“CFTC Cross-Border Margin Proposal”
On June 29, 2015, the Commodity Futures Trading Commission (“CFTC”) issued a proposed rule (the “Proposed Rule”) on the cross-border application of the margin requirements with respect to uncleared swaps to be adopted by the CFTC pursuant to Section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). When the CFTC issued a proposed rule containing such margin requirements on October 3, 2014, the CFTC also issued an Advance Notice of Proposed Rulemaking (“ANPR”) containing three alternative approaches with respect to the potential cross-border application of the proposed margin requirements. The Proposed Rule is distinct from all three approaches set forth in that ANPR. Although the Proposed Rule was unanimously approved, two of the four Commissioners expressed skepticism as to its merits.
The Proposed Rule imposes varying compliance obligations on uncleared swap transactions depending on whether one or both counterparties thereto qualifies as:
- a U.S. person; or
- a non-U.S. person:(1) whose obligations are guaranteed by a U.S. person; (2) that is a “Foreign Consolidated Subsidiary” of a U.S. person; or (3) acting through or by a U.S. branch.
Swaps between two non-U.S. persons who do not meet any of these three criteria would qualify for an exclusion from the CFTC’s proposed margin requirements.
This Stroock Special Bulletin describes the proposed compliance obligations set forth in the proposal, as well as the proposed tests to determine the status of a counterparty to a swap.