will apply extraterritorially under the July 2013 Interpretive Guidance and Policy Statement, the CFTC has divided substantive swaps regulations conceptually into (i) "Entity-Level Requirements" and (ii) "Transaction-Level Requirements." Entity-Level Requirements First Category: capital adequacy; chief compliance officer; risk management; swap data recordkeeping (other than complaints and marketing/sales materials) Second Category: SDR reporting; recordkeeping for complaints and marketing/sales materials; "large trader" reporting of physical commodity swaps Transaction-Level Requirements Category A: clearing and swap processing; margining and segregation for uncleared swaps; trade execution; swap trading relationship documentation; portfolio reconciliation and compression; real-time public reporting; trade confirmation; daily trading records Category B: external business conduct standards
13 Substituted Compliance Per Guidance: in the case of certain parties and certain rules compliance with another country's rules may satisfy CFTC in lieu of its own Parties – CFTC classifications Rules – Entity-Level (1 st and 2 nd )
14 Substituted Compliance (cont.) "May" – matrices at 78 FR Comparability analysis standard: comparable and comprehensive Broad MOU required Generic determinations 5% Exception – Transaction-level requirements Noted areas of concern: Data repository direct access Privacy laws Clearing and trading venue recognition
15 Substituted Compliance (cont.) "Essentially identical" – another standard or "one-off" concession? 6 jurisdictions have submitted to CFTC: EU, Australia, Canada, Hong Kong, Japan, Switzerland ("Six Jurisdictions") special timing applies to these jurisdictions
16 Exemptive Order CFTC solicited comments 75 days → Oct. 9: prior definition of U.S. person holds over Other 75-day changes? Relief?
17 Exemptive Order (cont.) Six Jurisdictions Earlier of Dec. 21 or 30 days after substituted compliance determination Non-U.S. SDs/MSPs – entity-level requirements for which substituted compliance is possible special reporting obligations Non-U.S. SDs/MSPs and Foreign Branches of U.S. – transaction-level requirements for which substituted compliance is possible But not clearing, trade execution or some Part 43 obligations
18 Common Path Forward European Commission and CFTC – July 11, 2013 Acknowledged risks of conflicts of law and legal uncertainty in international markets
19 Common Path Forward (cont.) "[J]urisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes." Practicalities CFTC deems EU and US rules for risk mitigation of bilateral uncleared swaps essentially identical and will issue no-action relief. The EU concept of "equivalence" is to be applicable.
20 Common Path Forward (cont.) CFTC will extend "foreign board of trade" no-action relief to swap contracts to facilitate the trade-execution requirement and may offer no-action relief to certain EU-regulated multilateral trading facilities. EC, ESMA and CFTC to work together on STP, margin for uncleared swaps mandatory clearing, and reporting to trade repositories. Common goal of assuring that overseas guaranteed subsidiaries and branches are covered.
21 Common Path Forward (cont.) With respect to CCPs, initial margin is viewed as the only key material difference.
22 Common Path Forward (cont.) CFTC No-Action Letters: – "Identicality" relief for certain EMIR risk mitigation rules – Eurex clearing temporary registration relief – LCH parallel – Amends foreign board of trade direct access no-action letters
23 Status? Europe – 2015? Substituted compliance – but are substitutes available? Next?