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June 4, 2015
Regulation of Swaps
under Dodd-Frank
Implications for
French Asset Managers
Presentation to The Association
Française de la Gestion Financière
Julien Bourgeois
Philip Hinkle
© 2015 Dechert LLP
Presenters
Julien Bourgeois
Partner, Washington DC
+1 202 261 3451
[email protected]
Bio: http://www.dechert.com/julien_bourgeois/
Philip Hinkle
Associate, Washington DC
+1 202 261 3460
[email protected]
Bio: http://www.dechert.com/philip_hinkle/
1900 K Street, NW
Washington, DC 20006
2
Agenda
 Dodd-Frank, Jurisdiction of CFTC and SEC and
Regulated Products
 Swap Dealer and Major Participant Swap Registration
 Overview of CFTC and SEC Swap Trading Rules
 Application of Swaps Rules to Non-U.S. Asset
Managers
– SEC and CFTC U.S. Person Definitions
– CFTC’s Substantive Guidance
 Detailed Review of CFTC Swap Trading Rules
 Overview of Dodd-Frank Protocols
June 4, 2015
3
Dodd-Frank, Jurisdiction of CFTC
and SEC and Regulated Products
June 4, 2015
Dodd-Frank Act Title VII
 First comprehensive U.S. regulatory framework for
swaps markets
 Part of a global de-risking through regulation
underway since the 2008 financial crisis
 Aims to prevent future crisis through transparency
and reduction of structured leverage and systemic
risk
June 4, 2015
5
Dodd-Frank Act Initiatives
 Swap clearing and transparent exchange trading
for standardized swaps to reduce counterparty risk
and enhance price discovery
 Registration and substantive regulation and
oversight of swap dealers and major swap
participants
 Capital and margin requirements to reduce
leverage in the markets
 Recordkeeping and reporting for swaps to
increase market surveillance capability and market
transparency
June 4, 2015
6
Dodd-Frank Act Swaps Jurisdiction
 U.S. Securities and Exchange Commission
(SEC) has jurisdiction over "security-based swaps"
under the U.S. Securities Exchange Act of 1934
(Exchange Act)
 U.S. Commodity Futures Trading Commission
(CFTC) has jurisdiction over all other "swaps"
under the U.S. Commodity Exchange Act (CEA)
June 4, 2015
7
CFTC and SEC Jurisdiction
Commodity Interests
subject to CFTC
Securities subject
Jurisdiction
to SEC Jurisdiction
New "Swaps"
- Swaps on broad-based
security indices
- Swaptions
- Options on interest rates,
currencies, commodities
- Many forward contracts
- Cash settled FX swaps
and FX forwards
Already Regulated
- Commodity and broadbased index futures
- Options on futures
- Options on commodities
June 4, 2015
New
"Mixed
Swaps"
Already
Single
stock and
narrowbased
index
futures
New "Swaps"
- "Security-based Swaps"
(on single security and
narrow-based security
indices)
Already Regulated
-Stocks
- Bonds
- Options on securities and
security indices
Joint CFTC/SEC
Jurisdiction
8
New CFTC-Regulated Swaps – Foreign
Exchange (FX) Products
CFTCRegulated
Swaps
Deliverable FX Forwards
Non-Deliverable FX Forwards
Non-Swaps
X*
X
Deliverable FX Swaps
X*
Non-Deliverable FX Swaps
X
FX Options
X
Off-Exchange Retail FX Options
X**
FX Options Traded on a Securities Exchange
X***
Cross-Currency Swaps
X
*Subject to CFTC reporting requirements and external business conduct standards (covered by DF Protocol 1.0)
**Regulated under CFTC retail forex regime
***Securities that are regulated by SEC
June 4, 2015
9
New CFTC-Regulated Swaps – Examples
of Other Products
CFTCRegulated
Swaps
Forward Rate Agreements
X
Swaptions
X
Forward Swaps
X
Mixed Swaps
X
Contracts for differences on individual securities
or narrow-based security indices
Contracts for differences on commodity interests,
including broad-based security indices
Non-Swaps
X*
X
*Security-based swaps that are regulated by SEC
June 4, 2015
10
New CFTC-Regulated Swaps – Examples
of Other Products
CFTC-Regulated
Swaps
Guarantees of Swaps
Non-Swaps
X
Insurance Products that meet "product"
and "provider" limits
X*
Consumer Transactions that are not typical
derivatives trades
X**
Commercial Transactions that are not
typical derivatives trades
X**
Loan Participations
X***
Forward Contracts in Nonfinancial
Commodities
X****
*Regulated by state insurance regulators
**Regulated under consumer / commercial laws
***Regulated as a security or bank product depending on facts
****Excluded from CFTC regulation under "forward contract exclusion"
June 4, 2015
11
Swap Dealer and Major Swap
Participant Registration
June 4, 2015
CFTC-Regulated Swap Dealer
 A swap dealer is an entity that:
–
holds itself out as a dealer in swaps; or
–
makes a market in swaps; or
–
regularly enters into swaps with counterparties as an ordinary course of
business for its own account; or
–
engages in any activity causing the entity to be commonly known in the trade
as a dealer or market maker in swaps
 Under a de minimis exclusion, an entity is not a swap dealer if the
gross notional value of its positions over the preceding 12 months:
–
in CFTC-regulated swaps, is no more than $8 billion; and
–
in transactions where the counterparty is a "special entity" (federal agency;
state, state/municipality; ERISA plan or U.S. governmental plan; or
endowment), is no more than $25 million
 We are not aware of asset managers that are swap dealers
June 4, 2015
13
CFTC-Regulated Major Swap Participant
("MSP")
 A MSP is an entity that is not a swap dealer and that:
 Substantial Position: Maintains a substantial position in any major
swap category
–
interest rate: $3 billion outward exposure or $6 billion outward exposure +
potential exposure;
–
credit, equity and commodity: $1 billion outward exposure or $2 billion
outward exposure + potential exposure OR
 Substantial Counterparty Exposure:
–
June 4, 2015
The entity’s outstanding swaps create "substantial counterparty exposure that
could have serious adverse effects on the financial stability of the banking
system or financial markets", meaning having aggregate swap positions of

$5 billion in daily average aggregate uncollateralized outward exposure; or

$8 billion in daily average aggregate uncollateralized outward exposure + daily average
aggregate potential outward exposure OR
14
CFTC-Regulated MSP (cont’d)
 Highly Leveraged Financial Entity:
–
The entity has an equity ratio of 12 to 1 and maintains a substantial position
in swaps and
–
There are safe harbors available
 We have not seen asset managers or funds have to register as
MSPs
June 4, 2015
15
SEC Registration Regime
 The SEC’s definition for security-based swap
dealer is substantially identical to the CFTC’s
 The SEC’s definition for MSBSP is substantially
identical to the CFTC’s
 We are not aware of asset managers that are
expected to be SBSDs or MSBSPs
June 4, 2015
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Overview of CFTC and SEC Swap
Trading Rules
June 4, 2015
Implementation
 The CFTC has adopted most rules mandated by DoddFrank
 The SEC has adopted a U.S. Person definition and
reporting and public dissemination and swap data repository
rules under Reg SBSR and Reg SDR; compliance dates are
yet to be adopted
 The SEC has not yet adopted the majority of the other
mandated rules relating to security-based swaps
 SEC requirements relating to mandatory clearing, trade
execution and other matters will be addressed in future SEC
rulemakings
June 4, 2015
18
CFTC "Entity-Level" Swap Requirements
 Impact applicable entities without distinction as to
counterparty or location of swap
 Category 1
– Capital adequacy (not implemented)
– Chief Compliance Officer
– Risk management
– Swap data recordkeeping
 Category 2
– Swap Data Repository ("SDR") reporting
– Swap data recordkeeping relating to complaints and marketing and
sales research
– Large trader reporting (apply to all "large traders" of CFTC-regulated
swaps)
June 4, 2015
19
CFTC "Transaction-Level" Swap Requirements
 Apply to all CFTC-regulated swaps
 Category A (ISDA March 2013 DF Protocol 2.0)
–
required clearing and swap processing (i.e., prompt submission)
–
margin (not finalized) and segregation requirements for uncleared swaps
–
trade execution (exchange trading)
–
swap trading relationship documentation
–
portfolio reconciliation and compression
–
real-time public reporting
–
trade confirmation
–
daily trading records
 Category B – External Business Conduct Rules requiring swap dealer
due diligence on counterparty eligibility, disclosures, suitability
determination / safe harbor (ISDA August 2012 DF Protocol 1.0)
June 4, 2015
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SEC Security-Based Swap Rules
 The SEC adopted two sets of rules under Dodd-Frank relating to swap
data reporting in March 2015
–
registration of security-based SDRs and the duties and core principles
relating SDRs
–
required reporting of security-based swap information to SDRs
–
required public dissemination of transaction, volume and pricing info by SDRs
–
generally assign reporting requirements to registered counterparties
–
substantially similar to the CFTC’s rules relating to SDR reporting
 SEC requirements relating to mandatory clearing, trade execution,
regulatory reporting, and public dissemination will be addressed in future
SEC rulemakings
 The SEC has not indicated the timing for the adoption of the remaining
substantive rules
June 4, 2015
21
Application of Swaps Rules to NonU.S. Asset Managers – SEC and
CFTC U.S. Person Definitions
June 4, 2015
U.S. Regulation of Non-U.S. Swap Activities
 The CEA and Exchange Act each set forth standard for
extraterritorial regulation of swaps
 Section 2(i) of the CEA: CEA swap provisions generally do not
apply to swap activities outside of the U.S. unless such activities:
–
have a direct and significant connection with activities in, or effect on,
commerce of the U.S., or
–
contravene CFTC rules preventing the evasion of the CEA swap provisions
 Section 30(c) of the Exchange Act: No Exchange Act securitybased swap provisions will apply to a person conducting securitybased swaps transactions outside of the jurisdiction of the U.S.
unless such person transacts such business in contravention of
SEC rules preventing the evasion of the SEC security-based swap
provisions
June 4, 2015
23
CFTC Cross-Border Guidance
 July 2013: CFTC adopted "cross-border guidance"
to implement Section 2(i) providing:
– a definition of "U.S. Person" with respect to the application of the
CEA and CFTC swap provisions
– which non-U.S. entities are required to register as swap dealers
and MSPs
– that the CFTC’s entity-level requirements apply to non-U.S.
person CFTC-registered swap-dealers and MSPs
– when the CFTC’s transaction-level requirements apply to
transactions involving non-U.S. persons
June 4, 2015
24
CFTC U.S. Person Definition
 prong (i): natural person resident in the United States;
 prong (iii): legal entity (including any collective investment vehicle)
that (a) is organized in the U.S. or (b) has its principal place of
business in the U.S.;
 prong (iv): pension plan for the employees, officers or principals of
a U.S. legal entity described in prong (iii) unless the pension plan
is primarily for foreign employees of such entity;
 prong (vi): collective investment vehicle that is a commodity pool
and not described in prong (iii) that is directly or indirectly
majority-owned by U.S. persons except a collective investment
vehicle that is publicly offered only to non-U.S. persons and not
offered to U.S. persons;
 prong (viii): any individual account or joint account directly or
indirectly owned by U.S. person(s)
June 4, 2015
25
CFTC U.S. Person Definition – Principal
Place of Business of Separate Accounts
 Analysis of whether a fund or other advisory client is a U.S.
person is based on the facts and circumstances and the
"economic reality" of the arrangement
 Whether a legal entity (other than a fund) has its "principal
place of business" in the U.S. is a question of whether the
non-U.S. entity has its "center of direction, control, and
coordination of [its] business activities in the United States"
 "In practice, it should normally be the place where the
[entity] maintains its headquarters—provided that the
headquarters is the actual center of direction, control, and
coordination, i.e., the nerve center, and is not simply an
office where the corporation holds its board meetings"
June 4, 2015
26
CFTC U.S. Person Definition – Principal
Place of Business of Funds
 Primary focus: The location of the investment managers, fund sponsors
and promoters, and related sales and trading desks, or the "actual center
of direction, control and coordination" (i.e., the "nerve center") of the fund
 The CFTC will focus primarily on where senior personnel are located
 The CFTC will generally consider a vehicle’s principal place of business
to be in the U.S. if its senior principal personnel responsible for the
following are in the U.S., depending on the facts and circumstances:
–
the "formation and promotion" of the vehicle or
–
the "implementation of the vehicle’s investment strategy"
 The location of the fund’s registered officer or board of directors generally
is not considered (directors are not implementing the investment
objectives of funds and so would not be viewed as "key personnel")
June 4, 2015
27
CFTC U.S. Person Definition – Principal Place of
Business of Funds – U.S. Sub-Advisers and PMs
 A fund is not a U.S. person where some investment personnel or
an independent, hired sub-adviser’s personnel are located in the
United States
 Such persons must report to non-U.S. persons who are
considered to be fulfilling the "key functions relating to [the
vehicle’s] formation or the achievement of its investment
objectives"
 CFTC examples distinguish between PMs that "facilitate"
implementation (even where acting autonomously day-to-day) and
personnel of the manager that directs / implements the fund’s high
level strategy
 So, a non-U.S. vehicle is not a U.S. person solely because it
employs a U.S. PM or CTA if the PM or CTA functions under the
direction of senior personnel located outside of the United States
June 4, 2015
28
CFTC U.S. Person – Exchange-Traded
Fund Exception
 Exception for a collective investment vehicle
from majority ownership rule if (i) publicly offered
outside of the United States (ii) only to non-U.S.
persons and (iii) not offered to U.S. persons
 This is a distinction from definitions of the SEC
(Reg S), the IRS, and the CFTC for CPO/CTA
regulation (Rule 4.7)
June 4, 2015
29
Sample U.S. Person Analysis 1
 Non-U.S. asset manager organizes a fund in the
U.S.
 Fund is a U.S. person under prong (iii)(a) as it is
organized in the U.S.
 No need to consider prong (vi) analysis of fund
ownership
June 4, 2015
30
Sample U.S. Person Analysis 2
 Non-U.S. asset manager organizes a fund outside of the U.S. and
personnel of manager located outside of the U.S. have primary
responsibility for implementing the fund’s objective and strategies
 Less than a majority of investors are U.S. persons
 Fund is sub-advised by a U.S. asset manager
 Because the fund is not owned by a majority of U.S. persons, the
fund does not trigger U.S. person status under prong (vi)
 Fund likely is not a U.S person under prong (iii)(b) because senior
personnel responsible for sponsoring the fund and implementing
its strategy are not in the U.S. (absent potential compelling facts
and circumstances)
June 4, 2015
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Sample U.S. Person Analysis 3
 Non-U.S. asset manager organizes a fund outside the U.S. and
non-U.S. personnel of manager have primary responsibility for
implementing the fund’s objective and strategies
 Less than a majority of investors are U.S. persons and sales
activity does not occur in the U.S.
 Personnel in Non-U.S. manager’s U.S. office are responsible for
stock selection on an autonomous basis subject to direction and
high-level oversight by higher-level non-U.S. personnel
 Because the fund is not owned by majority of U.S. persons, fund
does not trigger U.S. person status under prong (vi)
 The Fund likely would be able to determine it is not a U.S. person
under prong (iii) in light of the facts and circumstances
32
Sample U.S. Person Analysis 4
 U.S. asset manager organizes a fund outside of the U.S. and
personnel of manager located within the U.S. have primary
responsibility for implementing the fund’s objective and strategies
 Less than a majority of investors are U.S. persons
 Fund is sub-advised by a non-U.S. asset manager
 Because the fund is not owned by a majority of U.S. persons, the
fund does not trigger U.S. person status under prong (vi)
 Fund likely is a U.S person under prong (iii)(b) because senior
personnel responsible for sponsoring the fund and implementing
its strategy are located in the U.S. (absent potential compelling
facts and circumstances)
June 4, 2015
33
Sample U.S. Person Analysis 5
 U.S. asset manager organizes a fund outside the U.S.
 Fund is sold primarily to non-U.S. investors and Fund sales force is
located outside the U.S.; some investors (less than a majority) have
moved to the U.S. and are "U.S. persons"
 Fund managed by non-U.S. affiliate that has personnel with primary
responsibility for the fund’s objective and strategies under the fund’s
organizational documents outside of the U.S.; Manager uses U.S.
affiliate’s trading desk for transactions in U.S. holdings (40% of portfolio)
 Investment decisions are reviewed by the investment committee or top
level asset management organization (not U.S. residents)
 Because the fund is not owned by majority U.S. persons, fund does not
trigger U.S. person status under prong (vi).
 The Fund may also be able to determine it is not a U.S. person under
prong (iii) in light of the facts and circumstances
34
SEC U.S. Person Definition
 In July 2014, the SEC adopted final rules on the definition of the
term "U.S. person" for purposes of applying SEC security-based
swap rules to cross-border security-based swap activity
 The SEC U.S. person definition includes:
– any natural person residing in the United States;
– any partnership, corporation, trust, investment vehicle, or
other legal person organized, incorporated, or established
under the laws of the United States or having its principal
place of business in the United States; and
– any account (whether discretionary or non-discretionary) of a
U.S. person
June 4, 2015
35
SEC U.S. Person Definition (cont’d)
 Similar to the CFTC definition, the SEC will consider
the "the location from which the officers, partners, or
managers of the legal person direct, control, and
coordinate the activities of the legal person"
 This specifically considers the "office from which the
manager of the vehicle primarily directs, controls, and
coordinates the investment activities of the vehicle"
 The location of personnel directing swaps activity isn’t
the sole factor as the focus of the definition is on "the
location of a significant portion of the entity’s financial
and legal relationships"
 Does not consider impact of effecting trades in the U.S.
June 4, 2015
36
Differences in the CFTC and SEC U.S.
Person Definitions
 Principal place of business analysis (above)
 The SEC definition does not contain a carve-out
for pension plans
– a pension plan for a non-U.S. company that is advised by a
U.S. asset manager could be deemed to have its principal
place of business in the United States and thus be a U.S.
person for SEC but not CFTC purposes
 Beneficial ownership of a collective investment
vehicle by U.S. persons is not a factor under the
SEC definition
June 4, 2015
37
Application of Swaps Rules to NonU.S. Asset Managers – CFTC’s
Substantive Guidance
June 4, 2015
Cross-Border Application of CFTC Entity-Level Requirements
The CFTC’s entity-level requirements apply to CFTC registrants as follows:
U.S. swap dealer or MSP (including an
affiliate or such entity acting through a
foreign branch)
Category 1** and Category 2*** Apply
Non-U.S. swap dealer or MSP (including Category 1: Substituted Compliance*
an affiliate of a U.S. Person)
Category 2: Apply for U.S.
counterparties; Substituted Compliance*
for SDR Reporting with non-U.S.
counterparties that are not guaranteed
or conduit affiliates of U.S. persons
Non-U.S. person not registered as swap
dealer or MSP
Category 1 and Category 2: Not
Applicable
*Substituted Compliance applies upon "comparability determination" of CFTC (see below)
**Capital adequacy, Chief Compliance Officer, Risk management, Swap data recordkeeping
***SDR reporting, recordkeeping (complaints and marketing and sales research), Large trader reporting (
2 June 2015
39
Cross-Border Application of CFTC Transaction-Level Requirements
Buy Side
Sell
Side
U.S. Person
Foreign Branch of
U.S. Bank that is a
SD or MSP
Non-U.S. Person
Guaranteed by, or
Affiliate Conduit
of, a U.S. Person
Non-U.S. Person
NOT Guaranteed
by, and NOT an
Affiliate Conduit
of, a U.S. Person
U.S. Person SD or MSP
A** and B***:
Apply
A and B: Apply
A and B: Apply
A and B: Apply
U.S. Person SD or MSP
(when it solicits and
negotiates through a
foreign subsidiary or
affiliate)
A and B: Apply
A: Apply
B: Do not Apply
A: Apply
B: Do not Apply
A: Apply
B: Do not Apply
Foreign Branch of U.S.
Bank that is a SD or MSP
A and B: Apply
A: Substituted
Compliance*
B: Do not Apply
A: Substituted
Compliance
B: Do not Apply
A: Substituted
Compliance
B: Do not Apply
Non-U.S. Person SD or
MSP (including an affiliate
of a U.S. Person)
A and B: Apply
A: Substituted
Compliance
B: Do not Apply
A: Substituted
Compliance
B: Do not Apply
A and B: Do Not
Apply
*Substituted Compliance applies upon "comparability determination" of CFTC (see above)
**Category A: Clearing & processing, margin & segregation, exchange trading, documentation, portfolio reconciliation
and compression, real-time public reporting, confirmation, daily trading records
***Category B: Business conduct rules (e.g., counterparty eligibility, disclosures, suitability determination / safe harbor)
40
CFTC Substituted Compliance: Transaction-Level
Comparability Determinations and Relief (EU)
 Initial comparability determinations on December 20, 2013 for EU SDs:
–
swap trading relationship documentation – Comparable with conditions
–
portfolio reconciliation and compression – Comparable
–
trade confirmation – Comparable
–
daily trading records – Comparable with condition to maintain preexecution information
 No comparability determination for (i) clearing and swap processing,
(ii) exchange trading, (iii) margining (not finalized) and segregation for
uncleared swaps, or (iv) real-time public reporting, so a transaction of an
EU asset manager’s clients with a U.S. person swap dealer could be
subject to both the U.S. and EU requirements (e.g., reporting)
 No-action relief from trade execution for various categories of package
trades through 2015 and 2016 (Letter 14-137)
 No-action relief from trade execution requirements on February 12, 2014
for certain transactions on EU Multilateral Trading Facilities through
effective date of CFTC rules (if adopted) (Letter 14-16)
41
CFTC and EU Swaps Clearing Rules
 The CFTC and the European Commission ("EC") have been at
"loggerheads" over whether to recognize each other’s mandatory clearing
regimes governing central counterparty clearinghouses as equivalent
(dispute over required margin methodologies)

If recognized as equivalent by both jurisdictions, a fund based in Europe
trading with a U.S. swap dealer and required to clear its swaps through a
U.S. clearinghouse would satisfy its obligations under the European
clearing requirements by doing so
 If they do not, European sell side firms that are subject to EU capital
requirements and that clear through U.S. clearinghouses may have to
significantly increase the capital they are required to hold (i.e., margin
they charge their clients) to protect against default. The new EU capital
requirements will become effective June 15, 2015 (if not delayed)
 There is also a question as to whether the CFTC and EC will coordinate
what OTC swaps will be subject to mandatory clearing
June 4, 2015
42
CFTC November 2013 Advisory

The CFTC staff issued an advisory statement on November 14, 2013 that
would apply the CFTC’s transaction-level requirements to swaps of non-U.S.
registered SDs with other non-U.S. persons if the swaps are arranged,
negotiated, or executed by personnel or agents of the non-U.S. swap dealer
located in the U.S. (“one elevator rule”)

Compliance with the one elevator rule is delayed through the earlier of
September 15, 2015 or the effective date of any CFTC action on the advisory
(e.g., Letters 14-74 and 14-140)

The CFTC requested and is currently reviewing comments on the staff
advisory

The SEC issued a corresponding proposed rule on April 29, 2015 that would
apply only SEC reporting and public dissemination and external business
conduct standards to security-based swaps transactions where a non-U.S.
SBSD uses U.S. personnel to arrange, negotiate or execute a transaction

If effective, the CFTC advisory and SEC rules may cause non-U.S. buy side
participants with non-U.S. dealers to need to comply with certain U.S. rules
June 4, 2015
43
Managing Exposure to U.S. Swaps Rules
 Certain CFTC swaps rules may cover EU asset
managers to:
– foreign funds that might now be considered U.S. persons for purposes
of the swap provisions and
– funds that are not U.S. persons but trade swaps with
 U.S. person swap dealer
 U.S. person swap dealer’s foreign branch, affiliate or subsidiary,
or
 a non-U.S. person swap dealer conducting activities in the U.S.
under "one elevator" policy
 Avoid CFTC swaps rules by limiting activities
 Compliance with CFTC swaps rules
June 4, 2015
44
Detailed Review of CFTC Swap
Trading Rules
June 4, 2015
CFTC Swap Clearing Requirement
 The CFTC is required to designate swaps as subject to mandatory
clearing in response to requests from a derivatives clearing
organization ("DCO")
 Currently, the following categories of swaps are subject to
mandatory clearing by the CFTC under Dodd-Frank:
– Interest Rate Swaps ("IRS"): Basis Swaps, Fixed-to-Floating Swaps,
and Forward Rate Agreements in U.S. Dollars, Euro, Pounds
Sterling, and Japanese Yen, and Overnight Index Swaps in U.S.
Dollars, Euro, and Pounds Sterling
– Credit Default Swaps ("CDS"): Untranched CDS on CDXNA.IG and
CDXNA.HY North American Indexes and iTraxx Europe, iTraxx
Europe Crossover, and iTraxx Europe HiVol
June 4, 2015
46
CFTC Swap Execution Requirement
 The CEA mandates that any swap that is cleared on a DCO must
be traded on a board of trade designated as a "contract market"
("DCM") (i.e., historically, a futures exchange) or SEF
 Exception to the swap execution requirement where (i) no DCM or
SEF makes a swap "available to trade" (referred to as "MAT") or
(ii) the swap transaction is subject to the end user clearing
exemption
 The CFTC has adopted regulations that require the designation,
registration and regulation of SEFs
 The CFTC has issued "made available to trade" determinations
with respect to certain of the interest rate and credit default swaps
noted above
June 4, 2015
47
CFTC/Prudential Regulator/SEC Proposed
Margin Requirements for OTC Swaps
 Dodd-Frank requires SEC, CFTC and U.S. prudential regulators to adopt
margin requirements for uncleared swaps
– No regulator has yet adopted final rules
– Both the prudential regulators & CFTC proposed rules in 2011 and
re-proposed rules in 2014
– SEC proposed rules in 2012 with no revisions (re-proposal expected)
 Responding to G20 directives, Basel Committee on Banking Supervision
and IOSCO released a policy framework in 2013 intended to establish
minimum requirements to guide regulators
 The prudential regulators’ and CFTC’s re-proposed rules reflect the
BCBS/IOSCO framework
 BCBS/IOSCO suggested dates for implementation have been pushed
back in their framework for margin rules since the re-proposals
June 4, 2015
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CFTC/Prudential Regulator/SEC Margin
Proposed Requirements for OTC Swaps (cont’d)
 CFTC and prudential margin requirements proposals:
– Four categories of counterparties
– Depending on counterparty category and material swaps
exposure, entity would be required to collect and post initial
and/or variation margin
– No minimum margin requirement if transacting with nonfinancial end-users
– Variation margin would be required exclusively in cash
 Variation margin calculated on a daily basis
June 4, 2015
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CFTC/Prudential Regulator/SEC Margin
Proposed Requirements for OTC Swaps (cont’d)
 Many industry participants laud the harmonization with guidance
published in the international framework
 Buy-side participants criticize re-proposal as not sufficiently
conforming with international framework
– Material swaps exposure threshold
– Eligible collateral for variation margin (CFTC requires cashonly while framework requires that collateral be highly liquid
able to hold value in periods of stress)
June 4, 2015
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Reporting – CFTC Swaps Reports
 CFTC rules require reporting of (i) swap creation
data and (ii) swap continuation data
 The swap dealer entity typically satisfies all
reporting requirements, meaning overlapping
reporting generally does not impact the buy side
 As noted above, swaps reporting is required by
non-U.S. persons
June 4, 2015
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Reporting – CFTC Swaps Reports (cont’d)
 Non-SD/MSPs will bear reporting responsibilities if the other
counterparty is a Non-SD/MSP under one of three circumstances:
–
If the swap is executed on or pursuant to the rules of a SEF or DCM and the
swap is not cleared by a DCO, then the Non-SD/MSP will have to provide
continuation data for the life of the swap (but will not need to provide creation
data, which is reported by the SEF or DCM)
–
If the swap is not executed on or pursuant to the rules of a SEF or DCM and
the swap is accepted for clearing by a DCO after the applicable deadline for
reporting PET data has passed, then the Non-SD/MSP must report the PET
data (but does not need to provide confirmation data or any continuation data,
both of which are provided by the DCO)
–
If the swap is not executed on or pursuant to the rules of a SEF or DCM and
the swap is not cleared, then one of the Non-SD/MSPs must assume all
reporting obligations for both creation data and continuation data
June 4, 2015
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Reporting – CFTC Large Trader Reports
 CFTC Regulations require that a trader who owns, holds or controls large
position of exchange-traded futures and/or options and swaps, file CFTC
Form 40 or Form 40S upon a special call by the CFTC
 The CFTC revised CFTC Form 40 and CFTC Form 40S in November
2013 and imposed a continuing obligation on traders to update previously
filed CFTC Form 40 or CFTC Form 40S as directed in the CFTC’s special
call
 Compliance with these rules is delayed through no-action relief until
February 11, 2016 (unless no-action relief is extended)
June 4, 2015
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Reporting – CFTC OCR

The CFTC finalized its Ownership and Control Reporting rules ("OCR Rules") on
November 18, 2013 for the sell side

The OCR Rules require that all FCMs and swap dealers report to the CFTC the
ownership and "trading account controllers" of each entity trading in U.S. futures
and options or certain U.S. swaps above certain thresholds with or through the
reporting entity

The U.S. FIA established "FIA Tech" to allow reporting entities to obtain required
information from their clients, and FCMs/swap dealers may request that their
customers enter certain data into the FIA Tech online system to facilitate reporting
by FCMs, clearing members, foreign brokers and swap dealers

Through no-action letters, compliance with the OCR Rules has been delayed until
September 30, 2015, February 11, 2016 or February 13, 2017, depending on the
type of form required to be submitted
June 4, 2015
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Overview of Dodd-Frank Protocols
June 4, 2015
ISDA Dodd-Frank Protocol 1.0
 Facilitates the delivery of extensive "know your customer"
information from the counterparty to the SD. Additional disclosure
is required for Special Entities as defined in the CFTC regulations
 Party must elect applicable category of Eligible Contract
Participant and (for funds) exception to "look through" to investors
for off-exchange forex transactions
 Provides for designation of “third party control person" and
"designated evaluation agent" (typically the asset manager
directing trades)
 Can elect to have standard DF Terms Agreement apply if no ISDA
Master to satisfy documentation requirement
June 4, 2015
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ISDA Dodd-Frank Protocol 1.0 (cont’d)
 Protocol 1.0 also requires the counterparty to make a number of
representations and covenants:
– to promptly notify the SD of any material change in information
– to promptly provide the SD with "any information reasonably
requested" to enable the SD to comply with Dodd-Frank and related
CFTC regulations
– to report certain "life cycle events" on the second business day
following the day on which they occur
– to have adequate policies and procedures in place to ensure that the
person (whether the adherent itself or a third-party service provider)
evaluating swap recommendations and making trading decisions on
behalf of the adherent is capable of doing so
– to inform SD of reporting of swaps in another jurisdiction
June 4, 2015
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ISDA Dodd-Frank Protocol 2.0
 Facilitates compliance with the following Category A TransactionLevel Requirements:
–
Portfolio Reconciliation: Provides a framework for meeting the portfolio
reconciliation and dispute resolution requirements in Dodd-Frank. There are
two reconciliation methods. Counterparties can choose either "Review" of
Portfolio Data or "Exchange" of Portfolio Data. Portfolio reconciliation under
Dodd-Frank is required either annually or quarterly, based on whether the
counterparty surpasses a threshold of 100 trades per quarter
–
Swap Trading Relationship Documentation: SDs must have documentation in
place documenting the terms that govern the trading relationship with
counterparties
–
Valuation and Dispute Resolution: Protocol 2.0 specifically covers valuation
and dispute resolution, while other terms will typically be found in swap
confirmations
–
End-User Exception: Dodd-Frank provided an exception from mandatory
clearing if a customer qualifies as an "end-user." Protocol 2.0 contains a
number of representations for SDs to obtain the information needed to ensure
regulatory compliance in lieu of clearing with these counterparties. This
generally does not apply to funds
June 4, 2015
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ISDA Cross-Border Swaps Representation
Letter
 Designed to allow swap counterparties to make representations to their
SDs to assist SDs with determining whether the CFTC will assert
jurisdiction over the swap pursuant to the CFTC‘s guidance and related
"U.S. person" definition.
 The letter requires the counterparty to represent whether it reasonably
believes that it is a U.S. person. If the counterparty represents that it is
not a U.S. person, it must further represent whether it is an "affiliate
conduit" (as defined by the CFTC) or has a guarantee from a U.S.
person, which may also subject the swap to CFTC jurisdiction
June 4, 2015
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For further information, visit our
website at dechert.com.
Dechert practices as a limited liability partnership
or limited liability company other than in Dublin and
Hong Kong.