Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants

Cited as:85 FR 56924
Court:Commodity Futures Trading Commission
Publication Date:14 Sep 2020
Record Number:2020-16489
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Federal Register / Vol. 85, No. 178 / Monday, September 14, 2020 / Rules and Regulations
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 23
RIN 3038–AE84
Cross-Border Application of the
Registration Thresholds and Certain
Requirements Applicable to Swap
Dealers and Major Swap Participants
AGENCY
: Commodity Futures Trading
Commission.
ACTION
: Final rule.
SUMMARY
: The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is adopting a final rule (‘‘Final
Rule’’) addressing the cross-border
application of certain swap provisions
of the Commodity Exchange Act (‘‘CEA
or ‘‘Act’’), as added by Title VII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (‘‘Dodd-Frank
Act’’). The Final Rule addresses the
cross-border application of the
registration thresholds and certain
requirements applicable to swap dealers
(‘‘SDs’’) and major swap participants
(‘‘MSPs’’), and establishes a formal
process for requesting comparability
determinations for such requirements
from the Commission. The Final Rule
adopts a risk-based approach that,
consistent with the applicable section of
the CEA, and with due consideration of
international comity principles and the
Commission’s interest in focusing its
authority on potential significant risks
to the U.S. financial system, advances
the goals of the Dodd-Frank Act’s swap
reforms, while fostering greater liquidity
and competitive markets, promoting
enhanced regulatory cooperation, and
improving the global harmonization of
swap regulation.
DATES
: The Final Rule is effective
November 13, 2020. Specific
compliance dates are set forth in the
Final Rule.
FOR FURTHER INFORMATION CONTACT
:
Joshua Sterling, Director, (202) 418–
6056, jsterling@cftc.gov; Frank Fisanich,
Chief Counsel, (202) 418–5949,
ffisanich@cftc.gov; Amanda Olear,
Deputy Director, (202) 418–5283,
aolear@cftc.gov; Rajal Patel, Associate
Director, 202–418–5261, rpatel@
cftc.gov; Lauren Bennett, Special
Counsel, 202–418–5290, lbennett@
cftc.gov; Jacob Chachkin, Special
Counsel, (202) 418–5496, jchachkin@
cftc.gov; or Owen Kopon, Special
Counsel, okopon@cftc.gov, 202–418–
5360, Division of Swap Dealer and
Intermediary Oversight (‘‘DSIO’’),
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. Background
A. Statutory Authority and Prior
Commission Action
B. Proposed Rule and Brief Summary of
Comments Received
C. Global Regulatory and Market Structure
D. Interpretation of CEA Section 2(i)
1. Proposed Rule and Discussion of
Comments
2. Final Interpretation
E. Final Rule
II. Key Definitions
A. Reliance on Representations—Generally
B. U.S. Person, Non-U.S. Person, and
United States
1. Generally
2. Prongs
3. Principal Place of Business
4. Exception for International Financial
Institutions
5. Reliance on Prior Representations
6. Other
C. Guarantee
1. Proposed Rule
2. Summary of Comments
3. Final Rule
D. Significant Risk Subsidiary, Significant
Subsidiary, Subsidiary, Parent Entity,
and U.S. GAAP
1. Proposed Rule
2. Summary of Comments
3. Final Rule and Commission Response
E. Foreign Branch and Swap Conducted
Through a Foreign Branch
1. Proposed Rule
2. Summary of Comments
3. Final Rule and Commission Response
F. Swap Entity, U.S. Swap Entity, and Non-
U.S. Swap Entity
G. U.S. Branch
H. Swap Conducted Through a U.S. Branch
1. Proposed Rule
2. Summary of Comments
3. Final Rule—Swap Booked in a U.S.
Branch
I. Foreign-Based Swap and Foreign
Counterparty
1. Proposed Rule
2. Summary of Comments
3. Final Rule
III. Cross-Border Application of the Swap
Dealer Registration Threshold
A. U.S. Persons
B. Non-U.S. Persons
1. Swaps by a Significant Risk
Subsidiary
2. Swaps With a U.S. Person
3. Guaranteed Swaps
C. Aggregation Requirement
D. Certain Exchange-Traded and Cleared
Swaps
IV. Cross-Border Application of the Major
Swap Participant Registration Tests
A. U.S. Persons
B. Non-U.S. Persons
1. Swaps by a Significant Risk
Subsidiary
2. Swap Positions With a U.S. Person
3. Guaranteed Swap Positions
C. Attribution Requirement
D. Certain Exchange-Traded and Cleared
Swaps
V. ANE Transactions
A. Background and Proposed Approach
B. Summary of Comments
C. Commission Determination
VI. Exceptions From Group B and Group C
Requirements, Substituted Compliance
for Group A and Group B Requirements,
and Comparability Determinations
A. Classification and Application of
Certain Regulatory Requirements—
Group A, Group B, and Group C
Requirements
1. Group A Requirements
2. Group B Requirements
3. Group C Requirements
B. Exceptions From Group B and Group C
Requirements
1. Proposed Exceptions, Generally
2. Exchange-Traded Exception
3. Foreign Swap Group C Exception
4. Limited Foreign Branch Group B
Exception
5. Non-U.S. Swap Entity Group B
Exception
C. Substituted Compliance
1. Proposed Rule
2. Summary of Comments
3. Final Rule
D. Comparability Determinations
1. Standard of Review
2. Supervision of Swap Entities Relying
on Substituted Compliance
3. Effect on Existing Comparability
Determinations
4. Eligibility Requirements
5. Submission Requirements
VII. Recordkeeping
VIII. Other Comments
IX. Compliance Dates and Transition Issues
A. Summary of Comments
B. Commission Determination
X. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Benefits
2. Assessment Costs
3. Cross-Border Application of the SD
Registration Threshold
4. Cross-Border Application of the MSP
Registration Thresholds
5. Monitoring Costs
6. Registration Costs
7. Programmatic Costs
8. Exceptions From Group B and Group C
Requirements, Availability of
Substituted Compliance, and
Comparability Determinations
9. Recordkeeping
10. Alternatives Considered
11. Section 15(a) Factors
D. Antitrust Laws
XI. Preamble Summary Tables
A. Table A—Cross-Border Application of
the SD De Minimis Threshold
B. Table B—Cross-Border Application of
the MSP Threshold
C. Table C—Cross-Border Application of
the Group B Requirements in
Consideration of Related Exceptions and
Substituted Compliance
D. Table D—Cross-Border Application of
the Group C Requirements in
Consideration of Related Exceptions
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1
Public Law 111–203, 124 Stat. 1376 (2010).
2
7 U.S.C. 1 et seq.
3
7 U.S.C. 2(i).
4
See 17 CFR 1.3; ‘‘Swap dealer’’ and ‘‘Major swap
participant’’; 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). Commission regulations
referred to herein are found at 17 CFR chapter I.
5
See Interpretive Guidance and Policy Statement
Regarding Compliance With Certain Swap
Regulations, 78 FR 45292 (Jul. 26, 2013).
6
Id. at 45297–45301. The Commission is now
restating this interpretation, as discussed in section
I.D.2 infra.
7
Id. at 45297 n.39.
8
See id.
9
See G20 Leaders’ Statement: The Pittsburgh
Summit, A Framework for Strong, Sustainable, and
Balanced Growth (Sep. 24–25, 2009), available at
https://www.treasury.gov/resource-center/
international/g7-g20/Documents/pittsburgh_
summit_leaders_statement_250909.pdf.
10
See CFTC Staff Advisory No. 13–69,
Applicability of Transaction-Level Requirements to
Activity in the United States (Nov. 14, 2013),
available at http://www.cftc.gov/idc/groups/public/
@lrlettergeneral/documents/letter/13-69.pdf. All
Commission staff letters are available at https://
www.cftc.gov/LawRegulation/CFTCStaffLetters/
index.htm.
11
CFTC Staff Letter No. 13–71, No-Action Relief:
Certain Transaction-Level Requirements for Non-
U.S. Swap Dealers (Nov. 26, 2013), available at
https://www.cftc.gov/csl/13-71/download.
Commission staff subsequently extended this relief
in CFTC Letter Nos. 14–01, 14–74, 14–140, 15–48,
16–64, and 17–36.
12
Request for Comment on Application of
Commission Regulations to Swaps Between Non-
U.S. Swap Dealers and Non-U.S. Counterparties
Involving Personnel or Agents of the Non-U.S.
Swap Dealers Located in the United States, 79 FR
1347, 1348–49 (Jan. 8, 2014).
13
Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants—Cross-
Border Application of the Margin Requirements, 81
FR 34818 (May 31, 2016).
14
Cross-Border Application of the Registration
Thresholds and External Business Conduct
Standards Applicable to Swap Dealers and Major
Swap Participants, 81 FR 71946 (proposed Oct. 18,
2016).
15
Id. at 71947. As noted above, the SD and MSP
registration thresholds are codified in the
definitions of those terms at 17 CFR 1.3.
I. Background
A. Statutory Authority and Prior
Commission Action
In 2010, the Dodd-Frank Act
1
amended the CEA
2
to, among other
things, establish a new regulatory
framework for swaps. Added in the
wake of the 2008 financial crisis, the
Dodd-Frank Act was enacted to reduce
systemic risk, increase transparency,
and promote market integrity within the
financial system. Given the global
nature of the swap market, the Dodd-
Frank Act amended the CEA by adding
section 2(i) to provide that the swap
provisions of the CEA enacted by Title
VII of the Dodd-Frank Act (‘‘Title VII’’),
including any rule prescribed or
regulation promulgated under the CEA,
shall not apply to activities outside the
United States (‘‘U.S.’’) unless those
activities have a direct and significant
connection with activities in, or effect
on, commerce of the United States, or
they contravene Commission rules or
regulations as are necessary or
appropriate to prevent evasion of the
swap provisions of the CEA enacted
under Title VII.
3
In May 2012, the CFTC and Securities
and Exchange Commission (‘‘SEC’’)
jointly issued an adopting release that,
among other things, further defined and
provided registration thresholds for SDs
and MSPs in § 1.3 of the CFTC’s
regulations (‘‘Entities Rule’’).
4
In July 2013, the Commission
published interpretive guidance and a
policy statement regarding the cross-
border application of certain swap
provisions of the CEA (‘‘Guidance’’).
5
The Guidance included the
Commission’s interpretation of the
‘‘direct and significant’’ prong of section
2(i) of the CEA.
6
In addition, the
Guidance established a general, non-
binding framework for the cross-border
application of many substantive Dodd-
Frank Act requirements, including
registration and business conduct
requirements for SDs and MSPs, as well
as a process for making substituted
compliance determinations. Given the
complex and dynamic nature of the
global swap market, the Guidance was
intended to be a flexible and efficient
way to provide the Commission’s views
on cross-border issues raised by market
participants, allowing the Commission
to adapt in response to changes in the
global regulatory and market
landscape.
7
The Commission
accordingly stated that it would review
and modify its cross-border policies as
the global swap market continued to
evolve and consider codifying the cross-
border application of the Dodd-Frank
Act swap provisions in future
rulemakings, as appropriate.
8
At the
time that it adopted the Guidance, the
Commission was tasked with regulating
a market that grew to a global scale
without any meaningful regulation in
the United States or overseas, and the
United States was the first member
country of the Group of 20 (‘‘G20’’) to
adopt most of the swap reforms agreed
to at the G20 Pittsburgh Summit in
2009.
9
Developing a regulatory
framework to fit that market necessarily
requires adapting and responding to
changes in the global market, including
developments resulting from
requirements imposed on market
participants under the Dodd-Frank Act
and the Commission’s implementing
regulations in the U.S., as well as those
that have been imposed by non-U.S.
regulatory authorities since the
Guidance was issued.
On November 14, 2013, DSIO issued
a staff advisory (‘‘ANE Staff Advisory’’)
stating that a non-U.S. SD that regularly
uses personnel or agents located in the
United States to arrange, negotiate, or
execute a swap with a non-U.S. person
(‘‘ANE Transactions’’) would generally
be required to comply with
‘‘Transaction-Level Requirements,’’ as
the term was used in the Guidance
(discussed in section V.A).
10
On
November 26, 2013, Commission staff
issued certain no-action relief to non-
U.S. SDs registered with the
Commission from these requirements in
connection with ANE Transactions
(‘‘ANE No-Action Relief’’).
11
In January
2014, the Commission published a
request for comment on all aspects of
the ANE Staff Advisory (‘‘ANE Request
for Comment’’).
12
In May 2016, the Commission issued
a final rule on the cross-border
application of the Commission’s margin
requirements for uncleared swaps
(‘‘Cross-Border Margin Rule’’).
13
Among
other things, the Cross-Border Margin
Rule addressed the availability of
substituted compliance by outlining the
circumstances under which certain SDs
and MSPs could satisfy the
Commission’s margin requirements for
uncleared swaps by complying with
comparable foreign margin
requirements. The Cross-Border Margin
Rule also established a framework by
which the Commission assesses whether
a foreign jurisdiction’s margin
requirements are comparable.
In October 2016, the Commission
proposed regulations regarding the
cross-border application of certain
requirements under the Dodd-Frank Act
regulatory framework for SDs and MSPs
(‘‘2016 Proposal’’).
14
The 2016 Proposal
incorporated various aspects of the
Cross-Border Margin Rule and
addressed when U.S. and non-U.S.
persons, such as foreign consolidated
subsidiaries (‘‘FCSs’’) and non-U.S.
persons whose swap obligations are
guaranteed by a U.S. person, would be
required to include swaps or swap
positions in their SD or MSP registration
threshold calculations, respectively.
15
The 2016 Proposal also addressed the
extent to which SDs and MSPs would be
required to comply with the
Commission’s business conduct
standards governing their conduct with
swap counterparties (‘‘external business
conduct standards’’) in cross-border
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Id. The Commission’s external business
conduct standards are codified in 17 CFR part 23,
subpart H (17 CFR 23.400 through 23.451).
17
2016 Proposal, 81 FR at 71947.
18
Cross-Border Application of the Registration
Thresholds and Certain Requirements Applicable to
Swap Dealers and Major Swap Participants, 85 FR
952 (proposed Jan. 8, 2020).
19
Id. at 954.
20
The Commission received comments from
Alternative Investment Management Association
(‘‘AIMA’’); Americans for Financial Reform
Education Fund (‘‘AFR’’); Associated Foreign
Exchange, Inc. & GPS Capital Markets, Inc. (‘‘AFEX/
GPS’’); Chris Barnard (‘‘Barnard’’); Better Markets,
Inc. (‘‘Better Markets’’); BGC Partners & Tradition
America Holdings, Inc. (‘‘BGC/Tradition’’);
Chatham Financial (‘‘Chatham’’); Citadel
(‘‘Citadel’’); Commercial Energy Working Group
(‘‘Working Group’’); Credit Suisse (‘‘CS’’); Futures
Industry Association (‘‘FIA’’); Japan Financial
Markets Council & International Bankers
Association of Japan (‘‘JFMC/IBAJ’’); Institute for
Agriculture and Trade Policy (‘‘IATP’’); Institute of
International Bankers & Securities Industry and
Financial Markets Association (‘‘IIB/SIFMA’’);
International Swaps and Derivatives Association
(‘‘ISDA’’); Japanese Bankers Association (‘‘JBA’’);
Japan Securities Clearing Corporation (‘‘JSCC’’); and
State Street Corporation (‘‘State Street’’). The
Commission also received letters from PT Arba
Sinar Jaya, Robert Ware (UIUC), and William
Harrington that were not relevant to the Proposed
Rule. All comments on the Proposed Rule are
available at https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=3067.
21
See infra section VIII for a discussion of these
comments.
22
Proposed Rule, 85 FR at 954–955.
23
See, e.g., Financial Stability Board (‘‘FSB’’),
OTC Derivatives Market Reforms: 2019 Progress
Report on Implementation (Oct. 15, 2019) (‘‘2019
FSB Progress Report’’), available at https://
www.fsb.org/wp-content/uploads/P151019.pdf;
FSB, Implementation and Effects of the G20
Financial Regulatory Reforms: Fourth Annual
Report (Nov. 28, 2018), available at http://
www.fsb.org/wp-content/uploads/P281118-1.pdf.
24
For example, at the end of September 2019, 16
FSB member jurisdictions had comprehensive swap
margin requirements in force. See 2019 FSB
Progress Report, at 2.
25
See, e.g., 2019 FSB Progress Report; Bank of
International Settlements (‘‘BIS’’), Triennial Central
Bank Survey of Foreign Exchange and Over-the-
counter Derivatives Markets in 2019 (Sep. 16, 2019),
available at https://www.bis.org/statistics/
rpfx19.htm.
26
See, e.g., Institute of International Finance,
Addressing Market Fragmentation: The Need for
Enhanced Global Regulatory Cooperation (Jan.
2019), available at https://www.iif.com/Portals/0/
Files/IIF%20FSB%20Fragmentation%20Report.pdf.
27
See BIS, Committee on the Global Financial
System, No. 46, The macrofinancial implications of
alternative configurations for access to central
counterparties in OTC derivatives markets, at 1
(Nov. 2011), available at http://www.bis.org/publ/
cgfs46.pdf (stating that ‘‘[t]he configuration of
access must take account of the globalised nature
of the market, in which a significant proportion of
OTC derivatives trading is undertaken across
borders’’).
transactions.
16
In addition, the 2016
Proposal addressed ANE Transactions,
including the types of activities that
would constitute arranging, negotiating,
and executing within the context of the
2016 Proposal, the treatment of such
transactions with respect to the SD
registration threshold, and the
application of external business conduct
standards with respect to such
transactions.
17
B. Proposed Rule and Brief Summary of
Comments Received
In January 2020, the Commission
published a notice of proposed
rulemaking (‘‘Proposed Rule’’), which
proposed to: (1) Address the cross-
border application of the registration
thresholds and certain requirements
applicable to SDs and MSPs; and (2)
establish a formal process for requesting
comparability determinations for such
requirements from the Commission.
18
In
the Proposed Rule, the Commission also
withdrew the 2016 Proposal, stating that
the Proposed Rule reflected the
Commission’s current views on the
matters addressed in the 2016 Proposal,
which had evolved since the 2016
Proposal as a result of market and
regulatory developments in the swap
markets and in the interest of
international comity.
19
The Commission
requested comments generally on all
aspects of the Proposed Rule and on
many specific questions.
The Commission received 18 relevant
comment letters.
20
Though AFR and
IATP did not support the Commission
adopting the Proposed Rule in its
entirety, most commenters were
supportive of the Proposed Rule,
generally, or supportive of specific
elements of the Proposed Rule.
However, many of these commenters
suggested modifications to portions of
the Proposed Rule, which are discussed
in the relevant sections discussing the
Final Rule below. In addition, several
commenters requested Commission
action beyond the scope of the Proposed
Rule.
21
Further, IIB/SIFMA requested
that the Commission re-visit in the Final
Rule the applicability of the
Commission’s cross-border uncleared
swap margin requirements that were
addressed in the Cross-Border Margin
Rule. The Commission addressed those
requirements in the Cross-Border
Margin Rule, did not propose modifying
them in the Proposed Rule, and
therefore is not making any changes to
the Cross-Border Margin Rule in this
Final Rule.
C. Global Regulatory and Market
Structure
As noted in the Proposed Rule, the
regulatory landscape is far different now
than it was when the Dodd-Frank Act
was enacted in 2010.
22
When the CFTC
published the Guidance in 2013, very
few jurisdictions had made significant
progress in implementing the global
swap reforms to which the G20 leaders
agreed at the Pittsburgh G20 Summit.
Today, however, as a result of the
cumulative implementation efforts by
regulators throughout the world,
significant progress has been made in
the world’s primary swap trading
jurisdictions to implement the G20
commitments.
23
Since the enactment of
the Dodd-Frank Act, regulators in a
number of large developed markets have
adopted regulatory regimes that are
designed to mitigate systemic risks
associated with a global swap market.
These regimes include central clearing
requirements, margin requirements for
non-centrally cleared derivatives, and
other risk mitigation requirements.
24
Many swaps involve at least one
counterparty that is located in the
United States or another jurisdiction
that has adopted comprehensive swap
regulations.
25
Conflicting and
duplicative requirements between U.S.
and foreign regimes can contribute to
potential market inefficiencies and
regulatory arbitrage, as well as
competitive disparities that undermine
the relative positions of U.S. SDs and
their counterparties. This may result in
market fragmentation, which can lead to
significant inefficiencies that result in
additional costs to end-users and other
market participants. Market
fragmentation can also reduce the
capacity of financial firms to serve both
domestic and international customers.
26
The Final Rule supports a cross-border
framework that promotes the integrity,
resilience, and vibrancy of the swap
market while furthering the important
policy goals of the Dodd-Frank Act. In
that regard, it is important to consider
how market practices have evolved
since the publication of the Guidance.
As certain market participants may have
conformed their practices to the
Guidance, the Final Rule will ideally
cause limited additional costs and
burdens for these market participants,
while supporting the continued
operation of markets that are much more
comprehensively regulated than they
were before the Dodd-Frank Act and the
actions of governments worldwide taken
in response to the Pittsburgh G20
Summit.
The approach described below is
informed by the Commission’s
understanding of current market
practices of global financial institutions
under the Guidance. For business and
regulatory reasons, a financial group
that is active in the swap market often
operates in multiple market centers
around the world and carries out swap
activity with geographically-diverse
counterparties using a number of
different operational structures.
27
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The largest U.S. banks have thousands of
affiliated global entities, as shown in data from the
National Information Center (‘‘NIC’’), a repository of
financial data and institutional characteristics of
banks and other institutions for which the Federal
Reserve Board has a supervisory, regulatory, or
research interest. See NIC, available at https://
www.ffiec.gov/npw.
29
See Republic of Argentina v. Weltover, 504 U.S.
607, 618 (1992).
30
15 U.S.C. 6a.
31
See Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d
845, 857 (7th Cir. 2012).
Financial groups often prefer to operate
their swap dealing businesses and
manage their swap portfolios in the
jurisdiction where the swaps and the
underlying assets have the deepest and
most liquid markets. In operating their
swap dealing businesses in these market
centers, financial groups seek to take
advantage of expertise in products
traded in those centers and obtain
access to greater liquidity. These
arrangements permit them to price
products more efficiently and compete
more effectively in the global swap
market, including in jurisdictions
different from the market center in
which the swap is traded.
In this sense, a global financial
enterprise effectively operates as a
single business, with a highly integrated
network of business lines and services
conducted through various branches or
affiliated legal entities that are under the
control of the parent entity.
28
Branches
and affiliates in a global financial
enterprise are highly interdependent,
with separate entities in the group
providing financial or credit support to
each other, such as in the form of a
guarantee or the ability to transfer risk
through inter-affiliate trades or other
offsetting transactions. Even in the
absence of an explicit arrangement or
guarantee, a parent entity may, for
reputational or other reasons, choose to
assume the risk incurred by its affiliates
located overseas. Swaps are also traded
by an entity in one jurisdiction, but
booked and risk-managed by an affiliate
in another jurisdiction. The Final Rule
recognizes that these and similar
arrangements among global financial
enterprises create channels through
which swap-related risks can have a
direct and significant connection with
activities in, or effect on, commerce of
the United States.
D. Interpretation of CEA Section 2(i)
1. Proposed Rule and Discussion of
Comments
The Proposed Rule set forth the
Commission’s interpretation of CEA
section 2(i), which mirrored the
approach that the Commission took in
the Guidance.
Several commenters provided their
views on the Commission’s
interpretation of CEA section 2(i). Better
Markets agreed with the Commission’s
description of the Commission’s
authority to regulate swaps activities
outside of the United States, recognizing
that CEA section 2(i)’s mandatory
exclusion of only certain, limited non-
U.S. activities (i.e., those that do not
have a direct and significant connection
with activities in, or effect on, U.S.
commerce) evidences clear
congressional intent to preserve
jurisdiction with respect to others.
Better Markets stated its belief that this
reflects an intent to ensure U.S. law
broadly applies to non-U.S. activities
having requisite U.S. connections or
effects. Better Markets argued, however,
that the Commission does not have the
discretion to determine whether and
when to apply U.S. regulatory
requirements based on vague principles
of international comity, stating that the
Commission has not cited a legally valid
basis for its repeated reliance on
international comity, where it
simultaneously acknowledges direct
and significant risks to the U.S.
financial system.
BGC/Tradition supported the
Commission’s analysis related to CEA
section 2(i) and what constitutes ‘‘direct
and significant.’’ Specifically, BGC/
Tradition agreed that the appropriate
approach is ‘‘to apply the swap
provisions of the CEA to activities
outside the United States that have
either: (1) A direct and significant effect
on U.S. commerce; or, in the alternative,
(2) a direct and significant connection
with activities in U.S. commerce, and
through such connection present the
type of risks to the U.S. financial system
and markets that Title VII directed the
Commission to address.’’
IIB/SIFMA discussed the
Commission’s interpretation of ‘‘direct’’
in CEA section 2(i) and argued that the
Commission should have followed
Supreme Court precedent interpreting
the ‘‘direct effect’’ test found in the
Foreign Sovereign Immunities Act of
1976, which the Court has interpreted to
be satisfied only by conduct abroad that
has ‘‘an immediate consequence’’ in the
United States.
29
IIB/SIFMA argued that
a case cited by the Commission as a
factor in its interpretation, the Seventh
Circuit en banc decision in Minn-Chem,
Inc. v. Agrium, Inc., was based on
considerations that are relevant to the
Foreign Trade Antitrust Improvements
Act of 1982 (‘‘FTAIA’’),
30
—but not
section 2(i)—namely that (a) because the
FTAIA includes the word ‘‘foreseeable’’
along with ‘‘direct,’’ the word ‘‘direct’’
should be interpreted as part of an
integrated phrase that includes
‘‘foreseeable’’ effects, and (b) the FTAIA
already addresses foreign conduct that
has an immediate consequence in the
United States through its separate
provision for import commerce.
31
But,
IIB/SIFMA argued, CEA section 2(i)
does not include the word
‘‘foreseeable,’’ nor does it include any
other provisions addressing foreign
conduct that have an immediate
consequence within the United States,
so the Minn-Chem Court’s reasoning
does not support the Commission’s
decision to discount the Supreme
Court’s interpretation of the word
‘‘direct’’ in Weltover.
IATP argued that the Commission did
not provide a sufficient ‘‘international
comity’’ argument to justify deviating
from the plain meaning of ‘‘direct,’’ nor
a sufficient argument to rely on FTAIA
case law to interpret ‘‘direct.’’ IATP
stated its belief that the Commission’s
reliance on cross-border anti-trust trade
law to interpret its statutory authority
under CEA section 2(i) is an
inconsistent and unreliable foundation
for a rule that proposes no measures to
prevent or discipline SDs’ unreasonable
restraint of trade. IATP recommended
that the Commission abandon its
‘‘restatement’’ of its CEA section 2(i)
authority and rely on a plain reading of
CEA section 2(i).
In response to Better Markets’
contention that the Commission does
not have the discretion to determine
whether and when to apply U.S.
regulatory requirements based on
principles of international comity where
it simultaneously acknowledges direct
and significant risks to the U.S.
financial system, the Commission has
followed the Restatement of Foreign
Relations law in striving to minimize
conflicts with the laws of other
jurisdictions while seeking, pursuant to
CEA section 2(i), to apply the swaps
requirements of Title VII to activities
outside the United States that have a
direct and significant connection with
activities in, or effect on, U.S.
commerce. The Commission has
determined that the rule appropriately
accounts for these competing interests,
ensuring that the Commission can
discharge its responsibilities to protect
the U.S. markets, market participants,
and financial system, consistent with
international comity, as set forth in the
Restatement.
With respect to IIB/SIFMA’s
contention that the Commission erred in
its interpretation of the meaning of
‘‘direct’’ in CEA section 2(i), IIB/SIFMA
incorrectly asserted that the
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32
See Proposed Rule, 85 FR at 956.
33
See infra notes 41–51, and accompanying text.
34
15 U.S.C. 6a.
35
15 U.S.C. 1–7.
36
15 U.S.C. 6a.
37
15 U.S.C. 6a(1).
38
15 U.S.C. 6a(2).
39
542 U.S. 155, 162 (2004) (emphasis in original).
40
SIFMA v. CFTC, 67 F.Supp.3d 373, 425–26
(D.D.C. 2014) (‘‘The plain text of this provision
‘clearly expresse[s]’ Congress’s ‘affirmative
intention’ to give extraterritorial effect to Title VII’s
statutory requirements, as well as to the Title VII
rules or regulations prescribed by the CFTC,
whenever the provision’s jurisdictional nexus is
satisfied.’’). See also Prime Int’l Trading, Ltd. v. BP
P.L.C., 937 F.3d 94, 103 (2d Cir. 2019) (stating that
‘‘Section 2(i) contains, on its face, a ‘clear
statement,’ Morrison, 561 U.S. at 265, 130 S.Ct.
2869, of extraterritorial application’’ and describing
it as ‘‘an enumerated extraterritorial command’’).
41
Guidance, 78 FR at 45299.
42
See 28 U.S.C. 1605(a)(2).
43
United States v. LSL Biotechnologies, 379 F.3d
672, 693 (9th Cir. 2004). ‘‘As a threshold matter,
many courts have debated whether the FTAIA
established a new jurisdictional standard or merely
codified the standard applied in [United States v.
Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945)]
and its progeny. Several courts have raised this
question without answering it. The Supreme Court
did as much in [Harford Fire Ins. Co. v. California,
509 U.S. 764 (1993)].’’ Id. at 678.
44
Id. at 692–93, quoting Republic of Argentina v.
Weltover, Inc., 504 U.S. 607, 618 (1992) (providing
that, pursuant to the FSIA, 28 U.S.C. 1605(a)(2),
immunity does not extend to commercial conduct
outside the United States that ‘‘causes a direct effect
in the United States’’).
45
Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845,
857 (7th Cir. 2012) (en banc).
Commission relied on the Seventh
Circuit en banc decision in Minn-Chem,
Inc. v. Agrium, Inc. Rather, the
Commission was clear that its
interpretation of CEA section 2(i) is not
reliant on the reasoning of any
individual judicial decision, but instead
is drawn from a holistic understanding
of both the statutory text and legal
analysis applied by courts to analogous
statutes and circumstances, specifically
noting that the Commission’s
interpretation of CEA section 2(i) is not
solely dependent on one’s view of the
Seventh Circuit’s Minn-Chem
decision,
32
but informed by its overall
understanding of the relevant legal
principles.
Finally, the Commission disagrees
with IATP’s advice that the Commission
should abandon its interpretation of
CEA section 2(i) and proceed with a
‘‘plain reading’’ of the statute. The
Commission believes that IATP’s
assertion that the extraterritorial
provisions of FTAIA and the case law
construing such provisions are not
relevant to CEA section 2(i) because the
rule is not concerned with the
regulation of anti-competitive behavior
misconstrues the use that the
Commission’s interpretation has made
of the Federal case law construing the
meaning of the word ‘‘direct’’ in CEA
section 2(i).
33
2. Final Interpretation
In light of the foregoing, the
Commission is restating its
interpretation of section 2(i) of the CEA
with its adoption of the Final Rule in
substantially the same form as appeared
in the Proposed Rule.
CEA section 2(i) provides that the
swap provisions of Title VII 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 such rules or
regulations as the Commission may
prescribe or promulgate as are necessary
or appropriate to prevent the evasion of
any provision of the CEA that was
enacted by the Dodd-Frank Act.
The Commission believes that section
2(i) provides it express authority over
swap activities outside the United States
when certain conditions are met, but it
does not 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
international comity principles and will
focus its authority on potential
significant risks to the U.S. financial
system.
(i) Statutory Analysis
In interpreting the phrase ‘‘direct and
significant,’’ the Commission has
examined the plain language of the
statutory provision, similar language in
other statutes with cross-border
application, and the legislative history
of section 2(i).
The statutory language in CEA section
2(i) is structured similarly to the
statutory language in the FTAIA,
34
which provides the standard for the
cross-border application of the Sherman
Antitrust Act (‘‘Sherman Act’’).
35
The
FTAIA, like CEA section 2(i), excludes
certain non-U.S. commercial
transactions from the reach of U.S. law.
Specifically, the FTAIA provides that
the antitrust provisions of the Sherman
Act shall not apply to anti-competitive
conduct involving trade or commerce
with foreign nations.
36
However, like
paragraph (1) of CEA section 2(i), the
FTAIA also creates exceptions to the
general exclusionary rule and thus
brings back within antitrust coverage
any conduct that: (1) Has a direct,
substantial, and reasonably foreseeable
effect on U.S. commerce;
37
and (2) such
effect gives rise to a Sherman Act
claim.
38
In F. Hoffman-LaRoche, Ltd. v.
Empagran S.A., the U.S. Supreme Court
stated that ‘‘this technical language
initially lays down a general rule
placing all (nonimport) activity
involving foreign commerce outside the
Sherman Act’s reach. It then brings such
conduct back within the Sherman Act’s
reach provided that the conduct both (1)
sufficiently affects American commerce,
i.e., it has a ‘direct, substantial, and
reasonably foreseeable effect’ on
American domestic, import, or (certain)
export commerce, and (2) has an effect
of a kind that antitrust law considers
harmful, i.e., the ‘effect’ must ‘giv[e] rise
to a [Sherman Act] claim.’ ’’
39
It is appropriate, therefore, to read
section 2(i) of the CEA as a clear
expression of congressional intent that
the swap provisions of Title VII of the
Dodd-Frank Act apply to activities
beyond the borders of the United States
when certain circumstances are
present.
40
These circumstances include,
pursuant to paragraph (1) of section 2(i),
when activities outside the United
States meet the statutory test of having
a ‘‘direct and significant connection
with activities in, or effect on,’’ U.S.
commerce.
An examination of the language in the
FTAIA, however, does not provide an
unambiguous roadmap for the
Commission in interpreting section 2(i)
of the CEA because there are both
similarities, and a number of significant
differences, between the language in
CEA section 2(i) and the language in the
FTAIA. Further, the Supreme Court has
not provided definitive guidance as to
the meaning of the direct, substantial,
and reasonably foreseeable test in the
FTAIA, and the lower courts have
interpreted the individual terms in the
FTAIA differently.
Although a number of courts have
interpreted the various terms in the
FTAIA, only the term ‘‘direct’’ appears
in both CEA section 2(i) and the
FTAIA.
41
Relying upon the Supreme
Court’s definition of the term ‘‘direct’’ in
the Foreign Sovereign Immunities Act
(‘‘FSIA’’),
42
the U.S. Court of Appeals
for the Ninth Circuit construed the term
‘‘direct’’ in the FTAIA as requiring a
‘‘relationship of logical causation,’’
43
such that ‘‘an effect is ‘direct’ if it
follows as an immediate consequence of
the defendant’s activity.’’
44
However, in
an en banc decision, Minn-Chem, Inc. v.
Agrium, Inc., the U.S. Court of Appeals
for the Seventh Circuit held that ‘‘the
Ninth Circuit jumped too quickly on the
assumption that the FSIA and the
FTAIA use the word ‘direct’ in the same
way.’’
45
After examining the text of the
FTAIA as well as its history and
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Id.
47
Id. at 856–57.
48
Lotes Co., Ltd. v. Hon Hai Precision Industry
Co., 753 F.3d 395, 406–08 (2d Cir. 2014).
49
See, e.g., Animal Sciences Products. v. China
Minmetals Corp., 654 F.3d 462, 471 (3d Cir. 2011)
(‘‘[T]he FTAIA’s ‘reasonably foreseeable’ language
imposes an objec