Derivatives: Global convergence becomes global confusion

September 2013


At last week’s G20 summit, global regulators reiterated their desire for clarity in cross-border derivatives regulation. We remain far from that goal, but the US Commodity Futures Trading Commission (“CFTC”) took a major step forward this summer by finalizing its approach to regulating cross-border swap transactions, while providing temporary relief for some market participants.

The CFTC’s Final Guidance and Exemptive Order offer a detailed, albeit incomplete, road map and timeline for US and foreign institutions to meet Dodd-Frank’s cross border requirements. The Final Guidance contains few surprises when compared with the CFTC’s earlier proposals, but it represents a sea change from the way dealers around the world have been allowed to do business under interim relief provided by the CFTC in January (“January Order”). Moreover, the Final Guidance creates exceptionally tight deadlines which will impact firms well before the end of the year.

As a result, registered swap dealers, certain de minimis dealing entities, and others likely have to re-open most – if not all – of their work streams to meet these deadlines, starting with re-reviewing the scope of their business with US counterparties. Their most important concern centers on the new definition of a “US person,” which kicks in October 9, 2013. Calculating registration thresholds, determining the treatment of branches and affiliates, and identifying which jurisdictions’ laws apply, all turn on this definition. The new definition will also likely cause a number of dealing entities that have been operating under the de minimis threshold to have to register as swap dealers.

The Final Guidance also reveals when substituted compliance with a foreign regulator’s rules will be permitted for particular types of dealers and counterparties (in lieu of compliance with CFTC regulations), a point that the G20 highlighted as critical. However, non-US swap dealers (and foreign branches of US swap dealers) remain uncertain as to which particular requirements to build toward, because the CFTC has not finished assessing the comparability of requirements in the six countries where registered non-US swap dealers are located – Australia, Canada, European Union, Hong Kong, Japan, and Switzerland (“six jurisdictions”). The result of the CFTC’s analysis – expected later this year – will reveal whether substituted compliance will be available for certain “Entity Level” and “Transaction Level” requirements that the Final Guidance further details.

This A Closer Look builds on our Financial Services Regulatory Brief issued on July 12th by providing a timeline of principal dates, a deeper analysis of the Final Guidance’s key points, and our view of the major implications for several particular types of market actors.

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Dan Ryan
US Banking and Capital Markets Leader
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Alison Gilmore
US Asset and Wealth Management Marketing Leader
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